UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2017
OR
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| |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-815
E. I. du Pont de Nemours and Company
(Exact Name of Registrant as Specified in Its Charter)
|
| | |
| Delaware | | 51-0014090 |
| (State or other Jurisdiction of | | (I.R.S. Employer |
| Incorporation or Organization) | | Identification No.) |
974 Centre Road, Wilmington, Delaware 19805
(Address of Principal Executive Offices)
(302) 774-1000
(Registrant’s Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | |
Large Accelerated Filer x | | Accelerated Filer o |
| | | |
Non-Accelerated Filer o | | Smaller reporting company o |
| | | |
| | | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x
The Registrant had 867,032,000100 shares (excludes 87,041,000 shares of treasury stock) of common stock, $0.30$0.30 par value, outstanding at April 17, 2017.September 30, 2017, all of which are held by DowDuPont Inc.
E. I. DU PONT DE NEMOURS AND COMPANY
Table of Contents
The terms “DuPont” or the “company” as used herein refer to E. I. du Pont de Nemours and Company and its consolidated subsidiaries, or to E. I. du Pont de Nemours and Company, as the context may indicate.
PART I. FINANCIAL INFORMATION
| |
| Item 1. | CONSOLIDATED FINANCIAL STATEMENTS |
E. I. du Pont de Nemours and Company
Consolidated Income Statements of Operations (Unaudited)
(Dollars in millions, except per share)
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2017 | 2016 |
| Net sales | $ | 7,743 |
| $ | 7,405 |
|
| Cost of goods sold | 4,371 |
| 4,242 |
|
| Other operating charges | 204 |
| 185 |
|
| Selling, general and administrative expenses | 1,260 |
| 1,128 |
|
| Research and development expense | 416 |
| 418 |
|
| Other income, net | (306 | ) | (372 | ) |
| Interest expense | 84 |
| 92 |
|
| Employee separation / asset related charges, net | 152 |
| 77 |
|
| Income from continuing operations before income taxes | 1,562 |
| 1,635 |
|
| Provision for income taxes on continuing operations | 224 |
| 406 |
|
| Income from continuing operations after income taxes | 1,338 |
| 1,229 |
|
| (Loss) income from discontinued operations after income taxes | (217 | ) | 3 |
|
| Net income | 1,121 |
| 1,232 |
|
| Less: Net income attributable to noncontrolling interests | 8 |
| 6 |
|
| Net income attributable to DuPont | $ | 1,113 |
| $ | 1,226 |
|
| Basic earnings (loss) per share of common stock: | | |
| Basic earnings per share of common stock from continuing operations | $ | 1.53 |
| $ | 1.40 |
|
| Basic loss per share of common stock from discontinued operations | (0.25 | ) | — |
|
| Basic earnings per share of common stock | $ | 1.28 |
| $ | 1.40 |
|
| Diluted earnings (loss) per share of common stock: | | |
| Diluted earnings per share of common stock from continuing operations | $ | 1.52 |
| $ | 1.39 |
|
| Diluted loss per share of common stock from discontinued operations | (0.25 | ) | — |
|
| Diluted earnings per share of common stock | $ | 1.27 |
| $ | 1.39 |
|
| Dividends per share of common stock | $ | 0.38 |
| $ | 0.38 |
|
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions, except per share amounts) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Net sales | $ | 1,735 |
| $ | 2,991 |
| $ | 4,646 |
| $ | 17,281 |
| $ | 18,306 |
|
| Cost of goods sold | 1,511 |
| 1,975 |
| 2,997 |
| 10,205 |
| 10,923 |
|
| Other operating charges | | 136 |
| 172 |
| 504 |
| 490 |
|
| Research and development expense | 116 |
| 278 |
| 378 |
| 1,064 |
| 1,159 |
|
| Selling, general and administrative expenses | 267 |
| 798 |
| 970 |
| 3,306 |
| 3,227 |
|
| Amortization of intangibles | 89 |
| | | | |
| Restructuring and asset related charges - net | 40 |
| 11 |
| 172 |
| 323 |
| 162 |
|
| Integration and separation costs | 71 |
| | | | |
| Sundry income (expense) - net | 88 |
| (112 | ) | (15 | ) | 166 |
| 407 |
|
| Interest expense | 27 |
| 71 |
| 93 |
| 254 |
| 278 |
|
| (Loss) Income from continuing operations before income taxes | (298 | ) | (390 | ) | (151 | ) | 1,791 |
| 2,474 |
|
| (Benefit from) provision for income taxes on continuing operations | (23 | ) | (132 | ) | (85 | ) | 149 |
| 559 |
|
| (Loss) Income from continuing operations after income taxes | (275 | ) | (258 | ) | (66 | ) | 1,642 |
| 1,915 |
|
| (Loss) Income from discontinued operations after income taxes | (20 | ) | 29 |
| 72 |
| 119 |
| 347 |
|
| Net (loss) income | (295 | ) | (229 | ) | 6 |
| 1,761 |
| 2,262 |
|
| Net (loss) income attributable to noncontrolling interests | (2 | ) | 5 |
| 4 |
| 20 |
| 14 |
|
| Net (loss) income attributable to DuPont | $ | (293 | ) | $ | (234 | ) | $ | 2 |
| $ | 1,741 |
| $ | 2,248 |
|
| Basic (loss) earnings per share of common stock: | | | | | |
| Basic (loss) earnings per share of common stock from continuing operations |
|
| $ | (0.30 | ) | $ | (0.08 | ) | $ | 1.86 |
| $ | 2.17 |
|
| Basic earnings per share of common stock from discontinued operations |
|
| 0.03 |
| 0.08 |
| 0.13 |
| 0.40 |
|
| Basic (loss) earnings per share of common stock |
|
| $ | (0.27 | ) | $ | — |
| $ | 2.00 |
| $ | 2.56 |
|
| Diluted (loss) earnings per share of common stock: | | | | | |
| Diluted (loss) earnings per share of common stock from continuing operations |
|
| $ | (0.30 | ) | $ | (0.08 | ) | $ | 1.85 |
| $ | 2.16 |
|
| Diluted earnings per share of common stock from discontinued operations |
|
| 0.03 |
| 0.08 |
| 0.13 |
| 0.39 |
|
| Diluted (loss) earnings per share of common stock |
|
| $ | (0.27 | ) | $ | — |
| $ | 1.99 |
| $ | 2.55 |
|
| Dividends declared per share of common stock |
|
| $ | 0.38 |
| $ | 0.38 |
| $ | 1.14 |
| $ | 1.14 |
|
See Notes to the Consolidated Financial Statements beginning on page 7.
9.
E. I. du Pont de Nemours and Company
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in millions)
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2017 | 2016 |
| Net income | $ | 1,121 |
| $ | 1,232 |
|
| Other comprehensive income (loss), net of tax: |
|
|
| Cumulative translation adjustment | 378 |
| 170 |
|
| Adjustments to pension benefit plans | 109 |
| (619 | ) |
| Adjustments to other benefit plans | 4 |
| (115 | ) |
| Net change in unrealized losses on securities | — |
| (8 | ) |
| Net (losses) gains on cash flow hedging derivative instruments | (3 | ) | 17 |
|
| Total other comprehensive income (loss) | 488 |
| (555 | ) |
| Comprehensive income | 1,609 |
| 677 |
|
| Comprehensive income attributable to noncontrolling interests, net of tax | 8 |
| 6 |
|
| Comprehensive income attributable to DuPont | $ | 1,601 |
| $ | 671 |
|
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Net (loss) income | $ | (295 | ) | $ | (229 | ) | $ | 6 |
| $ | 1,761 |
| $ | 2,262 |
|
| Other comprehensive (loss) income - net of tax: | |
|
|
|
|
|
|
|
|
| Unrealized gains on investments | — |
| — |
| 5 |
| — |
| 11 |
|
| Cumulative translation adjustments | (572 | ) | 389 |
| 114 |
| 1,042 |
| 187 |
|
| Adjustments to pension benefit plans | — |
| 50 |
| (16 | ) | 247 |
| (1,271 | ) |
| Adjustments to other benefit plans | — |
| 3 |
| (11 | ) | 10 |
| (230 | ) |
| Derivative instruments | — |
| 1 |
| (2 | ) | (10 | ) | 32 |
|
| Total other comprehensive (loss) income | (572 | ) | 443 |
| 90 |
| 1,289 |
| (1,271 | ) |
| Comprehensive (loss) income | (867 | ) | 214 |
| 96 |
| 3,050 |
| 991 |
|
| Comprehensive (loss) income attributable to noncontrolling interests - net of tax | (2 | ) | 5 |
| 4 |
| 20 |
| 14 |
|
| Comprehensive (loss) income attributable to DuPont | $ | (865 | ) | $ | 209 |
| $ | 92 |
| $ | 3,030 |
| $ | 977 |
|
See Notes to the Consolidated Financial Statements beginning on page 7.9.
E. I. du Pont de Nemours and Company
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in millions, except per share)
| | | | March 31,
2017 | December 31,
2016 | Successor | Predecessor |
| (In millions, except share amounts) | | September 30,
2017 | December 31,
2016 |
| Assets | |
| |
| |
| |
|
| Current assets | |
| |
| |
| |
|
| Cash and cash equivalents | $ | 3,347 |
| $ | 4,605 |
| $ | 4,754 |
| $ | 4,548 |
|
| Marketable securities | 2,570 |
| 1,362 |
| 1,826 |
| 1,362 |
|
| Accounts and notes receivable, net | 7,272 |
| 4,971 |
| |
| Accounts and notes receivable - net | | 7,898 |
| 4,959 |
|
| Inventories | 5,287 |
| 5,673 |
| 8,783 |
| 5,350 |
|
| Prepaid expenses | 574 |
| 506 |
| |
| Other current assets | | 371 |
| 505 |
|
| Assets held for sale- current | | 3,171 |
| 789 |
|
| Total current assets | 19,050 |
| 17,117 |
| 26,803 |
| 17,513 |
|
Property, plant and equipment, net of accumulated depreciation (March 31, 2017 - $14,994; December 31, 2016 - $14,736) | 9,084 |
| 9,231 |
| |
| Investment in nonconsolidated affiliates | | 1,675 |
| 649 |
|
| Property, plant and equipment - net of accumulated depreciation (September 30, 2017 - $121; December 31, 2016 - $14,164) | | 11,902 |
| 8,851 |
|
| Goodwill | 4,172 |
| 4,180 |
| 45,213 |
| 4,169 |
|
| Other intangible assets | 3,624 |
| 3,664 |
| 27,668 |
| 3,664 |
|
| Investment in affiliates | 687 |
| 649 |
| |
| Deferred income taxes | 3,382 |
| 3,308 |
| 491 |
| 3,308 |
|
| Other assets | 1,851 |
| 1,815 |
| 2,068 |
| 1,810 |
|
| Total | $ | 41,850 |
| $ | 39,964 |
| |
| Total Assets | | $ | 115,820 |
| $ | 39,964 |
|
| Liabilities and Equity | |
| |
| |
| |
|
| Current liabilities | |
| |
| |
| |
|
| Short-term borrowings and capital lease obligations | | $ | 5,920 |
| $ | 429 |
|
| Accounts payable | $ | 3,038 |
| $ | 3,705 |
| 3,694 |
| 3,678 |
|
| Short-term borrowings and capital lease obligations | 2,279 |
| 429 |
| |
| Income taxes | 185 |
| 101 |
| |
| Other accrued liabilities | 4,308 |
| 4,662 |
| |
| Income taxes payable | | 134 |
| 101 |
|
| Accrued and other current liabilities | | 2,477 |
| 4,650 |
|
| Liabilities held for sale - current | | 108 |
| 74 |
|
| Total current liabilities | 9,810 |
| 8,897 |
| 12,333 |
| 8,932 |
|
| Long-term borrowings and capital lease obligations | 8,099 |
| 8,107 |
| |
| Other liabilities | 11,911 |
| 12,333 |
| |
| Deferred income taxes | 395 |
| 431 |
| |
| Total liabilities | 30,215 |
| 29,768 |
| |
| Commitments and contingent liabilities |
|
|
|
| |
| Long-Term Debt | | 9,815 |
| 8,107 |
|
| Other Noncurrent Liabilities | | | |
| Deferred income tax liabilities | | 9,443 |
| 425 |
|
| Pension and other post employment benefits - noncurrent | | 8,015 |
|
|
|
| Other noncurrent obligations | | 1,976 |
| 12,304 |
|
| Total noncurrent liabilities | | 29,249 |
| 20,836 |
|
| Stockholders’ equity | |
| |
| |
| |
|
| Preferred stock | 237 |
| 237 |
| |
Common stock, $0.30 par value; 1,800,000,000 shares authorized; Issued at March 31, 2017 - 953,937,000; December 31, 2016 - 950,044,000 | 286 |
| 285 |
| |
Preferred stock, without par value – cumulative; 23,000,000 shares authorized; issued at September 30, 2017 and December 31, 2016: | | | |
| $4.50 Series – 1,673,000 shares (callable at $120) | | 169 |
| 167 |
|
| $3.50 Series – 700,000 shares (callable at $102) | | 70 |
| 70 |
|
| Common stock, $.30 par value; 1,800,000,000 shares authorized; issued at September 30, 2017 - 100 and December 31, 2016 – 950,044,000 | | — |
| 285 |
|
| Additional paid-in capital | 11,354 |
| 11,190 |
| 74,706 |
| 11,190 |
|
| Reinvested earnings | 15,704 |
| 14,924 |
| |
| (Accumulated deficit) retained earnings | | (295 | ) | 14,924 |
|
| Accumulated other comprehensive loss | (9,423 | ) | (9,911 | ) | (572 | ) | (9,911 | ) |
Common stock held in treasury, at cost (87,041,000 shares at March 31, 2017 and December 31, 2016) | (6,727 | ) | (6,727 | ) | |
| Common stock held in treasury, at cost (Shares: December 31, 2016 – 87,041,000) | | — |
| (6,727 | ) |
| Total DuPont stockholders’ equity | 11,431 |
| 9,998 |
| 74,078 |
| 9,998 |
|
| Noncontrolling interests | 204 |
| 198 |
| 160 |
| 198 |
|
| Total equity | 11,635 |
| 10,196 |
| 74,238 |
| 10,196 |
|
| Total | $ | 41,850 |
| $ | 39,964 |
| |
| Total Liabilities and Equity | | $ | 115,820 |
| $ | 39,964 |
|
See Notes to the Consolidated Financial Statements beginning on page 7.9.
E. I. du Pont de Nemours and Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2017 | 2016 |
| Operating activities | | |
| Net income | $ | 1,121 |
| $ | 1,232 |
|
| Adjustments to reconcile net income to cash used for operating activities: | |
| |
|
| Depreciation | 230 |
| 238 |
|
| Amortization of intangible assets | 51 |
| 122 |
|
| Net periodic pension benefit cost | 109 |
| 146 |
|
| Contributions to pension plans | (82 | ) | (88 | ) |
| Gain on sale of businesses and other assets | (192 | ) | (374 | ) |
| Asset related charges | 119 |
| 78 |
|
| Other operating activities - net | 78 |
| 180 |
|
| Change in operating assets and liabilities - net | (3,058 | ) | (3,340 | ) |
| Cash used for operating activities | (1,624 | ) | (1,806 | ) |
| Investing activities | |
| |
|
| Purchases of property, plant and equipment | (330 | ) | (357 | ) |
| Investments in affiliates | (22 | ) | (1 | ) |
| Proceeds from sale of businesses and other assets - net | 283 |
| 193 |
|
| Purchases of short-term financial instruments | (2,073 | ) | (95 | ) |
| Proceeds from maturities and sales of short-term financial instruments | 868 |
| 377 |
|
| Foreign currency exchange contract settlements | (15 | ) | (78 | ) |
| Other investing activities - net | (46 | ) | (12 | ) |
| Cash (used for) provided by investing activities | (1,335 | ) | 27 |
|
| Financing activities | |
| |
|
| Dividends paid to stockholders | (331 | ) | (334 | ) |
| Net increase in short-term (less than 90 days) borrowings | 1,681 |
| 665 |
|
| Long-term and other borrowings: | | |
| Receipts | 197 |
| 654 |
|
| Payments | (34 | ) | (361 | ) |
| Proceeds from exercise of stock options | 160 |
| 36 |
|
| Other financing activities - net | (32 | ) | (35 | ) |
| Cash provided by financing activities | 1,641 |
| 625 |
|
| Effect of exchange rate changes on cash | 60 |
| 20 |
|
| Decrease in cash and cash equivalents | $ | (1,258 | ) | $ | (1,134 | ) |
| Cash and cash equivalents at beginning of period | 4,605 |
| 5,300 |
|
| Cash and cash equivalents at end of period | $ | 3,347 |
| $ | 4,166 |
|
|
| | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Operating activities | | | |
| Net (loss) income | $ | (295 | ) | $ | 1,761 |
| $ | 2,262 |
|
| Adjustments to reconcile net (loss) income to cash used for operating activities: |
|
|
|
|
|
|
| Depreciation and amortization | 200 |
| 749 |
| 979 |
|
| Provision for deferred income tax | 211 |
|
|
|
|
|
| Net periodic pension (benefit) cost | (28 | ) | 295 |
| 474 |
|
| Pension contributions | (19 | ) | (3,024 | ) | (427 | ) |
| Net gain on sales of property, businesses, consolidated companies, and investments | (1 | ) | (204 | ) | (385 | ) |
| Restructuring and asset related charges - net | 40 |
| | |
| Asset related charges | | 279 |
| 247 |
|
| Amortization of inventory step-up | 429 |
|
|
|
|
|
| Other net (gain) loss | (61 | ) | 481 |
| 421 |
|
| Change in operating assets and liabilities - net | (786 | ) | (4,286 | ) | (4,598 | ) |
| Cash used for operating activities | (310 | ) | (3,949 | ) | (1,027 | ) |
| Investing activities | |
| | |
|
| Capital expenditures | (92 | ) | (687 | ) | (759 | ) |
| Proceeds from sales of property, businesses, and consolidated companies - net of cash divested | 1 |
| 300 |
| 240 |
|
| Acquisitions of businesses - net of cash acquired | 3 |
| (246 | ) | — |
|
| Investments in and loans to nonconsolidated affiliates | — |
| (22 | ) | (2 | ) |
| Purchases of investments | (26 | ) | (5,457 | ) | (1,462 | ) |
| Proceeds from sales and maturities of investments | 1,049 |
| 3,977 |
| 1,294 |
|
| Foreign currency exchange contract settlements |
|
| (206 | ) | (370 | ) |
| Other investing activities - net | — |
| (41 | ) | (16 | ) |
| Cash provided by (used for) investing activities | 935 |
| (2,382 | ) | (1,075 | ) |
| Financing activities | |
| | |
|
| Change in short-term (less than 90 days) borrowings | 588 |
| 3,610 |
| 2,624 |
|
| Proceeds from issuance of long-term debt | — |
| 2,734 |
| 783 |
|
| Payments on long-term debt | (41 | ) | (229 | ) | (831 | ) |
| Repurchase of common stock |
|
| — |
| (416 | ) |
| Proceeds from exercise of stock options | 11 |
| 235 |
| 118 |
|
| Dividends paid to stockholders | (326 | ) | (666 | ) | (1,004 | ) |
| Other financing activities | (2 | ) | (52 | ) | (44 | ) |
| Cash provided by financing activities | 230 |
| 5,632 |
| 1,230 |
|
| Effect of exchange rate changes on cash | (69 | ) | 187 |
| 24 |
|
| Cash reclassified as held for sale | $ | (37 | ) | $ | (31 | ) | $ | (19 | ) |
| Increase (decrease) in cash and cash equivalents | $ | 749 |
| $ | (543 | ) | $ | (867 | ) |
| Cash and cash equivalents at beginning of period | 4,005 |
| 4,548 |
| 5,228 |
|
| Cash and cash equivalents at end of period | $ | 4,754 |
| $ | 4,005 |
| $ | 4,361 |
|
See Notes to the Consolidated Financial Statements beginning on page 7.9.
E.I. du Pont de Nemours and Company
Consolidated Statements of Equity (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comp Loss | Treasury Stock | Non-controlling Interests | Total Equity |
| Predecessor | | | | | | | | |
| Balance at January 1, 2016 | $ | 237 |
| $ | 288 |
| $ | 11,081 |
| $ | 14,510 |
| $ | (9,396 | ) | (6,727 | ) | 207 |
| $ | 10,200 |
|
| Net income |
|
|
| 2,248 |
|
|
| 14 |
| 2,262 |
|
| Other comprehensive loss |
|
|
|
| (1,271 | ) |
|
| (1,271 | ) |
| Common dividends ($1.14 per share) |
|
|
| (1,001 | ) |
|
| (12 | ) | (1,013 | ) |
| Preferred dividends |
|
|
| (7 | ) |
|
|
| (7 | ) |
| Common stock issued - compensation plans |
|
| 207 |
|
|
|
|
| 207 |
|
| Common stock repurchased |
| (1 | ) |
|
|
| (416 | ) | (2 | ) | (419 | ) |
| Common stock retired |
|
| (70 | ) | (343 | ) |
| 416 |
|
| 3 |
|
| Sale of a majority interest in a consolidated subsidiary |
|
| (4 | ) |
|
|
| (4 | ) | (8 | ) |
| Balance at September 30, 2016 | $ | 237 |
| $ | 287 |
| $ | 11,214 |
| $ | 15,407 |
| $ | (10,667 | ) | $ | (6,727 | ) | $ | 203 |
| $ | 9,954 |
|
| | | | | | | | | |
| Balance at January 1, 2017 | $ | 237 |
| $ | 285 |
| $ | 11,190 |
| $ | 14,924 |
| $ | (9,911 | ) | $ | (6,727 | ) | $ | 198 |
| 10,196 |
|
| Net income |
|
|
| 1,741 |
|
|
| 20 |
| 1,761 |
|
| Other comprehensive income |
|
|
|
| 1,289 |
|
|
| 1,289 |
|
| Common dividends ($1.14 per share) |
|
|
| (991 | ) |
|
| (4 | ) | (995 | ) |
| Preferred dividends |
|
|
| (7 | ) |
|
|
| (7 | ) |
| Common stock issued - compensation plans |
| 2 |
| 273 |
|
|
|
|
| 275 |
|
| Common stock repurchased |
|
|
|
|
|
|
| — |
|
| Common stock retired |
| (26 | ) | (1,044 | ) | (5,657 | ) |
| 6,727 |
|
| — |
|
| Sale of a majority interest in a consolidated subsidiary |
|
|
|
|
|
| (2 | ) | (2 | ) |
| Balance at August 31, 2017 | $ | 237 |
| $ | 261 |
| $ | 10,419 |
| $ | 10,010 |
| $ | (8,622 | ) | $ | — |
| $ | 212 |
| $ | 12,517 |
|
| | | | | | | | | |
| | Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comp Loss | Treasury Stock | Non-controlling Interests | Total Equity |
| Successor | | | | | | | | |
| Balance at September 1, 2017 (remeasured upon Merger) | $ | 239 |
| $ | — |
| $ | 74,680 |
| $ | — |
| $ | — |
| $ | — |
| $ | 162 |
| $ | 75,081 |
|
| Net loss |
|
|
| (293 | ) |
|
| (2 | ) | (295 | ) |
| Other comprehensive loss |
|
|
|
| (572 | ) |
|
| (572 | ) |
| Issuance of parent company stock |
|
| 11 |
|
|
|
|
| 11 |
|
| Stock-based compensation |
|
| 15 |
|
|
|
|
| 15 |
|
| Other |
|
|
| (2 | ) |
|
|
| (2 | ) |
| Balance at September 30, 2017 | $ | 239 |
| $ | — |
| $ | 74,706 |
| $ | (295 | ) | $ | (572 | ) | $ | — |
| $ | 160 |
| $ | 74,238 |
|
See Notes to the Consolidated Financial Statements beginning on page 9.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
|
| | |
| E.I. du Pont de Nemours and Company
| |
| Notes to the Consolidated Financial Statements | |
Table of Contents
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited consolidated financial statementsConsolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP)("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year. These interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2016,, collectively referred to as the “2016 Annual Report.”Report”. The interim Consolidated Financial Statements include the accounts of the company and all of its subsidiaries in which a controlling interest is maintained.
Principles of Consolidation and Basis of Presentation
DowDuPont Inc. ("DowDuPont") was formed on December 9, 2015 to effect an all-stock, merger of equals strategic combination between The Dow Chemical Company ("Dow") and E. I. du Pont de Nemours and Company ("DuPont") (the "Merger Transaction"). On August 31, 2017 at 11:59 pm ET, (the "Merger Effectiveness Time") pursuant to the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017 (the "Merger Agreement"), Dow and DuPont each merged with wholly owned subsidiaries of DowDuPont ("Mergers") and, as a result of the Mergers, Dow and DuPont became subsidiaries of DowDuPont (collectively, the "Merger"). Prior to the Merger, DowDuPont did not conduct any business activities other than those required for its formation and matters contemplated by the Merger Agreement. DowDuPont intends to pursue, subject to the receipt of approval by the board of directors of DowDuPont, the separation of the combined company's agriculture business, specialty products business and material science business through a series of tax-efficient transactions (collectively, the Intended Business Separations).
For purposes of DowDuPont's financial statement presentation, Dow was determined to be the accounting acquirer in the Merger and DuPont's assets and liabilities are reflected at fair value as of the Merger Effectiveness Time. In connection with the Merger and the related accounting determination, DuPont has elected to apply push-down accounting and reflect in its financial statements, the fair value of its assets and liabilities. DuPont's interim Consolidated Financial Statements for periods following the close of the Merger are labeled “Successor” and reflect DowDuPont’s basis in the fair values of the assets and liabilities of DuPont. All periods prior to the closing of the Merger reflect the historical accounting basis in DuPont's assets and liabilities and are labeled “Predecessor.” The interim Consolidated Financial Statements and Footnotes include a black line division between the columns titled "Predecessor" and "Successor" to signify that the amounts shown for the periods prior to and following the Merger are not comparable. See Note 3 for additional information on the Merger.
Transactions between DowDuPont, DuPont, Dow and their affiliates and other associated companies are reflected in the Successor consolidated financial statements and disclosed as related party transactions when material. Related party transactions with DowDuPont and Dow and their affiliates were not material as of September 30, 2017 and for the period September 1 through September 30, 2017.
As a condition of the regulatory approval for the Merger Transaction, the company is required to divest certain assets related to its Crop Protection business and research and development ("R&D") organization, specifically the company’s Cereal Broadleaf Herbicides and Chewing Insecticides portfolios, including Rynaxypyr®, Cyazypyr® and Indoxacarb as well as the Crop Protection R&D pipeline and organization, excluding seed treatment, nematicides, and late-stage R&D programs. On March 31, 2017, the company entered into a definitive agreement (the "FMC Transaction Agreement") with FMC Corporation ("FMC"). Under the FMC Transaction Agreement, FMC will acquire the Crop Protection business and R&D assets that DuPont is required to divest in order to obtain European Commission ("EC") approval of the Merger Transaction as described above, (the "Divested Ag Business") and DuPont has agreed to acquire certain assets relating to FMC’s Health and Nutrition segment, excluding its Omega-3 products, (the "Acquired H&N Business") (collectively, the "FMC Transactions"). This transaction closed on November 1; see Note 4 for further information regarding the closing.
Basis
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The assets and liabilities related to the Divested Ag Business at September 30, 2017 are presented as held for sale in the interim Consolidated Balance Sheet. The sale of the Divested Ag Business meets the criteria for discontinued operations and as such, earnings are included within income from discontinued operations after income taxes for all periods presented. The sum of the individual earnings per share amounts from continuing operations and discontinued operations may not equal the total company earnings per share amounts due to rounding. The cash flows and comprehensive income related to the Divested Ag Business have not been segregated and are included in the interim Condensed Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income, respectively, for all periods presented. Amounts related to the Divested Ag Business are consistently included or excluded from the Notes to the interim Consolidated Financial Statements based on the respective financial statement line item. See Note 4 for further information.
On July 1, 2015, the company completed the separation of its Performance Chemicals segment through the spin-off of all of the issued and outstanding stock of The Chemours Company ("Chemours"). In accordance with GAAP, the results of operations of the Performance Chemicals segment are presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented. The sum of the individual earnings per share amounts from continuing operations and discontinued operations may not equal the total company earnings per share amounts due to rounding.
Certain reclassifications of prior year's data have been made to conform to current year's presentation. As noted below under “Recent Accounting Pronouncements”,described in Note 2, effective January 1, 2017, the company adopted the Financial Accounting Standards Board (FASB)(“FASB”) Accounting Standards Update (ASU)("ASU") No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. In conjunction with the adoption of this ASU, the company retrospectively reclassified cash flows related to income tax impacts associated with employee share-based payments in the interim Condensed Consolidated Statements of Cash Flows, as described below.in Note 2.
Significant Accounting Policies
The company's accounting policies described below have been aligned with DowDuPont as a result of the Merger. See Note 1 in the 2016 Annual Report for information on DuPont's other significant accounting policies.
Cost of Goods Sold
Successor periods - Cost of goods sold primarily includes the cost of manufacture and delivery, ingredients or raw materials, direct salaries, wages and benefits and overhead, non-capitalizable costs associated with capital projects and other operational expenses.
Predecessor periods - Cost of goods sold primarily includes the cost of manufacture and delivery, ingredients or raw materials, direct salaries, wages and benefits and overhead.
