UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 2019
or
Commission file number: 001-38196
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) | |||
(Address of Principal Executive Offices) | (Zip Code) | |||||
(302 ) 774-1000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
No securities are registered pursuant to Section 12(g) of the Act.
_____________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No
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.
þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☑ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☑ | Accelerated filer | ¨ | |||||
Non-accelerated filer | ¨ | Smaller reporting company | |||||
Emerging growth company | |||||||
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☑ No
The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2019, (the last day of the registrant's most recently completed second fiscal quarter), was approximately $56.1 billion based on the New York Stock Exchange closing price on such date. For purposes of this computation, the registrant has assumed that its Directors and Executive Officers are affiliates.
The registrant had 739,388,462 shares of common stock, $0.01 par value, outstanding at February 10, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Proxy Statement for the 2020 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.
DuPont de Nemours, Inc.
ANNUAL REPORT ON FORM 10-K
For the year ended December 31, 2019
TABLE OF CONTENTS
Page | |||
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DuPont de Nemours, Inc. |
Throughout this Annual Report on Form 10-K, except as otherwise noted by the context, the terms "DuPont" or "Company" used herein mean DuPont de Nemours, Inc. and its consolidated subsidiaries. On June 1, 2019, DowDuPont Inc. changed its registered name to DuPont de Nemours, Inc. (“DuPont”) (for certain events prior to June 1, 2019, the Company may be referred to as DowDuPont). Beginning on June 3, 2019, the Company's common stock is traded on the New York Stock Exchange under the ticker symbol "DD".
On April 1, 2019, the Company completed the separation of its materials science business into a separate and independent public company by way of a distribution of Dow Inc. (“Dow”) through a pro rata dividend in-kind of all of the then-issued and outstanding shares of Dow’s common stock (the “Dow Distribution”). On June 1, 2019, the Company completed the separation of its agriculture business into a separate and independent public company by way of a distribution of Corteva, Inc. (“Corteva”) through a pro rata dividend in-kind of all of the then-issued and outstanding shares of Corteva’s common stock (the “Corteva Distribution”).
Following the Corteva Distribution, DuPont holds the specialty products business as continuing operations. Unless otherwise indicated, the Consolidated Financial Statements and Notes thereto present the financial position of DuPont's continuing operations as of December 31, 2019 and December 31, 2018 and the results of operations for the years ended December 31, 2019, 2018, and 2017. The cash flows and comprehensive income related to Dow and Corteva have not been segregated and are included, as applicable, in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income, respectively, for all periods presented.
On December 15, 2019, DuPont and International Flavors & Fragrances Inc. ("IFF") announced entry into definitive agreements to combine DuPont’s Nutrition & Biosciences business (the "N&B Business") with IFF in a transaction that would result in IFF issuing shares to DuPont shareholders. The transaction is expected to close by the end of the first quarter of 2021, subject to approval by IFF shareholders and other customary closing conditions, including regulatory approvals and receipt by DuPont of an opinion of tax counsel.
DuPontTM and all products, unless otherwise noted, denoted with TM, SM or ® are trademarks, service marks or registered trademarks of affiliates of DuPont de Nemours, Inc.
FORWARD-LOOKING STATEMENTS
This communication 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 often address expected future business and financial performance and financial condition, and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," "target," and similar expressions and variations or negatives of these words.
Forward-looking statements address matters that are, to varying degrees, uncertain and subject to risks, uncertainties and assumptions, many of which that are beyond DuPont's control, that could cause actual results to differ materially from those expressed in any forward-looking statements. Forward-looking statements are not guarantees of future results. Some of the important factors that could cause DuPont's actual results to differ materially from those projected in any such forward-looking statements include, but are not limited to: (i) the parties’ ability to meet expectations regarding the timing, completion and accounting and tax treatments of the proposed transaction with IFF; changes in relevant tax and other laws, (ii) failure to obtain necessary regulatory approvals, approval of IFF’s shareholders, anticipated tax treatment or any required financing or to satisfy any of the other conditions to the proposed transaction with IFF, (iii) the possibility that unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies that could impact the value, timing or pursuit of the proposed transaction with IFF, (iv) risks and costs and pursuit and/or implementation of the separation of the N&B Business, including timing anticipated to complete the separation, any changes to the configuration of businesses included in the separation if implemented, (v) risks and costs related to the Dow Distribution and the Corteva Distribution (together, the “Distributions”) including (a) with respect to achieving all expected benefits from the Distributions; (b) the incurrence of significant costs in connection with the Distributions, including costs to service debt incurred by the Company to establish the relative credit profiles of Corteva, Dow and DuPont and increased costs related to supply, service and other arrangements that, prior to the Dow Distribution, were between entities under the common control of DuPont; (c) indemnification of certain legacy liabilities of E. I. du Pont de Nemours and Company ("Historical EID") in connection with the Corteva Distribution; and (d) potential liability arising from fraudulent conveyance and similar laws in connection with the Distributions; (vi) failure to effectively manage acquisitions, divestitures, alliances, joint ventures and other portfolio changes, including meeting conditions under the Letter Agreement entered in connection with the Corteva Distribution, related to the transfer of certain levels of assets and businesses; (vii) uncertainty as to the long-term value of DuPont common stock; (viii) potential inability or reduced access to the capital markets or increased cost of borrowings, including as a result of a
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credit rating downgrade and (ix) other risks to DuPont's business, operations and results of operations including from: failure to develop and market new products and optimally manage product life cycles; ability, cost and impact on business operations, including the supply chain, of responding to changes in market acceptance, rules, regulations and policies and failure to respond to such changes; outcome of significant litigation, environmental matters and other commitments and contingencies; failure to appropriately manage process safety and product stewardship issues; global economic and capital market conditions, including the continued availability of capital and financing, as well as inflation, interest and currency exchange rates; changes in political conditions, including tariffs, trade disputes and retaliatory actions; impairment of goodwill or intangible assets; the availability of and fluctuations in the cost of energy and raw materials; business or supply disruption, including in connection with the Distributions; ability to effectively manage costs as the company’s portfolio evolves; security threats, such as acts of sabotage, terrorism or war, natural disasters, weather events and patterns, and global health risks and pandemics, which could result in a significant operational event for DuPont, adversely impact demand or production; ability to discover, develop and protect new technologies and to protect and enforce DuPont's intellectual property rights; 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 are and will be more fully discussed in DuPont's current, quarterly and annual reports and other filings made with the U.S. Securities and Exchange Commission, in each case, as may be amended from time to time in future filings with the SEC. While the list of factors presented here is considered representative, no such list should be considered 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 DuPont’s consolidated financial condition, results of operations, credit rating or liquidity. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. DuPont assumes no obligation to publicly provide revisions or updates to any forward-looking statements whether as a result of new information, future developments or otherwise, should circumstances change, except as otherwise required by securities and other applicable laws. A detailed discussion of some of the significant risks and uncertainties which may cause results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (Part I, Item 1A of this Form 10-K).
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DuPont de Nemours, Inc. | ||
PART I | ||
ITEM 1. BUSINESS
DuPont is a Delaware corporation formed in 2015 (formerly, DowDuPont Inc.), for the purpose of effecting an all-stock merger of equals transactions between The Dow Chemical Company ("Historical Dow") and E. I. du Pont de Nemours and Company ("Historical EID"). Effective August 31, 2017, pursuant to the merger of equals transaction contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017 ("DWDP Merger Agreement"), Historical Dow and 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 DWDP Merger Agreement. For purposes of DowDuPont's financial statement presentation, Historical Dow was determined to be the accounting acquirer in the Merger and Historical EID's assets and liabilities are reflected at fair value as of the Merger Effectiveness Time. The financial statements of Historical Dow for periods prior to the Merger are considered to be the historical financial statements of the Company.
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".
Today, DuPont is a global innovation leader with technology-based materials, ingredients and solutions that help transform industries and everyday life by applying diverse science and expertise to help customers advance their best ideas and deliver essential innovations in key markets including electronics, transportation, building and construction, health and wellness, food and worker safety. The Company had approximately 35,000 employees as of December 31, 2019. The Company has subsidiaries in about 70 countries worldwide and manufacturing operations in about 40 countries. See Note 24 to the Consolidated Financial Statements for details on the location of the Company's sales and property.
On December 15, 2019, DuPont and Nutrition & Biosciences, Inc. (presently a wholly owned subsidiary of DuPont) (“N&B Inc.”), entered into definitive agreements, including the Merger Agreement, with IFF, and Neptune Merger Sub I Inc. (a wholly owned subsidiary of IFF) (“Merger Sub I”), pursuant to which and subject to the terms and conditions therein, (1) DuPont will transfer its Nutrition and Biosciences business (the "N&B Business") to N&B Inc. (the “Contribution”), (2) DuPont will distribute to its stockholders all of the issued and outstanding shares of common stock, par value $0.01 per share, of N&B Inc. (the “N&B Inc. Common Stock”) held by DuPont by way of either (at DuPont’s option) a pro rata dividend or an exchange offer (the “N&B Distribution”), and (3) Merger Sub I will merge with and into N&B Inc., with N&B Inc. as the surviving corporation (the “N&B Merger” and collectively with the Contribution and the N&B Distribution, the "Proposed N&B Transaction"). As a result of the N&B Merger, the existing shares of N&B Inc. will be automatically converted into the right to receive a number of shares of IFF common stock, par value $0.125 per share (“IFF Common Stock”). When the N&B Merger is completed, holders of DuPont’s common stock (“DuPont Common Stock”) will own approximately 55.4% of the outstanding shares of IFF on a fully diluted basis. The actual value of IFF Common Stock received by DuPont stockholders will depend on the value of such shares at the time the transaction closes, and DuPont stockholders may receive more or less than the value announced at the time of the signing of the definitive agreements. In addition, as part of the proposed transaction, DuPont will receive a one-time $7.3 billion cash payment, subject to adjustment, (the “Special Cash Payment”). The Special Cash Payment is subject to adjustment due to, among other things, variances in net working capital, and, therefore, could be less or more than anticipated.
