01—Abstract
Summary
Summary of the 10-K filed February 15, 2018. Cited figures are marked; the original filing is the authoritative source.
DowDuPont Inc. reported 2017 net sales of $62.5 billiona, up 30 percent from $48.2 billion in 2016, reflecting the Merger of Dow and DuPont completed August 31, 2017, Dow Corning's silicones business addition, higher selling prices and demand growth.
Income from continuing operations, net of tax was $1,669 millionb, versus $4,404 million in 2016, and net income available to common stockholders was $1,460 million ($0.91 per diluted share). The results were weighed down by a $1,491 million goodwill impairment on the Coatings & Performance Monomers reporting unit, $3,280 million of restructuring, goodwill impairment and asset-related charges, $1,101 million of integration and separation costs, and a $1,469 million inventory fair value step-up charge tied to the Merger and the H&N acquisition. A net tax benefit of $1,086 million from the U.S. Tax Cuts and Jobs Act partly offset these charges.
The company remains on track for its planned separation into three companies covering agriculture, materials science and specialty products. On February 1, 2018, management updated the timing so materials science is expected to separate by the end of the first quarter of 2019 and agriculture and specialty products by June 1, 2019. The cost synergy commitment was raised from $3 billion to $3.3 billionc, and the DowDuPont Cost Synergy Program is expected to involve approximately $2 billion of pretax restructuring charges.
Cash provided by operating activities was $8,695 milliond and free cash flow was $5,125 million. Cash and marketable securities totaled $14,394 million at year-end, against total debt of $34,071 million.
Investors should note the company's exposure to legal and environmental matters, including PFOA and GenX litigation and a grand jury subpoena related to the Fayetteville Works facility, as well as asbestos liabilities at Union Carbide. Management also disclosed that the company repurchased $1 billion of stock in 2017, with a $4 billion authorization approved November 2, 2017, of which $3.0 billion remained at year-end, and intends to repurchase approximately $1.0 billion in the first quarter of 2018.
02—Key points
Key Highlights
- Net sales rose to $62.5 billion in 2017 from $48.2 billion, up 30 percent, with increases across all segments and geographic regions; pro forma net sales were $79.5 billion, up 12 percent.
- Income from continuing operations, net of tax, fell to $1,669 million from $4,404 million in 2016, reflecting a $1,491 million goodwill impairment, $3,280 million of restructuring and asset-related charges, and $1,101 million of integration and separation costs.
- Net income available to common stockholders was $1,460 million, or $0.91 per diluted share, compared with $3,978 million, or $3.52 per diluted share, in 2016.
- The Tax Cuts and Jobs Act produced a net tax benefit of $1,086 million in the fourth quarter of 2017, and the company reported a negative effective tax rate of 39.9 percent for 2017.
- Free cash flow was $5,125 million in 2017, up from $1,796 million in 2016, as cash provided by operating activities rose to $8,695 million.
- The intended separation into three companies was rescheduled: materials science by the end of Q1 2019, and agriculture and specialty products by June 1, 2019; the cost synergy target was raised to $3.3 billion.
- The company repurchased $1 billion of stock in 2017 under a $4 billion program, leaving $3.0 billion available, and plans to repurchase about $1.0 billion in Q1 2018.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 15, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $11.67B$48.16B | −75.8% |
| Cost of Revenue | $9.56B$37.67B | −74.6% |
| Gross Profit | $12.69B$10.52B | +20.7% |
| R&D Expenses | $657.00M$1.59B | −58.8% |
| SG&A Expenses | $1.61B$2.95B | −45.3% |
| Net Income | $1.16B$4.32B | −73.2% |
| EPS (Basic) | $2.18$3.57 | −38.9% |
| EPS (Diluted) | $2.15$3.52 | −38.9% |
| Shares Outstanding (Basic) | 526.60M1.11B | −52.5% |
| Shares Outstanding (Diluted) | 532.70M1.12B | −52.6% |
05—Questions
Frequently Asked Questions
Why did DowDuPont's reported income fall sharply in 2017 even though net sales rose 30 percent?
Income from continuing operations, net of tax, declined to $1,669 million from $4,404 million. The filing attributes the decline to several large charges in 2017, including a $1,491 million goodwill impairment on the Coatings & Performance Monomers reporting unit, $3,280 million of restructuring, goodwill impairment and asset-related charges, $1,101 million of integration and separation costs, and a $1,469 million inventory fair value step-up charge from the Merger and the H&N acquisition. The 2016 results also included a large non-recurring gain on the Dow Corning ownership restructure, which makes the year-over-year comparison less direct.
What is the company's plan for separating into multiple businesses, and what is the timing?
DowDuPont's Board may pursue the Intended Business Separations of its agriculture, materials science and specialty products businesses through two pro-rata spin-off transactions, creating three independent public companies. On February 1, 2018, the company updated the timing: materials science is expected to separate by the end of the first quarter of 2019, and agriculture and specialty products by June 1, 2019. The filing notes that the Board may still abandon one or more of the separations, and that the separations are subject to Board approval.
How strong is the company's liquidity and balance sheet?
At December 31, 2017, the company held cash, cash equivalents and marketable securities of $14,394 million, of which $12,177 million was held by foreign subsidiaries. Total debt was $34,071 million, including $1,948 million of notes payable, $2,067 million of long-term debt due within one year and $30,056 million of long-term debt. Dow's credit ratings were BBB (S&P), Baa2 (Moody's) and BBB (Fitch), while DuPont's were A- (S&P), A3 (Moody's) and A (Fitch). Dow's debt-to-capitalization covenant ratio was 0.43 to 1.00 against a maximum of 0.65 to 1.00, and management believed both subsidiaries were in compliance with their covenants at year-end.
What are the most significant legal and environmental exposures disclosed in the filing?
The filing discloses several material matters. Union Carbide's asbestos-related liability for pending and future claims, including defense and processing costs, was $1,369 million at December 31, 2017. DuPont faces PFOA and GenX litigation, including a grand jury subpoena related to the Fayetteville Works facility in North Carolina, although Chemours indemnifies DuPont in most of these matters. The Bayer CropScience arbitration award of $469 million was paid in May 2017, and the Nova Chemicals patent judgment produced a $137 million gain in sundry income. Accrued environmental obligations were $1,311 million at year-end, and management said reasonably possible costs could reach up to about two and a half times that amount.
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