(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Effective August 31, 2017, pursuant to the merger of equals transactions contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017 ("Merger Agreement"), The Dow Chemical Company ("Historical Dow") and E. I. du Pont de Nemours and Company ("Historical EID") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, as a result, Historical Dow and Historical EID became subsidiaries of DowDuPont (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. Historical Dow was determined to be the accounting acquirer in the Merger.
DowDuPont completed a series of internal reorganizations and realignment steps in order to separate into three, independent, publicly traded companies - one for each of its agriculture, materials science and specialty products businesses. DowDuPont formed two wholly owned subsidiaries: Dow Inc. ("Dow", formerly known as Dow Holdings Inc.), to serve as a holding company for its materials science business, and Corteva, Inc. ("Corteva"), to serve as a holding company for its agriculture business.
Effective as of 5:00 p.m. on April 1, 2019, DowDuPont completed the separation of its materials science business into a separate and independent public company by way of a distribution of Dow through a pro rata dividend in-kind of all of the then-issued and outstanding shares of Dow's common stock, par value $0.01 per share (the "Dow Common Stock"), to holders of the Company's common stock, par value $0.01 per share (the "DowDuPont common stock"), as of the close of business on March 21, 2019 (the "Dow Distribution").
Effective as of 12:01 a.m. on June 1, 2019, DuPont de Nemours, Inc. (formerly known as DowDuPont Inc.), completed the separation of its agriculture business into a separate and independent public company by way of a distribution of Corteva through a pro rata dividend in-kind of all of the then-issued and outstanding shares of Corteva's common stock, par value $0.01 per share (the "Corteva Common Stock"), to holders of the Company's common stock, par value $0.01 per share, as of the close of business on May 24, 2019 (the "Corteva Distribution" and, together with the Dow Distribution, the "Distributions").
Following the Corteva Distribution, the Company holds the specialty products business. On June 1, 2019, DowDuPont changed its registered name from "DowDuPont Inc." to "DuPont de Nemours, Inc." doing business as "DuPont" (the "Company"). Beginning on June 3, 2019, the Company's common stock is traded on the NYSE under the ticker symbol "DD".
The results of operations of DuPont for the three months ended March 31, 2019 present the historical financial results of Dow and Corteva as discontinued operations. The cash flows and comprehensive income related to Dow and Corteva have not been segregated and are included in the interim Consolidated Statements of Cash Flows and interim Consolidated Statements of Comprehensive Income, respectively, for the applicable period. Unless otherwise indicated, the information in the notes to the interim Consolidated Financial Statements refer only to DuPont's continuing operations and do not include discussion of balances or activity of Dow or Corteva.
The statements of operations and pro forma statements of operations included in this report and as discussed below include costs previously allocated to the materials science and agriculture businesses that did not meet the definition of expenses related to discontinued operations in accordance with Financial Accounting Standards Codification 205, "Presentation of Financial Statements" ("ASC 205") and thus are reflected in the Company's results of continuing operations. A significant portion of these costs relate to Historical Dow and consist of leveraged services provided through service centers, as well as other corporate overhead costs related to information technology, finance, manufacturing, research & development, sales & marketing, supply chain, human resources, sourcing & logistics, legal and communications, public affairs & government affairs functions. These costs are no longer incurred by the Company following the Distributions.
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COVID-19 The novel coronavirus ("COVID-19") pandemic has resulted in significant economic disruption and continues to adversely impact the broader global economy, including certain of the Company's customers and suppliers. Given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on its financial condition, results of operations or cash flows into the foreseeable future. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic subsides.
During the first quarter of 2020, the Company benefited from COVID-19 related demand in certain markets, principally personal protection, food & beverage, health & wellness and electronics. Although management currently expects strong demand from these certain markets to continue into the second quarter of 2020, the COVID-19 pandemic is expected to continue to significantly adversely impact demand in automotive, oil & gas, and select industrial end-markets. In response to this uncertainty, the Company is delaying certain capital investments in select sectors, and idling production at several manufacturing sites, predominantly production plants in the Transportation & Industrial segment.