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At DuPont's election (subject to certain restrictions), the N&B Distribution may be effected by means of a pro rata dividend in a spin-off transaction or an exchange offer for outstanding DuPont shares in a split-off transaction (or a combination of both). If DuPont elects a spin-off transaction, all DuPont stockholders will participate on a pro rata basis. If DuPont elects a split-off, then it will conduct an exchange offer and all DuPont stockholders will elect whether to exchange DuPont shares for shares of N&B Inc. (subject to any terms and conditions announced by DuPont with respect thereto). However, to the extent the split-off does not result in the distribution of all of the outstanding shares of N&B Inc., the additional shares of N&B Inc. still held by DuPont would be distributed in a spin-off transaction on a pro rata basis to all DuPont stockholders.
The Proposed N&B Transaction is expected to close by the end of the first quarter of 2021, subject to approval by IFF stockholders and other customary closing conditions, including regulatory approvals and receipt by DuPont of an opinion of tax counsel.
Basis of Presentation
The Consolidated Financial Statements included in this annual report present the financial position of DuPont as of December 31, 2019 and 2018 and the results of operations of DuPont for the years ended December 31, 2019, 2018 and 2017 giving effect to the Distributions, with the historical financial results of Dow and Corteva reflected as discontinued operations. The cash flows and comprehensive income related to Dow and Corteva have not been segregated and are included in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income, respectively, for all periods presented. Unless otherwise indicated, the information in the Notes to the Consolidated Financial Statements refer only to DuPont's continuing operations and do not include discussion of balances or activity of Dow or Corteva.
SEGMENT INFORMATION
DuPont’s worldwide operations are managed through global businesses, which are reported in five reportable segments: Electronics & Imaging; Nutrition & Biosciences; Transportation & Industrial; Safety & Construction, and Non-Core.
Effective June 1, 2019, DuPont changed its management and reporting structure resulting in the creation of a new Non-Core segment ("Second Quarter Segment Realignment").
These changes resulted in the following being realigned to Non-Core:
• | Photovoltaic and Advanced Materials business unit (including the HSC Group joint ventures: DC HSC Holdings LLC and Hemlock Semiconductor L.L.C) from the Electronics & Imaging segment; |
• | Biomaterials and Clean Technologies business units from the Nutrition & Biosciences segment; |
• | DuPont Teijin Films joint venture from the Transportation & Industrial (formerly Transportation & Advanced Polymers) segment; and |
• | Sustainable Solutions business unit from the Safety & Construction segment. |
In addition, the following changes have occurred:
• | Consolidation of the Nutrition & Health business with the Industrial Biosciences business within the Nutrition & Biosciences reportable segment. Previously, Nutrition & Health and Industrial Biosciences were separate operating segments which did not meet the quantitative thresholds. |
• | Pre-commercial activities related to the Biomaterials business unit was realigned from Corporate to Non-Core, with the remaining pre-commercial activities realigned to the Nutrition & Biosciences segment. |
In addition to the Second Quarter Segment Realignment, effective October 1, 2019, Electronics & Imaging realigned its product lines as Image Solutions, Interconnect Solutions and Semiconductor Technologies.
See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 24 to the Consolidated Financial Statements for additional information concerning the Company’s operating segments.
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ELECTRONICS & IMAGING
Electronics & Imaging is a leading global supplier of differentiated materials and systems for a broad range of consumer electronics including mobile devices, television monitors, personal computers and electronics used in a variety of industries. The segment is a leading supplier of key materials for the manufacturing of materials and printing systems to the advanced printing industry, and of materials and solutions for the fabrication of semiconductors and integrated circuits addressing both front-end and back-end of the manufacturing process. The segment offers the broadest portfolio of semiconductor and advanced packaging materials in the market, providing chemical mechanical planarization ("CMP") pads and slurries, photoresists and advanced coatings for lithography, removers and cleaners; dielectric and metallization solutions for back-end-of-line advanced chip packaging; along with silicones for light emitting diode ("LED") packaging and semiconductor applications. Electronics & Imaging also provides permanent and process chemistries for the fabrication of printed circuit boards to include laminates and substrates, electroless and electrolytic metallization solutions, as well as patterning solutions and materials and innovative metallization processes for metal finishing, decorative, and industrial applications. Electronics & Imaging is a leading global supplier in the packaging graphics industry providing flexographic printing inks, photopolymer plates, and platemaking systems used in digital printing applications for textile, commercial and home-office use. In addition, the segment provides cutting-edge materials for the manufacturing of advanced-matrix organic light emitting diode ("AMOLED") applications. Electronics & Imaging addresses these markets by leveraging a strong science and technology base to provide the critical materials and solutions for creating a more connected and digital world.
Divestitures
On June 30, 2017, Historical Dow sold its ownership interest in the SKC Haas Display Films group of companies.
In September 2019, the Company announced an agreement to sell its compound semiconductor solutions business, a part of the Electronics & Imaging segment, to SK Siltron for approximately $450 million. The transaction is expected to close in the first quarter of 2020, pending satisfaction of customary closing conditions, including receipt of regulatory approval.
Details on Electronics & Imaging's 2019 net sales, by major product line and geographic region, are as follows:
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Products
Major applications/market segments and technologies are listed below by major product line:
Major Product Line | Applications/Market Segments | Technologies |
Image Solutions | Flexographic printing and inkjet printing, display materials for mobile devices | Flexographic printing plates and materials, digital inks, OLED and other display process materials. |
Interconnect Solutions | Printed circuit board, electronic and industrial finishing | Circuit packaging film and laminate materials, interconnect metallization and imaging process chemistries, dry film laminates, polyimide films, and flexible circuit materials |
Semiconductor Technologies | Integrated circuit fabrication for memory and logic semiconductors | CMP consumables, photolithography materials, semiconductor fabrication materials, fabrication cleaners and removers, advanced chip packaging materials and thermal management materials and LED encapsuants |
Key Raw Materials
The major commodities, raw materials and supplies for the Electronics & Imaging segment include: acrylic monomers, p-acetoxystyrene, monomers, pigments and dyes, styrenic block copolymers, copper foil, diglycolamine, dimethylacetamide, hydroxylamine, oxydianiline, palladium metal, photoactive compounds, polyester and other polymer films, polyurethane resins and pyromellitic dianhydride.
Competitors
Electronics & Imaging's competitors include many large multinational firms as well as a number of regional and local competitors. Key competitors include 3M, Cabot Microsystems, Element Solutions, Entegris, Flint Group, JSR Micro, Merck KGaA, Shin-Etsu and Sun Chemical.
Current and Future Investments
In March 2019, the Company announced plans to invest more than $200 million in its Electronics & Imaging segment to build new production assets at its Circleville, Ohio, plant. The new assets will expand production of KAPTON® polyimide film and PYRALUX® flexible circuit materials to meet growing market demand. At December 31, 2019, the Company had spent approximately $40 million since project start date. The Company anticipates that the new assets will be operational by the second half of 2021.
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NUTRITION & BIOSCIENCES
Nutrition & Biosciences is an innovation-driven and customer-focused segment that provides solutions for the global food and beverage, dietary supplements, pharma, home and personal care, energy and animal nutrition markets. The segment is one of the world’s largest producers of specialty ingredients, developing and manufacturing solutions for the global food and beverage, dietary supplements and pharmaceutical markets. Its innovative and broad portfolio of natural-based ingredients marketed under the DANISCO® brand serves to improve health and nutrition as well as taste and texture in a wide range of dairy, beverage, bakery and dietary supplement applications. Its probiotics portfolio, including the HOWARU® brand, is world famous for its extensively documented strains that deliver consumers benefits in digestive and immune health. In addition to serving the global food and beverage market, the segment is one of the world's largest producers of cellulosics and alginates based pharma excipients, which are used to improve the functionality and delivery of pharmaceuticals, and enabling the development of more effective pharma solutions. Additionally, the segment is an industry pioneer and innovator that works with customers to improve the performance, productivity and sustainability of their products and processes, through differentiated technology in ingredients applications, fermentation, biotechnology, chemistry and manufacturing process excellence. The segment offers better, cleaner and safer solutions to a wide range of industries including food & beverages, dietary supplements, animal nutrition, biofuels, cleaning, personal care, pharmaceutical, and oil and gas.
On March 31, 2017, Historical EID entered into an agreement with FMC, under which and effective upon the closing of the transaction on November 1, 2017, FMC acquired certain Historical EID agriculture assets (the “Divested Ag Business”) as required to obtain approval of the European Commission for the Merger. As part of the FMC transaction, Historical EID agreed to acquire certain assets relating to FMC's Health & Nutrition (“H&N”) Business. The integration of the H&N Business together with Historical Dow’s Pharma & Food Solutions business into Nutrition & Biosciences, makes the segment a world leader in the oral dosage pharmaceutical excipients market. See further discussion of the H&N Business acquisition in Note 3 to the Consolidated Financial Statements.