Other Operating Charges
Predecessor periods - Other operating charges includes product claim charges and recoveries, non-capitalizable costs associated with capital projects and other operational expenses.
Selling, General and Administrative Expenses
Successor periods - Selling, general and administrative expenses primarily include selling and marketing expenses, commissions, functional costs, and business management expenses.
Predecessor periods - Selling, general and administrative expenses primarily include selling and marketing expenses, commissions, functional costs, business management expenses and integration and separation costs.
Integration and Separation Costs
Successor periods - Integration and separation costs includes costs incurred to prepare for and close the Merger, post-Merger integration expenses and costs incurred to prepare for the Intended Business Separations. These costs primarily consist of financial advisory, information technology, legal, accounting, consulting and other professional advisory fees associated with preparation and execution of these activities.
Changes in Accounting and Reporting
Within the Successor period, DuPont made the following changes in accounting and reporting to harmonize its accounting and reporting with DowDuPont.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Within the Successor period of the interim Consolidated Statements of Operations:
Included royalty income within net sales. In the Predecessor periods, royalty income is included within sundry income (expense) - net.
Eliminated the other operating charges line item. In the Successor period, these charges are included in costs of goods sold, selling, general and administrative expenses and amortization of intangibles.
Presented amortization of intangibles as a separate line item. In the Predecessor periods, amortization is included within selling, general and administrative expenses, other operating charges, and research and development expenses
Presented integration and separation costs as a separate line item. In the Predecessor periods, these costs are included within selling, general and administrative expenses.
Included interest accrued related to unrecognized tax benefits in the provision for income taxes. In the Predecessor period, interest accrued related to unrecognized tax benefits is included in sundry income (expense) - net.
Within the Successor period of the interim Condensed Consolidated Balance Sheets:
Included loans to nonconsolidated affiliates within noncurrent receivables. In the Predecessor period, loans are included within investment in nonconsolidated affiliates.
Included accrued discounts and rebates within accounts payable. In the Predecessor period, accrued discounts and rebates are included within accrued and other current liabilities.
Included non-current pension liabilities within pension and other post employment benefits - noncurrent. In the Predecessor period, non-current pension liabilities are included within other noncurrent obligations.
Within the Successor period of the interim Condensed Consolidated Statements of Cash Flows:
Included foreign currency exchange contract settlements within cash flows from operating activities, regardless of hedge accounting qualification. In the Predecessor period, DuPont reflected non-qualified hedge programs, specifically forward contracts, options and cash collateral activity, within cash flows from investing activities. In the Predecessor period, DuPont reflected cash flows from qualified programs within the line item it related to (i.e., revenue hedge cash flows presented within changes from accounts receivable).
Aligned the line items within the "change in operating assets and liabilities - net" to the DowDuPont presentation, including accounts and notes receivable, inventories, accounts payable, and other assets and liabilities. In the Predecessor period, the line item "changes in operating assets and liabilities - net" includes accounts and notes receivable, inventories and other operating assets, accounts payable and other operating liabilities, and accrued interest and income taxes.
Use of Estimates
In connection with the Merger, DowDuPont has performed a preliminary allocation of the total consideration exchanged for the DuPont assets and liabilities it acquired using preliminary estimates. The estimates are subject to change as discussed in Note 3.
Segments
Prior to the Merger, DuPont's reportable segments included Agriculture, Electronics & Communication, Industrial Biosciences, Nutrition & Health, Performance Materials, Protection Solutions and Other. Effective with the Merger, DuPont’s business activities are components of its parent company’s business operations. DuPont’s business activities, including the assessment of performance and allocation of resources, will be reviewed and managed by DowDuPont. Information used by the chief operating decision maker of DuPont relates to the company in its entirety. Accordingly, there are no separate reportable business segments for DuPont under Accounting Standards Codification ("ASC") Topic 280 “Segment Reporting” and DuPont's business results are reported in this Form 10-Q as a single operating segment.
Note 2. Recent Accounting PronouncementsGuidance
Recently Adopted Accounting Pronouncements Implemented in 2017Guidance
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which modifies the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows the company to repurchase more of an employee’s vested shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows. The company adopted this standard as of January 1, 2017.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The primary impact of adoption was the recognition of excess tax benefits in the company's provision for income taxes rather than additional paid-in capital, which is applied prospectively in accordance with the guidance. Adoption of the new standard resulted in the recognition of $20$5 million, $30 million and $0 million of excess tax benefits in the company's provision for income taxes rather than additional paid-in capital for the quarter ended Marchperiod July 1 through August 31, 2017.2017, the period January 1 through August 31, 2017, and the period September 1 through September 30, 2017, respectively.
The company elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented which resulted in a decrease to both net cash used for operating activities and net cash provided by financing activities of $20 and $15$22 million for quartersthe nine months ended March 31, 2017 and 2016, respectively.September 30, 2016. The presentation requirements for cash flows related to employee taxes paid for withheld shares resulted in a decrease to both net cash used for operating activities and net cash provided by financing activities of $26 and $23$28 million for the quartersnine months ended March 31, 2017 and 2016, respectively.September 30, 2016.
The remaining updates required by this standard did not have a material impact to the company’s interim Consolidated Financial Statements.
New Accounting PronouncementsGuidance Issued But Not Adopted as of September 30, 2017
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. The new guidance expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged items in the financial statements. For cash flow and net investment hedges existing as of the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year in which an entity adopts. Presentation and disclosure guidance is required to be Implementedadopted prospectively. The new standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted in any interim period. All transition requirements and elections should be applied to hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. The company is currently evaluating the impact this guidance will have on the Consolidated Financial Statements and related disclosures.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new guidance requires registrants to present the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Registrants will present the other components of net periodic benefit cost separately from the service cost component; and, the line item or items used in the income statement to present the other components of net periodic benefit cost must be disclosed. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period. The new standard must be adopted retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the income statement, and prospectively for the capitalization of the service cost component of net periodic benefit cost in assets. The company plans to adopt this guidance in the first quarter of 2018 and is currently evaluating the impact on the Consolidated Financial Statements and related disclosures. See Note 1415 for the components of net periodic benefit cost.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The new guidance eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. In connection with the Merger Transaction, the company adopted the policy of the parent company and will perform its annual goodwill impairment test in the fourth quarter. Previously, the annual impairment test was performed in the third quarter. The company is currently evaluatingplanning to early adopt the timingnew guidance for the annual goodwill impairment test that will be performed in the fourth quarter of adoption.2017.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. The new guidance narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set)"set") is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs, as defined by the ASU. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and should be applied prospectively. Early adoption is permitted. The company will adopt this standard on January 1, 2018 and will apply this guidanceit prospectively to all applicable transactions after the adoption date.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset is sold to an outside party. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period. The new guidance requires adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The company plans to adopt this guidance in the first quarter of 2018 and is currently evaluatingwith the impactexpectation that this guidance will have an immaterial impact on the Consolidated Financial Statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The new guidance makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the company would be required to apply the amendments prospectively as of the earliest date practicable. The company is currently evaluating the impact this guidance will have on the Consolidated Financial Statements and related disclosures, but does not expect there to be a significant impact.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments under the new guidance will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability, other than leases that meet the definition of a short-term lease. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The new leasing standard will be effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, requiring application at the beginning of the earliest comparative period presented. The company is currently evaluating the impact of adopting this guidance on its financial positionthe Consolidated Financial Statements and results of operations.related disclosures. The company is the lessee under various agreements for facilities and equipment that are currently accounted for as operating leases. A complete discussion of these leases is included in the company's 2016 Annual Report in Note 15, "Commitments and Contingent Liabilities."
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was further updated in March, April, May and December 2016. The new guidance clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new standard also will result in additional disclosure requirements to describe the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB approved a deferral of the ASU effective date from annual and interim periods beginning after December 15, 2016 to annual and interim periods beginning after December 15, 2017. The company continues to evaluate the impact of the new standard on itsthe Consolidated Financial Statements and related disclosures. Based on the analysis conducted to date, the company does not believe the impact upon adoption will be material to its Consolidated Financial Statements. The company plans to adopt the standard in the first quarter of 2018 under the modified retrospective transition method.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Planned 3. Business Combinations
Acquisition of Granular, Inc.
On August 31, 2017, the Company acquired Granular, Inc., a leading provider of software and analytics tools that helps farms improve efficiency, profitability, and sustainability. The purchase price was approximately $250 million and was primarily allocated to goodwill, developed technology and customer relationships.The fair value of the acquired assets relate to Granular, Inc. are included in the fair value measurement of DuPont’s assets and liabilities as a result of the application of push down accounting in connection with the Merger discussed below.
Merger with Dow Chemical
On December 11, 2015,Upon completion of the Merger, (i) each share of common stock, par value $0.30 per share, of the company (the “DuPont Common Stock”) was converted into the right to receive 1.2820 fully paid and non-assessable shares of DowDuPont common stock, par value $0.01 per share, ("DowDuPont Common Stock"), in addition to cash in lieu of any fractional shares of DowDuPont Common Stock, and (ii) each share of DuPont Preferred Stock—$4.50 Series and The Dow Chemical Company (Dow) announced entryDuPont Preferred Stock—$3.50 Series (collectively, the “DuPont Preferred Stock”) issued and outstanding immediately prior to the Merger Effectiveness Time remains issued and outstanding and was unaffected by the Mergers.
As provided in the Merger Agreement, at the Merger Effectiveness Time, all options relating to shares of DuPont Common Stock that were outstanding immediately prior to the effective time of the Mergers were generally automatically converted into an Agreementoptions relating to shares of DowDuPont Common Stock and Planall restricted stock units and performance based restricted stock units relating to shares of DuPont Common Stock that were outstanding immediately prior to the effective time of the Mergers were generally automatically converted into restricted stock units relating to shares of DowDuPont Common Stock, in each case, after giving effect to appropriate adjustments to reflect the Mergers and otherwise generally on the same terms and conditions as applied under the applicable plans and award agreements immediately prior to the Merger Effectiveness Time. See Note 16 for further discussion.
Prior to the Merger, shares of DuPont Common Stock were registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended and listed on Marchthe New York Stock Exchange (the “NYSE”). As a result of the Merger, on August 31, 2017, (the Merger Agreement), under which the companies will combine in an all-stock mergercompany requested that the NYSE withdraw the shares of equals (the Merger Transaction) subjectDuPont Common Stock from listing on the NYSE and filed a Form 25 with the U.S. Securities and Exchange Commission ("SEC") to satisfaction of customary closing conditions, including receipt of regulatory approval. The combined company will be namedreport that DuPont Common Stock is no longer listed on the NYSE. DuPont continues to have Preferred Stock outstanding and it remains listed on the NYSE. DowDuPont Inc. (DowDuPont). The Merger Transaction will be accomplished throughCommon Stock is listed and trades on the merger of separate DowDuPont subsidiaries with and into each of Dow and DuPont with DuPont and Dow surviving as subsidiaries of DowDuPont (the Mergers). Following the consummationNYSE, ticker symbol DWDP.
As a condition of the merger, regulatory approval of the Merger, DuPont was required to divest a portion of its Crop Protection business, including certain research and development capabilities. See Note 4 for additional information.
DuPont and Dow intend to pursue, subject to the receipt of approval by the boardBoard of directorsDirectors of DowDuPont, the separation of the combined company’s agriculture, business, specialty products business and material science businessbusinesses through a series of tax-efficient transactions (collectively, the Intended Business Separations).
On March 27, 2017,Preliminary Allocation of Purchase Price
Based on an evaluation of the provisions of ASC 805, "Business Combinations", Dow was determined to be the accounting acquirer in the Merger. DowDuPont has applied the acquisition method of accounting with respect to the assets and liabilities of DuPont, which have been measured at fair value as of the date of the Merger. In connection with the Merger and Dow announced that the European Commission (EC) granted conditional regulatory clearancerelated accounting determination, DuPont has elected to apply push-down accounting and reflect in Europeits financial statements, the fair value of assets and liabilities. Such fair values have been reflected in the Successor Consolidated Financial Statements.
DuPont's assets and liabilities were measured at estimated fair values as of the Merger Effectiveness Time, primarily using Level 3 inputs. Estimates of fair value represent management's best estimate which require a complex series of judgments about future events and uncertainties. Third-party valuation specialists were engaged to assist in the valuation of these assets and liabilities.
The total fair value of consideration transferred for the Merger Transaction conditional on DuPont and Dow fulfilling certain commitments. DuPontwas approximately $74,680 million. Total consideration is required to sell certain assets related to its Crop Protection business and research and development (R&D) organization, specificallycomprised of the company’s Cereal Broadleaf Herbicides and Chewing Insecticides portfolios, including Rynaxypyr®, Cyazypyr® and Indoxacarbequity value of the DowDuPont shares as well as the Crop Protection R&D pipeline and organization, excluding seed treatment, nematicides, and late-stage R&D programs. The company will continue to develop and bring to market its late-stage Crop Protection R&D programs and retain the personnel needed to support the Crop Protection marketed products and R&D programs not required to be divested per the EC's conditional approval.
On March 31, 2017, DuPont entered into a definitive agreement (the FMC Transaction Agreement) with FMC Corporation (FMC). Under the FMC Transaction Agreement, FMC will acquire the Crop Protection business and R&D assets that DuPont is required to divest in order to obtain EC approval of the Merger Transaction as described above, (the Divested Ag Business) andEffectiveness Time, that were issued in exchange for DuPont has agreed to acquire certain assets relating to FMC’s Health and Nutrition segment, excluding its Omega-3 products, (the Acquired H&N Business) (collectively,shares, the FMC Transactions). Additionally, FMC will pay DuPont $1,200 in cash subject to certain adjustments as set forth in the FMC Transaction Agreement, which reflects the difference in value between the Divested Ag Businessfor fractional shares, and the Acquired H&N Business. DuPont will retain accounts receivableportion of DuPont's share awards and accounts payable associated with the Divested Ag Business, with an expected net value of $425 at closing.
The divestiture will satisfy DuPont’s commitments to the EC in connection with its conditional regulatory clearance of the merger with Dow. The FMC Transaction is expected to close in the fourth quarter of 2017, subject to the closingshare options earned as of the Merger Transaction, in additionEffectiveness Time. Share awards and share options converted to customary closing conditions, including regulatory approvalDowDupont equity instruments, but not vested, were $144 million as of the FMC Transactions. Under the FMC Transaction Agreement, DuPont is not required to take certain specified actions to obtain regulatory approval wi
th respect to the acquisition of the Acquired H&N Business (Divestiture Actions) that would reasonably be likely to result in the one-year loss of revenues to DuPont, Dow, DowDuPont Inc., their respective subsidiaries or the Acquired H&N Business in excess of $350 in the aggregate (based on fiscal year 2016 annual revenues) (a Substantial Detriment).
To accommodate the requirements of the FMC Transaction Agreement, DuPont and Dow entered into Amendment No. 1 to the Merger Agreement which, among other things, extends the termination date of the Merger Agreement from June 15, 2017 to August 31, 2017, and sets forth the companies' current intention, subject to approval of the DowDuPont board of directors, that the first step in the Intended Business Separation processwhich will be expensed over the spin-off of the post-merger material science business, assuming that such sequencing would allow for the completion of all of the Intended Business Separations, through spin-offs as currently anticipated, within 18 months following closing of the merger and would not adversely impact the value of the intended spin-off transactions to DowDuPont's shareholders.remaining future vesting period.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
The following table summarizes the fair value of consideration exchanged as a result of the Merger:
|
| | | |
Consideration In millions (except exchange ratio) | |
| DuPont Common Stock outstanding as of the Merger Effectiveness Time | 868.3 |
|
| DuPont exchange ratio | 1.2820 |
|
| DowDuPont Common Stock issued in exchange for DuPont Common Stock | 1,113.2 |
|
Fair value of DowDuPont Common Stock issued 1 | $ | 74,195 |
|
Fair value of DowDuPont equity awards issued in exchange for outstanding DuPont equity awards 2 | 485 |
|
| Total consideration | $ | 74,680 |
|
| |
| 1. | Amount was determined based on the price per share of Dow Common Stock of $66.65 on August 31, 2017. |
| |
| 2. | Represents the fair value of replacement awards issued for DuPont's equity awards outstanding immediately before the Merger and attributable to the service periods prior to the Merger. The previous DuPont equity awards were converted into the right to receive 1.2820 shares of DowDuPont Common Stock. |
The acquisition method of accounting requires, among other things, that identifiable assets acquired and liabilities assumed be recognized on the balance sheet at the fair values as of the acquisition date. In determining the fair value, DowDuPont utilized various forms of the income, cost and market approaches depending on the asset or liability being fair valued. The estimation of fair value required significant judgment related to future net cash flows (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), discount rates reflecting the risk inherent in millions, except per share)each cash flow stream, competitive trends, market comparables and other factors. Inputs were generally determined by taking into account historical data, supplemented by current and anticipated market conditions, and growth rates.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AdditionalThe table below presents the preliminary fair value that was allocated to DuPont's assets and liabilities based upon fair values as determined by DowDuPont. The valuation process to determine the fair values is not yet complete. The company will finalize the amounts recognized as it obtains the information aboutnecessary to complete the analysis, but no later than one year from the date of the Merger. Final determination of the fair values may result in further adjustments to the values presented in the following table.
|
| | | |
| Fair Value of DuPont Assets and Liabilities as of the Merger Effectiveness Time | |
| (In millions) |
| Fair Value of Assets | |
| Cash and cash equivalents | $ | 4,005 |
|
| Marketable securities | 2,849 |
|
| Accounts and notes receivable - net | 7,851 |
|
| Inventories | 8,886 |
|
| Other current assets | 360 |
|
| Investment in nonconsolidated affiliates | 1,685 |
|
Assets held for sale - current
| 3,184 |
|
| Property, plant and equipment - net | 12,122 |
|
Goodwill 1 | 45,501 |
|
Other intangible assets 1 | 27,844 |
|
| Deferred income tax assets | 487 |
|
| Other assets | 2,076 |
|
| Total Assets | $ | 116,850 |
|
| Fair Value of Liabilities | |
Short-term borrowings and capital lease obligations
| $ | 5,319 |
|
| Accounts payable | 3,283 |
|
| Income taxes payable | 140 |
|
| Accrued and other current liabilities | 3,517 |
|
Liabilities held for sale - current
| 104 |
|
| Long-term debt | 9,878 |
|
| Deferred income tax liabilities | 9,408 |
|
Pension and other post employment benefits - noncurrent 2 | 8,092 |
|
| Other noncurrent obligations | 2,028 |
|
| Total Liabilities | $ | 41,769 |
|
| Noncontrolling interests | 162 |
|
| Preferred stock | 239 |
|
| Fair Value of Net Assets (Consideration for the Merger) | $ | 74,680 |
|
| |
| 1. | See Note 11 for additional information. |
| |
| 2. | Includes pension and other post employment benefits as well as long-term disability obligations. |
The significant fair value adjustments included in the preliminary allocation of purchase price are discussed below.
Inventories
Inventory is primarily comprised of finished products of $5,115 million, semi-finished products of $3,066 million and raw materials of $705 million. Fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort. Fair value of work-in-process inventory was primarily calculated as the estimated selling price, adjusted for estimated costs to complete the manufacturing, estimated costs of the selling effort, as well as a reasonable profit margin on the remaining manufacturing and selling effort. The fair value of raw materials was determined to approximate the historical carrying value. For inventory accounted for under the first-in, first-out method and average cost method, the preliminary fair value step-up of inventory will be recognized in costs of goods sold as the inventory is sold. The pre-tax amount recognized for the period September 1 through September 30, 2017, was $429 million, of which $360 million is reflected in costs of goods sold within loss from continuing operations before income taxes and $69 million is reflected in loss from discontinued operations after income taxes in the Consolidated Statements of Operations. For inventory accounted for under the last-in, first-out ("LIFO") method, the preliminary fair value of inventory becomes the LIFO base layer inventory.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant & Equipment
Property, plant and equipment is comprised of land and land improvements of $967 million, buildings of $2,615 million, machinery and equipment of $7,540 million and construction in progress of $1,000 million. The preliminary estimated fair value of property and equipment was primarily determined using a market approach for land and certain types of equipment, and a replacement cost approach for property and equipment. The market approach for certain types of equipment represents a sales comparison that measures the value of an asset through an analysis of sales and offerings of comparable assets. The replacement cost approach used for all other depreciable property and equipment measures the value of an asset by estimating the cost to acquire or construct comparable assets and adjusts for age and condition of the asset.
Goodwill
The excess of the consideration for the Merger Agreementover the preliminary net fair value of assets and liabilities was recorded as goodwill. The Merger resulted in the recognition of $45,501 million of goodwill, which is not deductible for tax purposes. Goodwill largely consists of expected cost synergies resulting from the Merger and the Intended Business Separations, is set forththe assembled workforce of DuPont and future technology and customers. Cost synergies will be achieved through a combination of workforce consolidations and savings from actions such as procurement synergies, harmonizing energy contracts at large sites, optimizing warehouse and logistics footprints, implementing materials and maintenance best practices and leveraging existing research and development knowledge management systems.
Other Intangible Assets
Other intangible assets primarily consist of customer-related, developed technology, trademarks and trade names and germplasm. The preliminary customer-related value was determined using the excess earnings method while the preliminary developed technology, trademarks and trade names and germplasm values were primarily determined utilizing the relief from royalty method. Both the excess earnings and relief from royalty methods are forms of the income approach. Refer to Note 11 for further information on other intangible assets.
Income Taxes
The deferred income tax assets and liabilities include the expected future federal, state and foreign tax consequences associated with temporary differences between the preliminary fair values of the assets and liabilities and the respective tax bases. Tax rates utilized in calculating deferred income taxes generally represent the enacted statutory tax rates in the company’s Current Reports on Form 8-K filedjurisdictions in which legal title of the underlying asset or liability resides.
The preliminary fair value of “Deferred income tax assets” includes a $172 million adjustment to establish a valuation allowance for certain historical net operating losses that will not be fully realized as a result of the Merger. Included in the fair value adjustment related to “Deferred income tax liabilities” is a $546 million adjustment reflecting a change in determination as to the reinvestment strategy of certain foreign operations of the company.
Integration and Separation Costs
Integration and separation costs have been and are expected to be significant. These costs to date primarily have consisted of financial advisory, information technology, legal, accounting, consulting, and other professional advisory fees associated with the U.S. Securitiespreparation and Exchange Commission (the SEC) on March 31, 2017, March 27, 2017execution of activities related to the Merger. These costs are recorded within Integration and December 11, 2015;separation costs in the company’s 2015 and 2016 Annual Reports filed with the SEC on February 4, 2016 and February 2, 2017, respectively,Successor period and the registration statement on Form S-4 (File No. 333-209869) (as amended, the Registration Statement) filed by DowDuPont and declared effective by the SEC on June 9, 2016. The Registration Statement constitutes a prospectus of DowDuPont and includes a joint proxy statement of Dow and DuPont. The joint proxy statement relates to the separate special meetings of the companies’ respective common stock shareholders of record as of the close of business on June 2, 2016, to adopt the Merger Agreement and related matters. DuPont's special meeting of stockholders was held on July 20, 2016, which resulted in a vote for adoption of the Merger Agreement and approval of related matters.
Dow and DuPont continue to work constructively with regulators to address questions and obtain approval, and to prepare for closing as soon as possible after closing conditions have been met. Consummation of the merger is contingent on satisfaction of customary closing conditions, including the receipt of regulatory approval from the U.S., European Commission, China, Brazil and Canada. Subject to satisfaction of these customary closing conditions, including the receipt of regulatory approvals, closing is anticipated to occur no earlier than August 1, 2017.
During the three months ended March 31, 2017 and 2016, the company incurred $170 and $24, respectively, of costs in connection with the planned merger with Dow and the Intended Business Separations, including costs relating to integration and separation planning. These costs wereare recorded inwithin selling, general and administrative expenses in the company's interimPredecessor periods within the Consolidated Income Statements and primarily include financial advisory, legal, accounting, consulting and other advisory fees and expenses.of Operations.
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Integration and separation costs | $ | 71 |
| | | | |
| Selling, general and administrative expenses | | $ | 210 |
| $ | 122 |
| $ | 581 |
| $ | 222 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 3.4. Divestitures and Other Transactions
Merger Remedy - Divested Ag Business
As a condition of the regulatory approval of the Merger Transaction, the company is required to divest certain assets related to its Crop Protection business and research and development ("R&D") organization, specifically the company’s Cereal Broadleaf Herbicides and Chewing Insecticides portfolios, including Rynaxypyr®, Cyazypyr® and Indoxacarb as well as the Crop Protection R&D pipeline and organization, excluding seed treatment, nematicides, and late-stage R&D programs. On March 31, 2017, the company entered into a definitive agreement (the "FMC Transaction Agreement") with FMC Corporation ("FMC"). Under the FMC Transaction Agreement, FMC will acquire the Crop Protection business and R&D assets that DuPont is required to divest in order to obtain European Commission ("EC") approval of the Merger Transaction as described above, (the "Divested Ag Business") and DuPont has agreed to acquire certain assets relating to FMC’s Health and Nutrition segment, excluding its Omega-3 products, (the "Acquired H&N Business") (collectively, the "FMC Transactions"). The assets and liabilities related to the Divested Ag Business at September 30, 2017 are presented as held for sale in the interim Consolidated Balance Sheet. The sale of the Divested Ag Business meets the criteria for discontinued operations and as such, earnings are included within (loss) income from discontinued operations after income taxes for all periods presented.
On November 1, 2017, the company completed the FMC Transactions through the disposition of the Divested Ag Business and the acquisition of the Acquired H&N Business. The preliminary fair value as determined by the company of the Acquired H&N Business is $1,900 million. The FMC Transactions includes cash consideration payment to DuPont of approximately $1,200 million, which reflects the difference in value between the Divested Ag Business and the Acquired H&N Business, subject to adjustments for inventory of the Divested Ag Business and net working capital of the Acquired H&N Business.
The company will apply the acquisition method of accounting in accordance with ASC 805, Business Combinations, to the Acquired H&N Business which requires the assets acquired and liabilities assumed to be recognized on the balance sheet at their fair values as of the acquisition date. As a result of the very recent closing of the FMC Transactions and the company's limited access to Acquired H&N Business information prior to the closing, the initial accounting for the business combination is incomplete at this time. As a result, the company is unable to provide amounts recognized as of the acquisition date for major classes of assets acquired and liabilities assumed. In addition, the company is unable to provide the supplemental pro forma revenue and earnings for the combined business. The company will include this information in its Annual Report on Form 10-K for the year ending December 31, 2017.
The results of operations of the Divested Ag Business are presented as discontinued operations as summarized below:
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Net sales | $ | 116 |
| $ | 191 |
| $ | 271 |
| $ | 1,068 |
| $ | 1,077 |
|
| Cost of goods sold | 110 |
| 79 |
| 93 |
| 412 |
| 399 |
|
| Other operating charges |
|
| 5 |
| 4 |
| 17 |
| 14 |
|
| Research and development expenses | 9 |
| 24 |
| 32 |
| 95 |
| 101 |
|
| Selling, general and administrative expenses | 29 |
| 46 |
| 46 |
| 146 |
| 128 |
|
| Restructuring and asset related charges - net | — |
| — |
| — |
| — |
| (3 | ) |
| Sundry income (expense) - net | — |
| — |
| (1 | ) | 7 |
| — |
|
| (Loss) income from discontinued operations before income taxes | (32 | ) | 37 |
| 95 |
| 405 |
| 438 |
|
| (Benefit from) provision for income taxes | (12 | ) | 8 |
| 16 |
| 79 |
| 84 |
|
| (Loss) Income from discontinued operations after income taxes | $ | (20 | ) | $ | 29 |
| $ | 79 |
| $ | 326 |
| $ | 354 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table presents depreciation and capital expenditures of the discontinued operations related to the Divested Ag Business:
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Depreciation | $ | — |
| $ | 5 |
| $ | 8 |
| $ | 21 |
| $ | 24 |
|
| Capital expenditures | $ | 4 |
| $ | — |
| $ | 8 |
| $ | 8 |
| $ | 18 |
|
The carrying amount of major classes of assets and liabilities classified as assets and liabilities held for sale at September 30, 2017 and December 31, 2016 related to the Divested Ag Business consist of the following:
|
| | | | | | |
| | Successor | Predecessor |
| (In millions) | September 30, 2017 | December 31, 2016 |
| Cash and cash equivalents | $ | 125 |
| $ | 57 |
|
| Accounts and notes receivable - net | 39 |
| 12 |
|
| Inventories | 973 |
| 323 |
|
| Other current assets | 1 |
| 1 |
|
| Property, plant and equipment - net | 523 |
| 380 |
|
| Goodwill | 145 |
| 11 |
|
| Other intangible assets | 1,360 |
| — |
|
| Other assets | 5 |
| 5 |
|
| Assets held for sale | $ | 3,171 |
| $ | 789 |
|
| Accounts payable | 62 |
| 27 |
|
| Accrued and other current liabilities | 13 |
| 12 |
|
Deferred income tax liabilities
| — |
| 6 |
|
| Pension and other post employment benefits - noncurrent | 12 |
| — |
|
| Other noncurrent obligations | 21 |
| 29 |
|
| Liabilities held for sale | $ | 108 |
| $ | 74 |
|
Food Safety Diagnostic Sale
In February 2017, the company completed the sale of its global food safety diagnostic business, a part of the Nutrition & Health segment,business, to Hygiena LLC. The sale resulted in a pre-tax gain of $162 million ($86 million net of tax). The gain was recorded in othersundry income (expense) - net in the company's interim Consolidated Income StatementsStatement of Operations for the three months ended Marchperiod January 1 through August 31, 2017.