In addition, in response to COVID-19 related market disruption and uncertainties, the Company has proactively taken steps to enhance its liquidity position. In April 2020, the Company entered into a $1.0 billion 364-day revolving credit facility (the "$1B Revolving Credit Facility") that replaces its $750 million 364-day revolving credit facility (the "Old 364-Day Revolving Credit Facility"), and completed a public underwritten offering of $2 billion of 2.169 percent fixed rate notes due May 1, 2023 (the "May Debt Offering"). Refer to Liquidity and Capital Resources for more information.
Nutrition & Biosciences Financing
2020 Restructuring Program
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recognized in "Restructuring and asset related charges - net" in the interim Consolidated Statements of Operations. Refer to Note 5 of the interim Consolidated Financial Statements.
On April 29, 2020, the Company announced that its Board declared a second quarter dividend of $0.30 per share payable on June 15, 2020, to shareholders of record on May 29, 2020.
SELECTED FINANCIAL DATA Three Months Ended In millions, except per share amounts March 31, 2020 March 31, 2019 Net sales $ 5,221 $ 5,414 Cost of sales $ 3,318 $ 3,621 Percent of net sales 63.6 % 66.9 % Research and development expenses $ 236 $ 267 Percent of net sales 4.5 % 4.9 % Selling, general and administrative expenses $ 633 $ 726 Percent of net sales 12.1 % 13.4 % Effective tax rate - continuing operations (7.8 )% 55.2 % Net (loss) income available for DuPont common stockholders $ (616 ) $ 521 Earnings per common share - basic $ (0.83 ) $ 0.69 Earnings per common share - diluted $ (0.83 ) $ 0.69
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RESULTS OF OPERATIONS Summary of Sales Results Three Months Ended In millions March 31, 2020 March 31, 2019 Net sales $ 5,221 $ 5,414 The following table summarizes sales variances by segment and geographic region from the prior year: Sales Variances by Segment and Geographic Region Three Months Ended March 31, 2020 Local Price & Percentage change from prior year Product Mix Currency Volume Portfolio & Other Total Electronics & Imaging (1 )% (1 )% 9 % - % 7 % Nutrition & Biosciences 2 (2 ) 1 - 1 Transportation & Industrial (4 ) (1 ) (8 ) - (13 ) Safety & Construction 2 (1 ) (4 ) 2 (1 ) Non-Core 2 - (12 ) (9 ) (19 ) Total - % (1 )% (2 )% (1 )% (4 )% U.S. & Canada - % - % (2 )% - % (2 )% EMEA 1 1 (3 ) (5 ) (1 ) (8 ) Asia Pacific (1 ) (1 ) - - (2 ) Latin America 2 (3 ) (3 ) (2 ) (6 ) Total - % (1 )% (2 )% (1 )% (4 )%
1. Europe, Middle East and Africa.
The Company reported net sales for the three months ended March 31, 2020 of $5.2 billion, down 4 percent from $5.4 billion for the three months ended March 31, 2019, due to a 2 percent decrease in volume, a 1 percent unfavorable currency impact and a 1 percent decline in portfolio actions. Local price and product mix remained flat. Volume declined across all geographic regions with the exception of Asia Pacific where it remained flat. Volume declined across all segments with the exception of Electronics & Imaging (up 9 percent) and Nutrition & Biosciences (up 1 percent). The most notable volume decrease were in Transportation & Industrial (down 8 percent) and Non-Core (down 12 percent). Currency was down 1 percent compared with the same period last year, driven primarily by EMEA currencies (down 3 percent). Portfolio and other changes contributed 1 percent of the sales decrease which impacted Non-Core (down 9 percent). Local price was flat compared with the same period last year. Local price increased in Latin America (up 2 percent) and EMEA (up 1 percent) and in all segments except Transportation & Industrial (down 4 percent) and Electronics & Imaging (down 1 percent).