Divestitures
In June 2019, the Company sold the natural colors business, a H&N Business.
In October 2018, Historical EID completed the sale of its heritage alginates business to JRS Group. The sale of the alginates business was a requirement set out by the European Commission ("EC") upon its conditional approval of the acquisition of the H&N Business from FMC. The Company remains active in the alginates market with the heritage H&N Business alginates portfolio.
In February 2017, the Company completed the sale of its global food safety diagnostic business to Hygiena LLC.
Acquisitions
On November 1, 2017, the Company acquired the H&N Business from FMC. See further discussion of the H&N Business acquisition in Note 3 to the Consolidated Financial Statements.
Details on Nutrition & Biosciences' 2019 net sales, by product line and geographic region, are as follows:
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Products
Major applications and products are listed below by product line:
Product Line | Applications / Market Segments | Major Products |
Food & Beverage | Food and beverage, dietary supplements, infant nutrition, sports nutrition | Major products include probiotics, soy protein, fibers, cultures, antioxidants, antimicrobials, emulsifiers, texturants, ingredient systems and sweeteners |
Health & Biosciences | Animal nutrition, detergents, biofuels production, food and beverage, phosphate fertilizer and microbial control solutions for oil and gas production, home and personal care, and other industrial preservation markets | Enzymes, yeast, betaine, direct-fed microbials, SILVADUR™ antimicrobial, glutaraldehyde, phenoxyethanol |
Pharma Solutions | Oral dosage pharmaceuticals excipients | Cellulosic and other technologies help bring new classes of medicines to market. Notable technologies include excipients and active pharmaceutical ingredients, solubility enhancers, reagents, granulation and binders, as well as coatings and controlled release |
Key Raw Materials
The major commodities, raw materials and supplies for the Nutrition & Biosciences segment include: gelatin, glycols, cellulose processed grains (including dextrose and glucose), guar, locust bean gum, organic vegetable oils, peels, saccharides, seaweed, soybeans, and sugars and yeasts.
Competitors
Nutrition & Biosciences' competitors include many large multinational nutrition and biosciences companies as well as a number of regional and local competitors. Key competitors include Chr. Hansen, Corbion, CP Kelco, Croda, Kerry, Lonza, Novozymes, Royal DSM and Tate & Lyle.
Current and Future Investments
In November 2016, Historical EID announced an investment to expand probiotics production capacity in the United States. The announced investment is the second phase of a broader probiotics expansion project. Phase one was complete as of the end of 2017 and increased capacity by about 30 percent. The second phase represented an investment of approximately $100 million and increased DuPont's probiotics production capacity by an additional 70 percent. The construction was completed in the first quarter of 2019, including the installation of new, high-volume fermenters and other processing equipment.
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TRANSPORTATION & INDUSTRIAL
Transportation & Industrial provides high-performance engineering resins, adhesives, silicones, lubricants and parts to engineers and designers in the transportation, electronics, healthcare, industrial and consumer end-markets to enable systems solutions for demanding applications and environments.
The segment delivers a broad range of polymer-based high-performance materials in its product portfolio, including elastomers and thermoplastic and thermoset engineering polymers which are used by customers to fabricate components for mechanical, chemical and electrical systems. In addition, the segment produces innovative engineering polymer solutions, high performance parts, specialty silicones and differentiated adhesive technologies to meet customer specifications in automotive, aerospace, electronics, industrial, healthcare and consumer markets. Transportation & Industrial is a global leader of advanced materials that provide technologies that differentiate customers’ products with improved performance characteristics enabling the transition to hybrid-electric-connected vehicles, high speed high frequency connectivity and smart healthcare.
Details on Transportation & Industrial's 2019 net sales, by major product line and geographic region, are as follows:
Products
Major applications and products are listed below by major product line, all which serve the transportation industry and electronics, medical, industrial and consumer end-markets.
Major Product Line | Major Products |
Healthcare & Specialty | KALREZ® perfluoroelastomer, VESPEL® parts and shapes, MOLYKOTE® lubricants, DOW CORNING® silicone solutions for healthcare, BETASEAL™, BETAMATE™ and BETAFORCE™ structural and elastic adhesives |
Industrial & Consumer | HYTREL® polyester thermoplastic elastomer resins, DELRIN® acetal resins, VAMAC® ethylene acrylic elastomer, and MULTIBASE™ TPSiV™ silicones for thermoplastics |
Mobility Solutions | DUPONT™ ZYTEL® nylon resins, CRASTIN® PBT thermoplastic polyester resin, RYNITE® PET polyester resin and TYNEX® filaments |
Key Raw Materials
The major commodities, raw materials and supplies for the Transportation & Industrial segment include: adipic acid, butanediol, carbon black, dimethyl terephthalate, epoxy resins, fiberglass, flame retardants, hexamethylene diamine, methanol, polyethylene terephthalate, purified terephthalic acid and silicones.
Competitors
Transportation & Industrial's competitors include many large multinational chemical firms as well as a number of regional and local competitors. Key competitors include BASF, Celanese, EMS, Henkel, Kluber, Mitsubishi, Royal DSM, Sika, Victrex and Wacker Chemie.
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SAFETY & CONSTRUCTION
Safety & Construction is the global leader in providing innovative engineered products and integrated systems for a number of industries including, worker safety, water purification and separation, aerospace, energy, medical packaging and building materials. Safety & Construction addresses the growing global needs of businesses, governments and consumers for solutions that make life safer, healthier and better.
Innovation is the business imperative. By uniting market-driven science with the strength of highly regarded brands including KEVLAR® high-strength material, NOMEX® thermal-resistant material, CORIAN® solid surfaces, TYVEK® selective barriers, FILMTEC™ reverse osmosis elements, STYROFOAM™ insulation and GREAT STUFF™ insulating foam sealants, the segment strives to bring new products and solutions to solve customers' needs faster, better and more cost effectively. Safety & Construction is investing in future growth initiatives such as digitally enabled protective clothing and water management solutions, construction productivity solutions, high strength and light weighting composite solutions, and circular ecosystem / zero waste solutions.
Acquisitions
During the fourth quarter of 2019, the Company completed three acquisitions: (1) BASF's Ultrafiltration Membrane business, including inge GmbH, the business’ international workforce, its headquarters and production site in Greifenberg, Germany, and associated intellectual property currently owned by BASF SE; (2) Evoqua Water Technologies Corp.’s MEMCOR® business including ultrafiltration and membrane biofiltration technologies, which together with the acquisition from BASF, add to Safety & Construction’s leading portfolio of water purification and separation technologies including ultrafiltration, reverse osmosis and ion exchange resins; and (3) OxyMem Limited, a company that develops and produces Membrane Aerated Biofilm Reactor technology for the treatment and purification of municipal and industrial wastewater. Additionally, in the fourth quarter of 2019, DuPont announced an agreement to acquire Desalitech Ltd., a closed circuit reverse osmosis (CCRO) company. The transaction closed in January 2020.
Details on Safety & Construction's 2019 net sales, by major product line and geographic region, are as follows:
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Products
Major applications and products are listed below by major product line:
Major Product Line | Applications / Market Segments | Major Products / Technologies |
Safety Solutions | Industrial personnel protection, military and emergency response, medical devices and packaging, automotive, aerospace, oil and gas, weatherization, waterproofing and roof coatings | KEVLAR® fiber; NOMEX® fiber and paper; TYVEK® protective materials; TYCHEM® protective suits |
Shelter Solutions | Rigid and spray foam insulation, weatherization, waterproofing and air sealing, caulks and sealants and roof coatings | STYROFOAM™ brand insulation products, THERMAX™ exterior insulation, WALOCEL™ cellulose ethers, XENERGY™ high performance insulation, LIQUIDARMOR™ flashing and sealant, GREAT STUFF™ insulating foam sealants and adhesives, CORIAN® design solid and quartz surfaces, TYVEK® weather resistant barriers |
Water Solutions | Water filtration and purification technology for residential and industrial use. Key industries include municipal, power, electronics, pharmaceuticals, food and beverage, mining and oil and gas applications | DOWEX™ and AMBERLITE™ ion exchange resins, FILMTEC™ reverse osmosis and nanofiltration elements, INTEGRAFLUX™ ultrafiltration modules and FORTILIFE™ challenging water reverse osmosis membranes |
Key Raw Materials
The major commodities, raw materials and supplies for the Safety & Construction segment include: alumina trihydrate, aniline, benzene, calcium chloride, carbon monoxide, chlorine, divinyl benzene monomers, high-density polyethylene, isophthalic acid, metaphenylenediamine, methyl methacrylate, methylpentanediol, polyester resin, polypropylene, polystyrene, sulfuric acid and terephthalic acid.
Competitors
Safety & Construction's competitors include many large multinational chemical firms as well as a number of regional and local competitors. Key competitors include 3M, Honeywell, Hydranautics, Kingspan, Lanxess, LG Corp, Owens-Corning, Purolite, Royal DSM, Toray and Teijin.
Current and Future Investments
In June 2018, the Company announced plans to invest more than $400 million in Safety & Construction to increase capacity for the manufacture of TYVEK® nonwoven materials at its Luxembourg site due to growing global demand. Commercial production related to the expansion, which includes investment in a new building and a third operating line at the site, is expected to begin in 2021.