DuPont (Shenzhen) Manufacturing Limited
In March 2016, the company recognized the sale of its 100 percent ownership interest in DuPont (Shenzhen) Manufacturing Limited to the Feixiang Group. The sale of the entity, which held certain buildings and other assets, resulted in a pre-tax gain of $369 million ($214 million net of tax). The gain was recorded in othersundry income (expense) - net in the company's interim Consolidated Income StatementsStatement of Operations for the threenine months ended March 31, 2016 and was reflected as a Corporate item.September 30, 2016.
Performance Chemicals
On July 1, 2015, DuPont completed the separation of its Performance Chemicals segment through the spin-off of all of the issued and outstanding stock of The Chemours Company (the Separation)"Separation"). In connection with the Separation, the company and The Chemours Company (Chemours)("Chemours") entered into a Separation Agreement, discussed below, and a Tax Matters Agreement and certain ancillary agreements, including an employee matters agreement, agreements related to transition and site services, and intellectual property cross licensing arrangements. In addition, the companies have entered into certain supply agreements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Separation Agreement
The company and Chemours entered into a Separation Agreement that sets forth, among other things, the agreements between the company and Chemours regarding the principal transactions necessary to effect the Separation and also sets forth ancillary agreements that govern certain aspects of the company’s relationship with Chemours after the separation. Among other matters, the Separation Agreement and the ancillary agreements provide for the allocation between DuPont and Chemours of assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the completion of the Separation.
Pursuant to the Separation Agreement, Chemours indemnifies DuPont against certain litigation, environmental, workers' compensation and other liabilities that arose prior to the distribution. The term of this indemnification is generally indefinite and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments. In 2017, DuPont and Chemours amended the Separation Agreement to provide for a limited sharing of potential future PFOA liabilities for a period of five years beginning July 6, 2017. See Note 13 for further information. In connection with the recognition of liabilities related to these matters, the company records an indemnification asset when recovery is deemed probable. At March 31,September 30, 2017, the indemnified assets are $422$96 million within accounts and notes receivable - net and $350$342 million within other assets on the condensedinterim Condensed Consolidated Balance Sheet. See Note 1113 for further discussion of certain litigation and environmental matters indemnified by Chemours.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
LossIncome (loss) from discontinued operations after taxes in the company's interim Consolidated Income Statement of Operations during the three months ended Marchperiod January 1 through August 31, 2017 reflects a tax benefit of $10 million associated with an adjustment to the tax benefit recognized in the first quarter of 2017 related to the charge for the perfluorooctanoic acid ("PFOA") multi-district litigation settlement. Income (loss) from discontinued operations after taxes for the period January 1 through August 31, 2017 includes a charge of $335 million ($224214 million net of tax) in connection with the perfluorooctanoic acid (PFOA)PFOA multi-district litigation settlement. See Note 1113 for further discussion. Income (loss) from discontinued operations after taxes during the three and nine months ended March 31,September 30, 2016, includes $7$10 million and $30 million, respectively, of costs in connection with the separation transaction primarily related to professional fees associated with preparation of regulatory filings and separation activities within finance, tax, legal, and information system functions.
Note 4. Employee Separation /5. Restructuring and Asset Related Charges Net
DowDuPont Cost Synergy Program
In September 2017, DowDuPont approved initial post-merger actions under the DowDuPont Cost Synergy Program (the “Synergy Program”) which is designed to integrate and optimize the organization following the Merger and Intended Business Separations. In connection with the approved actions under the Synergy Program, DuPont expects to incur pre-tax charges of approximately $70 million, comprised primarily of severance and related benefit costs. For the period September 1 through September 30, 2017, the company recognized pre-tax charges of $40 million in restructuring and asset related charges - net in the company's interim Consolidated Statements of Operations. These actions are expected to be substantially complete by the end of 2018.
DuPont account balances and activity for the DowDuPont Cost Synergy Program are summarized below:
|
| | | |
| (In millions) | Severance and Related Benefit Costs |
| Charges to (loss) income from continuing operations for the period September 1 through September 30, 2017 (Successor) | $ | 40 |
|
| Payments | (1 | ) |
| Non-cash compensation | (7 | ) |
| Balance as of September 30, 2017 | $ | 32 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On November 1, 2017, the company approved additional restructuring actions under the Synergy Program, adopted by the DowDuPont Board of Directors. Based on all actions approved to date under the Synergy Program, DuPont expects to record total pre-tax restructuring charges of about $850 million, comprised of approximately $350 million to $400 million of severance and related benefits costs; up to $360 million of asset related charges, and $110 million to $140 million of costs related to contract terminations. DuPont’s current estimated total pre-tax restructuring charges include the $40 million recorded for the period September 1 through September 30, 2017, comprised of severance and related benefit costs. DuPont expects to record pre-tax restructuring charges of approximately $115 million in the fourth quarter of 2017, with the remaining restructuring charges to be incurred by the end of 2019. The Synergy Program includes certain asset actions, including strategic decisions regarding the cellulosic biofuel business reflected in the preliminary fair value measurement of DuPont’s assets as of the merger date. Current estimated total pre-tax restructuring charges could be impacted by future adjustments to the preliminary fair value of DuPont’s assets.
2017 Restructuring Program
During the first quarter 2017, DuPont committed to take actions to improve plant productivity and better position its businesses for productivity and growth before and after the anticipated closing of the Merger Transaction.Transaction (the "2017 restructuring program"). In connection with these actions, the company expects to incurincurred pre-tax charges of $326,$1 million and $313 million, during the period July 1 through August 31, 2017 and January 1 through August 31, 2017 ("Predecessor" periods), respectively, recognized in restructuring and asset related charges - net in the company's interim Consolidated Statements of Operations. The charge for the period July 1 through August 31, 2017 is severance and related benefit costs. The charge for the period January 1 through August 31, 2017 is comprised of $293$279 million of asset-related charges and $33$34 million in severance and related benefit costs (the 2017 restructuring program).costs. The charges primarily relate to the second quarter closure of the Protection Solutions segment'sbusiness Cooper River manufacturing site located near Charleston, South Carolina. The asset-related charges mainly consist of accelerated depreciation associated with the closure. The actions associated with this plan are expected to be substantially complete by the end of 2017.
Of the $326 of pre-tax charges discussed above, $152 was recognized during the three months ended March 31, 2017 in employee separation / asset related charges, net, in the company's interim Consolidated Financial Statement, consisting of $33 of severance and related benefit costs and $119 of asset-related charges. The asset-related charges mainly consist of accelerated depreciation associated with the closure of the Cooper River manufacturing site. Additional charges for accelerated depreciation are expected in 2017, the majority of which will be recognized in the second quarter.
The 2017 restructuring program charge related to the segments, as well as corporate expenses, was as follows:
|
| | | |
| | Three Months Ended March 31, 2017 |
| Electronics & Communications | $ | 5 |
|
| Industrial Biosciences | 6 |
|
| Nutrition & Health | 2 |
|
| Performance Materials | 11 |
|
| Protection Solutions | 124 |
|
| Corporate expenses | 4 |
|
| | $ | 152 |
|
Account balances and activity for the 2017 restructuring program are summarized below:
| | | | Severance and Related Benefit Costs | Asset Related Charges1 | Total | |
| Charges to income from continuing operations for the quarter ended March 31, 2017 | $ | 33 |
| $ | 119 |
| $ | 152 |
| |
| (In millions) | | Severance and Related Benefit Costs | Asset Related Charges1 | Total |
| Charges to income from continuing operations for the period January 1 through August 31, 2017 (Predecessor) | | $ | 34 |
| $ | 279 |
| $ | 313 |
|
| Payments | (1 | ) | — |
| (1 | ) | (8 | ) | — |
| (8 | ) |
| Asset write-offs | — |
| (119 | ) | (119 | ) | — |
| (279 | ) | $ | (279 | ) |
| Balance as of March 31, 2017 | $ | 32 |
| $ | — |
| $ | 32 |
| |
| Balance as of August 31, 2017 | | $ | 26 |
| $ | — |
| $ | 26 |
|
| | | | | |
| Charges to income from continuing operations for the period September 1 through September 30, 2017 (Successor) | | $ | — |
| $ | — |
| $ | — |
|
| Payments | | (1 | ) | — |
| (1 | ) |
| Balance as of September 30, 2017 | | $ | 25 |
| $ | — |
| $ | 25 |
|
| |
1. | Includes accelerated depreciation related to site closure. Charge for accelerated depreciation represents the difference between the depreciation expense to be recognized over the revised useful life of the site, based upon the anticipated date the site will be closed and depreciation expense as determined utilizing the useful life prior to the restructuring action. |
La Porte Plant, La Porte, Texas
In March 2016, DuPont announced its decision to not re-start the Agriculture segment’sbusiness's insecticide manufacturing facility at the La Porte site located in La Porte, Texas. The facility manufacturesmanufactured Lannate® and Vydate® insecticides and has been shut down since November 2014. As a result of this decision, during the threenine months ended March 31,September 30, 2016, a pre-tax charge of $75 million was recorded in employee separation /restructuring and asset related charges - net in the company's interim Consolidated Income Statement of Operations which included $41 million of asset related charges, $18 million of contract termination costs, and $16 million of employee severance and related benefit costs.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
2016 Global Cost Savings and Restructuring Plan
At March 31,September 30, 2017, total liabilities related to the program were $63. The restructuring actions associated with the charge were substantially completed in 2016.$35 million. A complete discussion of restructuring initiatives is included in the company's 2016 Annual Report in Note 4, "Employee Separation /"Restructuring and Asset Related Charges - Net." In connection with these actions, the company incurred pre-tax charges of $10 million during the period July 1 through August 31, 2017, recognized in restructuring and asset related charges - net in the company’s interim Consolidated Statement of Operations. This was due to additional severance payments owed to previously terminated executives that became probable during the period.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Account balances and activity for the restructuring plan, which reflect timing of payments,program are summarized below:
| | | | Severance and Related Benefit Costs | Other Non-Personnel Charges1 | Total | |
| Balance at December 31, 2016 | $ | 100 |
| $ | 22 |
| $ | 122 |
| |
| (In millions) | | Severance and Related Benefit Costs | Other Non-Personnel Charges1 | Total |
| Balance at December 31, 2016 (Predecessor) | | $ | 100 |
| $ | 22 |
| $ | 122 |
|
| Payments | (50 | ) | (10 | ) | (60 | ) | (76 | ) | (11 | ) | (87 | ) |
| Net translation adjustment | 1 |
| — |
| 1 |
| 2 |
| — |
| 2 |
|
| Balance as of March 31, 2017 | $ | 51 |
| $ | 12 |
| $ | 63 |
| |
| Other adjustments | | 10 |
| — |
| 10 |
|
| Balance as of August 31, 2017 | | $ | 36 |
| $ | 11 |
| $ | 47 |
|
| | | | |
| Balance at September 1, 2017 (Successor) | | $ | 36 |
| $ | 11 |
| $ | 47 |
|
| Payments | | (11 | ) | (1 | ) | (12 | ) |
| Balance as of September 30, 2017 | | $ | 25 |
| $ | 10 |
| $ | 35 |
|
1. Other non-personnel charges consist of contractual obligation costs.
| |
| 1. | Other non-personnel charges consist of contractual obligation costs. |
During the three months ended March 31,September 30, 2016, a net charge of $2$17 million was recorded, associated with the 2016 global cost savingsconsisting of $14 million of restructuring and restructuring plan in employee separation / asset related charges - net and $3 million in sundry income (expense) -net in the company's interim Consolidated Income Statement.Statement of Operations. During the nine months ended September 30, 2016, a net (benefit) charge of $(68) million was recorded, consisting of $(71) million in restructuring and asset related charges - net and $3 million in sundry income (expense)-net in the company's interim Consolidated Statement of Operations. This was primarily due to a reduction in severance and related benefit costs partially offset by the identification of additional projects in certain segments, offsetbusinesses. The reduction in severance and related benefit costs was driven by the elimination of positions at a lower cost than expected as a result of redeployments and attrition as well as lower than estimated workforce reductions achieved through non-severance programs. Theindividual severance costs.
Asset Impairment
During the third quarter 2016, the company recognized a $158 million pre-tax impairment charge in restructuring and asset related charges - net chargein the company's interim Consolidated Statements of Operations related to indefinite-lived intangible trade names within the segmentsIndustrial Biosciences business. In connection with business strategy reviews and brand realignment conducted during the third quarter 2016, the company decided to phase out the use of certain acquired trade names within the business resulting in a change from an indefinite life to a finite useful life for these assets. As a result of these changes, the carrying value of the trade name assets exceeded the fair value.
The basis of the fair value for the three months ended March 31,charges was calculated utilizing an income approach (relief from royalty method) using Level 3 inputs within the fair value hierarchy, as described in the company’s 2016 Annual Report in Note 1, “Summary of Significant Accounting Policies.” The key assumptions used in the calculation included projected revenue, royalty rates and discount rates. These key assumptions involve management judgment and estimates relating to future operating performance and economic conditions that may differ from actual cash flows. After the recognition of the impairment charge, the remaining net book value of the trade names was as follows: Agriculture - $21, Electronics & Communications - $(7), Industrial Biosciences - $(1), Nutrition & Health - $(1), Performance Materials - $4, Protection Solutions - $(3), Other - $3, as well as Corporate expenses $(14).$28 million, which represented fair value.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Other Income, Net6. Supplementary Information
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2017 | 2016 |
| Royalty income | $ | 45 |
| $ | 57 |
|
| Interest income | 25 |
| 16 |
|
| Equity in earnings of affiliates, net | 18 |
| 10 |
|
Net gain on sales of businesses and other assets1,2 | 192 |
| 373 |
|
| Net exchange losses | (59 | ) | (121 | ) |
Miscellaneous income and expenses, net3 | 85 |
| 37 |
|
| Other income, net | $ | 306 |
| $ | 372 |
|
|
| | | | | | | | | | | | | | | |
| Sundry Income (Expense) - Net | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
Royalty income1 | | $ | 11 |
| $ | 27 |
| $ | 84 |
| $ | 108 |
|
| Interest income | $ | 12 |
| 26 |
| 30 |
| 83 |
| 71 |
|
| Equity in (losses) earnings of affiliates - net | (4 | ) | 13 |
| 22 |
| 55 |
| 60 |
|
Net gain on sales of businesses and other assets2,3 | 1 |
| 2 |
| — |
| 205 |
| 384 |
|
| Net exchange gains (losses) | 77 |
| (195 | ) | (76 | ) | (394 | ) | (212 | ) |
Miscellaneous income and expenses - net4 | 2 |
| 31 |
| (18 | ) | 133 |
| (4 | ) |
| Sundry income (expense) - net | $ | 88 |
| $ | (112 | ) | $ | (15 | ) | $ | 166 |
| $ | 407 |
|
| |
1. | Includes a pre-tax gainIn the Successor period, royalty income of $162 ($86 net of tax) for the three months ended March 31, 2017 related to the sale of the global food safety diagnostic business. See Note 3 for additional information.$9 million is included in Net Sales. |
| |
2. | Includes a pre-tax gain of $369$162 million ($21486 million net of tax) for the three months ended Marchperiod January 1 through August 31, 20162017 related to the sale of DuPont (Shenzhen) Manufacturing Limited.the global food safety diagnostic business. See Note 34 for additional information. |
| |
3. | Includes a pre-tax gain of $369 million ($214 million net of tax) for the nine months ended September 30, 2016 related to the sale of DuPont (Shenzhen) Manufacturing Limited. See Note 4 for additional information. |
| |
4. | Miscellaneous income and expenses - net, includes interest items, gains (losses) on available for sale securities, gains related to litigation settlements, licensing income, gains on purchases, and other items. For the three months ended March 31, 2017, the amount includes a $47 benefit associated with accrued interest reversals related to a reduction in the company's unrecognized tax benefits due to the closure of various tax statutes of limitations. See Note 6 for additional information. |
The following table summarizes the impacts of the company's foreign currency hedging program on the company's results of operations for the three months ended March 31, 2017 and 2016.operations. The company routinely uses foreign currency exchange contracts to offset its net exposures, by currency, related to the foreign currency-denominated monetary assets and liabilities. The objective of this program is to maintain an approximately balanced position in foreign currencies in order to minimize, on an after-tax basis, the effects of exchange rate changes on net monetary asset positions. The hedging program gains (losses) are largely taxable (tax deductible) in the U.S.United States (U.S.), whereas the offsetting exchange gains (losses) on the re-measurementremeasurement of certainthe net monetary asset positions are often not taxable (tax deductible) in their local jurisdictions. The net pre-tax exchange gains (losses) are recorded in othersundry income (expense) - net and the related tax impact is recorded in provision for income taxes on continuing operations in the interim Consolidated Income Statements.Statements of Operations.
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Subsidiary Monetary Position (Loss) Gain | | | | | |
| Pre-tax exchange (loss) gain | $ | (35 | ) | $ | 65 |
| $ | 6 |
| $ | 37 |
| $ | 185 |
|
| Local tax (expenses) benefits | (31 | ) | 88 |
| 18 |
| 217 |
| (29 | ) |
| Net after-tax impact from subsidiary exchange (loss) gain | $ | (66 | ) | $ | 153 |
| $ | 24 |
| $ | 254 |
| $ | 156 |
|
| | | | | | |
| Hedging Program Gain (Loss) | | | | | |
| Pre-tax exchange gain (loss) | $ | 112 |
| $ | (260 | ) | $ | (82 | ) | $ | (431 | ) | $ | (397 | ) |
| Tax (expenses) benefits | (40 | ) | 94 |
| 30 |
| 155 |
| 143 |
|
| Net after-tax impact from hedging program exchange gain (loss) | $ | 72 |
| $ | (166 | ) | $ | (52 | ) | $ | (276 | ) | $ | (254 | ) |
| | | | | | |
| Total Exchange Gain (Loss) | | | | | |
| Pre-tax exchange gain (loss) | $ | 77 |
| $ | (195 | ) | $ | (76 | ) | $ | (394 | ) | $ | (212 | ) |
| Tax (expenses) benefits | $ | (71 | ) | $ | 182 |
| $ | 48 |
| $ | 372 |
| $ | 114 |
|
| Net after-tax exchange gain (loss) | $ | 6 |
| $ | (13 | ) | $ | (28 | ) | $ | (22 | ) | $ | (98 | ) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2017 | 2016 |
| Subsidiary Monetary Position Gain (Loss) | | |
| Pre-tax exchange gains | $ | 26 |
| $ | 33 |
|
| Local tax benefits | 36 |
| 13 |
|
| Net after-tax impact from subsidiary exchange gains | 62 |
| 46 |
|
| | | |
| Hedging Program Gain (Loss) | | |
| Pre-tax exchange losses | (85 | ) | (154 | ) |
| Tax benefits | 30 |
| 55 |
|
| Net after-tax impact from hedging program exchange losses | (55 | ) | (99 | ) |
| | | |
| Total Exchange Gain (Loss) | | |
| Pre-tax exchange losses | (59 | ) | (121 | ) |
| Tax benefits | 66 |
| 68 |
|
| Net after-tax exchange gains (losses) | $ | 7 |
| $ | (53 | ) |
Effective with the Merger, the company and Dow are subsidiaries of DowDuPont. The company is included in DowDuPont consolidated tax groups and related income tax returns within certain jurisdictions. The company will continue to record a separate tax liability for its share of the taxable income and tax attributes and obligations on DowDuPont’s consolidated income tax returns following a formula consistent with the economic sharing of tax attributes and obligations. Dow and DuPont compute the amount due to DowDuPont for their share of taxable income and tax attributes on DowDuPont’s consolidated tax return. The amounts reported as income tax payable or receivable represent the company’s payment obligation (or refundable amount) to DowDuPont based on a theoretical tax liability calculated based on the methodologies agreed, elected or required in each combined or consolidated filing jurisdiction. Note 6. Income Taxes
Each year the company files hundreds of tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the company. As a result, there is an uncertainty in income taxes recognized in the company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. It is reasonably possible that changes to the company's global unrecognized tax benefits could be significant; however, due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.
During the three months ended Marchperiod January 1 through August 31, 2017, the company recognized tax expense of $29 million associated with the elimination of the U.S. domestic manufacturing deduction recorded in 2016 due to taxable income limitations triggered by the Company's decision to deduct the second quarter 2017 principal U.S. pension plan contribution on its 2016 consolidated U.S. tax return.
Additionally, during the period January 1 through August 31, 2017, the company recognized a tax benefit of $57 million, as well as a $50 pre-tax benefit of $50 million on associated accrued interest reversals, related to a reduction in the company's unrecognized tax benefits due to the closure of various tax statutes of limitations. Income from continuing operations during the three months ended Marchperiod January 1 through August 31, 2017 includes a tax benefit of $53 million and a pre-tax benefit of $47 million for accrued interest reversals (recorded in othersundry income (expense) - net). LossIncome (loss) from discontinued operations after taxes during the three months ended Marchperiod January 1 through August 31, 2017 includes a tax benefit of $4 million and a pre-tax benefit of $3 million for the accrued interest reversal.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Note 7.8. Earnings Per Share of Common Stock
Set forth below is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations for the Predecessor periods indicated:indicated below:
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2017 | 2016 |
| Numerator: | | |
| Income from continuing operations after income taxes attributable to DuPont | $ | 1,330 |
| $ | 1,223 |
|
| Preferred dividends | (2 | ) | (2 | ) |
| Income from continuing operations after income taxes available to DuPont common stockholders | $ | 1,328 |
| $ | 1,221 |
|
| | | |
| (Loss) income from discontinued operations after income taxes available to DuPont common stockholders | $ | (217 | ) | $ | 3 |
|
| | | |
| Net income available to common stockholders | $ | 1,111 |
| $ | 1,224 |
|
| | | |
| Denominator: | | |
| Weighted-average number of common shares outstanding - Basic | 866,516,000 |
| 873,546,000 |
|
| Dilutive effect of the company’s employee compensation plans | 4,567,000 |
| 3,705,000 |
|
| Weighted-average number of common shares outstanding - Diluted | 871,083,000 |
| 877,251,000 |
|
|
| | | | | | | | | | | | |
| | Predecessor |
| | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Numerator: | | | | |
| (Loss) income from continuing operations after income taxes attributable to DuPont | (263 | ) | (70 | ) | 1,624 |
| 1,902 |
|
| Preferred dividends | (2 | ) | (2 | ) | (7 | ) | (7 | ) |
| (Loss) income from continuing operations after income taxes available to DuPont common stockholders | $ | (265 | ) | $ | (72 | ) | $ | 1,617 |
| $ | 1,895 |
|
| | | | | |
| Income from discontinued operations after income taxes available to DuPont common stockholders | 29 |
| 72 |
| 117 |
| 346 |
|
| | | | | |
| Net (loss) income available to common stockholders | $ | (236 | ) | $ | — |
| $ | 1,734 |
| $ | 2,241 |
|
| | | | | |
| Denominator: | | | | |
| Weighted-average number of common shares outstanding - Basic | 868,992,000 |
| 874,292,000 |
| 867,888,000 |
| 874,274,000 |
|
Dilutive effect of the company’s employee compensation plans1 | — |
| 5,099,000 |
| 4,532,000 |
| 4,332,000 |
|
Weighted-average number of common shares outstanding - Diluted1 | 868,992,000 |
| 879,391,000 |
| 872,420,000 |
| 878,606,000 |
|
| |
1. | Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. |
The following average number of stock options were antidilutive, and therefore not included in the dilutive earnings per share calculations:
|
| | | | |
| | Three Months Ended |
| | March 31, |
| | 2017 | 2016 |
| Average number of stock options | 6,000 |
| 5,104,000 |
|
The change in the average number of stock options that were antidilutive in the three months ended March 31, 2017, compared to the same period last year was due to changes in the company's average stock price.
Note 8. Inventories
|
| | | | | | |
| | March 31,
2017 | December 31,
2016 |
| Finished products | $ | 2,953 |
| $ | 3,113 |
|
| Semi-finished products | 1,838 |
| 2,009 |
|
| Raw materials, stores and supplies | 669 |
| 719 |
|
| | 5,460 |
| 5,841 |
|
| Adjustment of inventories to a last-in, first-out (LIFO) basis | (173 | ) | (168 | ) |
| Total | $ | 5,287 |
| $ | 5,673 |
|
|
| | | | | | | | |
| | Predecessor |
| | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Average number of stock options | 4,832,000 |
| 4,558,000 |
| 1,906 |
| 4,885,000 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Note 9. Inventories
|
| | | | | | |
| | Successor | Predecessor |
| (In millions) | September 30,
2017 | December 31,
2016 |
| Finished products | $ | 4,132 |
| $ | 2,961 |
|
| Semi-finished products | 3,310 |
| 1,877 |
|
| Raw materials | 388 |
| 292 |
|
| Stores and supplies | 336 |
| 398 |
|
| Total | 8,166 |
| 5,528 |
|
| Adjustment of inventories to a last-in, first-out (LIFO) basis | 617 |
| (178 | ) |
| Total inventories | $ | 8,783 |
| $ | 5,350 |
|
Total inventories increased $3,433 million from December 31, 2016, primarily reflecting inventory at fair value at the date of the Merger. See Note 3 for additional information regarding the Merger.
Note 10. Property
|
| | | | | | |
| | Successor | Predecessor |
| (In millions) | September 30, 2017 | December 31, 2016 |
| Land and land improvements | $ | 941 |
| $ | 501 |
|
| Buildings | 2,558 |
| 4,224 |
|
| Machinery and equipment | 7,559 |
| 16,909 |
|
| Construction in progress | 965 |
| 1,381 |
|
| Total property, plant and equipment | 12,023 |
| 23,015 |
|
| Accumulated depreciation | (121 | ) | (14,164 | ) |
Total property, plant and equipment - net
| $ | 11,902 |
| $ | 8,851 |
|
Net property increased $3,051 million from December 31, 2016, primarily reflecting property, plant and equipment at fair value at the date of the Merger. See Note 3 for additional information regarding the Merger.
Equipment and buildings are depreciated over useful lives on a straight-line basis ranging from 1 to 25 years. Capitalizable costs associated with computer software for internal use are amortized on a straight-line basis over 1 to 8 years.
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Depreciation expense | $ | 111 |
| $ | 143 |
| $ | 226 |
| $ | 589 |
| $ | 683 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 9.11. Other Intangible Assets
The gross carrying amounts and accumulated amortization of other intangible assets by major class are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | March 31, 2017 | December 31, 2016 |
| | Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net |
| Intangible assets subject to amortization (Definite-lived): | |
| |
| |
| |
| |
| |
|
| Customer lists | $ | 1,597 |
| $ | (612 | ) | $ | 985 |
| $ | 1,574 |
| $ | (586 | ) | $ | 988 |
|
| Patents | 451 |
| (280 | ) | 171 |
| 446 |
| (259 | ) | 187 |
|
| Purchased and licensed technology | 930 |
| (577 | ) | 353 |
| 964 |
| (579 | ) | 385 |
|
| Trademarks / trade names | 53 |
| (16 | ) | 37 |
| 53 |
| (15 | ) | 38 |
|
Other1 | 172 |
| (86 | ) | 86 |
| 171 |
| (82 | ) | 89 |
|
| | 3,203 |
| (1,571 | ) | 1,632 |
| 3,208 |
| (1,521 | ) | 1,687 |
|
| | | | | | | |
| Intangible assets not subject to amortization (Indefinite-lived): | |
| |
| |
| |
| |
| |
|
| In-process research and development | 74 |
| — |
| 74 |
| 73 |
| — |
| 73 |
|
| Microbial cell factories | 306 |
| — |
| 306 |
| 306 |
| — |
| 306 |
|
| Pioneer germplasm | 1,057 |
| — |
| 1,057 |
| 1,053 |
| — |
| 1,053 |
|
| Trademarks / trade names | 555 |
| — |
| 555 |
| 545 |
| — |
| 545 |
|
| | 1,992 |
| — |
| 1,992 |
| 1,977 |
| — |
| 1,977 |
|
| Total | $ | 5,195 |
| $ | (1,571 | ) | $ | 3,624 |
| $ | 5,185 |
| $ | (1,521 | ) | $ | 3,664 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| | September 30, 2017 | December 31, 2016 |
| | Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net |
| Intangible assets subject to amortization (Definite-lived): | |
| |
| |
| |
| |
| |
|
| Customer-related | $ | 9,383 |
| $ | (45 | ) | $ | 9,338 |
| $ | 1,574 |
| $ | (586 | ) | $ | 988 |
|
| Developed technology | 4,112 |
| (34 | ) | 4,078 |
| 1,410 |
| (838 | ) | 572 |
|
| Trademarks/trade names | 1,071 |
| (6 | ) | 1,065 |
| 53 |
| (15 | ) | 38 |
|
Microbial cell factories1 | 430 |
| (2 | ) | 428 |
| | | |
Other2 | 297 |
| (2 | ) | 295 |
| 171 |
| (82 | ) | 89 |
|
| Total other intangible assets with finite lives | 15,293 |
| (89 | ) | 15,204 |
| 3,208 |
| (1,521 | ) | 1,687 |
|
| | | | | | | |
| Intangible assets not subject to amortization (Indefinite-lived): | |
| |
| |
| |
| |
| |
|
| In-process research and development ("IPR&D") | 655 |
| — |
| 655 |
| 73 |
| — |
| 73 |
|
Microbial cell factories1 | | | | 306 |
| — |
| 306 |
|
Germplasm3 | 6,773 |
| — |
| 6,773 |
| 1,053 |
| — |
| 1,053 |
|
| Trademarks / trade names | 5,036 |
| — |
| 5,036 |
| 545 |
| — |
| 545 |
|
| Total other intangible assets | 12,464 |
| — |
| 12,464 |
| 1,977 |
| — |
| 1,977 |
|
| Total | $ | 27,757 |
| $ | (89 | ) | $ | 27,668 |
| $ | 5,185 |
| $ | (1,521 | ) | $ | 3,664 |
|
| |
1. | Microbial cell factories, derived from natural microbes, are used to sustainably produce enzymes, peptides and chemicals using natural metabolic processes. The company recognized the microbial cell factories as intangible assets upon the acquisition of Danisco. As a result of the valuation as part of the merger, it was determined that this now has a definite life and therefore it has been moved from indefinite-lived to definite-lived as of September 1, 2017. |
| |
2. | Primarily consists of sales and grower networks, marketing and manufacturing alliances and noncompetition agreements. |
| |
3. | Pioneer germplasm is the pool of genetic source material and body of knowledge gained from the development and delivery stage of plant breeding. The company recognized germplasm as an intangible asset upon the acquisition of Pioneer. This intangible asset is expected to contribute to cash flows beyond the foreseeable future and there are no legal, regulatory, contractual, or other factors which limit its useful life. |
In connection with the Merger, the company recorded $27,844 million of intangible assets, as shown in the table below, representing the preliminary fair values at the Merger date. See Note 3 for additional information regarding the Merger.
|
| | | | |
| Intangible Assets | Gross Carrying Amount | Weighted-average Amortization Period (years) |
| (In millions) |
| Intangible assets with finite lives: | | |
| Customer-related | $ | 9,434 |
| 18 |
| Developed technology | 4,124 |
| 12 |
| Trademarks/trade names | 1,073 |
| 12 |
| Microbial cell factories | 430 |
| 23 |
| Other | 294 |
| 15 |
| Total other intangible assets with finite lives | $ | 15,355 |
| |
| Intangible assets with indefinite lives: | | |
| IPR&D | $ | 655 |
|
|
| Germplasm | 6,773 |
|
|
| Trademarks/trade names | 5,061 |
|
|
| Total intangible assets | $ | 27,844 |
| |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The aggregate pre-tax amortization expense from continuing operations for definite-lived intangible assets was $51 and $122$89 million for the three months ended Marchperiod September 1 through September 30, 2017, $31 million for the period July 1 through August 31, 2017, and 2016, respectively.$139 million for the period January 1 through August 31, 2017. The estimated aggregate pre-tax amortization expense from continuing operations for definite-lived intangible assets was $46 million and $272 million for the remainder of 2017three and each ofnine months ended September 30, 2016.