Cost of Sales
Cost of Sales as a percentage of net sales for the three months ended March 31, 2020 was 64 percent compared with 67 percent for the three months ended March 31, 2019.
Research and Development Expenses ("R&D") R&D expenses totaled $236 million in the first quarter of 2020, down from $267 million in the first quarter of 2019. R&D as a percentage of net sales was 5 percent for the three months ended March 31, 2020 and 2019.
The decrease for the three months ended March 31, 2020 as compared with the same periods of the prior year was primarily due to the absence of R&D costs previously allocated to the materials science and agriculture businesses that did not meet the definition of expenses related to discontinued operations in accordance with ASC 205 and therefore remained as costs of continuing operations for periods prior to the Distributions.
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Selling, General and Administrative Expenses ("SG&A") SG&A expenses were $633 million in the first quarter of 2020, down from $726 million in the first quarter of 2019. SG&A as a percentage of net sales was 12 percent and 13 percent for the three months ended March 31, 2020 and 2019, respectively. The decrease for the three months ended March 31, 2020 as compared with the same period of the prior year was primarily due to the absence of SG&A costs previously allocated to the materials science and agriculture businesses that did not meet the definition of expenses related to discontinued operations in accordance with ASC 205 and therefore remained as costs of continuing operations for periods prior to the Distributions.
Amortization of Intangibles
Restructuring and Asset Related Charges - Net Restructuring and asset related charges - net were $404 million in the first quarter of 2020, up from $71 million in the first quarter of 2019. The activity in the first quarter of 2020 included a $270 million impairment charge related to long-lived assets in the Non-Core segment, a $111 million charge related to the 2020 Restructuring Program, $18 million charge related to the 2019 Restructuring Program and a $5 million charge related to the DowDuPont Cost Synergy Program (the "Synergy Program"). The charges in the first quarter of 2019 related to the Synergy Program. See Note 5 to the interim Consolidated Financial Statements for additional information.
Goodwill Impairment Charge
Integration and Separation Costs
Equity in Earnings of Nonconsolidated Affiliates The Company's share of the earnings of nonconsolidated affiliates was $39 million in the first quarter of 2020, down from $40 million in the first quarter of 2019. The decrease is primarily due to lower equity earnings from the HSC Group.
Sundry Income (Expense) - Net
Provision for Income Taxes on Continuing Operations The Company's effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to tax attribute. The effective tax rate on continuing operations for the first quarter of 2020 was
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SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following supplemental unaudited pro forma financial information (the "unaudited pro forma financial statements") is derived from DuPont's Consolidated Financial Statements, adjusted to give effect to certain events directly attributable to the Distributions. In contemplation of the Distributions and to achieve the respective credit profiles of each of the current companies, in the fourth quarter of 2018, DowDuPont borrowed $12.7 billion under the 2018 Senior Notes and entered the Term Loan Facilities with an aggregate principal amount of $3.0 billion. Additionally, DuPont issued approximately $1.4 billion in commercial paper in May 2019 in anticipation of the Corteva Distribution (the "Funding CP Issuance" together with the 2018 Senior Notes and the Term Loan Facilities, the "Financings"). The unaudited pro forma financial statements for the three months ended March 31, 2019 were prepared in accordance with Article 11 of Regulation S-X. The historical consolidated financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the Distributions and the Financings (collectively the "Transactions"), (2) factually supportable and
Restructuring or integration activities or other costs following the Distributions that may be incurred to achieve cost or growth synergies of DuPont are not reflected. The unaudited pro forma income statements provides shareholders with summary financial information and historical data that is on a basis consistent with how DuPont reports current financial information.
The unaudited pro forma financial statements are presented for informational purposes only, and do not purport to represent what DuPont's results of operations or financial position would have been had the Transactions occurred on the dates indicated, nor do they purport to project the results of operations or financial position for any future period or as of any future date.
May 05, 2020
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