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NON-CORE
The Non-Core segment is a leading global supplier of key materials for the manufacturing of photovoltaic cells and panels, including innovative SOLAMET® metallization pastes,TEDLAR® backsheet materials, and FORTASUN® silicone encapsulants and adhesives. The segment also includes the Company's joint venture interests in the Hemlock Semiconductor Corporation Group ("HSC Group"), a U.S.-based group of companies that manufacture and sell polycrystalline silicon products for the photovoltaic and semiconductor industries. Additionally, the segment provides materials used in components and films for consumer electronics, automotive, and aerospace markets. The segment also provides sustainable materials and services for sulfuric acid production and regeneration technologies, alkylation technology for production of clean, high-octane gasoline, and a comprehensive suite of aftermarket service and solutions offerings, including safety consulting and services, to improve the safety, productivity, and sustainability of organizations across a range of industries. The Non-Core segment is also a leading producer of SORONA® specialty biotechnology materials for carpet and apparel markets as well as polyester films for the healthcare, photovoltaics, electronics, packaging and labels, and electrical insulation industries.
Divestitures
In the third quarter of 2019, the Company completed the sale and separation of its Sustainable Solutions business unit, a part of the Non-Core segment, to Gyrus Capital. The Company is actively evaluating strategic options, including potential divestitures, related to a substantial portion of the segment’s business units and expects to make significant progress over the next one to two years.
Details on Non-Core's 2019 net sales, by business or major product line and geographic region, are as follows:
Products
Major applications and products/services/technologies are listed below by major product line:
Major Product Line | Applications / Market Segments | Major Products / Services / Technologies |
Biomaterials | Carpet, apparel | SORONA® polymer |
Clean Technologies | Sulfuric acid, fertilizer, chemicals, refining, scrubbing | STRATCO® alkylation technology, MECS® sulfuric acid & environmental technologies, ISOTHERMING® hydroprocessing technology, BELCO® wet scrubbing technology |
DuPont Teijin Films | Healthcare, photovoltaics, electronics, packaging and labels, electrical insulation, dry film resists | MYLAR®, MELINEX® polyester films |
Photovoltaic & Advanced Materials | Photovoltaics, aerospace/aircraft, automotive, military, consumer electronics | Metallization pastes (including SOLAMET®), TEDLAR® polyvinyl fluoromaterials, FORTASUN® silicone encapsulants and adhesives, trichlorosilanes, polycrystalline silicon |
Sustainable Solutions | Manufacturing, other | Safety consulting services |
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Key Raw Materials
The major commodities, raw materials and supplies for the Non-Core segment include propanediol, terephthalic acid, precious metals, silicon metal and hydrochloric acid.
Competitors
Non-Core's competitors include many large multinational chemical firms as well as a number of regional and local competitors. Key competitors include Arkema, Giga Solar Materials, Heraeus, Outotec, Samsung SDI, Yihua Toray Polyester Film, and Zhangjiagang Glory.
INDUSTRY SEGMENTS AND GEOGRAPHIC REGION RESULTS
See Note 5 to the Consolidated Financial Statements for net sales by business or major product line.
Sales by geographic region are included within Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Results of Operations." See Note 24 to the Consolidated Financial Statements for information regarding total net sales, pro forma net sales, pro forma Operating EBITDA and total assets by segment, as well as net sales and long-lived assets by geographic region.
SIGNIFICANT CUSTOMERS AND COMPETITION
In 2019, no significant portion of the Company's sales was dependent upon a single customer. The markets in which the Company participates compete primarily through technology, range of products and services, performance, quality, reliability, brand, reputation, service and support. The Company provides extensive support, technical services and testing services for its customers, in addition to new product development. The Company believes that its proprietary product and process technologies, robust product and application development pipelines, customer intimacy, global manufacturing capability and local service capability enable it to compete successfully.
Against this competitive backdrop, value-in-use is the primary driver of price for the Company’s products, although price is impacted by many factors including, among others, fluctuations in supply and demand, and availability and cost of key manufacturing inputs including raw materials and energy.
DISTRIBUTION
Most products are marketed primarily through the Company's sales organization, although in some regions, more emphasis is placed on sales through distributors. The Company has a diverse worldwide network which markets and distributes the Company's brands to customers globally. This network consists of the Company's sales and marketing organization partnering with distributors, independent retailers, cooperatives and agents throughout the world.
BACKLOG
In general, the Company does not manufacture its products against a backlog of orders and does not consider backlog to be a significant indicator of the level of future sales activity. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, the Company believes that backlog information is not meaningful to understanding its overall business and should not be considered a reliable indicator of the Company's ability to achieve any particular level of revenue or financial performance.
INTELLECTUAL PROPERTY
Trade Secrets: Trade secrets are an important part of the Company's intellectual property. Many of the processes used to make products are kept as trade secrets which, from time to time, may be licensed to third parties. DuPont vigilantly protects all of its intellectual property including its trade secrets. When the Company discovers that its trade secrets have been unlawfully taken, it reports the matter to governmental authorities for investigation and potential criminal action, as appropriate. In addition, the Company takes measures to mitigate any potential impact, which may include civil actions seeking redress, restitution and/or damages based on loss to the Company and/or unjust enrichment.
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Patents: The Company continually applies for and obtains patents in many countries, including the U.S., and has access to a large patent portfolio, both owned and licensed. DuPont’s rights under these patents and licenses, as well as the products made and sold under them, are important to the Company in the aggregate. The protection afforded by these patents varies based on country, scope of individual patent coverage, as well as the availability of legal remedies in each country. The term of these patents is generally about twenty years, but varies depending on country. This significant patent estate may be leveraged to align with the Company’s strategic priorities within and across product lines. At December 31, 2019, the Company owned more than 27,000 patents and patent applications globally. Approximately 80% of the Company’s patent estate has a remaining term of more than 5 years.
Trademarks: The Company owns or licenses many trademarks that have significant recognition at the consumer retail level and/or has a product line to product line level. Ownership rights in trademarks do not expire if the trademarks are continued in use and properly protected.
DowDuPont Intellectual Property Agreements: In connection with the separation and distribution of Dow and Corteva, effective April 1, 2019 and June 1, 2019, respectively, the Company entered into intellectual property license agreements related to fields of use within the scope of the respective businesses, (together, the “IP License Agreements”). The IP License Agreements set forth the terms and conditions under which the applicable parties may use in their respective businesses, certain know-how (including trade secrets), copyrights, trademarks, and software, and certain patents and standards, allocated to another party pursuant to the DowDuPont Separation and Distribution Agreement.
ENVIRONMENTAL MATTERS
Information related to environmental matters is included in several areas of this report: (1) Environmental Proceedings beginning on page 28, (2) Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 60, and (3) Notes 1 and 16 to the Consolidated Financial Statements.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, the Company is required to file reports and information with the Securities and Exchange Commission ("SEC"), including reports on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which the public may obtain any materials the Company files with the SEC.
The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are also accessible on DuPont's website at http://www.investors.dupont.com by clicking on the section labeled "Investors", then on "Filings & Reports." These reports are made available, without charge, as soon as is reasonably practicable after the Company files or furnishes them electronically with the SEC.
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ITEM 1A. RISK FACTORS
The Company's operations could be affected by various risks, many of which are beyond its control. Based on current information, the Company believes that the following identifies the most significant risk factors that could affect its operations. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
Risks Relating to the Proposed N&B Transaction and the Dow and Corteva Distributions
DuPont is pursuing a plan to separate and combine its Nutrition & Biosciences business with IFF in a Reverse Morris Trust transaction. This proposed transaction involves risks, including risks that the proposed transaction may not be completed on the currently contemplated timeline or at all and may not achieve the intended benefits.
On December 15, 2019, DuPont and IFF announced they had entered definitive agreements to combine DuPont’s Nutrition & Biosciences business (the "N&B Business") with IFF in a transaction that would result in IFF issuing shares to DuPont shareholders. The proposed transaction with IFF, (the "Proposed N&B Transaction") is expected to close by the end of the first quarter of 2021, subject to approval by IFF stockholders and other customary closing conditions, including regulatory approvals and receipt by DuPont of an opinion of tax counsel. A voting agreement was entered on December 15, 2019, with Winder Investment Pte. Ltd., a shareholder of IFF. Pursuant to the voting agreement, Winder agrees, among other things, to vote in favor of the issuance of IFF common stock in connection with the N&B Transaction and any proposal or action presented to effectuate the issuance. The voting agreement terminates on September 30, 2020. The satisfaction of the required conditions could delay the consummation of the proposed transaction with IFF or prevent it from occurring. Further, there can be no assurance that the conditions to the closing of the proposed transaction will be satisfied or waived or that the proposed transaction will be consummated. With respect to regulatory approvals, there can be no assurance that the required regulatory approvals will be received in a timely manner or at all, or that such approvals will not contain adverse conditions. Failure to consummate the proposed transaction in a timely manner or at all could negatively impact the market price of DuPont’s Common Stock, as well as DuPont’s future business and its financial condition, results of operations and cash flows.