Total estimated amortization expense for the next five fiscal years is approximately $151, $209, $211, $193, $138 and $115, respectively.as follows:
|
| | | |
| (In millions) | |
| 2017 | $ | 512 |
|
| 2018 | 1,096 |
|
| 2019 | 1,090 |
|
| 2020 | 1,080 |
|
| 2021 | 1,067 |
|
| 2022 | 1,060 |
|
Note 10. Short-Term12. Short-term borrowings, Long-term Debt and Long-Term BorrowingsAvailable Credit Facilities
The following tables summarize the company's short-term borrowings and capital lease obligations and long-term debt:
|
| | | | | | |
| Short-term borrowings and capital lease obligations | Successor | Predecessor |
| (In millions) | September 30, 2017 | December 31, 2016 |
| Commercial paper | $ | 3,244 |
| $ | 386 |
|
| Other loans - various currencies | 48 |
| 39 |
|
| Long-term debt payable within one year | 1,328 |
| 4 |
|
| Repurchase facility | 1,300 |
| — |
|
| Total short-term borrowings and capital lease obligations | $ | 5,920 |
| $ | 429 |
|
|
| | | | | | | | |
| Long Term Debt | Successor1 | Predecessor |
| | September 30, 2017 | December 31, 2016 |
| (In millions) | Amount | Weighted Average Rate | Amount |
| Promissory notes and debentures: | | | |
| Final maturity 2018 | $ | 1,293 |
| 1.59 | % | $ | 1,290 |
|
| Final maturity 2019 | 525 |
| 2.23 | % | 500 |
|
| Final maturity 2020 | 3,079 |
| 1.78 | % | 999 |
|
| Final maturity 2021 | 1,586 |
| 2.07 | % | 1,498 |
|
| Final maturity 2023 and thereafter | 3,496 |
| 3.32 | % | 3,188 |
|
| Other facilities: | | | |
| Term loan due 2019 | 1,000 |
| 2.24 | % | 500 |
|
| Other loans | 19 |
| 4.32 | % | 22 |
|
| Foreign currency loans, various rates and maturities | 30 |
| 2.84 | % | 29 |
|
| Medium-term notes, varying maturities through 2043 | 110 |
| 0.98 | % | 111 |
|
| Capital lease obligations | 5 |
|
|
| 9 |
|
| Less: Unamortized debt discount and issuance costs | — |
|
|
| 35 |
|
| Less: Long-term debt due within one year | 1,328 |
|
|
| 4 |
|
| Total | $ | 9,815 |
| | $ | 8,107 |
|
| |
1. | The Successor period includes the reflection of debt at fair value at the date of the Merger. See Note 3 for additional information regarding the Merger. |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Principal payments of long-term debt for the next five years are as follows:
|
| | | |
| Maturities of Long-Term Debt For Next Five Years | |
| (In millions) | |
| 2017 | $ | 2 |
|
| 2018 | 1,284 |
|
| 2019 | 1,505 |
|
| 2020 | 3,005 |
|
| 2021 | 1,505 |
|
| 2022 | 2 |
|
Available Committed Credit Facilities
The following table summarizes the company's credit facilities:
|
| | | | | | | | | |
| Committed and Available Credit Facilities at September 30, 2017 (Successor) | | |
| (In millions) | Effective Date | Committed Credit | Credit Available | Maturity Date | Interest |
| DuPont Revolving Credit Facility | March 2016 | $ | 3,000 |
| $ | 2,945 |
| May 2019 | Floating Rate |
| DuPont Term Loan Facility | March 2016 | 4,500 |
| 3,500 |
| March 2019 | Floating Rate |
| Repurchase Facility (see below) | January 2017 | 1,300 |
| — |
| November 2017 | Floating Rate |
| Total Committed and Available Credit Facilities | | $ | 8,800 |
| $ | 6,445 |
| | |
Debt Offering
In May 2017, the company completed an underwritten public offering of $1,250 million of the company's 2.20 percent Notes due 2020 and $750 million of the company's Floating Rate Notes due 2020 (the "May 2017 Debt Offering"). The proceeds of this offering were used to make a discretionary pension contribution to the company's principal U.S. pension plan. See Note 15 for further discussion regarding this contribution.
Repurchase Facility
In January 2017, the company entered into a committed receivable repurchase agreement of up to $1,300 million (the Repurchase Facility)"Repurchase Facility"). The Repurchase Facility is structured to account for the seasonality of the agriculturalagriculture business and expires on November 30, 2017. Under the Repurchase Facility, the company may sell a portfolio of available and eligible outstanding customer notes receivables within the Agriculture segmentbusiness to participating institutions and simultaneously must agree to repurchase such notes receivable at a future date. The Repurchase Facility is considered a secured borrowing with the customer notes receivables utilized as collateral. The amount of collateral required equals 105 percent of the outstanding borrowing amounts. Borrowings under the Repurchase Facility have an interest rate of the London interbank offered rate (LIBOR)("LIBOR") plus 0.75 percent.
As of March 31,September 30, 2017, $315$1,365 million of notes receivable, recorded in accounts and notes receivable - net, were pledged as collateral against outstanding borrowings under the Repurchase Facility of $300,$1,300 million, recorded in short-termShort-term borrowings and capital lease obligations.obligations on the interim Consolidated Balance Sheet.
Term Loan Facility
In March 2016, the company entered into a credit agreement that provides for a three-year, senior unsecured term loan facility in the aggregate principal amount of $4,500 million (as amended from time to time, the Term"Term Loan Facility)Facility"). In the first quarter of 2017, the Term Loan Facility was amended to extend the date on which the commitment to lend terminates. As a result, DuPont may make up to seven term loan borrowings through July 27, 2018; amounts repaid or prepaid are not available for subsequent borrowings. The Term Loan Facility matures in March 2019 at which time all outstanding borrowings, including accrued but unpaid interest, become immediately due and payable. As of March 31,September 30, 2017, the company had borrowed $500$1,000 million and had unused commitments of $4,000$3,500 million under the Term Loan Facility.
In October 2017, under the Term Loan Facility, DuPont borrowed $500 million at the LIBOR Loan Rate, primarily to pay down commercial paper.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Note 11.13. Commitments and Contingent Liabilities
Guarantees
Indemnifications
In connection with acquisitions and divestitures as of March 31,September 30, 2017, the company has indemnified respective parties against certain liabilities that may arise in connection with these transactions and business activities prior to the completion of the transactions. The term of these indemnifications, which typically pertain to environmental, tax and product liabilities, is generally indefinite. In addition, the company indemnifies its duly elected or appointed directors and officers to the fullest extent permitted by Delaware law, against liabilities incurred as a result of their activities for the company, such as adverse judgments relating to litigation matters. If the indemnified party were to incur a liability or have a liability increase as a result of a successful claim, pursuant to the terms of the indemnification, the company would be required to reimburse the indemnified party. The maximum amount of potential future payments is generally unlimited.
Obligations for Equity Affiliates & Others
The company has directly guaranteed various debt obligations under agreements with third parties related to equity affiliates, customers and suppliers. Additionally, in connection with the Separation, the company has directly guaranteed Chemours' purchase obligations under an agreement with a third partythird-party supplier. At March 31,September 30, 2017 and December 31, 2016, the company had directly guaranteed $356323 million and $354388 million, respectively, of such obligations. These amounts represent the maximum potential amount of future (undiscounted) payments that the company could be required to make under the guarantees. The company would be required to perform on these guarantees in the event of default by the guaranteed party.
The company assesses the payment/performance risk by assigning default rates based on the duration of the guarantees. These default rates are assigned based on the external credit rating of the counterparty or through internal credit analysis and historical default history for counterparties that do not have published credit ratings. For counterparties without an external rating or available credit history, a cumulative average default rate is used.
In certain cases, the company has recourse to assets held as collateral, as well as personal guarantees from customers and suppliers. Assuming liquidation, these assets are estimated to cover 2016 percent percent of the $176111 million of guaranteed obligations of customers and suppliers.suppliers as of September 30, 2017.
Set forth below areThe following tables provide a summary of the company's guaranteed obligations at March 31, 2017:final expiration and maximum future payments for each type of guarantee:
|
| | | | | | | | | |
| | Short-Term | Long-Term | Total |
Obligations for customers and suppliers1: | |
| |
| |
|
| Bank borrowings (terms up to 5 years) | $ | 167 |
| $ | 9 |
| $ | 176 |
|
Obligations for equity affiliates2: | |
| |
| |
|
| Bank borrowings (terms up to 1 year) | 165 |
| — |
| 165 |
|
Obligations for Chemours3: | | | |
| Chemours' purchase obligations (final expiration - 2018) | 15 |
| — |
| 15 |
|
| Total | $ | 347 |
| $ | 9 |
| $ | 356 |
|
|
| | | | |
| Guarantees at September 30, 2017 (Successor) | Final Expiration | Maximum Future Payments |
| (In millions) |
Obligations for customers and suppliers1: | | |
| Bank borrowings | 2022 | $ | 111 |
|
Obligations for non-consolidated affiliates2: |
|
|
|
| Bank borrowings | 2017 | 164 |
|
Obligations for Chemours3: |
|
|
|
| Chemours' purchase obligations | 2018 | 11 |
|
Residual value guarantees4 | 2029 | 37 |
|
| Total guarantees | | $ | 323 |
|
| |
1. | Existing guarantees for customers and suppliers, as part of contractual agreements. |
| |
2. | Existing guarantees for equitynon-consolidated affiliates' liquidity needs in normal operations. |
| |
3. | Guarantee for Chemours' raw material purchase obligations under agreement with third party supplier. |
| |
| 4. | The company provides guarantees related to leased assets specifying the residual value that will be available to the lessor at lease termination through sale of the assets to the lessee or third parties. |
Litigation
The company is subject to various legal proceedings arising out of the normal course of its business including product liability, intellectual property, commercial, environmental and antitrust lawsuits. It is not possible to predict the outcome of these various proceedings. Although considerable uncertainty exists, management does not anticipate that the ultimate disposition of these matters will have a material adverse effect on the company's results of operations, consolidated financial position or liquidity. However, the ultimate liabilities could be material to results of operations in the period recognized.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
PFOA
DuPont used PFOA (collectively, perfluorooctanoic acids and its salts, including the ammonium salt), as a processing aid to manufacture some fluoropolymer resins at various sites around the world including its Washington Works plant in West Virginia. At March 31,September 30, 2017, DuPont hashad a total accrual balance of $686$15 million related to the PFOA matters discussed below and has recorded a total indemnification asset of $350 from Chemours pursuant to the Separation Agreement discussed in Note 3 and the first quarter 2017 agreement between Chemours and DuPont.$15 million.
Leach v. DuPont
In August 2001, a class action, captioned Leach v. DuPont, was filed in West Virginia state court alleging that residents living near the Washington Works facility had suffered, or may suffer, deleterious health effects from exposure to PFOA in drinking water.
DuPont and attorneys for the class reached a settlement in 2004 that binds aboutapproximately 80,000 residents, (the Leach Settlement). In 2005,pursuant to which DuPont paid the plaintiffs’ attorneys’plaintiffs' attorneys' fees and expenses of $23 million and made a payment of $70 whichmillion that class counsel designated to fund a community health project. Theproject (the "Leach Settlement"). In addition, the company funded a series of health studies which were completed in October 2012 by an independent science panel of experts (the C8"C8 Science Panel)Panel"). The studies were conducted in communities exposed to PFOA to evaluate available scientific evidence on whether any probable link exists, as defined in the Leach Settlement Agreement, between exposure to PFOA and human disease. The C8 Science Panel found probable links, as defined in the Leach Settlement, Agreement, between exposure to PFOA and pregnancy-induced hypertension, including preeclampsia; kidney cancer; testicular cancer; thyroid disease; ulcerative colitis; and diagnosed high cholesterol.
In May 2013, a panel of three independent medical doctors released its initial recommendations for screening and diagnostic testing of eligible class members for the six human diseases for which the C8 Science Panel determined a probable link exists. In September 2014, the medical panel recommended follow-up screening and diagnostic testing three years after initial testing, based on individual results. The medical panel has not communicated its anticipated schedule for completion of its protocol. Under the Leach Settlement, Agreement, the company is obligated to fund up to $235 million for a medical monitoring program for eligible class members and, in addition, administrative costs associated with the program, including class counsel fees. In January 2012, the company established and put $1 million into an escrow account to fund medical monitoring as required by the settlement agreement. The balance in the escrow account must be at least $0.5; as a result, transfersAs of additional funds may be required periodically. The court-appointed Director of Medical Monitoring has established the program to implement the medical panel's recommendations and the registration process, as well as eligibility screening, is ongoing. Diagnostic screening and testing has begun and associated payments to service providers are being disbursed from the escrow account; at March 31,September 30, 2017, less than $1 hasmillion had been disbursed.disbursed from the account. While it is probable that the company will incur liabilities related to funding the medical monitoring program, the company does not expect any such liabilities cannotto be reasonably estimated due to uncertainties surrounding the level of participation by eligible class members and the scope of testing.material. In addition, under the Leach Settlement, Agreement, the company must continue to provide water treatment designed to reduce the level of PFOA in water to six area water districts, including the Little Hocking Water Association, (LHWA), and private well users.
Multi-District Litigation
Leach class members may pursue personal injury claims against DuPont only for the six human diseases for which the C8 Science Panel determined a probable link exists. At March 31, 2017, there wereFollowing the Leach Settlement, approximately 3,550 lawsuits of which about 30 allege wrongful death, pendingalleging personal injury claims were filed in various federal and state courts in Ohio and West Virginia. These lawsuits are consolidated in multi-district litigation (MDL)("MDL") in the U.S. District Court for the Southern District of Ohio (the Court).
The table below approximates the number of lawsuits based on primary alleged disease.
|
| | |
Alleged Injury | Number of Claims |
Kidney cancer | 210 |
|
Testicular cancer | 70 |
|
Ulcerative colitis | 300 |
|
Preeclampsia | 200 |
|
Thyroid disease | 1,430 |
|
High cholesterol | 1,340 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Ohio.
In Februarythe first quarter of 2017, DuPont entered into an agreement in principle with MDL plaintiffs’ counsel providing for a global settlement of all cases and claims in the MDL including all filed and unfiled personal injury cases and claims that are part of the plaintiffs’ counsel’s claim inventory as well as the cases captioned Bartlett v. DuPont, Freeman v. DuPont, Moody v. DuPont and Vigneron v. DuPont,was settled for $670.7 million in cash (the MDL Trial Plaintiffs).
In connection with all filed and unfiled personal injury cases and claims that are part of the plaintiffs' counsel's claim inventory, on March 31, 2017, DuPont and MDL plaintiffs’ counsel entered into a definitive agreement covering Leach class members who either, 1) asserted a qualifying claim, not previously settled, withdrawn or dismissed as of February 11, 2017; or 2) claimed to have a qualifying condition and on or before February 11, 2017, had retained counsel for purposes of making a qualifying claim,(the Master Settlement Agreement). Also on March 31, 2017, DuPont and MDL plaintiffs’ counsel entered into a definitive agreement related to the MDL Trial Plaintiffs (the MDL Trial Plaintiffs Settlement Agreement). The Master Settlement Agreement and the MDL Trial Plaintiffs Settlement Agreement (collectively referred to as the MDL Settlement) are not subject to court approval.
The aggregate total settlement amount under the MDL Settlement is $670.7 in cash. DuPont and Chemours have agreed that"MDL Settlement"), half of that amount willwhich was to be paid by Chemours and half paid by DuPont. At September 30, 2017, all payments under the settlement agreement have been made by both companies. DuPont’s payment wouldis not be subject to indemnification or reimbursement by Chemours. In exchange for that payment, DuPont and Chemours will receive a complete releasereleases of all claims by the settling plaintiffs. The MDL Settlement was entered into solely by way of compromise and settlement and is not in any way an admission of liability or fault by DuPont or Chemours. The MasterClaims from a small number of plaintiffs opting out of the MDL Settlement Agreement includes a "Walk-Away Right" that allowsremain pending.
Additional Actions
Since 2006, DuPont to terminate the settlement if required participation thresholds are not met for any disease category. Whether those thresholds are met will be determined in accordancehas undertaken obligations under agreements with the Master Settlement AgreementU.S. Environmental Protection Agency ("EPA"), including a 2009 consent decree under the Safe Drinking Water Act (the "Order"), and voluntary commitments to the New Jersey Department of Environmental Protection. These obligations and voluntary commitments include surveying, sampling and testing drinking water in and around certain company sites and offering treatment or an alternative supply of drinking water if tests indicate the presence of PFOA in drinking water at various dates intoor greater than the third quarternational health advisory level, even if provisional, as established from time to time by the EPA. A provisional health advisory level was set in 2009 at 0.4 parts per billion ("ppb") for PFOA in drinking water considering episodic exposure. In May 2016, the EPA announced a health advisory level of 0.07 ppb for PFOA in drinking water considering lifetime versus episodic exposure. In January 2017, subjectthe EPA announced it had amended the Order to extension.include Chemours, and to make the new health advisory level the trigger for additional actions by DuPont and Chemours, thus expanding the obligations to the EPA beyond the previously established testing and water supply commitments around the Washington Works facility. The Master Settlement Agreement will not be deemed effective until the date on which the parties agree that the required participation thresholds have been met (the MSA Effective Date).company's accrual at September 30, 2017, includes $15 million related to these obligations and voluntary commitments.
In connection
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Concurrent with the MDL Settlement, the company increased the accrual related to the PFOA multi-district litigation to $670.7 at March 31, 2017, (the MDL Settlement Accrual). Due to the first quarter 2017 agreement with Chemours discussed above, the company increased the indemnification asset related to the PFOA multi-district litigation to $335 at March 31, 2017. The remainder of the MDL Settlement Accrual amount was recorded as a charge of $335 ($224 net of tax) to loss from discontinued operations in the company's interim Consolidated Income Statement during the three months ended March 31, 2017.
DuPont and Chemours have also agreed, subjectamended the Separation Agreement to and following the MSA Effective Date, toprovide for a limited sharing of potential future PFOA liabilities (i.e., indemnifiable losses, as defined in the Separation Agreement) for a period of 5five years starting on the MSA Effective Date.beginning July 6, 2017. During that five-year period, Chemours wouldwill annually pay future PFOA liabilities up to $25 million and, if such amount is exceeded, DuPont would pay any excess amount up to the next $25 million (which payment will not be subject to indemnification by Chemours), with Chemours annually bearing any further excess liabilities. After the five-year period, this limited sharing agreement wouldwill expire, and Chemours’ indemnification obligations under the Separation Agreement would continue unchanged. There have been no charges incurred by DuPont under this arrangement through September 30, 2017. Chemours has also agreed that upon the occurrence of the MSA Effective Date, it will not contest its liability to DuPont under the Separation Agreement for PFOA liabilities on the basis of ostensible defenses generally applicable to the indemnification provisions under the Separation Agreement, including defenses relating to punitive damages, fines or penalties or attorneys’ fees, and waives any such defenses with respect to PFOA liabilities. Chemours has, however, retained defenses as to whether any particular PFOA claim is within the scope of the indemnification provisions of the Separation Agreement.
Status of MDL Post MDL Settlement
In 2014, six cases fromIt is possible that new lawsuits could be filed against DuPont related to PFOA that may not be within the MDL were selected for individual trial. In 2016, three of these cases, (two kidney cancer cases and one ulcerative colitis case), were settled for amounts immaterial individually and in the aggregate, and one case was voluntarily withdrawn by plaintiffs.
Three other cases were tried to verdict in 2015 (Bartlett v. DuPont, kidney cancer), 2016 (Freeman v. DuPont, testicular cancer), and 2017 (Vigneron v. DuPont, testicular cancer), and a fourth trial (Moody v. DuPont, testicular cancer) began in 2017 and was still underway at the timescope of the MDL Trial Plaintiffs Settlement Agreement. The Bartlett jury awarded compensatory damages of $1.6 and no punitive damages. That verdict was on appealSettlement. Any such new litigation would be subject to indemnification by Chemours under the Separation Agreement, as amended.
Prior to the separation of Chemours, the company introduced GenX as a polymerization processing aid at the Fayetteville Works facility in North Carolina. The facility is now owned and operated by Chemours which continues to manufacture and use GenX as a polymerization processing aid. Chemours is responding to ongoing inquiries and investigations from federal, state and local investigators, regulators and other governmental authorities as well as inquiries from the media and local community stakeholders. These inquiries and investigations involve the discharge of the polymerization processing aid GenX and certain similar compounds from the Chemours’ facility in Fayetteville, North Carolina into the Cape Fear River.
In August 2017, the U.S. Court of AppealsAttorney’s Office for the Sixth CircuitEastern District of North Carolina served the company with a subpoena for testimony and the production of documents to a grand jury. The subpoena seeks documents related to alleged discharges of PFOA and/or GenX, (the replacement product for PFOA) from the Fayetteville Works facility into the Cape Fear River in Bladen County, North Carolina.
In the fourth quarter of 2017, lawsuits, including purported class actions, were filed against Chemours and the company, one of which also names DowDuPont, alleging that certain perflourinated chemicals, discharged into the Cape Fear River, Bladen County, North Carolina, from the operations and wastewater treatment at the time ofFayetteville Works facility, contaminated the MDL Trial Plaintiffs Settlement Agreement.water supply causing economic or property damage. It is possible that these ongoing inquiries and investigations, including the grand jury subpoena, could result in penalties or sanctions, or that additional litigation will be instituted against Chemours and/or the company. The Freeman jury awarded compensatory damages of $5.1company has an indemnification claim against Chemours with respect to current and $0.5 in punitive damagesfuture inquiries, investigations, and attorneys’ fees. The Vigneron jury awarded compensatory damages of $2 and punitive damages of $10.5. Post-trial motions in Freeman and Vigeron were still pending at the time of the MDL Trial Plaintiffs Settlement Agreement.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
As a result of the MDL Settlement, all litigation and judicial proceedingsclaims, including lawsuits, related to the MDL pending beforeforegoing.
Environmental
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the Courtamount of the liability can be reasonably estimated based on current law and U.S. Courtexisting technologies. At September 30, 2017, the company had accrued obligations of Appeals$455 million for probable environmental remediation and restoration costs, including $74 million for the Sixth Circuit have been stayed (the MDL Stay). At March 31, 2017,remediation of Superfund sites. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the MDL Settlement Accrual reflectsinterim Consolidated Balance Sheets. This is management’s best estimate of MDL-related loss. If the Master Settlement Agreement is terminated or otherwise does not proceed, additional lawsuits could go to trial or appeal over the course of many years. In this event, management would consider the outcomes of such rulings, trials and appeals, the uniqueness of the individual MDL plaintiff’s claims and the defenses to those claims, both as to potential liability and damages on an individual claim basis, among other factors, in reviewing its estimate of or ability to reasonably estimate loss.
Additional Actions
Since 2006, DuPont has undertaken obligations under agreements with the U.S. Environmental Protection Agency (EPA), including a 2009 consent decree under the Safe Drinking Water Act (the Order), and voluntary commitments to the New Jersey Department of Environmental Protection (NJDEP). These obligations and voluntary commitments include surveying, sampling and testing drinking water in and around certain company sites and offering treatment or an alternative supply of drinking water if tests indicate the presence of PFOA in drinking water at or greater than the national health advisory level, even if provisional, as established from time to time by EPA. A provisional health advisory level was set in 2009 at 0.4 parts per billion (ppb)costs for PFOA in drinking water considering episodic exposure. In May 2016, EPA announced a health advisory level of 0.07 ppb for PFOA in drinking water considering lifetime versus episodic exposure. In January 2017, EPA announced it had amended the Order to include Chemours, and to make the new health advisory level the trigger for additional actions by the companies, thus expanding the obligations to the EPA beyond the previously established testing and water supply commitments around the Washington Works facility. The company's accrual balance at March 31, 2017, include $15 related to these obligations and voluntary commitments.
Environmental
The company is also subject to contingencies pursuant to environmental laws and regulations that in the future may require the company to take further action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the company or other parties. The company accrues for environmental remediation activities consistent with the policy as described in the company's 2016 Annual Report in Note 1, "Summary of Significant Accounting Policies." Much of this liability results from the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, often referred to as Superfund), the Resource Conservation and Recovery Act (RCRA) and similar state and global laws. These laws require the company to undertake certain investigative, remediation and restoration activities at sites wherewith respect to environmental matters for which the company conducts or once conducted operations or at sites where company-generated waste was disposed. The accrual also includes estimated costs related to a number of sites identified by the company for whichhas accrued liabilities, although it is probablereasonably possible that environmental remediation will be required, but which are not currently the subject of enforcement activities.
Remediation activities vary substantially in duration andultimate cost from site to site. These activities, and their associated costs, depend on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, as well as the presence or absence of potentially responsible parties. At March 31, 2017, the Condensed Consolidated Balance Sheet included a liability of $487, relating to these matters and, in management's opinion, is appropriate based on existing facts and circumstances. The average time frame over which the accrued or presently unrecognized amounts may be paid, based on past history, is estimated to be 15-20 years. Considerable uncertainty exists with respect to these costs and, under adverse changes in circumstances, the potential liability mayparticular matters could range up to $775$910 million above the amount accrued asat September 30, 2017. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of Marchamounts accrued could have a material impact on the company’s results of operations, financial condition and cash flows. It is the opinion of the company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the company’s results of operations, financial condition or cash flows. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. At December 31, 2017. 2016, the company had accrued obligations of $457 million for probable environmental remediation and restoration costs, including $17 million for the remediation of Superfund sites.
Pursuant to the DuPont and Chemours Separation Agreement, discussed in Note 3, the company is indemnified by Chemours for certain environmental matters, included in the liability of $487,$455 million, that have an estimated liability of $265$256 million as of March 31,September 30, 2017, and a potential exposure that ranges up to approximately $400$436 million above the amount accrued. As such, the company has recorded an indemnification asset of $265$256 million corresponding to the company’s accrual balance related to these matters at March 31, 2017.
September 30, 2017, including $54 million related to the Superfund sites.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Note 12.14. Stockholders’ Equity
Treasury Stock
Immediately prior to the closing of the Merger Transaction, all 87 million shares of DuPont common stock that were held in treasury were automatically canceled and retired for no consideration. Common stock held in treasury was recorded at cost. When retired, the excess of the cost of treasury stock over its par value was allocated between reinvested earnings ($5,657 million) and additional paid-in capital ($1,044 million).
