DowDuPont Inc. (now expected to operate as DuPont) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; amounts are unaudited and in U.S. dollars. The filing is by DowDuPont Inc., not a standalone post-separation DuPont. Its Q1 results include the materials science and agriculture businesses. Dow was distributed on April 1, 2019; the company expected to distribute Corteva on June 1, 2019, after which the remaining specialty products business would operate as DuPont.
Key financial results and position
| Metric | Q1 2019 | Q1 2018 or prior balance-sheet date | Change / context |
|---|---|---|---|
| Net sales | $19.649 billion | $21.510 billion | Down 9%; local price and mix down 4%, currency down 3%, volume down 2%. |
| Net income available to common stockholders | $520 million | $1.104 billion | Down about 53%; diluted EPS was $0.23 versus $0.47. |
| Income from continuing operations, net of tax | $571 million | $1.153 billion | Down about 50%. |
| Operating EBITDA | $4.019 billion | $4.871 billion | Down about 17%; this is the company’s segment performance measure and excludes significant items. |
| Cost of sales as a share of sales | 74.9% | 75.8% | Improved; lower costs and prior-year inventory step-up charges contributed. |
| Cash from operating activities | $26 million | $(2.137) billion | Improved, with lower working-capital use and higher customer prepayments and affiliate dividends among the factors. |
| Free cash flow (non-GAAP) | $(1.113) billion | $(2.913) billion | Operating cash flow less capital expenditures. |
| Capital expenditures | $1.139 billion | $776 million | Higher year over year. |
| Cash and cash equivalents | $11.543 billion | $13.482 billion at Dec. 31, 2018 | Marketable securities were an additional $119 million; $523 million of cash was restricted. |
| Total debt | $41.970 billion | $40.464 billion at Dec. 31, 2018 | Includes $12.599 billion at the holding company and debt at Historical Dow and Historical DuPont. |
| Current ratio | 1.72:1 | 2.01:1 at Dec. 31, 2018 | Net working capital fell to $20.668 billion from $24.888 billion. |
Material changes and segment performance
- Sales declined across most segments and all geographic regions, with the largest segment sales decline in Packaging & Specialty Plastics (down 15%) and Agriculture (down 11%). Safety & Construction sales increased 2%.
- Operating EBITDA declined in Agriculture ($667 million versus $891 million), Performance Materials & Coatings ($481 million versus $586 million), Industrial Intermediates & Infrastructure ($448 million versus $654 million), and Packaging & Specialty Plastics ($993 million versus $1.301 billion). Safety & Construction EBITDA rose to $411 million from $354 million.
- Integration and separation costs increased to $813 million from $457 million. Equity earnings from nonconsolidated affiliates fell to $26 million from $257 million, primarily reflecting increased Sadara losses and lower joint-venture earnings.
- Interest expense rose to $454 million from $350 million, primarily due to debt issued in late 2018. Net income was also affected by lower sales and higher separation costs; sundry income increased to $248 million from $115 million, in part due to lower foreign-exchange losses.
- Q1 included all three businesses. Beginning in Q2 2019, Dow’s prior-period results were to be presented as discontinued operations, so subsequent reported results are not directly comparable to the consolidated Q1 presentation.
Outlook, management commentary, risks and unusual items
- Separation plans: Dow’s distribution was completed April 1. Corteva’s distribution was expected June 1, 2019. The filing cautions that separation execution, costs, third-party consents, shared-service arrangements, and market or regulatory conditions could affect timing and benefits.
- Restructuring: The company expected approximately $650 million to $700 million of additional Synergy Program cash expenditures, primarily by year-end 2019, and expected the program to be substantially complete by year-end. Total pretax program charges were estimated at approximately $2.2 billion. Agriculture division actions were expected to be substantially complete by mid-2019.
- Potential impairment: Management said separation-related reviews of reporting units, goodwill and asset carrying values could result in non-cash impairment charges in Q2 2019; the outcome was not known and charges could be material. Industrial Biosciences and Clean Technologies were identified as at-risk reporting units.
- Debt and liquidity: If the separations were abandoned or not completed by May 1, 2020, DowDuPont would be required to redeem its $12.7 billion notes at 101% of principal plus accrued interest. After quarter-end, the company drew $3.0 billion of term loans on May 2 and Historical DuPont repaid its $3.0 billion term loan. Historical DuPont also redeemed $1.53 billion of notes on April 22.
- Legal and environmental contingencies: Recorded asbestos liability was $1.243 billion; management said actual costs could differ materially and could affect results, cash flows or financial position. Accrued environmental remediation and restoration obligations were $1.197 billion, and the ultimate cost could be up to approximately 2.5 times the accrual. PFOA/PFAS matters, including New Jersey actions, and Fayetteville Works investigations and litigation remain relevant; certain matters are subject to Chemours indemnification, with reservations. The filing also describes ongoing La Porte incident investigations and Dow Silicones Chapter 11-related claims.
- Other unusual items: Q1 restructuring and asset-related charges were $287 million. The company completed a $3.0 billion share-repurchase program, spending $1.6 billion in Q1, and declared dividends of $0.38 per share paid in March and $325 million ($0.14 per share) payable in May. A proposed reverse stock split was subject to shareholder approval.
- Controls: Management concluded disclosure controls were effective at March 31, 2019; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Corteva’s distribution occurred as expected, and the final allocation of assets, liabilities, employees, taxes and ongoing agreements among DuPont, Dow and Corteva.
- Post-separation DuPont’s standalone sales, margins, cash generation, debt, liquidity and credit ratings; Q1 consolidated figures include businesses subsequently distributed.
- Whether separation and restructuring costs, remaining cash expenditures, and any Q2 impairment charges differ materially from management’s estimates.
- Cash-flow seasonality and working-capital trends, including whether operating cash flow supports capital spending, dividends, pension contributions and debt obligations.
- Developments in asbestos, environmental, PFOA/PFAS and other legal matters, including the adequacy of recorded accruals and the scope and collectability of indemnifications.
- Debt redemptions, borrowing needs and compliance with covenants, including the consequences if the Corteva separation is delayed or abandoned.