The announcement and pendency of the Proposed N&B Transaction could cause disruptions in DuPont’s and IFF’s respective businesses, including potential adverse reactions or changes to business relationships and competitive responses to the transaction. The transaction will also require significant amounts of time and effort which could divert management’s attention from operating and growing our business. DuPont has incurred and expects to incur a number of non-recurring costs in connection with the Proposed N&B Transaction. These costs and expenses include financial, legal, accounting, consulting and other advisory fees and expenses; reorganization and restructuring costs; severance/employee benefit-related expenses; regulatory and SEC filing fees and expenses; printing expenses and other related charges some of which are payable by DuPont regardless of whether the proposed transaction is consummated. The Merger Agreement with IFF also generally requires DuPont to operate the N&B Business in the ordinary course pending consummation of the Mergers and restricts DuPont, without IFF’s consent, from taking certain specified actions until the proposed transaction is consummated or the Merger Agreement is terminated, including making certain acquisitions and divestitures and entering into certain contracts. Any of the foregoing could adversely affect DuPont’s business, financial condition and results of operations. Declines in sales, earnings and cash flows could also result in future asset impairments (including goodwill).
Even if the proposed transaction is completed, there can be no assurance that DuPont will be able to realize the anticipated value and benefits therefrom or that the new combined company will perform as expected. Further, if the proposed transaction is completed, the combined value of the DuPont Common Stock and the shares of IFF Common Stock issued as consideration in the N&B Merger could be greater than, less than or equal to what the value of DuPont’s Common Stock would have been had the proposed transaction not occurred.
In connection with the proposed transaction with IFF, N&B Inc. entered into a Bridge Commitment Letter to secure from certain financing sources, committed financing in an aggregate principal amount of $7.5 billion, (the “Bridge Loans”) provided that such commitment shall be reduced by, among other things, (1) the amount of net cash proceeds received by N&B Inc. from any issuance of senior unsecured notes pursuant to a Rule 144A offering or other private placement (the "N&B Notes Offering") and (2) certain qualifying term loan commitments under senior unsecured term loan facilities. The proceeds of funded Bridge Loans, if any, would be used by N&B Inc. to make the Special Cash Payment and to pay the related transaction fees and expenses.
In January 2020, N&B Inc. entered into a senior unsecured term loan agreement in the amount of $1.25 billion split evenly between three- and five-year facilities, the proceeds of which shall be used to make the Special Cash Payment and to pay the related transaction fees and expenses. Such term loan facility, reduced the commitments under the Bridge Commitment Letter. The remaining $6.25 billion is expected to be funded through the N&B Notes Offering, if any, and/or the Bridge Loans. The commitments under the Bridge Commitment Letter and the availability of funding under the term loan are subject to customary closing conditions.
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Borrowing under the term loan facility and, if any, under the Bridge Loans would occur substantially concurrently with closing of the transaction. Any issuance of senior unsecured notes pursuant to a Rule 144A offering or other private placement for some or all the remaining $6.25 billion would likely occur in advance of the closing. If such issuance occurred prior to the closing, during the period between the offering and the closing of the Proposed N&B Transaction the debt of DuPont on a consolidated basis would be materially increased. Such increase, if any, is not expected to adversely impact DuPont’s results of operations, financial position or access to liquidity. If any notes are issued prior to closing and the proposed transaction with IFF is subsequently terminated, DuPont expects that N&B Inc. would immediately repay any such debt.
The separation and combination of DuPont’s Nutrition & Biosciences business with IFF could result in significant tax liability to DuPont.
Following the N&B Merger with N&B Inc. as the surviving company, except as agreed by the parties, N&B Inc. will merge with and into Neptune Merger Sub II LLC (a wholly owned subsidiary of IFF) (“Merger Sub II”), with Merger Sub II surviving as a wholly owned subsidiary of IFF (the “Second Merger,” and together with the N&B Merger, the “Mergers”).
The N&B Distribution and Mergers are expected to be tax-free to DuPont stockholders for U.S. federal income tax purposes (except to the extent that cash is paid to DuPont stockholders in lieu of fractional shares pursuant to the Merger Agreement), and the Contribution, N&B Distribution, and Special Cash Payment are expected to result in no recognition of gain or loss by DuPont for U.S. federal income tax purposes.
The proposed transaction with IFF is conditioned on DuPont's receipt of an opinion from Skadden, Arps, Slate, Meagher & Flom LLP regarding (i) the qualification of the Contribution, N&B Distribution and Special Cash Payment as a “reorganization” within the meaning of Sections 368(a), 361 and 355 of the Internal Revenue Code of 1986 (the “Code”), (ii) the nonrecognition of gain or loss by DuPont on receipt of the Special Cash Payment (subject to certain conditions), (iii) the qualification of the N&B Distribution as a distribution described in Section 355 and to which Section 355(e) does not apply and (iv) the qualification of the Mergers as a “reorganization” within the meaning of Section 368(a) of the Code. This opinion will be based upon and rely on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of DuPont, N&B Inc., IFF and Merger Sub 1 and Merger Sub II. If any of these representations, statements or undertakings are, or become, inaccurate or incomplete, or if any party breaches any of its covenants in the relevant transaction documents, the opinion may be invalid and the conclusions reached therein could be jeopardized. Notwithstanding the receipt of such opinion, the Internal Revenue Service (the “IRS”) could determine that the separation of DuPont’s Nutrition & Biosciences business should be treated as a taxable transaction if it determines that any of the facts, assumptions, representations, statements or undertakings upon which the opinion of counsel was based are false or have been violated, or if it disagrees with the conclusions in the opinion. An opinion of counsel is not binding on the IRS and there can be no assurance that the IRS will not assert a contrary position.
If the Contribution, N&B Distribution and Special Cash Payment failed to qualify for the treatment described above, DuPont would be required to generally recognize taxable gain on the transactions and stockholders of DuPont who receive N&B Inc. Common Stock (and subsequently, IFF Common Stock) pursuant to a pro-rata dividend distribution or an exchange offer would be subject to tax on their receipt of the N&B Inc. Common Stock. Additionally, if certain internal transactions related to the separation of the Nutrition & Biosciences business fail to qualify for their intended tax-free treatment under U.S. federal, state, local tax and/or foreign tax law, DuPont could incur additional tax liabilities.
Under the tax matters agreement to be entered into by DuPont with N&B Inc. and IFF, N&B Inc. or IFF would generally be required to indemnify DuPont for any taxes resulting from the separation of the Nutrition & Biosciences business (and any related costs and other damages) to the extent such amounts resulted from (i) certain actions taken by N&B Inc. or IFF involving the capital stock of N&B Inc. or IFF or any assets of the N&B Inc. group (excluding actions required by the documents governing the proposed transactions), or (ii) any breach of certain representations and covenants made by N&B Inc. or IFF.
DuPont is subject to continuing contingent tax-related liabilities of Dow and Corteva following the separations and Distributions.
After the separations and Distributions, there are several significant areas where the liabilities of Dow and Corteva may become the Company’s obligations, either in whole or in part. For example, to the extent that any subsidiary of the Company was included in the consolidated tax reporting group of either Historical Dow or Historical EID for any taxable period or portion of any taxable period ending on or before the effective date of the Merger, such subsidiary is jointly and severally liable for the U.S. federal income tax liability of the entire consolidated tax reporting group of Historical Dow or Historical EID, as applicable, for such taxable period. In connection with the separations and Distributions, DuPont, Dow and Corteva have entered into a Tax Matters Agreement, as amended, that allocates the responsibility for prior period consolidated taxes among Dow, Corteva and DuPont. If Dow or Corteva are unable to pay any prior period taxes for which it is responsible, however, DuPont could be required to pay the entire amount of such taxes, and such amounts could be significant. Other provisions of federal, state, local, or foreign law
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may establish similar liability for other matters, including laws governing tax-qualified pension plans, as well as other contingent liabilities.
In connection with the separations and Distributions, certain liabilities are allocated to or retained by DuPont through assumption or indemnification of Dow and/or Corteva, as applicable. If DuPont is required to make payments pursuant to these indemnities to Dow and/or Corteva, DuPont may need to divert cash to meet those obligations, and the Company’s financial results could be negatively impacted. In addition, certain liabilities are allocated to or retained by Dow and/or Corteva through assumption or indemnification, or subject to indemnification by other third parties. These indemnities may not be sufficient to insure the Company against the full amount of liabilities, including PFAS Stray Liabilities, allocated to or retained by it, and Dow, Corteva and/or third parties may not be able to satisfy their respective indemnification obligations in the future.
Pursuant to the Separation and Distribution Agreement, the Employee Matters Agreement, and the Tax Matters Agreement, as amended, (collectively, the “Core Agreements”) with Dow and Corteva, as well as the Letter Agreement between DuPont and Corteva, DuPont has agreed to assume, and indemnify Dow and Corteva for, certain liabilities. (See discussion of the Core Agreements in Note 4 to the Consolidated Financial Statements and Litigation and Environmental Matters in Note 16 to the Consolidated Financial Statements.) Payments pursuant to these indemnities may be significant and could negatively impact the Company’s business, particularly indemnities relating to the Company’s actions that could impact the tax-free nature of the distributions. Third parties could also seek to hold it responsible for any of the liabilities allocated to Dow and Corteva, including those related to Historical EID’s materials science and/or agriculture businesses, or for the conduct of such businesses prior to the distributions, and such third parties could seek damages, other monetary penalties (whether civil or criminal) and/or other remedies. Additionally, DuPont generally assumes and is responsible for the payment of the Company’s share of (i) certain liabilities of DowDuPont relating to, arising out of or resulting from certain general corporate matters of DuPont and (ii) certain separation expenses not otherwise allocated to Corteva or Dow (or allocated specifically to it) pursuant to the Core Agreements, and third parties could seek to hold it responsible for Dow’s or Corteva’s share of any such liabilities. Dow and/or Corteva, as applicable, have agreed to indemnify it for such liabilities; however, such indemnities may not be sufficient to protect it against the full amount of such liabilities or from other remedies, and Dow and/or Corteva, as applicable, may not be able to fully satisfy their indemnification obligations. Even if DuPont ultimately succeeds in recovering from Dow and/or Corteva, as applicable, any amounts for which DuPont are held liable, DuPont may be temporarily required to bear these losses. Each of these risks could negatively affect the Company’s business, financial condition, results of operations and cash flows.