Other Comprehensive Income (Loss)
The changes and after-tax balances of components comprising accumulated other comprehensive loss are summarized below:
| | | | Cumulative Translation Adjustment1 | Net Gains (Losses) on Cash Flow Hedging Derivative Instruments | Pension Benefit Plans | Other Benefit Plans | Unrealized Gain (Loss) on Securities | Total | |
| (In millions) | | Cumulative Translation Adjustment1 | Derivative Instruments | Pension Benefit Plans | Other Benefit Plans | Unrealized Gain (Loss) on Investments | Total |
| 2017 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| Balance January 1, 2017 | $ | (2,843 | ) | $ | 7 |
| $ | (6,720 | ) | $ | (357 | ) | $ | 2 |
| $ | (9,911 | ) | |
Balance January 1, 2017 (Predecessor) | | $ | (2,843 | ) | $ | 7 |
| $ | (6,720 | ) | $ | (357 | ) | $ | 2 |
| $ | (9,911 | ) |
| Other comprehensive income (loss) before reclassifications | 378 |
| 2 |
| (15 | ) | — |
| 1 |
| 366 |
| 1,042 |
| 3 |
| (78 | ) | — |
| 1 |
| 968 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| (5 | ) | 124 |
| 4 |
| (1 | ) | 122 |
| — |
| (13 | ) | 325 |
| 10 |
| (1 | ) | 321 |
|
| Net other comprehensive income (loss) | 378 |
| (3 | ) | 109 |
| 4 |
| — |
| 488 |
| 1,042 |
| (10 | ) | 247 |
| 10 |
| — |
| 1,289 |
|
| Balance March 31, 2017 | $ | (2,465 | ) | $ | 4 |
| $ | (6,611 | ) | $ | (353 | ) | $ | 2 |
| $ | (9,423 | ) | |
Balance August 31, 2017 (Predecessor) | | $ | (1,801 | ) | $ | (3 | ) | $ | (6,473 | ) | $ | (347 | ) | $ | 2 |
| $ | (8,622 | ) |
| | | | | | |
Balance September 1, 2017 (Successor)2 | | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Other comprehensive loss before reclassifications | | (572 | ) | — |
| — |
| — |
| — |
| (572 | ) |
| Net other comprehensive loss | | (572 | ) | — |
| — |
| — |
| — |
| (572 | ) |
Balance September 30, 2017 (Successor) | | $ | (572 | ) | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (572 | ) |
| |
1. | The cumulative translation adjustment gain for the three months ended Marchperiod January 1 through August 31, 2017 is primarily driven by the weakening of the U.S.U.S dollar (USD) against the European Euro (EUR). The cumulative translation adjustment loss for the period September 1 through September 30, 2017 is primarily driven by the modest strengthening of the USD against the EUR. |
| |
2. | In connection with the Merger, previously unrecognized prior service benefits and net losses related to DuPont's pension and OPEB plans were eliminated as a result of the Brazilian real (BRL).reflecting the balance sheet at fair value as of the date of the Merger. See Note 3 and 15 for further information regarding the Merger and pension and OPEB plans, respectively. |
| | | | Cumulative Translation Adjustment1 | Net Gains (Losses) on Cash Flow Hedging Derivative Instruments | Pension Benefit Plans2 | Other Benefit Plans | Unrealized Gain (Loss) on Securities | Total | |
| (In millions) | | Cumulative Translation Adjustment1 | Derivative Instruments | Pension Benefit Plans2 | Other Benefit Plans | Unrealized Gain (Loss) on Securities | Total |
| 2016 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
| Balance January 1, 2016 | $ | (2,333 | ) | $ | (24 | ) | $ | (7,043 | ) | $ | 22 |
| $ | (18 | ) | $ | (9,396 | ) | $ | (2,333 | ) | $ | (24 | ) | $ | (7,043 | ) | $ | 22 |
| $ | (18 | ) | $ | (9,396 | ) |
| Other comprehensive (loss) income before reclassifications | 170 |
| 10 |
| (762 | ) | (79 | ) | (9 | ) | (670 | ) | 187 |
| 21 |
| (1,740 | ) | (172 | ) | (8 | ) | (1,712 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | — |
| 7 |
| 143 |
| (36 | ) | 1 |
| 115 |
| — |
| 11 |
| 469 |
| (58 | ) | 19 |
| 441 |
|
| Net other comprehensive (loss) income | 170 |
| 17 |
| (619 | ) | (115 | ) | (8 | ) | (555 | ) | 187 |
| 32 |
| (1,271 | ) | (230 | ) | 11 |
| (1,271 | ) |
| Balance March 31, 2016 | $ | (2,163 | ) | $ | (7 | ) | $ | (7,662 | ) | $ | (93 | ) | $ | (26 | ) | $ | (9,951 | ) | |
| Balance September 30, 2016 | | $ | (2,146 | ) | $ | 8 |
| $ | (8,314 | ) | $ | (208 | ) | $ | (7 | ) | $ | (10,667 | ) |
| |
1. | The cumulative translation adjustment gain for the threenine months ended March 31,September 30, 2016 is primarily driven by the modest weakening of the USDU.S. dollar (USD) against the EUREuropean Euro (EUR) and BRL.the Brazilian real (BRL). |
| |
2. | The Pension Benefit Plans loss recognized in other comprehensive (loss) income during the threenine months ended March 31,September 30, 2016 includes the impact of the re-measurementremeasurement of the principal U.S. pension plan as of March 31,June 30, 2016. See Note 1415 for additional information. |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The tax (expense) benefit on the net activity related to each component of other comprehensive income (loss) were as follows:
|
| | | | | | |
| For the three months ended March 31, | 2017 | 2016 |
| Net gains (losses) on cash flow hedging derivative instruments | $ | 1 |
| $ | (10 | ) |
| Pension benefit plans, net | (60 | ) | 351 |
|
| Other benefit plans, net | (2 | ) | 61 |
|
| Tax (expense) benefit from income taxes related to other comprehensive income (loss) items | $ | (61 | ) | $ | 402 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Derivative instruments | $ | — |
| $ | — |
| $ | 1 |
| $ | 6 |
| $ | (20 | ) |
| Pension benefit plans - net | — |
| (31 | ) | (40 | ) | (145 | ) | 668 |
|
| Other benefit plans - net | — |
| (1 | ) | 6 |
| (5 | ) | 125 |
|
| (Provision for) benefit from income taxes related to other comprehensive income (loss) items | $ | — |
| $ | (32 | ) | $ | (33 | ) | $ | (144 | ) | $ | 773 |
|
A summary of the reclassifications out of accumulated other comprehensive loss is provided as follows:
| | | | 2017 | 2016 | Consolidated Statements of Income Classification | Successor | Predecessor | Income Classification |
| For the three months ended March 31, | |
| Net gains (losses) on cash flow hedging derivative instruments, before tax: | $ | (8 | ) | $ | 11 |
| See (1) below | |
| (In millions) | | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 | Income Classification |
| Derivative Instruments: | | $ | — |
| $ | — |
| $ | — |
| $ | (21 | ) | $ | 18 |
|
| Tax expense (benefit) | 3 |
| (4 | ) | See (2) below | — |
| — |
| — |
| 8 |
| (7 | ) | (2) |
| After-tax | $ | (5 | ) | $ | 7 |
| | $ | — |
| $ | — |
| $ | — |
| $ | (13 | ) | $ | 11 |
| |
| Amortization of pension benefit plans: | | |
|
|
|
|
|
|
|
|
|
| |
| Prior service benefit | (1 | ) | (2 | ) | See (3) below | — |
| (1 | ) | (2 | ) | (3 | ) | (5 | ) | (3) |
| Actuarial losses | 190 |
| 172 |
| See (3) below | — |
| 127 |
| 229 |
| 506 |
| 605 |
| (3) |
| Curtailment loss | — |
| 49 |
| See (3) below | |
| Curtailment (loss) gain | | — |
| — |
| (1 | ) | — |
| 65 |
| (3) |
| Settlement loss | — |
| 1 |
| See (3) below | — |
| — |
| 22 |
| — |
| 60 |
| (3) |
| Total before tax | $ | 189 |
| $ | 220 |
| | $ | — |
| $ | 126 |
| $ | 248 |
| $ | 503 |
| $ | 725 |
| |
| Tax benefit | (65 | ) | (77 | ) | See (2) below | — |
| (45 | ) | (88 | ) | (178 | ) | (256 | ) | (2) |
| After-tax | $ | 124 |
| $ | 143 |
| | $ | — |
| $ | 81 |
| $ | 160 |
| $ | 325 |
| $ | 469 |
| |
| Amortization of other benefit plans: | | |
|
|
|
|
|
|
|
|
|
| |
| Prior service benefit | (17 | ) | (39 | ) | See (3) below | — |
| (11 | ) | (36 | ) | (46 | ) | (111 | ) | (3) |
| Actuarial losses | 23 |
| 17 |
| See (3) below | — |
| 15 |
| 21 |
| 61 |
| 56 |
| (3) |
| Curtailment gain | — |
| (30 | ) | See (3) below | — |
| — |
| — |
| — |
| (33 | ) | (3) |
| Total before tax | $ | 6 |
| $ | (52 | ) | | $ | — |
| $ | 4 |
| $ | (15 | ) | $ | 15 |
| $ | (88 | ) | |
| Tax (benefit) expense | (2 | ) | 16 |
| See (2) below | — |
| (1 | ) | 6 |
| (5 | ) | 30 |
| (2) |
| After-tax | $ | 4 |
| $ | (36 | ) | | $ | — |
| $ | 3 |
| $ | (9 | ) | $ | 10 |
| $ | (58 | ) | |
| Net realized gains (losses) on investments, before tax: | (1 | ) | 1 |
| See (4) below | — |
| — |
| 6 |
| (1 | ) | 19 |
| (4) |
| Tax expense | — |
| — |
| See (2) below | — |
| — |
| — |
| — |
| — |
| (2) |
| After-tax | $ | (1 | ) | $ | 1 |
| | $ | — |
| $ | — |
| $ | 6 |
| $ | (1 | ) | $ | 19 |
| |
| Total reclassifications for the period, after-tax | $ | 122 |
| $ | 115 |
| | $ | — |
| $ | 84 |
| $ | 157 |
| $ | 321 |
| $ | 441 |
| |
| |
2. | Provision for income taxes from continuing operations. |
| |
3. | These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost of the company's pension and other benefit plans. See Note 1415 for additional information. |
| |
4. | OtherSundry income (expense) - net. |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
Note 15. Pension Plans and Other Post Employment Benefits
As a result of the Merger, the company re-measured its pension and other post employment benefit (OPEB) plans. The remeasurement of the company’s pension and OPEB plans are included in millions, except per share)the fair value measurement of DuPont’s assets and liabilities as a result of the application of push down accounting in connection with the Merger. In addition, net losses and prior service benefits recognized in accumulated other comprehensive loss were eliminated. Dow and DuPont did not merge their pension plans and other post employment benefit plans as a result of the Merger. See Note 3 for details on the Merger.
Pension Plans
The company’s remeasurement of its pension plans upon the effective date of the Merger resulted in an increase in the underfunded status of $596 million. In connection with the remeasurement, the company updated the weighted average discount rate from 3.80 percent at December 31, 2016 to 3.42 percent as of August 31, 2017.
During the period January 1 through August 31, 2017, the company made total contributions of $2,900 million to its principal U.S. pension plan funded through the May 2017 Debt Offering; short-term borrowings, including commercial paper issuance; and cash. See Note 12 for further discussion related to the May 2017 Debt Offering. Additionally, the company made total contributions of $19 million during the period September 1 through September 30, 2017 for plans other than the principal U.S. pension plan. DuPont expects to contribute approximately $50 million to its pension plans in the remainder of 2017.
The workforce reductions in 2016 related to the 2016 global cost savings and restructuring plan triggered curtailments for certain of the company's pension plans, including the principal U.S. pension plan. For the principal U.S. pension plan, the company recorded curtailment losses of $63 million during the nine months ended September 30, 2016 and re-measured the principal U.S. pension plan as of March 31, 2016 and June 30, 2016. The curtailment losses were driven by the changes in the benefit obligation based on the demographics of the terminated positions partially offset by accelerated recognition of a portion of the prior service benefit. In connection with the remeasurements, the company recognized a pre-tax net loss of $2,352 million within other comprehensive income (loss) for the nine months ended September 30, 2016. The loss was driven by the decrease in the discount rate from 4.47 percent at December 31, 2015 to 3.74 percent as of June 30, 2016. In addition, the company recorded $15 million and $51 million settlement charges during the three and nine months ended September 30, 2016 related to the company's Pension Restoration Plan which provides for lump sum payments to certain eligible retirees.
The following sets forth the components of the company’s net periodic benefit cost for pensions:
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Service cost | $ | 12 |
| $ | 25 |
| $ | 44 |
| $ | 92 |
| $ | 133 |
|
| Interest cost | 62 |
| 132 |
| 189 |
| 524 |
| 612 |
|
| Expected return on plan assets | (102 | ) | (207 | ) | (327 | ) | (824 | ) | (996 | ) |
| Amortization of loss | — |
| 127 |
| 229 |
| 506 |
| 605 |
|
| Amortization of prior service benefit | — |
| (1 | ) | (2 | ) | (3 | ) | (5 | ) |
| Curtailment (gain) loss | — |
| — |
| (1 | ) | — |
| 65 |
|
| Settlement loss | — |
| — |
| 22 |
| — |
| 60 |
|
| Net periodic benefit (credit) cost - Total | $ | (28 | ) | $ | 76 |
| $ | 154 |
| $ | 295 |
| $ | 474 |
|
| Less: Discontinued operations | — |
| 1 |
| 1 |
| 3 |
| — |
|
| Net periodic benefit (credit) cost - Continuing operations | $ | (28 | ) | $ | 75 |
| $ | 153 |
| $ | 292 |
| $ | 474 |
|
In determining the U.S. pension plan net periodic benefit costs for the Successor period, the company updated the expected return on plan assets assumption from 8.00 percent for the period July 1 through August 31, 2017 to 6.25 percent for the period September 1 through September 30, 2017. The lower return assumption reflects the company's updated strategic asset allocation for the U.S. pension trust.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Other Post Employment Benefits
The company’s remeasurement of its OPEB plans upon the effective date of the Merger resulted in an increase in the benefit obligation of $41 million. In connection with the remeasurement, the company lowered the weighted average discount rate to
3.62 percent as of August 31, 2017 from 4.03 percent as of December 31, 2016.
As a result of the workforce reductions noted above, a curtailment was triggered for the company's other post employment benefit plans. The company recorded curtailment gains of $33 million for the nine months ended September 30, 2016 and re-measured the associated plans as of March 31, 2016 and June 30, 2016. The curtailment gain was driven by accelerated recognition of a portion of the prior service benefit partially offset by the change in the benefit obligation based on the demographics of the terminated positions. In connection with the remeasurement, the company updated the associated plans’ weighted average discount rate assumed at December 31, 2015 from 4.30 percent to 3.55 percent as of June 30, 2016. The remeasurement resulted in a net increase of $265 million to the company’s other post employment benefit obligation with a corresponding increase to net loss within other comprehensive loss for the nine months ended September 30, 2016.
The following sets forth the components of the company’s net periodic benefit cost (credit) for other post employment benefits:
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Service cost | $ | 1 |
| $ | 2 |
| $ | 2 |
| $ | 6 |
| $ | 9 |
|
| Interest cost | 6 |
| 15 |
| 20 |
| 60 |
| 64 |
|
| Amortization of loss | — |
| 15 |
| 21 |
| 61 |
| 56 |
|
| Amortization of prior service benefit | — |
| (11 | ) | (36 | ) | (46 | ) | (111 | ) |
| Curtailment gain | — |
| — |
| — |
| — |
| (33 | ) |
Net periodic benefit cost (credit) - Continuing operations | $ | 7 |
| $ | 21 |
| $ | 7 |
| $ | 81 |
| $ | (15 | ) |
Note 16. Stock-Based Compensation
The DuPont Equity and Incentive Plan ("EIP") provides for equity-based and cash incentive awards to certain employees, directors, and consultants. All outstanding DuPont equity awards as of the Merger date were converted into equity awards with respect to DowDuPont Common Stock. The previous DuPont equity awards were converted into the right to receive 1.2820 shares of DowDuPont Common Stock and had a fair value of approximately $629 million at the Merger closing date, which was included in the total consideration exchanged. The converted DuPont equity awards were measured at their fair value and included $485 million as consideration exchanged and $144 million (includes $23 million of incremental expense as a result of the conversion) that will be amortized to stock compensation expense over the remaining vesting period of the awards. The fair values of the converted awards were based on valuation assumptions developed by management and other information including, but not limited to, historical volatility and exercise trends of DuPont and Dow. DuPont and Dow did not merge their equity and incentive plans as a result of the Merger.
As of September 30, 2017, the company had unrecognized pre-tax compensation expense of $24 million and $110 million related to non-vested stock options and non-vested restricted stock units (RSUs), respectively. Performance stock units held prior to merger were converted to RSUs. As of September 30, 2017, the expected remaining weighted-average recognition period for non-vested stock options, non-vested RSUs is 1.80 years and 1.91 years, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 13.17. Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The company's cash, cash equivalents andAt September 30, 2017, the company had $1,826 million ($1,362 million at December 31, 2016) of held-to-maturity securities (primarily time deposits) classified as marketable securities as these securities had maturities of March 31, 2017 and December 31, 2016more than three months to less than 1 year at the time of purchase. The company’s investments in held-to-maturity securities are comprised of the following:
|
| | | | | | | | | | | | | | | | | | |
| | March 31, 2017 | December 31, 2016 |
| | Cash and Cash Equivalents | Marketable Securities | Total Estimated Fair Value | Cash and Cash Equivalents | Marketable Securities | Total Estimated Fair Value |
| Cash | $ | 1,515 |
| $ | — |
| $ | 1,515 |
| $ | 1,892 |
| $ | — |
| $ | 1,892 |
|
| | | | | | | |
| Level 2: | | | | | | |
Certificate of deposit / time deposits1 | 1,832 |
| 2,570 |
| 4,402 |
| 2,713 |
| 1,362 |
| 4,075 |
|
| | | | | | | |
| Total cash, cash equivalents and marketable securities | $ | 3,347 |
| $ | 2,570 |
| | $ | 4,605 |
| $ | 1,362 |
| |
| |
1.
| Represents held-to-maturity investments reported at amortized cost. |
The estimated fair value of the company's cash equivalents,held at amortized cost, which approximates carrying value as of March 31, 2017 and December 31, 2016, was determined using Level 2 inputs within the fair value hierarchy. Level 2 measurements were based on current interest rates for similar investments with comparable credit risk and time to maturity.
The estimated fair value of the held-to-maturity securities, which approximates carrying value as of March 31, 2017 and December 31, 2016, was determined using Level 2 inputs within the fair value hierarchy. Level 2 measurements were based on current interest rates for similar investments with comparable credit risk and time to maturity. The carrying value approximates fair value due to the short-term nature of the investments.value.
Available-for-sale securities are reported at estimated fair value with unrealized gains and losses reported as a component of accumulated other comprehensive loss. There were no sales of available-for-sale securities for the three months ended Marchperiod September 1 through September 30, 2017 or for the period January 1 through August 31, 2017. The proceeds from the sale of available-for-sale securities for the three and nine months ended March 31,September 30, 2016 were $260.
Debt
The estimated fair value of the company's total debt, including interest rate financial instruments, was determined using level 2 inputs within the fair value hierarchy, as described in the company's 2016 Annual Report in Note 1, “Summary of Significant Accounting Policies.” Based on quoted market prices for the same or similar issues or on current rates offered to the company for debt of the same remaining maturities, the fair value of the company's debt was approximately $10,800$161 million and $8,890 as of March 31, 2017 and December 31, 2016, respectively.$626 million, respectively.
Derivative Instruments
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the company enters into contractual arrangements (derivatives) to reduce its exposure to foreign currency, interest rate and commodity price risks. The company has established a variety of derivative programs to be utilized for financial risk management. These programs reflect varying levels of exposure coverage and time horizons based on an assessment of risk.
Derivative programs have procedures and controls and are approved by the Corporate Financial Risk Management Committee, consistent with the company's financial risk management policies and guidelines. Derivative instruments used are forwards, options, futures and swaps. The company has not designated any nonderivatives as hedging instruments.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The company's financial risk management procedures also address counterparty credit approval, limits and routine exposure monitoring and reporting. The counterparties to these contractual arrangements are major financial institutions and major commodity exchanges. The company is exposed to credit loss in the event of nonperformance by these counterparties. The company utilizes collateral support annex agreements with certain counterparties to limit its exposure to credit losses. The company's derivative assets and liabilities are reported on a gross basis in the Condensed Consolidated Balance Sheets. The company anticipates performance by counterparties to these contracts and therefore no material loss is expected. Market and counterparty credit risks associated with these instruments are regularly reported to management.
The notional amounts of the company's derivative instruments were as follows:
| | | | March 31, 2017 | December 31, 2016 | |
| Notional Amounts | | Successor | Predecessor |
(In millions) | | September 30, 2017 | December 31, 2016 |
| Derivatives designated as hedging instruments: | | | | |
| Commodity contracts | $ | 282 |
| $ | 422 |
| $ | — |
| $ | 422 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | 7,342 |
| 9,896 |
| 11,528 |
| 9,896 |
|
| Commodity contracts | 460 |
| 7 |
| 8 |
| 7 |
|
The notional amounts of the company's commodity derivatives were as follows: |
| | | | | |
| Commodity Gross Aggregate Notionals | Successor September 30, 2017 | Predecessor December 31, 2016 | Notional Volume Unit |
|
Derivatives designated as hedging instruments:
| | | |
| Corn | — |
| 55.2 |
| million bushels |
| Soybean | — |
| 22.1 |
| million bushels |
| Derivatives not designated as hedging instruments: |
|
|
|
| |
| Soybean | 0.5 |
| 0.2 |
| million bushels |
| Soybean Oil | 3.3 |
| 7.3 |
| million pounds |
| Soybean Meal | 4.8 |
| 9.1 |
| kilotons |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Risk
The company's objective in managing exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign currency rate changes. Accordingly, the company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency-denominated assets, liabilities, commitments and cash flows.
The company routinely uses forward exchange contracts to offset its net exposures, by currency, related to the foreign currency-denominated monetary assets and liabilities of its operations. The primary business objective of this hedging program is to maintain
an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes,
net of related tax effects, are minimized. The company also uses foreign currency exchange contracts to offset a portion of the company's exposure to certain foreign currency-denominated revenues so that gains and losses on these contracts offset changes
in the USD value of the related foreign currency-denominated revenues. The objective of the hedge program is to reduce earnings
and cash flow volatility related to changes in foreign currency exchange rates.
Commodity Price Risk
Commodity price risk management programs serve to reduce exposure to price fluctuations on purchases of inventory such as corn, soybeans, soybean oil and soybean meal. The company enters into over-the-counter and exchange-traded derivative commodity instruments to hedge the commodity price risk associated with agricultural commodity exposures.
Derivatives Designated as Cash Flow Hedges
Foreign Currency Contracts
The company uses foreign currency exchange instruments such as forwards and options to offset a portion of the company's exposure to certain foreign currency-denominated revenues so that gains and losses on these contracts offset changes in the USD value of the related foreign currency-denominated revenues. In addition, the company occasionally uses forward exchange contracts to offset a portion of the company'scompany’s exposure to certain foreign currency-denominated transactions such as capital expenditures.
Commodity Contracts
The company enters into over-the-counter and exchange-traded derivative commodity instruments, including options, futures and swaps, to hedge the commodity price risk associated with agriculture commodity exposures.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
While each risk management program has a different time maturity period, most programs currently do not extend beyond the next two-year period. Cash flow hedge results are reclassified into earnings during the same period in which the related exposure impacts earnings. Reclassifications are made sooner if it appears that a forecasted transaction is not probable of occurring.
The following table summarizes the after-tax effect of cash flow hedges on accumulated other comprehensive loss for the three months ended March 31, 2017 and 2016:loss:
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2017 | 2016 |
| Beginning balance | $ | 7 |
| $ | (24 | ) |
| Additions and revaluations of derivatives designated as cash flow hedges | 2 |
| 10 |
|
| Clearance of hedge results to earnings | (5 | ) | 7 |
|
| Ending balance | $ | 4 |
| $ | (7 | ) |
At March 31, 2017, an after-tax net gain of $8 is expected to be reclassified from accumulated other comprehensive loss into earnings over the next twelve months. |
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Beginning balance | $ | — |
| $ | (4 | ) | $ | 10 |
| $ | 7 |
| $ | (24 | ) |
| Additions and revaluations of derivatives designated as cash flow hedges | — |
| 1 |
| (2 | ) | 3 |
| 21 |
|
| Clearance of hedge results to earnings | — |
| — |
| — |
| (13 | ) | 11 |
|
| Ending balance | $ | — |
| $ | (3 | ) | $ | 8 |
| $ | (3 | ) | $ | 8 |
|
Derivatives not Designated in Hedging Relationships
Foreign Currency Contracts
The company routinely uses forward exchange contracts to reduce its net exposure, by currency, related to foreign currency-denominated monetary assets and liabilities of its operations so that exchange gains and losses resulting from exchange rate changes are minimized. The netting of such exposures precludes the use of hedge accounting; however, the required revaluation of the forward contracts and the associated foreign currency-denominated monetary assets and liabilities intends to achieve a minimal earnings impact, after taxes. The company also uses foreign currency exchange contracts to offset a portion of the company's exposure to certain foreign currency-denominated revenues so that gains and losses on the contracts offset changes in the USD value of the related foreign currency-denominated revenues.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Commodity Contracts
The company utilizes options, futures and swaps that are not designated as hedging instruments to reduce exposure to commodity price fluctuations on purchases of inventory such as corn, soybeans, soybean oil and soybean meal.
Fair ValuesValue of Derivative Instruments
During the Predecessor period, the company's derivative assets and liabilities are reported on a gross basis in the interim Condensed Consolidated Balance Sheets. During the Successor period, to conform with DowDuPont's presentation post-merger, asset and liability derivatives subject to an enforceable master netting arrangement with the same counterparty are presented on a net basis in the interim Condensed Consolidated Balance Sheets. The table below presents the fair valuespresentation of the company's derivative assets and liabilities within the fair value hierarchy,is as described in the company's 2016 Annual Report in Note 1, “Summary of Significant Accounting Policies.”follows:
| | | | | Fair Value Using Level 2 Inputs | | Successor |
| | Balance Sheet Location | March 31, 2017 | December 31, 2016 | | September 30, 2017 |
| (In millions) | | Balance Sheet Location | Gross | Counterparty and Cash Collateral Netting1 | Net Amounts Included in the Condensed Consolidated Balance Sheet |
| Asset derivatives: | | | | | | | |
| Derivatives not designated as hedging instruments: | | |
| | | |
| | |
Foreign currency contracts1 | Accounts and notes receivable, net | $ | 60 |
| $ | 182 |
| |
| Commodity contracts | Accounts and notes receivable, net | 6 |
| — |
| |
Total asset derivatives2 | | $ | 66 |
| $ | 182 |
| |
Cash collateral1 | Other accrued liabilities | $ | — |
| $ | 52 |
| |
| Foreign currency contracts | | Other current assets | $ | 88 |
| $ | (75 | ) | $ | 13 |
|
| Total asset derivatives | | | $ | 88 |
| $ | (75 | ) | $ | 13 |
|
| | | | | | | | |
| Liability derivatives: | | |
| | | |
| | |
| Derivatives not designated as hedging instruments: | | |
| |
| | |
| | |
|
| Foreign currency contracts | Other accrued liabilities | $ | 69 |
| $ | 121 |
| Accrued and other current liabilities | $ | 107 |
| $ | (75 | ) | $ | 32 |
|
Total liability derivatives2 | | $ | 69 |
| $ | 121 |
| |
| Total liability derivatives | | | $ | 107 |
| $ | (75 | ) | $ | 32 |
|
| |
1. | Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. The company held cash collateral of $0 million as of September 30, 2017. |
|
| | | | |
| | | Predecessor |
| (In millions) | Balance Sheet Location | December 31, 2016 |
| Asset derivatives: | | |
| Derivatives not designated as hedging instruments: | | |
Foreign currency contracts1 | Accounts and notes receivable - net | $ | 182 |
|
Total asset derivatives2 | | $ | 182 |
|
Cash collateral1 | Accrued and other current liabilities | $ | 52 |
|
| | | |
| Liability derivatives: | | |
| Derivatives not designated as hedging instruments: | | |
|
| Foreign currency contracts | Accrued and other current liabilities | $ | 121 |
|
Total liability derivatives2 | | $ | 121 |
|
| |
1. | Cash collateral held as of March 31, 2017 and December 31, 2016 is related to foreign currency derivatives not designated as hedging instruments. |
| |
2. | The company's derivative assets and liabilities subject to enforceable master netting arrangements totaled $48 at March 31, 2017 and $114 million at December 31, 2016. |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Effect of Derivative Instruments
| | | | Amount of Gain (Loss) Recognized in OCI1 (Effective Portion) | Amount of Gain (Loss) Recognized in Income2 | | Amount of Gain (Loss) Recognized in OCI1 (Effective Portion) |
| Three Months Ended March 31, | 2017 | 2016 | 2017 | 2016 | Income Statement Classification | |
| | | Successor | Predecessor |
| (In millions) | | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Derivatives designated as hedging instruments: | | | | | | | | |
| Cash flow hedges: | | | |
|
|
|
|
|
|
|
|
|
|
| Commodity contracts | $ | 4 |
| $ | 16 |
| $ | 8 |
| $ | (11 | ) | Cost of goods sold | $ | — |
| $ | 1 |
| $ | (3 | ) | $ | 5 |
| $ | 34 |
|
| | 4 |
| 16 |
| 8 |
| (11 | ) | | |
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | — |
| — |
| (85 | ) | (154 | ) | Other income, net3 | |
| Foreign currency contracts | — |
| — |
| — |
| (4 | ) | Net sales | |
| Commodity contracts | — |
| — |
| 4 |
| — |
| Cost of goods sold | |
| | — |
| — |
| (81 | ) | (158 | ) | | |
| Total derivatives | $ | 4 |
| $ | 16 |
| $ | (73 | ) | $ | (169 | ) | | $ | — |
| $ | 1 |
| $ | (3 | ) | $ | 5 |
| $ | 34 |
|
| |
1. | OCI is defined as other comprehensive income (loss). |
|
| | | | | | | | | | | | | | | |
| | Amount of Gain (Loss) Recognized in Income1 |
| | Successor | Predecessor |
| (In millions) | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Derivatives designated as hedging instruments: | | | | | |
| Cash flow hedges: | | | | | |
Commodity contracts2 | $ | — |
| $ | — |
| $ | — |
| $ | 21 |
| $ | (18 | ) |
| |
|
|
|
|
|
|
|
|
|
|
| Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts4 | 112 |
| (260 | ) | (82 | ) | (431 | ) | (397 | ) |
Foreign currency contracts3 | — |
| — |
| — |
| — |
| (15 | ) |
Commodity contracts2 | — |
| 2 |
| (1 | ) | 2 |
| (11 | ) |
| | | | | | |
| Total derivatives | $ | 112 |
| $ | (258 | ) | $ | (83 | ) | $ | (408 | ) | $ | (441 | ) |
| |
2.