Generally, as described in Litigation and Environmental Matters, losses related from liabilities related to discontinued and/or divested operations and businesses of Historical EID that are not primarily related to its agriculture business or specialty products business, (“Stray Liabilities”), are allocated to or shared by each of Corteva and DuPont. Stray Liabilities include liabilities arising out of actions to the extent related to or resulting from Historical EID’s development, testing, manufacture or sale of per- or polyfluoroalkyl substances, (“PFAS Stray Liabilities”). In connection with Historical EID’s separation of its Performance Chemicals segment through the spinoff of The Chemours Company (“Chemours”), Chemours indemnifies certain PFAS Stray Liabilities as well as other litigation, environmental and other liabilities that arose prior to the Chemours Separation,
Certain Stray Liabilities are subject to third party indemnities, including certain PFAS Stray Liabilities as discussed above and further described in Note 16 to the Consolidated Financial Statements; however, such indemnities may not be sufficient to protect the Company against the full amount of such liabilities or such third parties may refuse or otherwise claim defenses to payment. For example, as described in Note 16 to the Consolidated Financial Statements, on May 13, 2019, Chemours filed suit in the Delaware Court of Chancery against Historical EID, Corteva and the Company in an attempt to limit its responsibility for the litigation and environmental liabilities allocated to and assumed by Chemours under the Chemours Separation Agreement.
Although the Company believes it is remote, there can be no assurance that any such third party would have adequate resources to satisfy its indemnification obligation when due, or, would not ultimately be successful in claiming defenses against payment. Even if recovery from the third party is ultimately successful, DuPont may be temporarily required to bear these losses. Each of these risks could negatively affect the Company’s business, financial condition, results of operations and cash flows.
If the completed distribution of Corteva or Dow, in each case, together with certain related transactions, were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, then the Company could be subject to significant tax and indemnification liability.
The completed distributions of Corteva and Dow were each conditioned upon the receipt of an opinion from Skadden, Arps, Slate, Meagher & Flom LLP, the Company’s tax counsel, regarding the qualification of the applicable distribution along with certain related transactions as a tax-free transaction under Section 355 and Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code,” and such opinions, collectively, the “Tax Opinions”). The Tax Opinions relied on certain facts, assumptions, and undertakings, and certain representations from the Company, Dow and Corteva, as applicable, as well as the IRS Ruling (as defined below). Notwithstanding the Tax Opinions and the IRS Ruling, the Internal Revenue Service (the “IRS”) could determine
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on audit that either, or both, of the distributions and certain related transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated, or that the distributions should be taxable for other reasons, including if the IRS were to disagree with the conclusions of the Tax Opinions.
Even if a distribution otherwise constituted a tax-free transaction to stockholders under Section 355 of the Code, the Company could be required to recognize corporate level tax on such distribution and certain related transactions under Section 355(e) of the Code if the IRS determines that, as a result of the Merger or other transactions considered part of a plan with such distribution, there was a 50 percent or greater change in ownership in the Company, Dow or Corteva, as relevant. In connection with the Merger, the Company sought and received a private letter ruling from the IRS regarding the proper time, manner and methodology for measuring common ownership in the stock of the Company, Historical EID and Historical Dow for purposes of determining whether there was a 50 percent or greater change of ownership under Section 355(e) of the Code as a result of the Merger (the “IRS Ruling”). The Tax Opinions relied on the continued validity of the IRS Ruling and representations made by the Company as to the common ownership of the stock of Historical Dow and Historical EID immediately prior to the Merger, and concluded that there was not a 50 percent or greater change of ownership for purposes of Section 355(e) as a result of the Merger. Notwithstanding the Tax Opinions and the IRS Ruling, the IRS could determine that a distribution or a related transaction should nevertheless be treated as a taxable transaction to the Company if it determines that any of the Company’s facts, assumptions, representations or undertakings was not correct or that a distribution should be taxable for other reasons, including if the IRS were to disagree with the conclusions in the Tax Opinions that are not covered by the IRS Ruling.
Generally, corporate taxes resulting from the failure of a distribution to qualify for non-recognition treatment for U.S. federal income tax purposes would be imposed on the Company. Under the Tax Matters Agreement, as amended, that the Company entered into with Dow and Corteva, Dow and Corteva are generally obligated to indemnify the Company against any such taxes imposed on it. However, if a distribution fails to qualify for non-recognition treatment for U.S. federal income tax purposes for certain reasons relating to the overall structure of the Merger and the distributions, then under the Tax Matters Agreement, as amended, the Company and Corteva, on the one hand, and Dow, on the other hand, would share the tax liability resulting from such failure in accordance with the relative equity values of the Company and Dow on the first full trading day following the distribution of Dow, and the Company and Corteva would in turn share any such resulting tax liability in accordance with the relative equity values of the Company and Corteva on the first full trading day following the distribution of Corteva. Furthermore, under the terms of the Tax Matters Agreement, as amended, a party also generally will be responsible for any taxes imposed on the other parties that arise from the failure of either distribution to qualify as tax-free for U.S. federal income tax purposes within the meaning of Section 355 of the Code or the failure of certain related transactions to qualify for tax-free treatment, to the extent such failure to qualify is attributable to actions, events or transactions relating to such party, or such party's affiliates’, stock, assets or business, or any breach of such party's representations made in connection with the IRS Ruling or in any representation letter provided to a tax advisor in connection with certain tax opinions, including the Tax Opinions, regarding the tax-free status of the distributions and certain related transactions. To the extent that the Company is responsible for any liability under the Tax Matters Agreement, as amended, there could be a material adverse impact on the Company's business, financial condition, results of operations and cash flows in future reporting periods.
The separations and Distributions may expose the Company to potential liabilities arising out of state and federal fraudulent conveyance laws and legal distribution requirements.
Although DuPont received a solvency opinion from an investment bank confirming that DuPont, Dow and Corteva would each be adequately capitalized following the separations and Distributions, the separations and Distributions could be challenged under various state and federal fraudulent conveyance laws. Fraudulent conveyances or transfers are generally defined to include transfers made or obligations incurred with the actual intent to hinder, delay or defraud current or future creditors or transfers made or obligations incurred for less than reasonably equivalent value when the debtor was insolvent, or that rendered the debtor insolvent, inadequately capitalized or unable to pay its debts as they become due. Any unpaid creditor could claim that DuPont did not receive fair consideration or reasonably equivalent value in the separations and distributions, and that the separations and distributions left DuPont insolvent or with unreasonably small capital or that DuPont intended or believed DuPont would incur debts beyond the Company’s ability to pay such debts as they mature. If a court were to agree with such a plaintiff, then such court could void the separations and distributions as a fraudulent transfer or impose substantial liabilities on it, which could adversely affect the Company’s financial condition and the Company’s results of operations.
The separations and Distributions are also subject to review under state corporate distribution statutes. Under the Delaware General Corporation Law, a corporation may only pay dividends to its stockholders either (i) out of its surplus (net assets minus capital) or (ii) if there is no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Although DuPont’s Board of Directors made the distributions out of DuPont’s surplus and received an opinion that DuPont had adequate surplus under Delaware law to declare the dividends of Corteva and Dow common stock in connection with the Distributions, there can be no assurance that a court will not later determine that some or all of the distributions were unlawful.
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Risks Relating to DuPont’s Business
Changes in the Company’s credit ratings could increase the Company’s cost of borrowing or restrict the Company’s ability to access debt capital markets. The Company’s credit ratings are important to the Company’s cost of capital.
DuPont relies on access to the debt capital markets and other short-term borrowings to finance the Company’s long-term and day-to-day operations. A decrease in the ratings assigned to it by the ratings agencies may negatively impact the Company’s access to the debt capital markets and increase the Company’s cost of borrowing. The major rating agencies will routinely evaluate the Company’s credit profile and assign debt ratings to it. This evaluation is based on a number of factors, which include weighing the Company’s financial strength versus business, industry and financial risk. The addition of further leverage to the Company’s capital structure could impact the Company’s credit ratings. Failure to maintain an investment grade rating at the Company’s current level would adversely affect the Company’s cost of funding and the Company’s results of operations and could adversely affect the Company’s liquidity and access to the capital markets. Any limitation on the Company’s ability to continue to raise money in the debt capital markets could have a substantial negative effect on the Company’s liquidity. If DuPont is unable to generate sufficient cash flow or maintain access to adequate external financing, including from significant disruptions in the global credit markets, it could restrict the Company’s current operations, activities under its current and future stock buyback programs, and the Company’s growth opportunities, which could adversely affect the Company’s operating results.
A significant percentage of the Company’s net sales are generated from the Company’s international operations and are subject to economic, political, regulatory, foreign exchange and other risks.