1. | For cash flow hedges, this represents the effective portion of the gain (loss) reclassified from accumulated OCI into income during the period. For the three months ended March 31, 2017 and 2016, thereThere was no material ineffectiveness with regard to the company's cash flow hedges. hedges during the period. |
| |
2. | Recorded in cost of goods sold |
| |
| 4. | Gain (loss) recognized in othersundry income (expense) - net was partially offset by the related gain (loss) on the foreign currency-denominated monetary assets and liabilities of the company's operations, seewhich were $65 million for the periods July 1 through August 31, 2017 and $6 million for the three months ended September 30, 2016, and $37 million for the period January 1 through August 31, 2017 and $185 million for the nine months ended September 30, 2016. See Note 56 for additional information. |
Note 14. Long-Term Employee Benefits
Defined Benefit Pensions
The workforce reductions in 2016 related to the 2016 global cost savings and restructuring plan triggered curtailments for certain of the company's pension plans, including the principal U.S. pension plan. For the principal U.S. pension plan, the company recorded curtailment losses of $49 during the quarter ended March 31, 2016 and re-measured the principal U.S. pension plan as of March 31, 2016. The curtailment loss was driven by the changes in the benefit obligation based on the demographics of the terminated positions partially offset by accelerated recognition of a portion of the prior service benefit. In connection with the re-measurement, the company recognized a pre-tax net loss of $1,191 within other comprehensive income (loss) for the three months ended March 31, 2016.
The following sets forth the components of the company’s net periodic benefit cost for pensions:
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2017 | 2016 |
| Service cost | $ | 33 |
| $ | 47 |
|
| Interest cost | 195 |
| 217 |
|
| Expected return on plan assets | (308 | ) | (338 | ) |
| Amortization of loss | 190 |
| 172 |
|
| Amortization of prior service benefit | (1 | ) | (2 | ) |
| Curtailment loss | — |
| 49 |
|
| Settlement loss | — |
| 1 |
|
| Net periodic benefit cost - Total | $ | 109 |
| $ | 146 |
|
| Less: Discontinued operations | — |
| (4 | ) |
| Net periodic benefit cost - Continuing operations | $ | 109 |
| $ | 150 |
|
Other Post Employment Benefits
As a result of the workforce reductions noted above, curtailments were triggered for the company's other post employment benefit plans. The company recorded curtailment gains of $30 for the three months ended March 31, 2016. The curtailment gains were driven by accelerated recognition of a portion of the prior service benefit partially offset by the change in the benefit obligation based on the demographics of the terminated positions.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Note 18. Fair Value Measurements
The following sets forthtables summarize the components of the company’s net periodic benefit cost (credit) for other post employment benefits:bases used to measure certain assets and liabilities at fair value on a recurring basis at September 30, 2017 and December 31, 2016:
|
| | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2017 | 2016 |
| Service cost | $ | 2 |
| $ | 3 |
|
| Interest cost | 22 |
| 23 |
|
| Amortization of loss | 23 |
| 17 |
|
| Amortization of prior service benefit | (17 | ) | (39 | ) |
| Curtailment gain | — |
| (30 | ) |
Net periodic benefit cost (credit) - Total | $ | 30 |
| $ | (26 | ) |
Note 15. Segment Information
Segment operating earnings is defined as income (loss) from continuing operations before income taxes excluding significant pre-tax benefits (charges), non-operating pension and other post employment benefit (OPEB) costs, exchange gains (losses), corporate expenses and interest. Non-operating pension and OPEB costs includes all of the components of net periodic benefit cost from continuing operations with the exception of the service cost component.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, | Agriculture1 | Electronics & Communications | Industrial Biosciences | Nutrition & Health | Performance Materials | Protection Solutions | Other | Total |
| 2017 | |
| |
| | | |
| |
| |
| |
|
| Net sales | $ | 3,928 |
| $ | 510 |
| $ | 368 |
| $ | 789 |
| $ | 1,368 |
| $ | 747 |
| $ | 33 |
| $ | 7,743 |
|
| Operating earnings | 1,236 |
| 89 |
| 75 |
| 121 |
| 355 |
| 177 |
| (62 | ) | 1,991 |
|
| | | | | | | | | |
| 2016 | |
| |
| | | |
| |
| |
| |
|
| Net sales | $ | 3,786 |
| $ | 452 |
| $ | 352 |
| $ | 801 |
| $ | 1,249 |
| $ | 729 |
| $ | 36 |
| $ | 7,405 |
|
| Operating earnings | 1,101 |
| 59 |
| 63 |
| 104 |
| 273 |
| 176 |
| (59 | ) | 1,717 |
|
|
| | | | | | |
| September 30, 2017 | Significant Other Observable Inputs (Level 2) | Total |
| (In millions) |
| Assets at fair value: | | |
Cash equivalents1 | $ | 3,251 |
| $ | 3,251 |
|
| Marketable securities | 1,826 |
| 1,826 |
|
Derivatives relating to:2 | |
|
|
| Foreign currency | 13 |
| 13 |
|
| Total assets at fair value | $ | 5,090 |
| $ | 5,090 |
|
| Liabilities at fair value: | | |
Long-term debt3 | $ | 11,097 |
| $ | 11,097 |
|
Derivatives relating to:2 |
|
| |
| Foreign currency | 32 |
| 32 |
|
| Total liabilities at fair value | $ | 11,129 |
| $ | 11,129 |
|
| |
1. | As of March 31, 2017, Agriculture net assets were $9,131, an increase of $2,789 from $6,342 at December 31, 2016. The increase was primarily due to higher trade receivables related to normal seasonalityTime deposits included in "Cash and cash equivalents" in the sales and cash collections cycle. |
Reconciliation to interim Consolidated Income Statements
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | 2016 |
| Total segment operating earnings | $ | 1,991 |
| $ | 1,717 |
|
| Significant pre-tax benefits (charges) not included in segment operating earnings | 14 |
| (68 | ) |
| Non-operating pension and other post employment benefit costs | (104 | ) | (74 | ) |
| Exchange losses | (59 | ) | (121 | ) |
Corporate (expenses) income1,2,3,4,5 | (196 | ) | 273 |
|
| Interest expense | (84 | ) | (92 | ) |
| Income from continuing operations before income taxes | $ | 1,562 |
| $ | 1,635 |
|
| |
1.
| Includes transaction costs associated with the planned merger with Dow and related activities of $(170) and $(24) in the three months ended March 31, 2017 and 2016, respectively,consolidated balance sheets are held at amortized cost, which were recorded in selling, general and administrative expenses in the company's interim Consolidated Income Statements. See Note 2 for additional information.approximates fair value. |
| |
2. | Includes a $(4) charge recorded in employee separation / asset related charges, netSee Note 17 for the classification of derivatives in the company's interim Consolidated Income Statement for the three months ended March 31, 2017 associated with the 2017 restructuring program. See Note 4 for additional information.consolidated balance sheets. |
| |
3. | Includes a $47 benefitSee Note 12 for information on accrued interest reversals recordedfair value measurements of long-term debt. |
|
| | | | | | |
| December 31, 2016 | Significant Other Observable Inputs (Level 2) | Total |
| (In millions) |
| Assets at fair value: | | |
Cash equivalents1 | $ | 2,713 |
| $ | 2,713 |
|
| Marketable securities | 1,362 |
| 1,362 |
|
Derivatives relating to:2 | |
|
| Foreign currency | 182 |
| 182 |
|
| Total assets at fair value | $ | 4,257 |
| $ | 4,257 |
|
| Liabilities at fair value: | | |
Long-term debt3 | $ | 8,464 |
| $ | 8,464 |
|
Derivatives relating to:2 |
| |
| Foreign currency | 121 |
| 121 |
|
| Total liabilities at fair value | $ | 8,585 |
| $ | 8,585 |
|
| |
| 1. | Time deposits included in other income, net,"Cash and cash equivalents" in the company's interim Consolidated Income Statement for the three months ended March 31, 2017, related to a reduction in the company’s unrecognized tax benefits due to the closure of various tax statutes of limitations. See Note 6 for additional information.consolidated balance sheets are held at amortized cost, which approximates fair value. |
| |
4.
2. | Includes a gainSee Note 17 for the classification of $369 associated with the sale of DuPont (Shenzhen) Manufacturing Limited entity, which held certain buildings and other assets. The gain was recorded in other income, net,derivatives in the company's interim Consolidated Income Statement for the three months ended March 31, 2016. See Note 3 for additional information.consolidated balance sheets. |
| |
5.
3. | Includes a $14 net benefit recorded in employee separation / asset related charges, net in the company's interim Consolidated Income Statement for the three months ended March 31, 2016 associated with the 2016 global cost savings and restructuring plan. See Note 412 for additional information.information on fair value measurements of long-term debt. |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Note 19. Subsequent Events
Significant Pre-tax Benefits (Charges) Not Included in Segment Operating EarningsIn October 2017, under the Term Loan Facility, DuPont borrowed $500 million at the LIBOR Loan Rate, primarily to pay down commercial paper.
The three months ended March 31,
On November 1, 2017, the company approved additional restructuring actions under the Synergy Program. See Note 5 for further information.
On November 1, 2017, the company completed the FMC Transactions. See Notes 3 and 2016, respectively, included the following significant pre-tax benefits (charges) which are excluded from segment operating earnings:
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | 2016 |
Agriculture1,4,5 | $ | — |
| $ | (73 | ) |
Electronics & Communications2,4 | (5 | ) | 7 |
|
Industrial Biosciences2,4 | (6 | ) | 1 |
|
Nutrition & Health2,3,4 | 160 |
| 1 |
|
Performance Materials2,4 | (11 | ) | (4 | ) |
Protection Solutions2,4 | (124 | ) | 3 |
|
Other4 | — |
| (3 | ) |
| | $ | 14 |
| $ | (68 | ) |
| |
1.
| Includes $23 for reduction in accrual recorded in other operating charges in the company's interim Consolidated Income Statement for the three months ended March 31, 2016, for customer claims related to the use of the Imprelis® herbicide.
|
| |
2.
| Includes a $(148) restructuring charge in employee separation / asset related charges, net in the company's interim Consolidated Income Statement for the three months ended March 31, 2017, associated with the 2017 restructuring program. See Note 4 for additional4 for further information. |
| |
3.
| Includes a $162 gain recorded in other income, net, in the company's interim Consolidated Income Statement for the three months ended March 31, 2017, associated with the sale of the company's global food safety diagnostic business. See Note 3 for additional information. |
| |
4.
| Includes a $(16) net restructuring charge in employee separation / asset related charges, net in the company's interim Consolidated Income Statement for the three months ended March 31, 2016, associated with the 2016 global cost savings and restructuring program. See Note 4 for additional information. |
| |
5.
| Includes a $(75) restructuring charge recorded in employee separation / asset related charges, net in the company's interim Consolidated Income Statement for the three months ended March 31, 2016, related to the decision not to re-start the insecticide manufacturing facility at the La Porte site located in La Porte, Texas. See Note 4 for additional information. |
| |
| Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Cautionary Statements About Forward-Looking Statements
This reportcommunication contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In this context, forward-looking statements which may be identified by their use ofoften address expected future business and financial performance and financial condition, and often contain words like “plans,such as “expect,” “expects,“anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “anticipates,“would,” “believes,“target,” “intends,” “projects,” “estimates”similar expressions, and variations or other wordsnegatives of similar meaning. All statements that address expectations or projections about the future, including statements about the company's strategy for growth, product development, regulatory approval, market position, anticipated benefits of recent acquisitions, timing of anticipated benefits from restructuring actions, outcome of contingencies, such as litigation and environmental matters, expenditures, and financial results, Forward-looking statements including statements about the consummation of and expected benefits, including synergies, from the planned merger withthese words.
On December 11, 2015, The Dow Chemical Company (Dow) (the Merger Transaction)(“Dow”) and the proposedcompany announced entry into an Agreement and Plan of Merger, as amended on March 31, 2017, (the “Merger Agreement”) under which the companies would combine in an all-stock merger of equals transaction (the “Merger Transaction”). Effective August 31, 2017, the Merger Transaction was completed and each of Dow and DuPont became subsidiaries of DowDuPont Inc (the “Merger”) For more information, See Note 3.
Forward-looking statements by their nature address matters that are, to different degrees, uncertain, including the intended separation of the combined company’s (DowDuPont)DowDuPont’s agriculture, business,materials science and specialty products business and material science business through a series of tax-efficientbusinesses in one or more tax efficient transactions on anticipated terms (the Intended“Intended Business Separations),Separations”) and the transactions with FMC Transactions, as defined below,Corporation, which closed on November 1, 2017, in which, among other things, FMC will acquire the Divested Ag Business, as defined belowacquired a portion of DuPont’s Crop Protection business and DuPont will acquire the Acquired H&N Business, as defined below,acquired substantially all of FMC’s Health and the anticipated benefits thereof. These and other forward-lookingNutrition business (the “FMC Transactions”). See Note 4. Forward-looking statements including the failure to consummate the Merger Transaction or FMC Transactions or to make or take any filing or other action required to consummate such transactions in a timely manner or at all, are not guarantees of future resultsperformance and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of future events which may not be accurate or realized. Forward-looking statements also involve risks and uncertainties, many of which are beyond the company'scompany’s control.
Some of the important factors that could cause actual results to differ materially from those projected in any such forward-looking statements include, but are not limited to: (i) successful integration of the respective agriculture, materials science and specialty products businesses of Dow and DuPont, including anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the combined operations; (ii) impact of the divestitures required as a condition to consummation of the Merger Transaction as well as other conditional commitments; (iii) the possibility that the anticipated benefits of the FMC Transactions may not be obtained; (iv) achievement of the anticipated synergies by DowDuPont’s agriculture, materials science and specialty products businesses and related inpact on DuPont; (v) risks associated with the Intended Business Separations, including a number of conditions which could delay, prevent or otherwise adversely affect the proposed transactions, including possible issues or delays in obtaining required regulatory approvals or clearances related to the Intended Business Separations, disruptions in the financial markets or other potential barriers; (vi) the ability of DowDuPont and DuPont to integrate FMC’s Health and Nutrition business and to achieve anticipated synergies; (vii) the risk that disruptions from the Intended Business Separations and the FMC Transactions will harm DowDuPont’s agriculture and specialty products businesses as conducted by or through DuPont, including current plans and operations; (viii) the ability to retain and hire key personnel; (ix) potential adverse reactions or changes to business relationships resulting from the completion of the merger, the Intended Business Separations, and the FMC Transactions; (x) continued availability of capital and financing and rating agency actions; (xi) legislative, regulatory and economic developments; (xii) potential business uncertainty, including changes to existing business relationships, during the pendency of the Intended Business Separations could affect the company’s financial performance; and (xiv) unpredictability and severity of catastrophic events, including, but not limited to, acts of terrorism or outbreak of war or hostilities, as well as management’s response to any of the aforementioned factors. These risks, as well as other risks associated with the Merger and the Intended Business Separations, are more fully discussed in (1) the Registration Statement and (2) the current, quarterly and annual reports filed with the SEC by DuPont. While the listslist of factors presented here is, and the list of factors presented in the Registration Statement are, considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on DowDuPont’s, Dow’s or DuPont’s consolidated financial condition, results of operations, credit rating or liquidity. SomeNone of the important factors that could cause the company's actual resultsDowDuPont, Dow or DuPont assumes any obligation to differ materially from those projected inpublicly provide revisions or updates to any such forward-looking statements are:
Risks related to the DowDuPont Merger, the Intended Business Separations and the FMC Transactions including, but not limited to, (i) the completionwhether as a result of the Merger Transaction and the FMC Transactions on anticipated terms and timing, including obtaining regulatory approvals, anticipated tax treatment, unforeseen liabilities,new information, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the new combined company’s operationsdevelopments or the Acquired H&N Businessotherwise, should circumstances change, except as otherwise required by securities and other conditions to the completion of the Merger Transaction and the FMC Transactions, (ii) the possibility that the Merger Transaction and the FMC Transactions may not close, including because the various approvals, authorizations and declarations of non-objections from certain regulatory and governmental authorities with respect to either the Merger Transaction or the FMC Transactions may not be obtained, on a timely basis or otherwise, including that these regulatory or governmental authorities may not approve of FMC as an acceptable purchaser of the Divested Ag Business in connection with the FMC Transactions or may impose conditions on the granting of the various approvals, authorizations and declarations of non-objections, including requiring the respective Dow, DuPont and FMC businesses, including the Acquired H&N Business (in the case of DuPont) and the Divested Ag Business (in the case of FMC), to divest certain assets if necessary to obtain certain regulatory approvals or otherwise limiting the ability of the combined company to integrate parts of the Dow and DuPont businesses and/or the DuPont and Health and Nutrition businesses, (iii) the ability of DuPont to integrate the Acquired H&N Business successfully and to achieve anticipated synergies, (iv) potential litigation or regulatory actions relating to the Merger Transaction or the FMC Transactions that could be instituted against DuPont or its directors, (v) the risk that disruptions from the Merger Transaction or the FMC Transactions will harm DuPont’s business, including current plans and operations, (vi) the ability of DuPont to retain and hire key personnel, (vii) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the Merger Transaction or the FMC Transactions, (viii) uncertainty as to the long-term value of DowDuPont common stock, (ix) continued availability of capital and financing and rating agency actions, (x) legislative, regulatory and economic developments, (xi) potential business uncertainty, including changes to existing business relationships, during the pendency of the Merger Transaction or the FMC Transactions that could affect DuPont’s financial performance, (xii) certain restrictions during the pendency of the Merger Transaction or the FMC Transactions that may impact DuPont’s ability to pursue certain business opportunities or strategic transactions and (xiii) unpredictability and severity of catastrophic events, including, but not limited to, acts of terrorism or outbreak of war or hostilities, as well as management’s response to any of the aforementioned factors. These risks, as well as other risks associated with the Merger Transaction or the FMC Transactions, are more fully discussed in (1) DuPont’s most recently filed Form 10-K, 10-Q and 8-K reports, (2) DuPont’s subsequently filed Form 10-K and 10-Q
reports and (3) the joint proxy statement/prospectus included in the Registration Statement filed with the SEC in connection with the Merger Transaction;
Volatility in energy and raw material prices;
Failure to develop and market new products and optimally manage product life cycles;
Outcome of significant litigation and environmental matters, including those related to divested businesses, including realization of associated indemnification assets, if any;
Failure to appropriately manage process safety and product stewardship issues;
Ability to obtain and maintain regulatory approval for its products especially in the Agriculture segment;
Failure to realize all of the expected benefits from cost and productivity initiatives to the extent and as anticipated;
Effect of changes in tax, environmental and other laws and regulations or political conditions in the United States of America (U.S.) and other countries in which the company operates;
Conditions in the global economy and global capital markets, including economic factors such as inflation, deflation, fluctuation in currency rates, interest rates and commodity prices;
Failure to appropriately respond to market acceptance, government rules, regulations and policies affecting products based on biotechnology;
Impact of business disruptions, including supply disruptions, and security threats, regardless of cause, including acts of sabotage, cyber-attacks, terrorism or war, natural disasters and weather events and patterns which could affect demand as well as availability of product, particularly in the Agriculture segment;
Ability to discover, develop and protect new technologies and enforce the company's intellectual property rights; and
Successful integration of acquired businesses and separation of underperforming or non-strategic assets or businesses.applicable laws.
For further discussion of some of the important factors that could cause the company's actual results to differ materially from those projected in any such forward-looking statements, see the Risk Factors discussion set forth under Part I, Item 1A of the company's 2016 Annual Report.Report and the section titled “Risk Factors” (Part II, Item 1A of this Form 10-Q).
Recent Developments
DuPont DowDowDuPont Merger of Equals
DowDuPont Inc. ("DowDuPont") was formed on December 9, 2015 to effect an all-stock, merger of equals strategic combination between The Dow Chemical Company ("Dow") and E. I. du Pont de Nemours and Company ("DuPont") (the "Merger Transaction"). On December 11, 2015, DuPont and Dow announced entry into anAugust 31, 2017 at 11:59 pm ET, (the "Merger Effectiveness Time") pursuant to the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017 (the Merger Agreement)"Merger Agreement"), under which the companies will combine in an all-stock mergerDow and DuPont each merged with wholly owned subsidiaries of equals (the Merger Transaction) subject to satisfaction of customary closing conditions, including receipt of regulatory approval. The combined company will be named DowDuPont Inc. (DowDuPont). Following the consummation("Mergers") and, as a result of the Mergers, Dow and DuPont became subsidiaries of DowDuPont (collectively, the "Merger"). Prior to the Merger, Transaction, DuPontDowDuPont did not conduct any business activities other than those required for its formation and Dow intendmatters contemplated by the Merger Agreement. DowDuPont intends to pursue, subject to the receipt of approval by the Boardboard of Directorsdirectors of DowDuPont, the separation of the combined company’scompany's agriculture business, specialty products business and material science business through a series of tax-efficient transactions (collectively, the Intended Business Separations).
On March 27, 2017, DuPont and Dow announced thatAs a condition of the European Commission (EC) granted conditional regulatory clearance in Europe forapproval of the Merger Transaction, conditional on DuPont and Dow fulfilling certain commitments. DuPontthe company is required to selldivest certain assets related to its Crop Protection business and research and development (R&D)("R&D") organization, specifically the company’s Cereal Broadleaf Herbicides and Chewing Insecticides portfolios, including Rynaxypyr®, Cyazypyr® and Indoxacarb as well as the Crop Protection R&D pipeline and organization, excluding seed treatment, nematicides, and late-stage R&D programs. The company will continue to develop and bring to market its late-stage Crop Protection R&D programs and retain the personnel needed to support the Crop Protection marketed products and R&D programs not required to be divested per the EC’s conditional approval.
On March 31, 2017, DuPontthe company entered into a definitive agreement (the FMC"FMC Transaction Agreement)Agreement") with FMC Corporation (FMC)("FMC"). Under the FMC Transaction Agreement, FMC will acquire the Crop Protection business and R&D assets that DuPont is required to divest in order to obtain ECEuropean Commission ("EC") approval of the Merger Transaction as described above, (the Divested"Divested Ag Business),Business") and DuPont has agreed to acquire certain assets relating to FMC’s Health and Nutrition segment, excluding its Omega-3 products, (the "Acquired H&N Business") (collectively, the "FMC Transactions"). The assets and liabilities related to the Divested Ag Business at September 30, 2017 are presented as held for sale in the interim Consolidated Balance Sheet. The sale of the Divested Ag Business meets the criteria for discontinued operations and as such, earnings are included within income from discontinued operations after income taxes for all periods presented.
On November 1, 2017, the company completed the FMC Transactions through the disposition of the Divested Ag Business and the acquisition of the Acquired H&N Business) (collectively,Business. The preliminary fair value as determined by the company of the Acquired H&N Business is $1,900 million. The FMC Transactions). Additionally, FMC will payTransactions includes cash consideration payment to DuPont $1.2 billion in cash, subject to certain adjustments as set forth in the FMC Transaction Agreement,of approximately $1,200 million, which reflects the difference in value between the Divested Ag Business and the Acquired H&N Business, subject to adjustments for inventory of the Divested Ag Business and net working capital of the Acquired H&N Business. DuPont will retainretained accounts receivable and accounts payable associated with the Divested Ag Business with an expectedapproximate net receivable value of $425$400 million. Refer to Note 4 for further information regarding the FMC Transactions.
Basis of Presentation
For purposes of DowDuPont's financial statement presentation, Dow was determined to be the accounting acquirer in the Merger and DuPont's assets and liabilities are reflected at fair value as of the Merger Effectiveness Time. In connection with the Merger and the related accounting determination, DuPont has elected to apply push-down accounting and reflect in its financial statements, the fair value of assets and liabilities. DuPont's interim Consolidated Financial Statements for periods following the close of the Merger are labeled “Successor” and reflect DowDuPont’s basis in the fair values of the assets and liabilities of DuPont. All periods prior to the closing of the Merger reflect the historical accounting basis in DuPont's assets and liabilities and are labeled “Predecessor.” The interim Consolidated Financial Statements and Footnotes include a black line division between the columns titled "Predecessor" and "Successor" to signify that the amounts shown for the periods prior to and following the Merger are not comparable. See Note 3 for additional information on the Merger.
DowDuPont Cost Synergy Program
In September 2017, DowDuPont approved initial post-merger actions under the DowDuPont Cost Synergy Program (the “Synergy Program”) which is designed to integrate and optimize the organization following the Merger. In connection with approved actions under the Synergy Program, for the period September 1 through September 30, 2017, DuPont incurred pre-tax charges of $40 million at closing.of the expected pre-tax charges of approximately $70 million, comprised primarily of severance and related benefit costs. The assetscharge for the period September 1 through September 30, 2017 was recognized in restructuring and asset related charges - net in the company's interim Consolidated Statements of Operations. Additional charges for severance related to these actions are expected in the fourth quarter of 2017. The actions associated with this plan are expected to be substantially complete by the Divested Ag Business generated revenues in 2016end of 2018.
On November 1, 2017, the company approved additional restructuring actions under the Synergy Program, adopted by the DowDuPont Board of Directors. Based on all actions approved to date under the Synergy Program, DuPont expects to record total pre-tax restructuring charges of about $1.4 billion. The FMC Health$850 million, comprised of approximately $350 million to $400 million of severance and Nutrition business being acquired, which includes texturants as food ingredientsrelated benefits costs; up to $360 million of asset related charges, and pharmaceutical excipients, generated$110 million to $140 million of costs related to contract terminations. DuPont’s current estimated pre-tax restructuring charges include the $40 million recorded for the period September 1 through September 30, 2017, comprised of severance and related benefit costs. DuPont expects to record pre-tax restructuring charges of approximately $700$115 million in revenues in 2016.
The divestiture will satisfy DuPont’s commitments to the EC in connection with its conditional regulatory clearance of the merger with Dow. The FMC Transaction is expected to close in the fourth quarter of 2017, subjectwith the remaining restructuring charges to be incurred by the end of 2019. The Synergy Program includes certain asset actions, including strategic decisions regarding the cellulosic biofuel business reflected in the preliminary fair value measurement of DuPont’s assets as of the merger date. Current estimated total pre-tax restructuring charges could be impacted by future adjustments to the preliminary fair value of DuPont’s assets.
Future cash payments related to this charge are anticipated to be approximately $460 million to $540 million, primarily related to the payment of severance and related benefits and contract termination costs. It is possible that additional charges and future cash payments could occur in relation to the restructuring actions. The company anticipates including savings associated with these actions against the targeted $3 billion of cost synergies associated with the Merger Transaction.
2017 Restructuring Program
During the first quarter 2017, DuPont committed to take actions to improve plant productivity and better position its businesses for productivity and growth before and after the anticipated closing of the Merger Transaction in addition to customary closing conditions, including regulatory approval(the "2017 restructuring program"). In connection with these actions, the company incurred pre-tax charges of $1 million and $313 million, for the FMC Transactions.
To accommodate the transaction with FMC, DuPont and Dow have amended the Merger Agreement to extend the “Outside Date” toperiod July 1 through August 31, 2017 and January 1 through August 31, 2017 ("Predecessor" periods), respectively, recognized in restructuring and asset related charges - net in the companies anticipate closingcompany's interim Consolidated Statements of Operations. The charge for the period July 1 through August 31, 2017 is severance. The charge for the period January 1 through August 31, 2017 is comprised of $279 million of asset-related charges and $34 million in severance and related benefit costs. The charges primarily relate to the second quarter closure of the merger to occur no sooner than August 1, 2017, subject to satisfactionProtection Solutions business Cooper River manufacturing site located near Charleston, South Carolina. The asset-related charges mainly consist of customary closing conditions, including receipt of regulatory approvals.accelerated depreciation associated with the closure. The companies still expect the Intended Business Separations to occur within 18 months after closing the Merger Transaction. In addition, Dow and DuPont now expect the first step in the Intended Business Separations process will be the spin-off of the post-merger material science business. About $3 billion in aggregate cost synergiesactions associated with this plan are currently expected to be realized on a run-rate basissubstantially complete by the combined businesses within 24 months after consummationend of 2017. The company anticipates including savings associated with these actions against the targeted $3 billion of cost synergies associated with the Merger Transaction.
Acquisition of Granular, Inc.
On August 31, 2017, the Company acquired Granular, Inc., a leading provider of software and analytics tools that helps farms improve efficiency, profitability, and sustainability. The purchase price was approximately $250 million and was primarily allocated to goodwill, developed technology and customer relationships.
Impact of 2017 Hurricanes
On August 25, 2017, Hurricane Harvey made landfall in Texas and caused widespread damage. DuPont sites impacted include plants in Sabine and Victoria, however, the financial impact, including lost sales and repairs and maintenance, is not material to the Predecessor or Successor financial statements.
On September 20, 2017, Hurricane Maria made landfall in Puerto Rico and caused widespread damages to the island and its infrastructure. DuPont's presence in Puerto Rico includes Pioneer located in Salinas, and Crop Protection and DuPont Electronics Microcircuits Industries, Ltd. ("DEMI"), both located in Manati. The company's Crop Protection business in Manati was transferred to FMC as part of the MergerDivested Ag Business. Under the FMC Transaction with approximately $1.6 billion fromAgreement, DuPont is required to bear certain repair costs related to the material science business; approximately $1 billion fromcondition of the agriculture business; and approximately $0.4 billion fromCrop Protection assets at Manati. While it is probable that repairs are required, the specialty products business.company cannot reasonably estimate the cost at this time.
On October 6, 2017, DuPont formally declared a force majeure event at DEMI's manufacturing facility in Manati. In connection with obtaining regulatory clearanceits formal force majeure notice, DuPont notified customers that for the Merger Transaction, on February 2, 2017, Dow announced that itsome time DuPont, and/or its affiliates, will divest its global Ethylene Acrylic Acid (EAA) copolymers and ionomers businessbe unable to SK Global Chemical Co., LTD. Consummation of the divestiturefulfill, either in part or in full, customer existing and/or future orders for DuPont advanced materials products. The company is conditioned on closing the Merger Transaction and regulatory clearance for the divestiture as other customary closing conditions.
See Note 2currently assessing total damages to the interim Consolidated Financial Statementssites but cannot reasonably estimate the financial impact until power is restored and production equipment and systems are evaluated for additional information.operational capabilities.
Settlement of PFOA MDL
As previously reported, approximately 3,550 lawsuits have been filed in various federal and state courts in Ohio and West Virginia alleging personal injury from exposure to perfluorooctanoic acid and its salts, including the ammonium salt (PFOA)("PFOA"), in drinking water as a result of the historical manufacture or use of PFOA at the Washington Works plant'plant outside Parkersburg, West Virginia. That plant is now owned and/or operated by The Chemours Company (Chemours)("Chemours"). These personal injury lawsuits were consolidated in multi-district litigation in the United States District Court for the Southern District of Ohio (the MDL)"MDL"). In February 2017, DuPont and plaintiffs’ counsel agreed to a settlement in principle of the MDL; the parties executed the definitive settlement agreements in March 2017. The total settlement amount is $670.7 million in cash, half of which willto be paid by Chemours and half paid by DuPont. At September 30, 2017, all payments under the settlement agreement have been made by both companies. In exchange for that payment, DuPont and Chemours will receive a complete release of all claims by the settling plaintiffs. The settlement was entered into solely by way of compromise and is not in any way an admission of liability or fault by DuPont or Chemours.
As a result at March 31, 2017, the company increased the accrual related to the MDL to $670.7 million and the indemnification asset for indemnification by Chemours to $335 million. The company recorded a pre-tax charge of $335 million ($224214 million net of tax) to loss(loss) income from discontinued operations after taxes in the company's interim Consolidated Income Statement of Operations for the three months ended Marchperiod January 1 through August 31, 2017 for the remainder of the settlement not subject to indemnification by Chemours. See Note 1113 to the interim Consolidated Financial Statements for additional information.
2017 Restructuring Program
Selected Financial Data
|
| | | | | | | | | | | | | | | |
| | Successor | Predecessor |
| In millions, except per share amounts | For the Period
September 1 - September 30, 2017 | For the Period
July 1 - August 31, 2017 | Three Months Ended
September 30, 2016 | For the Period
Jan. 1 - August 31, 2017 | Nine Months Ended
September 30, 2016 |
| Net sales | $ | 1,735 |
| $ | 2,991 |
| $ | 4,646 |
| $ | 17,281 |
| $ | 18,306 |
|
| | | | | | |
| Cost of sales | $ | 1,511 |
| $ | 1,975 |
| $ | 2,997 |
| $ | 10,205 |
| $ | 10,923 |
|
| Percent of net sales | 87.1 | % | 66.0 | % | 64.5 | % | 59.1 | % | 59.7 | % |
| | | | | | |
| Research and development expenses | $ | 116 |
| $ | 278 |
| $ | 378 |
| $ | 1,064 |
| $ | 1,159 |
|
| Percent of net sales | 6.7 | % | 9.3 | % | 8.1 | % | 6.2 | % | 6.3 | % |
| | | | | | |
| Selling, general and administrative expenses | $ | 267 |
| $ | 798 |
| $ | 970 |
| $ | 3,306 |
| $ | 3,227 |
|
| Percent of net sales | 15.4 | % | 26.7 | % | 20.9 | % | 19.1 | % | 17.6 | % |
| | | | | | |
| Effective tax rate on continuing operations | 7.7 | % | 33.8 | % | 56.3 | % | 8.3 | % | 22.6 | % |
| | | | | | |
| Net (loss) income available for common stockholders | | $ | (236 | ) | $ | — |
| $ | 1,734 |
| $ | 2,241 |
|
| | | | | | |
| Basic earnings per share of common stock from continuing operations | | $ | (0.30 | ) | $ | (0.08 | ) | $ | 1.86 |
| $ | 2.17 |
|
| Diluted earnings per share of common stock from continuing operations | | $ | (0.30 | ) | $ | (0.08 | ) | $ | 1.85 |
| $ | 2.16 |
|
Results of Operations
Note on Financial Presentation
In connection with the first quarterMerger Transaction, the company applied the acquisition method of accounting as of September 1, 2017 DuPont committedand the financial statements reflect the related adjustments. As a result, financial information for the period July 1 through August 31, 2017 and January 1 through August 31, 2017 ("Predecessor") and the period September 1 through September 30, 2017 ("Successor") are not comparable to take actionsthe financial information for the three and nine months ended September 30, 2016 ("Predecessor"). In addition, the company has elected to improve plant productivitymake certain changes in presentation to harmonize it's accounting and better positions its businessesreporting with the Parent Company in the Successor period. See Note 1 for productivityfurther discussion of these changes and growth before and after the anticipated closing ofNote 3 for additional information regarding the Merger Transaction.
Net Sales
Net sales increased from $4.6 billion for the three months ended September 30, 2016 to $3.0 billion for the period July 1 through August 31, 2017 and $1.7 billion for the period September 1 through September 30, 2017. The increase was primarily driven by higher sales volume, particularly DuPont electronics products in the Asia Pacific region. Net sales and percentage of total company sales by region are shown in the table below for each of these periods.
|
| | | | | | | | | | | | |
| | Successor | Predecessor |
| | For the Period September 1 - September 30, 2017 | For the Period July 1 - August 31, 2017 | Three Months Ended September 30, 2016 |
| | Net Sales ($ Billions) | % | Net Sales
($ Billions) | % | Net Sales
($ Billions) | % |
| Worldwide | $ | 1.7 |
| 100.0 | $ | 3.0 |
| 100.0 | $ | 4.6 |
| 100.0 |
| U.S. & Canada | 0.5 |
| 27.6 | 1.0 |
| 32.5 | 1.5 |
| 33.6 |
| Europe, Middle East & Africa (EMEA) | 0.4 |
| 24.5 | 0.7 |
| 24.9 | 1.1 |
| 22.8 |
| Asia Pacific | 0.5 |
| 30.4 | 0.9 |
| 31.3 | 1.3 |
| 28.9 |
| Latin America | 0.3 |
| 17.5 | 0.4 |
| 11.3 | 0.7 |
| 14.7 |
Net sales increased from $18.3 billion for the nine months ended September 30, 2016 to $17.3 billion for the period January 1 through August 31, 2017 and $1.7 billion for the period September 1 through September 30, 2017. The increase was primarily driven by higher sales volume, particularly DuPont electronics products in the Asia Pacific region and higher seed sales in EMEA and North America. Net sales and percentage of total company sales by region are shown in the table below for each of these periods.
|
| | | | | | | | | | | | |
| | Successor | Predecessor |
| | For the Period September 1 - September 30, 2017 | For the Period January 1 - August 31, 2017 | Nine Months Ended September 30, 2016 |
| | Net Sales
($ Billions) | % | Net Sales
($ Billions) | % | Net Sales
($ Billions) | % |
| Worldwide | $ | 1.7 |
| 100.0 | $ | 17.3 |
| 100.0 | $ | 18.3 |
| 100.0 |
| U.S. & Canada | 0.5 |
| 27.6 | 8.1 |
| 47.0 | 8.5 |
| 46.6 |
| Europe, Middle East & Africa (EMEA) | 0.4 |
| 24.5 | 3.9 |
| 22.8 | 4.1 |
| 22.6 |
| Asia Pacific | 0.5 |
| 30.4 | 3.9 |
| 22.2 | 4.0 |
| 21.8 |
| Latin America | 0.3 |
| 17.5 | 1.4 |
| 8.0 | 1.7 |
| 9.0 |
Cost of Goods Sold ("COGS")
COGS increased from $3.0 billion for the three months ended September 30, 2016 to $2.0 billion for the period July 1 through August 31, 2017 and $1.5 billion for the period September 1 through September 30, 2017. The increase was primarily driven by the amortization of the inventory step-up of $360 million for the period September 1 through September 30, 2017 as well as higher sales volume.
COGS increased from $10.9 billion for the nine months ended September 30, 2016 to $10.2 billion for the period January 1 through August 31, 2017 and $1.5 billion for the period September 1 through September 30, 2017. The increase was primarily driven by the amortization of the inventory step-up of $360 million for the period September 1 through September 30, 2017 as well as higher sales volume.
See Note 3 for additional information regarding the Merger, including the valuation of inventory.
Other Operating Charges
Other operating charges were $172 million and $490 million for the three and nine months ended September 30, 2016, respectively, and $136 million and $504 million for the period July 1 through August 31, 2017 and the period January 1 through August 31, 2017, respectively. In the Successor period, other operating charges are included in cost of goods sold; selling, general and administrative expenses; and amortization of intangibles. See Note 1 for further discussion of the changes in presentation.
Research and Development Expense ("R&D")
R&D expense increased from $378 million for the three months ended September 30, 2016 to $278 million for the period July 1 through August 31, 2017 and $116 million for the period September 1 through September 30, 2017. The increase was was primarily driven by an increase in agriculture R&D expense partially offset by lower pension and OPEB costs.
R&D expense increased from $1,159 million for the nine months ended September 30, 2016 to $1,064 million for the period January 1 through August 31, 2017 and $116 million for the period September 1 through September 30, 2017. The increase was primarily driven by an increase in agriculture R&D expense.
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses increased from $970 million for the three months ended September 30, 2016 to $798 million for the period July 1 through August 31, 2017 and $267 million for the period September 1 through September 30, 2017. The increase is primarily driven by higher transaction costs. During the three months ended September 30, 2016 and period July 1 through August 31, 2017, the company incurred $122 million and $210 million, respectively, of transaction costs in connection with these actions,the merger with Dow and the Intended Business Separations. In the Successor period, integration and separation costs are presented as a line item on the Consolidated Statement of Operations. See Note 1 for further discussion of the changes in presentation.
SG&A expenses increased from $3,227 million for the nine months ended September 30, 2016 to $3,306 million for the period January 1 through August 31, 2017 and $267 million for the period September 1 through September 30, 2017. The increase is primarily driven by higher transaction costs. During the nine months ended September 30, 2016 and the period January 1 through August 31, 2017, the company expectsincurred $222 million and $581 million, respectively, of transaction costs in connection with the merger with Dow and the Intended Business Separations.
Amortization of Intangibles
Intangible asset amortization was $89 million for the period September 1 through September 30, 2017. In the Predecessor periods, amortization of intangibles was included within SG&A; other operating charges; and R&D. See Note 3 for further information regarding the Merger, including the valuation of intangible assets.
Restructuring and Asset Related Charges - Net
Restructuring and asset related charges - net decreased from $172 million for the three months ended September 30, 2016 to incur pre-tax$11 million for the period July 1 through August 31, 2017 and $40 million for the period September 1 through September 30, 2017. The charges for the period July 1 through August 31, 2017 and for the period September 1 through September 30, 2017 were primarily severance and related benefit costs related to the 2016 global cost savings and restructuring plan and the Synergy program, respectively. The charges for the three months ended September 30, 2016 were due to a $158 million impairment charge related to indefinite-lived intangible trade names within the Industrial Biosciences business and a $14 million charge associated with the 2016 global cost savings and restructuring plan. The impairment charge was the result of $326realignment of brand marketing strategies and a determination to phase out the use of certain acquired trade names. See Note 5 to the interim Consolidated Financial Statements for additional information.
Restructuring and asset related charges - net increased from $162 million for the nine months ended September 30, 2016 to $323 million for the period January 1 through August 31, 2017 and $40 million for the period September 1 through September 30, 2017. The charge for the period January 1 through August 31, 2017 is comprised of $293$279 million of asset-related charges and $33$44 million in severance and related benefit costs (the 2017 restructuring program).costs. The asset-related charges primarily relate to the second quarter closure of the Protection Solutions segment's Cooper River manufacturing site located near Charleston, South Carolina.Carolina as part of the 2017 restructuring program. The actions associated with this program are expected to be substantially complete bycharges for the end of 2017. The company anticipates including savings associated with these actions against the targeted $3 billion of cost synergies associated with the Merger Transaction.
Of the $326 million of pre-tax charges discussed above, $152 million was recognized during the three months ended March 31,period September 1 through September 30, 2017 in employee separation / asset related charges, net, in the company's interim Consolidated Income Statement, consisting of $33 million ofwere primarily severance and related benefit costs and $119 million of asset-related charges. The asset-related charges mainly consist of accelerated depreciation associated with the closure of the Cooper River manufacturing site. The remainder of the charges relate to accelerated depreciation, the majority of which will be recognized in the second quarter.
Sale of Food Safety Diagnostic Business
In December 2016, the company announced an agreement to sell its global food safety diagnostic business, aas part of the Nutrition & Health segment,Synergy program. The charges for the nine months ended September 30, 2016 were due to Hygiena LLC.a $158 million impairment charge related to indefinite-lived intangible tradename offset by a net benefit of $71 million primarily driven by a reduction in severance and related benefit costs in the 2016 global cost savings and restructuring plan. The transaction closedreduction in Februaryseverance and related benefit costs was driven by the elimination of positions at a lower cost than expected as a result of redeployments and attrition as well as lower than estimated individual severance costs. This was offset by a $75 million charge in the first quarter related to the decision not to re-start the insecticide manufacturing facility at the La Porte site located in La Porte, Texas. See Note 5 to the interim Consolidated Financial Statements for additional information.
Integration and Separation Costs
Integration and separation costs were $71 million for the period September 1 through September 30, 2017. In the Predecessor periods, integration and separation costs were included within SG&A. See Note 1 for further discussion of the changes in presentation.
Sundry Income (Expense) - Net
Sundry income (expense) - net was income of $88 million and a loss of $(112) million for the period September 1 through September 30, 2017 and resulted infor the period July 1 through August 31, 2017, respectively. Sundry income (expense) - net was a pre-tax gainloss of $162$(15) million ($86 million net of tax). The gain was recorded in other income, net in the company's interim Consolidated Income Statements for the three months ended MarchSeptember 30, 2016. The period September 1 through September 30, 2017, the period July 1 through August 31, 2017.
Results of Operations
Overview
The following is a summary of the results of continuing operations for2017 and the three months ended March 31, 2017:September 30, 2016 includes a net exchange gain of $77 million, a net exchange loss of $(195) million and a net exchange loss of $(76) million, respectively.
Net sales were $7.7 billion, 5 percent above the same period last year, reflecting a 4 percent volume increaseSundry income (expense) - net was income of $88 million and 1 percent higher local prices. Sales grew in most segments, led by Agriculture, Performance Materials, and Electronics & Communications.
Segment operating earnings increased in all reportable segments driven by higher volumes. Segment operating margins expanded in most reportable segments.
First quarter results include pre-tax chargesincome of $322 million, comprised of $170 million of costs in connection with the planned merger with Dow and the Intended Business Separations, including costs relating to integration and separation, and $152 million of restructuring charges, partially offset by a $162 million gain from the sale of the global food safety diagnostics business. First quarter results in prior year included a pre-tax gain of $369$166 million for the sale of the DuPont (Shenzhen) Manufacturing Limited entity.
Income from continuing operations after taxes was $1.3 billion versus $1.2 billionperiod September 1 through September 30, 2017 and for the same period in the prior year.
Net Sales
Net sales for the three months ended MarchJanuary 1 through August 31, 2017, were $7.7 billion, up 5 percent versus $7.4 billion in the prior year reflecting 4 percent higher volume, and a 1 percent increase in local prices. Worldwide sales volume increased 4 percent, largely driven by a 16 percent volume increase in Asia Pacific where Performance Materials and Electronics & Communications had significant growth. Volume increased 8 percent in EMEA, driven by increased seed sales in Eastern Europe, and higher sales in the Performance Materials and Protection Solutions segments. The increase in local price principally reflects higher seed prices, primarily in Latin America, partly offset by a decline in the Protection Solutions segment. Net sales in developing markets, which include China, India, and countries in Southeast Asia, Latin America, Eastern and Central Europe, Middle East, and Africa, were $2.4 billion, up 15 percent, driven by higher volume. Volume largely reflects strong growth in Electronics & Communications and Performance Materials in developing Asia Pacific, and Agriculture in developing EMEA. Sales in developing markets represent 31 percentrespectively. Sundry income (expense) - net was income of total sales versus 29 percent last year.
The table below shows a regional breakdown of net sales based on location of customers and percentage variances from the prior year:
|
| | | | | | | | | | | | | |
| | Three Months Ended March 31, 2017 | Percent Change Due to: |
| | Net Sales ($ Billions) | Percent Change vs. 2016 | Local Price and Product Mix | Currency | Volume | Portfolio and Other |
| Worldwide | $ | 7.7 |
| 5 |
| 1 |
| — |
| 4 |
| — |
|
| U.S. & Canada | 3.6 |
| — |
| 1 |
| — |
| (1 | ) | — |
|
| Europe, Middle East & Africa (EMEA) | 2.1 |
| 5 |
| 1 |
| (3 | ) | 8 |
| (1 | ) |
| Asia Pacific | 1.4 |
| 13 |
| (1 | ) | (1 | ) | 16 |
| (1 | ) |
| Latin America | 0.6 |
| 14 |
| 7 |
| 11 |
| (3 | ) | (1 | ) |
Cost of Goods Sold (COGS)
COGS for the first quarter 2017 increased 3 percent to $4.4 billion from $4.2 billion in the prior year. The increase principally reflects 4 percent higher sales volume. COGS as a percentage of sales decreased to 56 percent from 57 percent in the prior year, reflecting higher selling prices, lower unit costs and favorable mix.
Other Operating Charges
Other operating charges were $204$407 million for the first quarter of 2017 versus $185 million in the prior year, principally reflecting the absence of a $23 million prior-year benefit from a reduction in the estimated liability related to Imprelis® herbicide claims.
Selling, General and Administrative Expenses (SG&A)
SG&A expenses were $1.3 billion for the first quarter of 2017 versus $1.1 billion in the prior year, with the increase primarily driven by costs in connection with the planned merger with Dow and related activities and increases in commission expense, partially offset by cost savings. During the threenine months ended MarchSeptember 30, 2016. The period September 1 through September 30, 2017, the period January 1 through August 31, 2017 and the nine months ended September 30, 2016 the company incurred $170includes a net exchange gain of $77 million, a net exchange loss of $(394) million and $24a net exchange loss of $(212) million, respectively, of transaction costs associated with the planned merger with Dow. SG&A was approximately 16 percent and 15 percent of net sales for the three months ended Marchrespectively. The period January 1 through August 31, 2017 and 2016, respectively.
Research and Development Expense (R&D)
R&D expense was relatively flat at $416 million and $418 million in the first quarter 2017 and 2016, respectively. R&D was approximately 5 percent and 6 percent of net sales for the three months ended March 31, 2017 and 2016, respectively.
Other Income, Net
Other income, net totaled $306 million for the first quarter of 2017 compared to $372 million in the prior year,included a decrease of $66 million, primarily due to the change in net gains on sales of businesses and other assets period over period, partially offset with a decrease in pre-tax exchange losses and the reversal of accrued interest related to unrecognized tax benefits. The first quarter 2017 included pre-tax gain of $162 million associated with the sale of the global food safety diagnosticsdiagnostic business. The first quarternine months ended September 30, 2016 included a pre-tax gain of $369 million associated with the sale of DuPont (Shenzhen) Manufacturing Limited entity.
See Note 56 to the interim Consolidated Financial Statements for additional information.
Interest Expense
Interest expense totaled $84increased from $93 million infor the first quarterthree months ended September 30, 2016 to $71 million for the period July 1 through August 31, 2017 as compared to $92and $27 million infor the prior year,period September 1 through September 30, 2017. The $8 million decreaseincrease was primarily due to lower interest on long-termdriven by higher debt balances, partially offset by interest on commercial paper.debt amortization as a result of reflecting the company’s debt at fair value upon the effective date of the Merger.
Employee Separation / Asset Related Charges, Net
Employee separation / asset related charges, net totaled $152Interest expense increased from $278 million versus $77for the nine months ended September 30, 2016 to $254 million infor the prior year.period January 1 through August 31, 2017 and $27 million for the period September 1 through September 30, 2017. The charges recorded in the first quarter 2017 related to the 2017 restructuring program. The charges in the first quarter 2016 included a $75 million charge related to the decision not to re-start the insecticide manufacturing facility at the La Porte site located in La Porte, Texas, as wellincrease was primarily driven by higher debt balances, partially offset by debt amortization as a $2 million net restructuring charge associated withresult of reflecting the 2016 global cost savings and restructuring plan.
company’s debt at fair value upon the effective date of the Merger. See Note 4 to the interim Consolidated Financial Statements3 for additional information.information regarding the Merger.
Provision for Income Taxes on Continuing Operations
The company'sFor the period from September 1 through September 30, 2017, the company’s effective tax rate forof 7.7 percent on pre-tax (loss) from continuing operations of $(298) million was impacted by geographic mix of earnings, the first quarter 2017 was 14.3 percent as compared to 24.8 percent in 2016. The lower effective tax rate primarily relates to the absenceimpact associated with amortization of the unfavorable tax consequences of a gain on the sale of an entity in the first quarter 2016, tax benefits related to a reduction in the company’s unrecognized tax benefits due to the closure of various tax statutes of limitations,inventory-step up, as well as increased tax benefits on costs associated with the planned merger with Dow and employee separation /restructuring and asset related charges. NetThose impacts were partially offset by certain net exchange losses recognized on the remeasurement of the net monetary asset positions which were not tax deductible in their local jurisdictions.
For the periods from July 1 through August 31, 2017 and January 1 through August 31, 2017, the company’s effective tax rates were 33.8 percent and 8.3 percent on pre-tax (loss) income from continuing operations of $(390) million and $1,791 million, respectively. For the period from January 1 through August 31, 2017, the company’s effective tax rate was favorably impacted by geographic mix of earnings, certain net exchange gains recognized on the remeasurement of the net monetary asset positions which were not taxable in their local jurisdictions, net favorable tax consequences of the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, tax benefits related to a reduction in the company’s unrecognized tax benefits due to the closure of various tax statutes of limitations, as well as changes in accruals for certain prior year tax positions, also contributed tobenefits on costs associated with the lower effective tax rate.merger with Dow and restructuring and asset related charges. Those tax benefits were partially offset by the unfavorable tax consequences of non-deductible goodwill associated with the gain on the sale of the company’s global food safety diagnostics business in the first quarter 2017.
For the three months ended September 30, 2016, the company’s effective tax rate of 56.3 percent on pre-tax (loss) from continuing operations of $(151) million was driven by the impact of costs associated with the planned merger with Dow and related activities, in addition to the impact of the write-down of indefinite lived intangible assets within the Industrial Biosciences business. These impacts were partially offset by favorable geographic mix of earnings as well as the impact of the certain net exchange gains recognized on the remeasurement of the net monetary asset positions which were not taxable in their local jurisdictions.
For the nine months ended September 30, 2016, the company’s effective tax rate of 22.6 percent pre-tax income from continuing operations of $2,474 million was impacted by geographic mix of earnings as well as certain net exchange gains recognized on the remeasurement of the net monetary asset positions which were not taxable in their local jurisdictions. Those benefits were partially offset by the tax consequences of the gain on the sale of an entity in the first quarter 2016.
See Note 67 to the interim Consolidated Financial Statements for additional information.
(Loss) Income from Discontinued Operations, Net of Tax (Loss) income from discontinued operations, net of tax, decreased from income of $72 million for the three months ended September 30, 2016 to income of $29 million for the period July 1 through August 31, 2017 and a loss of $(20) million for the period September 1 through September 30, 2017. The (loss) from discontinuing operations, net of tax for the period September 1 through September 30, 2017 includes pre-tax costs of $69 million related to the amortization of the inventory step-up.
(Loss) income from discontinued operations, net of tax, decreased from income of $347 million for the nine months ended September 30, 2016 to income of $119 million for the period January 1 through August 31, 2017 and a loss of $(20) million for the period September 1 through September 30, 2017. Activity during the period January 1 through August 31, 2017 included a pre-tax charge of $335 million ($214 million net of tax) associated with the PFOA MDL settlement.
See Note 4 to the interim Consolidated Financial Statements for additional information.
Recent Accounting Pronouncements
See Note 12 to the interim Consolidated Financial Statements for a description of recent accounting pronouncements.
Segment Reviews
Summarized below are comments on individual segment net sales and operating earnings for the three month period ended March 31, 2017 compared with the same period in 2016. Segment operating earnings is defined as income (loss) from continuing operations before income taxes excluding significant pre-tax benefits (charges), non-operating pension and other post employment employee benefit costs, exchange gains (losses), corporate expenses and interest. Non-operating pension and other post employment benefit costs includes all of the components of net periodic benefit costs from continuing operations with the exception of the service cost component. See Note 15 to the interim Consolidated Financial Statements for details related to significant pre-tax benefits (charges) excluded from segment operating earnings. All references to prices are based on local price unless otherwise specified.
A reconciliation of segment operating earnings to income from continuing operations before income taxes for the three month periods ended March 31, 2017 and 2016 is included in Note 15 to the interim Consolidated Financial Statements.
The following table summarizes first quarter 2017 segment net sales and related variances versus prior year:
|
| | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | March 31, 2017 | Percentage Change Due to: |
| | Segment Net Sales ($ Billions) | Percent Change vs. 2016 | Local Price and Product Mix | Currency | Volume | Portfolio and Other |
| Agriculture | $ | 3.9 |
| 4 |
| 2 |
| 1 |
| 2 | (1 | ) |
| Electronics & Communications | 0.5 |
| 13 |
| — |
| (1 | ) | 15 | (1 | ) |
| Industrial Biosciences | 0.4 |
| 5 |
| 2 |
| (1 | ) | 4 | — |
|
| Nutrition & Health | 0.8 |
| (1 | ) | — |
| (1 | ) | — | — |
|
| Performance Materials | 1.4 |
| 10 |
| — |
| (1 | ) | 11 | — |
|
| Protection Solutions | 0.7 |
| 2 |
| (2 | ) | (1 | ) | 5 | — |
|
Agriculture - First quarter 2017 segment net sales of $3,928 million increased $142 million, or 4 percent, on price and volume growth. A benefit from currency was offset by portfolio changes. Local pricing growth was realized by double-digit increases in Brazil, driven by the continued expansion of Pioneer® brand hybrids with Leptra® insect protection, the launch of Pioneer® brand soybeans with Roundup Ready 2 Xtend®1 technology, and increased sunflower seed sales in Europe. Volume growth was driven by the shift in timing of seed deliveries, which benefited first quarter sales by approximately $140 million, insecticide growth and increased sunflower seed sales. These increases were partially offset by lower North America corn seed volumes impacted by an expected decrease in corn acreage. Operating earnings of $1,236 million increased $135 million, or 12 percent, on price and volume growth.
Electronics & Communications - First quarter 2017 segment net sales of $510 million increased $58 million, or 13 percent, as increased volume growth was partially offset by the negative impact from currency and portfolio changes. Volume growth was driven by increased demand in consumer electronics and semiconductor markets, as well as stronger photovoltaic material sales. Operating earnings of $89 million increased $30 million, or 51 percent, on volume growth and the absence of a $16 million prior year litigation expense. Operating earnings included a gain on the sale of a business offset by costs associated with a legal matter.