The percentage of net sales generated by the international operations of DuPont, including U.S. exports, was approximately 70 percent of net sales on a continuing operations basis for the year ended December 31, 2019. With Asia Pacific as the Company’s largest region, DuPont expects the percentage of the Company’s net sales derived from international operations to continue to be significant. Risks related to international operations include:
• | difficulties and costs associated with complying with a wide variety of complex, and often conflicting, laws, treaties and regulations, including antitrust regulations; |
• | restrictions on, as well as difficulties and costs associated with, the repatriation of cash from foreign countries to the United States and the allocation of revenues or distributions of cash between the Company’s foreign subsidiaries; |
• | exchange control regulations; |
• | fluctuations in foreign exchange rates; |
• | labor compliance costs, including wage, salary and benefit controls and other costs associated with a global workforce, as will as difficulties in hiring and maintaining a qualified staff outside of the United States, especially in the Asia Pacific region; |
• | government mandated price controls; |
• | foreign investment laws; |
• | potential for changes in global trade policies, including import, export and other trade restrictions (such as sanctions and embargoes) and tariffs; |
• | trends such as populism, economic nationalism and negative sentiment toward multinational companies, as well as government takeover or nationalization of businesses; and |
• | instability and uncertainty arising from the global geopolitical environment and the evolving international and domestic political, regulatory and economic landscape. |
These and other factors can impair the Company’s flexibility in modifying product, marketing, pricing or other strategies for growing the Company’s businesses, as well as the Company’s ability to improve productivity and maintain acceptable operating margins.
The Company’s international operations expose it to fluctuations in foreign currencies relative to the U.S. dollar, which could adversely affect the Company’s results of operations. For its continuing operations as of the year ended December 31, 2019, the Company’s largest currency exposures are the Chinese renminbi and the Taiwan dollar. U.S. dollar fluctuations against foreign currency have an impact to commercial prices and raw material costs in some cases and could result in local price increases if the price or raw material costs is denominated in U.S. dollar.
Sales and expenses of the Company’s non-U.S. businesses are also translated into U.S. dollars for reporting purposes and fluctuations of foreign currency against the U.S. dollar could impact U.S. dollar-denominated earnings. In addition, the Company’s assets and liabilities denominated in foreign currencies can also be impacted by foreign currency exchange rates against the U.S. dollar, which could result in exchange gain or loss from revaluation.
DuPont also faces exchange rate risk from the Company’s investments in subsidiaries owned and operated in foreign countries.
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DuPont has a balance sheet hedging program and actively looks for opportunities in managing currency exposures related to earnings. However, foreign exchange hedging activities bear a financial cost and may not always be available to it or be successful in completely mitigating such exposures.
DuPont generates significant amounts of cash outside of the United States that is invested with financial and non-financial counterparties. While DuPont employs comprehensive controls regarding global cash management to guard against cash or investment loss and to ensure the Company’s ability to fund the Company’s operations and commitments, a material disruption to the counterparties with whom DuPont transacts business could expose it to financial loss.
Any one or more of the above factors could adversely affect the Company’s international operations and could significantly affect the Company’s business, results of operations, financial condition and cash flows.
Volatility in energy and raw material costs could have a significant impact on the Company’s sales and earnings.
The Company’s manufacturing processes consume significant amounts of energy and raw materials, the costs of which are subject to worldwide supply and demand as well as other factors beyond the Company’s control. Significant variations in the cost of energy, which primarily reflect market prices for oil, natural gas and raw materials, affect the Company’s operating results from period to period. Legislation to address climate change by reducing greenhouse gas emissions, creating a carbon tax or implementing a cap and trade program could create increases in energy costs and price volatility.
When possible, DuPont purchases raw materials through negotiated long-term contracts to minimize the impact of price fluctuations. Additionally, DuPont uses over-the-counter and exchange traded derivative commodity instruments to hedge the Company’s exposure to price fluctuations on certain raw material purchases, including food ingredients. DuPont also takes actions to offset the effects of higher energy and raw material costs through selling price increases, productivity improvements and cost reduction programs. Success in offsetting higher raw material costs with price increases is largely influenced by competitive and economic conditions and could vary significantly depending on the market served. As a result, volatility in these costs may negatively impact the Company’s business, results of operations, financial condition and cash flows.
The Company’s results will be affected by competitive conditions and customer preferences.
Demand for the Company’s products, which impacts revenue and profit margins, will be affected by (i) the development and timing of the introduction of competitive products; (ii) the Company’s response to downward pricing trends to stay competitive; (iii) changes in customer order patterns, such as changes in the levels of inventory maintained by customers and the timing of customer purchases which may be affected by announced price changes, changes in the Company’s incentive programs, or the customer’s ability to achieve incentive goals; (iv) the impact of tariffs or trade disputes on availability of raw materials; and (v) changes in customers’ preferences for the Company’s products, including the success of products offered by the Company’s competitors, and changes in customer’s designs for their products that can affect the demand for some of the Company’s products.
Additionally, success in achieving the Company’s growth objectives is significantly dependent on the timing and market acceptance of the Company’s new product offerings, including the Company’s ability to renew the Company’s pipeline of new product offerings and to bring those offerings to market. This ability may be adversely affected by difficulties or delays in product development, such as the inability to identify viable new products, obtain adequate intellectual property protection, or gain market acceptance of new products. There are no guarantees that new products will prove to be commercially successful. The Company’s success will depend on several factors, including the Company’s ability to:
• | correctly identify customer needs and preferences and predict future needs and preferences; |
• | allocate the Company’s research & development funding to products and services with higher growth prospects; |
• | anticipate and respond to the Company’s competitors’ development of new products and services and technological innovations; |
• | differentiate the Company’s offerings from the Company’s competitors’ offerings and avoid commoditization; |
• | innovate and develop new technologies and applications, and acquire or obtain rights to third-party technologies that may have valuable applications in the Company’s served markets; |
• | obtain adequate intellectual property rights with respect to key technologies before the Company’s competitors do; |
• | successfully commercialize new technologies in a timely manner, price them competitively and cost-effectively manufacture and deliver sufficient volumes of new products of appropriate quality on time; |
• | obtain necessary regulatory approvals of appropriate scope; and |
• | stimulate customer demand for, and convince customers, to adopt new technologies. |
There are no guarantees that new product offerings will prove to be commercially successful. Additionally, the Company’s expansion into new markets may result in greater-than-expected risks, liabilities and expenses.
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The costs of complying with evolving regulatory requirements could negatively impact the Company’s business, results of operations, financial condition and cash flows. Actual or alleged violations of environmental laws or permit requirements could result in restrictions or prohibitions on plant operations and substantial civil or criminal sanctions, as well as the assessment of strict liability and/or joint and several liability.
DuPont continues to be subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment, greenhouse gas emissions, and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. Costs and capital expenditures relating to environmental, health or safety matters are subject to evolving regulatory requirements and depend on the timing of the promulgation and enforcement of specific standards which impose the requirements. Moreover, changes in environmental regulations could inhibit or interrupt the Company’s operations, or require modifications to the Company’s facilities. Changes to regulations or the implementation of additional regulations, especially in certain highly regulated markets served by the Company’s Nutrition & Biosciences businesses, such as regulatory modernization of food safety laws and evolving standards and regulations affecting pharmaceutical excipients, microbials, or in reaction to new or next-generation technologies, including advances in protein engineering, gene editing and gene mapping, or novel uses of existing technologies may result in significant costs or capital expenditures or require changes in business practice that could result in reduced margins or profitability.
Accordingly, environmental, health or safety regulatory matters could result in significant unanticipated costs or liabilities causing a negative impact on the Company’s business, cash flows and results of operations.
The Company’s business, results of operations and reputation could be adversely affected by industry-specific risks including process safety and product stewardship/regulatory compliance issues.
DuPont is subject to risks which include, but are not limited to, product safety or quality; shifting consumer preferences; federal, state, and local regulations on manufacturing or labeling; environmental, health and safety regulations; and customer product liability claims. While DuPont maintains general liability insurance, the amount of liability that may result from certain of these risks may not always be covered by, or could exceed, the applicable insurance coverage. In addition, negative publicity related to product liability, food safety, safety, health and environmental matters may damage the Company’s reputation. The occurrence of any of the matters described above could adversely affect the Company’s business, results of operations, financial condition and cash flows.
In most jurisdictions, DuPont must test the safety, efficacy and environmental impact of the Company’s products to satisfy regulatory requirements and obtain the needed approvals. In certain jurisdictions, DuPont must periodically renew the Company’s approvals, which may require it to demonstrate compliance with then-current standards. The regulatory approvals process is lengthy, complex and in some markets unpredictable, with requirements that can vary by product, technology, industry and country. Additionally, the regulatory environment may be impacted by the activities of non-governmental organizations and special interest groups and stakeholder reactions to the actual or perceived impacts of new technology, products or processes on safety, health and the environment. Obtaining and maintaining regulatory approvals will require submitting a significant amount of information and data, which may require participation from technology providers. Regulatory standards and trial procedures are continuously changing. The pace of change together with the lack of regulatory harmony could result in unintended noncompliance. To maintain the Company’s right to produce or sell existing products or to commercialize new products, DuPont must be able to demonstrate the Company’s ability to satisfy the requirements of regulatory agencies.
The failure to meet existing and new requirements or receive necessary permits or approvals could have near- and long-term effects on the Company’s ability to produce and sell certain current and future products, which could significantly increase operating costs and adversely affect the Company’s business, results of operations, financial condition and cash flows.