Industrial Biosciences - First quarter 2017 segment net sales of $368 million increased $16 million, or 5 percent, due to growth in volume and price, partially offset by the negative impact of currency. Volume growth reflected increased demand for biomaterials in carpeting and apparel, and bioactives in the grain processing market, partially offset by declines in clean technologies. Operating earnings of $75 million increased $12 million, or 19 percent, on volume growth, improved joint venture performance and cost savings, partially offset by declines in clean technologies.
Nutrition & Health - First quarter 2017 segment net sales of $789 million decreased $12 million, or 1 percent, primarily due to the negative impact of currency. Volume and price growth in probiotics and emulsifiers was offset by declines in protein solutions and systems and texturants. Operating earnings of $121 million increased $17 million, or 16 percent, on plant productivity and mix enrichment.
1 Registered trademark of Monsanto Technology LLC used under license.
Performance Materials - First quarter 2017 segment net sales of $1,368 million increased $119 million, or 10 percent, as volume growth was partially offset by the negative impact of currency. Volume growth was driven by increased demand for polymers in automotive markets, particularly in China and Europe, coupled with specialty copolymers growth in packaging and timing benefits from the second quarter 2017. Overall volume growth was constrained by lower ethylene sales as the business prepares for a planned turnaround of the ethylene cracker in the second quarter. Operating earnings of $355 million increased $82 million, or 30 percent, driven by higher volumes and cost savings.
Protection Solutions - First quarter 2017 segment net sales of $747 million increased $18 million, or 2 percent, as increased volume was partially offset by lower local price and the negative impact of currency. Volume growth reflected improved demand for Nomex® thermal-resistant fiber in oil and gas and mass transit markets, partially offset by declines in Kevlar® high-strength material, Tyvek® protective material, and surfaces. Operating earnings of $177 million increased $1 million, or 1 percent, as volume growth and cost savings offset higher raw material costs, unfavorable mix and lower plant productivity.
Liquidity & Capital Resources
Information related to the company's liquidity and capital resources can be found in the company's 2016 Annual Report, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources. Discussion below provides the updates to this information for the three months ended Marchperiod January 1 through August 31, 2017 and the period September 1 through September 30, 2017.
| | | (Dollars in millions) | March 31, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 |
| Cash, cash equivalents and marketable securities | $ | 5,917 |
| $ | 5,967 |
| $ | 6,580 |
| $ | 5,910 |
|
| Total debt | 10,378 |
| 8,536 |
| 15,735 |
| 8,536 |
|
The company's cash, cash equivalents and marketable securities at March 31,September 30, 2017 and December 31, 2016 are $6.6 billion and $5.9 billion, and $6.0respectively. The increase of $0.7 billion respectively.was primarily due to funding the company's seasonal working capital needs in the U.S. with short term borrowings.
Total debt as of March 31,September 30, 2017 was $10.4$15.7 billion, a $1.9$7.2 billion increase from $8.5 billion as of December 31, 2016,2016. This increase was due primarily to the May 2017 Debt Offering as well as increased borrowings from commercial paper and the Repurchase Facility and increased borrowings under the Term Loan Facility used primarily to fund seasonal working capital requirements. The fair value measurement of DuPont’s assets and liabilities as a result of the application of push down accounting in connection with the Merger resulted in an increase to total debt of $0.6 billion. Refer to Note 3 for further information regarding the Merger.
In May 2017, the company completed an underwritten public offering of $1.25 billion of the company's 2.20 percent Notes due 2020 and $750 million of the company's Floating Rate Notes due 2020 (the "May 2017 Debt Offering"). The proceeds of this offering were used to make a discretionary pension contribution to the company's principal U.S. pension plan, as discussed below. The company will be required to redeem all of the Notes associated with the May 2017 Debt Offering at a redemption price equal to 100 percent of the aggregate principal amount plus any accrued and unpaid interest upon the announcement of the record date for the separation of either the agriculture or specialty products business, or the entry into an agreement to sell all or substantially all of the assets of either business to a third party.
In March 2016, the company entered into a credit agreement that provides for a three-year, senior unsecured term loan facility in the aggregate principal amount of $4.5 billion (as amended from time to time, the Term"Term Loan Facility)Facility"). In the first quarter of 2017, the Term Loan Facility was amended to extend the date on which the commitment to lend terminates. As a result, DuPont may make up to seven term loan borrowings through July 27, 2018; amounts repaid or prepaid are not available for subsequent borrowings. The Term Loan Facility matures in March 2019 at which time all outstanding borrowings, including accrued but unpaid interest, become immediately due and payable. As of March 31,September 30, 2017, the company had borrowed $500 million$1.0 billion and had unused commitments of $4.0$3.5 billion under the Term Loan Facility. DuPont may elect to borrow under the Term Loan Facility to meet its short-term liquidity needs.
In October 2017, under the Term Loan Facility, DuPont borrowed $500 million at the LIBOR Loan Rate, primarily to pay down commercial paper.
The Term Loan Facility and the amended revolving credit facility contain customary representations and warranties, affirmative and negative covenants, and events of default that are typical for companies with similar credit ratings and generally consistent with those applicable to DuPont’s long-term public debt. The Term Loan Facility and the amended revolving credit facility contain a financial covenant requiring that the ratio of Total Indebtedness to Total Capitalization for DuPont and its consolidated subsidiaries not exceed 0.6667. At March 31,September 30, 2017, the company was in compliance with this financial covenant.
In January 2017, in line with seasonal agricultural working capital requirements, the company entered into a committed receivable repurchase agreement of up to $1.3 billion (the Repurchase Facility)"Repurchase Facility") that expires on November 30, 2017. Under the Repurchase Facility, the company may sell a portfolio of available and eligible outstanding customer notes receivables within the Agriculture segmentbusiness to participating institutions and simultaneously agree to repurchase at a future date. See further discussion of this facility in Note 1012 to the interim Consolidated Financial Statements.
The company has access to approximately $8.9$7.2 billion in committed and uncommitted unused credit lines, an increasea decrease of $1.0$0.7 billion from $7.9 billion as of December 31, 2016. The increaseThis decrease was primarily due to increased borrowings under the Repurchase Facility discussed above.Term Loan Facility. These unused credit lines provide support to meet the company's short-term liquidity needs and for general corporate purposes which may include funding of discretionary and non-discretionary contributions to certain benefit plans, severance plans in the event of a change in control, repayment and refinancing of debt, working capital, capital expenditures and repurchases and redemptions of securities.
In 2017, theThe company previously anticipated making contributions of aboutapproximately $230 million to theits principal U.S. pension plan.plan in 2017. During the period January 1 through August 31, 2017, the company made total contributions of $2.9 billion to its principal U.S pension plan, an increase of approximately $2.7 billion reflecting discretionary contributions. The company is evaluating potential, additional discretionary contributions to this plan that could resultcontribution was funded through the May 2017 Debt Offering, as discussed above; short-term borrowings, including commercial paper issuance; and cash. The $2.9 billion contribution was taken as a deduction on the company’s 2016 federal tax return and resulted in a significant reductionnet operating loss for tax purposes. This loss resulted in an overpayment of taxes paid of approximately $800 million. A portion of the overpayment will be applied against current year tax liability. The remainder of the loss generated a refund of approximately $700 million which was received during the fourth quarter of 2017.
DuPont entered into a trust agreement in 2013 (as amended and restated in the third quarter of 2017) that establishes and requires DuPont to fund a trust (the "Trust") for cash obligations under certain nonqualified benefit and deferred compensation plans upon a change-in-control event as defined in the trust agreement. Under the Trust agreement, the consummation of the Merger was a change-in-control event. As a result, within 90 days following August 31, 2017, DuPont is required to contribute to the underfunded benefit obligation, a portionTrust approximately $570 million. DuPont may use one or more sources of whichliquidity to fund the contribution. Management is expected to be funded through proceeds from a debt offering. Any additional contribution abovecurrently evaluating and will finalize the $230 million depends on various factors including market conditions, access to capital markets and tax deductible limits.funding source(s) in the fourth quarter 2017.
Summary of Cash Flows
Cash used for operating activities was $1.6$3.9 billion for the three months ended Marchperiod January 1 through August 31, 2017 and $0.3 billion for the period September 1 through September 30, 2017, compared to $1.8$1.0 billion during the same period innine months ended September 30, 2016. The $0.2$3.2 billion decrease in cash used for operating activitiesincrease was due primarily due to the absence of the prior year prepayment to Chemours of $190 millionhigher pension contributions, increased transactions costs and lower tax payments,PFOA multi-district litigation settlement, partially offset by transaction costs associated with the merger and the Intended Business Separations, including costs relating to integration and separation planning.lower tax payments.
Cash used for investing activities was $1.3$2.4 billion for the three months ended Marchperiod January 1 through August 31, 2017 compared to $27 millionand cash provided by investing activities was $0.9 billion for the period September 1 through September 30, 2017, compared to cash used for investing activities of $1.1 billion during the same period innine months ended September 30, 2016. The $0.4 billion increase in cash used for investing activities was primarily due to increased net purchases of marketable securities and payments for acquisitions of businesses, partially offset by proceedslower net payments from sales of businesses and other assets.foreign currency contracts.
Cash provided by financing activities was $1.6$5.6 billion for the three months ended Marchperiod January 1 through August 31, 2017 and $0.2 billion for the period September 1 through September 30, 2017, compared to $0.6$1.2 billion during the same period last year.nine months ended September 30, 2016. The $1.0$4.6 billion increase to cash provided by financing activities was primarily due to the May 2017 Debt Offering as well as increased short-term borrowings infrom commercial paper, forthe Repurchase Facility and increased borrowings under the Term Loan Facility used primarily to fund seasonal working capital requirements.
In January 2017, the Board of Directors declared a first quarter common stock dividend of $0.38 per share. The first quarter dividendDividend payments to shareholders of DuPont common and preferred stock totaled $0.7 billion during the three months ended Marchperiod January 1 through August 31, 2017, totaledand $0.3 billion.billion during the period September 1 through September 30, 2017.
As of the consummation of the Merger, shares of DuPont common stock held publicly were redeemed and DuPont's common stock is owned solely by its parent company, DowDuPont. DuPont's preferred stock remains issued and outstanding, and DuPont continues to be responsible for dividends on its preferred stock; however, the obligation is not material to the company's liquidity.
Dow and DuPont anticipate funding DowDuPont primarily through dividend distributions, which the subsidiaries can fund with cash or another source of liquidity, to DowDuPont.
Guarantees and Off-Balance Sheet Arrangements
For detailed information related to Guarantees, Indemnifications, and Obligations for Equity Affiliates and Others, see the company's 2016 Annual Report, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Off- Balance Sheet Arrangements, and Note 1113 to the interim Consolidated Financial Statements.
Critical Accounting Estimates
The company's significant accounting policies are more fully described in Note 1 in the company's 2016 Annual Report. Management believes that the application of these policies on a consistent basis enables the company to provide the users of the financial statements with useful and reliable information about the company's operating results and financial condition.
As a result of the merger with Dow, the accounting policy described below has been identified as significant to DuPont.
Fair Value of the Assets and Liabilities of Our Existing Businesses
Due to the Merger and the related accounting determination, DuPont has elected to apply the acquisition method of accounting, which requires that all assets and liabilities be remeasured to fair value as of the date of the Merger. Such fair values have been reflected in the company's financial statements following the “push down method of accounting.” Estimates of fair value require a complex series of judgments about future events and uncertainties. The estimates and assumptions used to determine the preliminary estimated fair value assigned to each class of assets and liabilities, as well as asset lives, have a material impact to the company's consolidated financial statements, and are based upon assumptions believed to be reasonable but that are inherently uncertain. Third party valuation specialists were engaged to assist in the valuation of certain of these assets and liabilities.
Contractual Obligations
Information related to the company's contractual obligations at December 31, 2016 can be found in the company's 2016 Annual Report, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Off-Balance Sheet Arrangements. The company's contractual obligations at September 30, 2017 have increased approximately $1.7 billion versus prior year end. The increase is primarily driven by the May 2017 Debt Offering and increased borrowings under the Term Loan Facility, partially offset by payments of purchase obligations. See Note 12 to the interim Consolidated Financial Statements for further discussion of the company's debt offering and drawdown under the Term Loan Facility.
| |
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See Note 1317 to the interim Consolidated Financial Statements. See also Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, of the company's 2016 Annual Report for information on the company's utilization of financial instruments and an analysis of the sensitivity of these instruments.
Item 4. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
The company maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in the company's reports filed or submitted under the Securities Exchange Act of 1934 (Exchange Act)("Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.
As of March 31,September 30, 2017, the company's Chief Executive Officer (CEO)("CEO")" and Chief Financial Officer (CFO)("CFO"), together with management, conducted an evaluation of the effectiveness of the company's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective.
b) Changes in Internal Control over Financial Reporting
There has been no change in the company's internal control over financial reporting that occurred during the quarter ended Marchperiod September 1 through September 30, 2017 and the period July 1 through August 31, 2017 that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
Effective August 31, 2017, pursuant to the merger of equals transactions contemplated by the Agreement and Plan of Merger, dated as of December 31, 2015, as amended on March 31, 2017, the company and the Dow Chemical Company (“Dow”) each merged with wholly owned subsidiaries of DowDuPont Inc and, as a result, Dow and DuPont become subsidiaries of DowDuPont Inc. The company’s internal control over financial reporting continued to operate as designed to support the consolidation of DuPont into DowDuPont Inc.
PART II. OTHER INFORMATION
The company is subject to various litigation matters, including, but not limited to, product liability, patent infringement, antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. Information regarding certain of these matters is set forth below and in Note 1113 to the interim Consolidated Financial Statements.
Litigation
PFOA: Environmental and Litigation Proceedings
For purposes of this report, the term PFOA means collectively perfluorooctanoic acid and its salts, including the ammonium salt and does not distinguish between the two forms. Information related to this matter is included in Note 1113 to the interim Consolidated Financial Statements under the heading PFOA.
Fayetteville Works Facility, Fayetteville, North Carolina
In August 2017, the U.S. Attorney’s Office for the Eastern District of North Carolina served the company with a subpoena for testimony and the production of documents to a grand jury. Information related to this matter is included in Note 13 to the interim Consolidated Financial Statements under the heading PFOA.
La Porte Plant, La Porte, Texas - Crop Protection - releaseRelease Incident Investigations
On November 15, 2014, there was a release of methyl mercaptan at the company’s La Porte facility. The release occurred at the site’s Crop Protection unit resulting in four employee fatalities inside the unit. DuPont continues to cooperate with governmental agencies, including the U.S. Environmental Protection Agency (EPA)("EPA"), the Chemical Safety Board and the Department of Justice (DOJ)("DOJ"), still conducting investigations. These investigations could result in sanctions and civil or criminal penalties against the company.
Environmental Proceedings
The company believes it is remote that the following matters will have a material impact on its financial position, liquidity or results of operations. The descriptions are included per Regulation S-K, Item 103(5)(c) of the Securities Exchange Act of 1934.
La Porte Plant, La Porte, Texas - EPA Multimedia Inspection
The EPA conducted a multimedia inspection at the La Porte facility in January 2008. DuPont, EPA and DOJ began discussions in the fallFall 2011 relating to the management of certain materials in the facility's waste water treatment system, hazardous waste management, flare and air emissions. These negotiationsdiscussions continue.
Sabine Plant, Orange, Texas - EPA Multimedia Inspection
In June 2012, DuPont began discussions with EPA and DOJ related to a multimedia inspection that EPA conducted at the Sabine facility in March 2009 and December 2015. The discussions involve the management of materials in the facility's waste water treatment system, hazardous waste management, flare and air emissions, including leak detection and repair. These negotiationsdiscussions will continue.
La Porte Plant, La Porte, Texas - OSHA Release Incident Citations
In May 2015, the Occupational Safety & Health Administration (OSHA)("OSHA") cited the company in connection with the November 2014 release for 14fourteen violations (twelve serious, one repeat and one other-than-serious) with an aggregate associated penalty of $99,000. The company has contested the citations and the matter is before the U.S. Occupational Safety and Health Review Commission (the OSHRC). The hearing before an administrative law judge appointed by OSHRC has been postponed toIn the second quarter 2017.2017, OSHA and the company settled the Release Incident matter. The company agreed to pay penalties of $106,375 for ten violations (two repeat, seven serious and one other-than-serious). Four violations were withdrawn. The settlement was finalized and the penalties paid in the third quarter.
La Porte Plant, La Porte, Texas - OSHA Process Safety Management (PSM)("PSM") Audit
In 2015, OSHA conducted a PSM audit of the Crop Protection and Fluoroproducts units at the La Porte Plant. In July 2015, OSHA cited the company for three willful, one repeat and five serious PSM violations and placed the company in its Severe Violator Enforcement Program. OSHA has proposed a penalty of $273,000. The company has contested the citations and the matter is before the OSHRC. A hearing before an administrative law judge appointed by OSHRC has been postponed toIn the second quarter 2017.2017, OSHA and the company settled the PSM Audit matter. The company agreed to pay penalties of $285,848 for seven violations (four repeat and three serious). Two violations were withdrawn and all willful violations were reclassified. The settlement was finalized and the penalties paid in predecessor period.
Item 1A. RISK FACTORS
The following risk factor presented inupdates the company's risk factors discussed in Part I, Item 1A, Risk Factors, in the company's 2016 Annual ReportReport.
An Impairment of Goodwill or Intangibles Assets could Negatively Impact the company's Financial Results.
As a result of the Merger and the related accounting determination, DuPont elected to apply push-down accounting and has reflected the fair value of assets and liabilities in its Successor Consolidated Financial Statements, including a significant amount of goodwill and intangible assets. The company assesses both goodwill and indefinite-lived intangible assets for impairment on an annual basis, or more frequently if conditions indicate that an impairment may have occurred. If an initial qualitative assessment identifies that it is updated solelymore likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. The company may also elect to reflect Amendment No. 1skip the qualitative testing and proceed directly to quantitative testing. If the quantitative testing indicates that goodwill is impaired, the carrying value of goodwill is written down to fair value with a charge against earnings. Since the company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units, continued weak demand for a specific business could result in an impairment. Future impairments of goodwill or intangible assets could be recorded in results of operations due to changes in assumptions, estimates or circumstances and there can be no assurance that such impairments would be immaterial to the Merger Agreement which, among other things, extendscompany.
Item 5. OTHER INFORMATION
On March 31, 2017, the company entered into a definitive agreement (the "FMC Transaction Agreement") with FMC Corporation ("FMC"), providing for FMC's acquisition of the Crop Protection business and R&D assets that DuPont is required to divest in order to obtain EC approval of the Merger AgreementTransaction as described in Item 1, Note 4, (the "Divested Ag Business") and DuPont's acquisition of certain assets relating to August 31, 2017.FMC’s Health and Nutrition segment, excluding its Omega-3 products, (the "Acquired H&N Business") (collectively, the "FMC Transactions"). On November 1, 2017, the company completed the FMC Transactions through the disposition of the Divested Ag Business and the acquisition of the Acquired H&N Business. The FMC Transactions includes cash consideration payment to DuPont of approximately $1,200 million, which reflects the difference in value between the Divested Ag Business and the Acquired H&N Business, subject to adjustments for inventory of the Divested Ag Business and net working capital of the Acquired H&N Business.
Unaudited pro forma consolidated financial information of the company giving effect to the divestment of the Divested Ag Business required by Article 11 of Regulation S-X is attached hereto as Exhibit 99.1. The Merger Agreement may be terminatedcompany’s acquisition of the H&N Business has not been reflected in the pro forma financial statements as it is individually insignificant in accordance with its termsRules 1-02(w) and the Mergers may not be completed.
The completion3-05 of the Mergers is subject to the satisfaction or waiver of a number of conditions. Those conditions include: (i) the receipt of certain domestic and foreign regulatory approvals under competition laws, including the termination or expiration of the waiting period under the HSR Act; (ii) the absence of certain governmental restraints or prohibitions preventing completion of the DuPont Merger or the Dow Merger; (iii) the approval of the shares of DowDuPont Common Stock to be issued to DuPont stockholders and Dow stockholders for listing on the NYSE; (iv) the reasonable determination by DuPont and Dow that neither the DuPont Merger nor the Dow Merger will constitute an acquisition of a 50 percent or greater interest in Dow or DuPont, under Section 355(e) of the Code; (v) the truth and correctness of the representations and warranties made by both parties (generally subject to certain “materiality” and “material adverse effect” qualifiers); (vi) the performance by DuPont and Dow of their respective obligations under the Merger Agreement in all material respects; and (vii) the receipt by both parties of legal opinions from their respective tax counsels with respect to the tax-free nature of each of the Mergers.Regulation S-X.
These conditions to the closing may not be fulfilled and, accordingly, the Mergers may not be completed. In addition, if the Mergers are not completed by August 31, 2017, either DuPont or Dow may choose not to proceed with the Mergers, and the parties can mutually decide to terminate the Merger Agreement at any time prior to the consummation of the Mergers. In addition, DuPont or Dow may elect to terminate the Merger Agreement in certain other circumstances. If the Merger Agreement is terminated, Dow and DuPont may incur substantial fees in connection with termination of the Merger Agreement and will not recognize the anticipated benefits of the Mergers.
Exhibits: The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | E. I. DU PONT DE NEMOURS AND COMPANY |
| | (Registrant) |
| | | |
| | Date: | April 25,November 6, 2017 |
| | | |
| | | |
| | By: | /s/ Nicholas C. Fanandakis |
| | | |
| | | Nicholas C. Fanandakis |
| | | Executive Vice President and |
| | | Chief Financial Officer |
| | | (As Duly Authorized Officer and |
| | | Principal Financial and Accounting Officer) |
EXHIBIT INDEX
|
| | |
Exhibit Number | | Description |
| | | |
| | Company’s Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 99.23.1 to the company’s Current Report on Form 8-K (Commission file number 1-815) dated JuneSeptember 1, 2015)2017). |
| | | |
| | Company’s Amended and Restated Bylaws as last amended effective October 22, 2015 (incorporated by reference to Exhibit 3.2 to the company's QuarterlyCurrent Report on Form 10-Q8-K (Commission file number 1-815) for the period ended September 30, 2015)1, 2017). |
| | | |
| 4 | | The company agrees to provide the Commission, on request, copies of instruments defining the rights of holders of long-term debt of the company and its subsidiaries. |
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10.1* | | The DuPont Stock Accumulation and Deferred Compensation Plan for Directors, as last amended effective January 1, 2009 (incorporated by reference to Exhibit 10.1 to the company's Annual Report on Form 10-K (Commission file number 1-815) for the year ended December 31, 2013). |
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10.2* | | Company’s Supplemental Retirement Income Plan, as last amended effective December 18, 1996 (incorporated by reference to Exhibit 10.2 to the company’s Annual Report on Form 10-K (Commission file number 1-815) for the year ended December 31, 2011). |
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10.3* | | Company’s Pension Restoration Plan, as last amended effective June 29, 2015 (incorporated by reference to Exhibit 10.3 to the company's Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2015). |
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10.4* | | Company’s Rules for Lump Sum Payments, as last amended effective May 15, 2014 (incorporated by reference to Exhibit 10.4 to the company's Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2015). |
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10.5* | | Company’s Stock Performance Plan, as last amended effective January 25, 2007 (incorporated by reference to Exhibit 10.5 to the company’s Annual Report on Form 10-K (Commission file number 1-815) for the year ended December 31, 2011). |
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10.6* | | Company’s Equity and Incentive Plan, as amended and restated effective March 14, 2016 (incorporated by reference to Exhibit 10.06 to the company's Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2016). |
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10.7* | | Form of 2013 Award Terms under the company’s Equity and Incentive Plan (incorporated by reference to Exhibit 10.7 to the company’s Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2013). |
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10.8* | | Company’s Retirement Savings Restoration Plan, as last amended effective May 15, 2014. (incorporated by reference to Exhibit 10.08 to the company's Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2014). |
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10.9* | | Company’s Retirement Income Plan for Directors, as last amended January 2011 (incorporated by reference to Exhibit 10.9 to the company's Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended March 31, 2012). |
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10.10* | | Company's Senior Executive Severance Plan, as amended and restated effective December 10, 2015 (incorporated by reference to Exhibit 10.10 to the company's Annual Report on Form 10-K (Commission file number 1-815) for the year ended December 31, 2015). The company agrees to furnish supplementally a copy of any omitted schedules to the Commission upon request. |
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Exhibit
Number
| | Description |
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10.11* | | Supplemental Deferral Terms for Deferred Long Term Incentive Awards and Deferred Variable Compensation Awards (incorporated by reference to Exhibit 10.12 to the company's Annual Report on Form 10-K (Commission file number 1-815) for the year ended December 31, 2013). |
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10.13* | | Company’s Management Deferred Compensation Plan, as last amended effective April 15, 2014 (incorporated by reference to Exhibit 10.13 to the company's Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2014). |
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10.15* | | Form of 2015 Award Terms under the Company's Equity and Incentive Plan (incorporated by reference to Exhibit 10.15 to the company's Quarterly Report on 10-Q (Commission file number 1-815) for the period ended March 31, 2015). |
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10.16* | | Form of 2016 Award Terms under the Company’s Equity and Incentive Plan. |
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| 10.18** | | Separation Agreement by and between the Company and The Chemours Company (incorporated by reference to Exhibit 2.1 to the company's Current Report on Form 8-K (Commission file number 1-815) dated July 8, 2015). |
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| | Tax Matters Agreement by and between the Company and The Chemours Company (incorporated by reference to Exhibit 2.2 to the company's Current Report on Form 8-K (Commission file number 1-815) dated July 8, 2015). |
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10.20** | | Agreement and Plan of Merger by and between the Company and The Dow Chemical Company, dated as of December 11, 2015 (incorporated by reference to Exhibit 2.1 to the company's Current Report on Form 8-K (Commission file number 1-815) dated December 11, 2015). |
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| | Master Repurchase Agreement by and among Cooperatieve Rabobank, U.A. (New York Branch), The Bank of Tokyo Mitsubishi UFJ Ltd. (New York Branch) and PHI Financial Services, Inc. dated as of January 31, 2017.2017 (incorporated by reference to Exhibit 10.21 to the company's Annual Report on Form 10-K (Commission file number 1-815) for the year ended December 31, 2016). |
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| | Master Framework Agreement by and among Cooperatieve Rabobank, U.A. (New York Branch), The Bank of Tokyo Mitsubishi UFJ Ltd. (New York Branch) and PHI Financial Services, Inc. dated as of January 31, 2017.2017 (incorporated by reference to Exhibit 10.22 to the company's Annual Report on Form 10-K (Commission file number 1-815) for the year ended December 31, 2016). |
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10.23* | | Form of 2017 Award Terms under the Company's Equity and Incentive Plan. |
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10.24** | | Amendment No. 1, dated March 31, 2017, to the Agreement and Plan of Merger, dated as of December 11, 2015 by and among the Company, The Dow Chemical Company, Diamond Merger Sub, Inc., Orion Merger Sub, Inc. and Diamond-Orion HoldCo, Inc. (n/k/a DowDuPont Inc.) (incorporated by reference to Exhibit 2.1 to the Company’s current report on Form 8-K (Commission file number 1-815) dated March 31, 2017. |
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10.25** | | Transaction Agreement, dated as of March 31, 2017, by and between the Company and FMC Corporation.Corporation (incorporated by reference to Exhibit 10.25 to the company’s Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended March 31, 2017). |
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| | Purchase Price Allocation Side Letter Agreement, dated as of May 12, 2017, by and between the Company and FMC Corporation (incorporated by reference to Exhibit 10.26 to the company’s Quarterly Report on Form 10-Q (Commission file number 1-815) for the period ended June 30, 2017). |
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| | Amendment No. 1 to Separation Agreement by and between the Company and The Chemours Company, dated August 24, 2017 (incorporated by reference to Exhibit 2.1 to the company's Current Report on Form 8-K (Commission file number 1-815) dated August 25, 2017). |
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| | Employment Agreement by and between the Company and Edward D. Breen, dated as of August 31, 2017, (incorporated by reference to Exhibit 10.1 to the company's Current Report on Form 8-K (Commission file number 1-815) dated September 1, 2017). |
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| | Computation of Ratio of Earnings to Fixed Charges. |
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| | Rule 13a-14(a)/15d-14(a) Certification of the company’s Principal Executive Officer. |
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| | Rule 13a-14(a)/15d-14(a) Certification of the company’s Principal Financial Officer. |
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| | Section 1350 Certification of the company’s Principal Executive Officer. The information contained in this Exhibit shall not be deemed filed with the Securities and Exchange Commission nor incorporated by reference in any registration statement filed by the registrant under the Securities Act of 1933, as amended. |
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Exhibit Number | | Description |
| | |
| | Section 1350 Certification of the company’s Principal Financial Officer. The information contained in this Exhibit shall not be deemed filed with the Securities and Exchange Commission nor incorporated by reference in any registration statement filed by the registrant under the Securities Act of 1933, as amended. |
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| | Unaudited Pro Forma Consolidated Financial Information |
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| 101.INS | | XBRL Instance Document |
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| 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
*Management contract or compensatory plan or arrangement.
**DuPont hereby undertakes to furnish supplementally a copy of any omitted schedule or exhibit to such agreement to the U.S. Securities and Exchange Commission upon request.