The Company’s business, results of operations, financial condition and cash flows could be adversely affected by interruption of the Company’s supply chain, information technology or network systems and other business disruptions.
Supply chain disruptions, plant and/or power outages, labor disputes and/or strikes, information technology system and/or network disruptions, whether caused by acts of sabotage, employee error, malfeasance or other actions, geo-political activity, weather events and natural disasters, including hurricanes or flooding that impact coastal regions, and global health risks or pandemics could seriously harm the Company’s operations as well as the operations of the Company’s customers and suppliers. In addition, terrorist attacks and natural disasters have increased stakeholder concerns about the security and safety of chemical production and distribution.
Supply chain and other business disruptions may also be caused by security breaches, which could include, for example, attacks on information technology and infrastructure by hackers, viruses, breaches due to employee error, malfeasance or other actions or other disruptions. DuPont and/or the Company’s suppliers may fail to effectively prevent, detect and recover from these or other security breaches and, therefore, such breaches could result in misuse of the Company’s assets, loss of property including trade secrets and confidential or personal information, some of which is subject to privacy and security laws, and other business
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disruptions. As a result, DuPont may be subject to legal claims or proceedings, reporting errors, processing inefficiencies, negative media attention, loss of sales, interference with regulatory compliance which could result in sanctions or penalties, liability or penalties under privacy laws, disruption in the Company’s operations, and damage to the Company’s reputation, which could adversely affect the Company’s business, results of operations, financial condition and cash flows.
Like most major corporations, DuPont is the target of industrial espionage, including cyber-attacks, from time to time. DuPont has determined that these attacks have resulted, and could result in the future, in unauthorized parties gaining access to certain confidential business information. Although management does not believe that DuPont has experienced any material losses to date related to these security breaches, including cybersecurity incidents, there can be no assurance that DuPont will not suffer such losses in the future.
DuPont seeks to actively manage the risks within the Company’s control that could lead to business disruptions and security breaches. As these threats continue to evolve, particularly around cybersecurity, DuPont may be required to expend significant resources to enhance the Company’s control environment, processes, practices and other protective measures. Despite these efforts, such events could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
Enforcing the Company’s intellectual property rights, or defending against intellectual property claims asserted by others, could adversely affect the Company’s business, results of operations, financial condition and cash flows.
Intellectual property rights, including patents, trade secrets, know-how and other confidential information, trademarks, tradenames and other forms of trade dress, are important to the Company’s business. DuPont endeavors to protect the Company’s intellectual property rights in jurisdictions in which the Company’s products are produced or used and in jurisdictions into which the Company’s products are imported. However, DuPont may be unable to obtain protection for the Company’s intellectual property in key jurisdictions. Further, changes in government policies and regulations, including changes made in reaction to pressure from non-governmental organizations, or the public generally, could impact the extent of intellectual property protection afforded by such jurisdictions.
DuPont has designed and implemented internal controls intended to restrict access to and distribution of the Company’s intellectual property. Despite these precautions, the Company’s intellectual property is vulnerable to unauthorized access through employee error or actions, theft and cybersecurity incidents, and other security breaches. When unauthorized access and use or counterfeit products are discovered, DuPont considers the matter for report to governmental authorities for investigation, as appropriate, and take measures to mitigate any potential impact. Protecting intellectual property related to biotechnology is particularly challenging because theft is difficult to detect and biotechnology can be self-replicating. Accordingly, the impact of such theft can be significant.
Competitors are increasingly challenging the Company’s intellectual property positions, and the potential outcomes can be highly uncertain. Third parties may also claim the Company’s products violate their intellectual property rights. Defending such claims, even those without merit, is time-consuming and expensive. In addition, as a result of such claims, DuPont has and could be required in the future to enter into license agreements, develop non-infringing products or engage in litigation that could be costly. If challenges are resolved adversely, it could negatively impact the Company’s ability to obtain licenses on competitive terms, commercialize new products and generate sales from existing products.
In addition, because of the rapid pace of technological change, the confidentiality of patent applications in some jurisdictions and/or the uncertainty in predicting the outcome of complex proceedings relating to ownership or the scope of protection of patents relating to certain emerging technologies, competitors may be unexpectedly issued patents that DuPont does not anticipate. These patents could reduce the value of the Company’s commercial or pipeline products or, to the extent they cover key technologies on which DuPont has unknowingly relied, require it to seek to obtain licenses or cease using the technology, no matter how valuable to the Company’s business. If DuPont decided to obtain licenses to continue using the technology, it cannot ensure DuPont would be able to obtain such a license on acceptable terms.
Legislation and jurisprudence on patent protection is evolving, and changes in laws could affect the Company’s ability to obtain or maintain patent protection for the Company’s products.
Any one or more of the above factors could significantly affect the Company’s business, results of operations, financial condition and cash flows.
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Increased concerns regarding chemicals in commerce and their potential impact on the environment have resulted in more restrictive regulations, may lead to new regulations and compliance may be costly.
Concerns about chemicals and biotechnology, as well as their potential impact on health and the environment, reflect a growing trend in societal demands for increasing levels of product safety and environmental protection. These concerns could manifest themselves in stockholder proposals, preferred purchasing, delays or failures in obtaining or retaining regulatory approvals, delayed product launches, lack of market acceptance, product discontinuation, continued pressure for and adoption of more stringent regulatory intervention and litigation. These concerns could also influence public perceptions, the viability or continued sales of certain of the Company’s products, the Company’s reputation and the cost to comply with regulations and, as a result, could have a negative impact on the Company’s business, results of operations and financial condition.
An impairment of goodwill or intangible assets could negatively impact the Company’s financial results.
At least annually, DuPont must assess both goodwill and indefinite-lived intangible assets for impairment. Intangible assets with finite lives are tested for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. If testing indicates that goodwill or intangible assets are impaired, their carrying values will be written down based on fair values with a charge against earnings. Where DuPont utilizes discounted cash flow methodologies in determining fair values, continued weak demand for a specific product line or business could result in an impairment. Accordingly, any determination requiring the write-off of a significant portion of goodwill or intangible assets could negatively impact the Company’s results of operations.
As a result of the Merger and related acquisition method of accounting, Historical EID’s assets and liabilities were measured at fair value, and any declines in projected cash flows could have a material, negative impact on the fair value of the Company’s reporting units and assets. Future impairments of the Company’s goodwill or intangible assets also could be recorded due to changes in assumptions, estimates or circumstances and the magnitude of such impairments may be material to it.
Failure to effectively manage acquisitions, divestitures, alliances and other portfolio actions could adversely impact the Company’s business, results of operations, financial condition and cash flows.
DuPont from time to time evaluates acquisition candidates that may strategically fit the Company’s business and/or growth objectives. If DuPont is unable to successfully integrate and develop acquired businesses, DuPont could fail to achieve anticipated synergies and cost savings, including any expected increases in revenues and operating results, which could have a material adverse effect on the Company’s financial results. DuPont expects to continually review the Company’s portfolio of assets for contributions to the Company’s objectives and alignment with the Company’s growth strategy. The Letter Agreement between the Company and Corteva limits DuPont’s ability to separate certain businesses and assets to third parties without assigning certain of its indemnification obligations under the Separation and Distribution Agreement to the transferee of such businesses and assets or meeting certain other alternative conditions. DuPont may be unable to meet the conditions under the Letter Agreement, if applicable. Even if the conditions under the Letter Agreement are met or are not applicable, DuPont may not be successful in separating underperforming or non-strategic assets, and gains or losses on the divestiture of, or lost operating income from, such assets may affect the Company’s earnings. Moreover, DuPont might incur asset impairment charges related to acquisitions or divestitures that reduce the Company’s earnings. In addition, if the execution or implementation of acquisitions, divestitures, alliances, joint ventures and other portfolio actions is not successful and/or the Company fails to effectively manage its cost as its portfolio evolves, it could adversely impact the Company’s business, results of operations, financial condition and cash flows.
The Company’s results of operations could be adversely affected by litigation and other commitments and contingencies.
DuPont faces risks arising from various unasserted and asserted litigation matters, including product liability, patent infringement and other intellectual property disputes, contract and commercial litigation, claims for damage or personal injury, antitrust claims, governmental regulations and other actions. An adverse outcome in any one or more of these matters could be material to the Company’s business, results of operations, financial condition and cash flows.
In the ordinary course of business, DuPont may make certain commitments, including representations, warranties and indemnities relating to current and past operations, including those related to divested businesses, and DuPont may issue guarantees of third-party obligations. If DuPont is required to make payments as a result, they could exceed the amounts accrued therefor, thereby adversely affecting the Company’s results of operations.
DuPont is subject to numerous laws, regulations and mandates globally which could adversely affect the Company’s operating results and forward strategy.
DuPont does business globally in more than 60 countries. DuPont is required to comply with the numerous and far-reaching laws and regulations administered by United States federal, state, local and foreign governmental authorities. DuPont is required to comply with other general business regulations covering areas such as income taxes, anti-corruption, anti-bribery, global trade, trade sanctions, environmental protections, product safety, and handling and production of regulated substances. DuPont expects to frequently face challenges from U.S. and foreign tax authorities regarding the amount of taxes due. These challenges may include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions.
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In evaluating the exposure associated with various tax filing positions, DuPont expects to record reserves for estimates of potential additional tax DuPont may owe. Any failure to comply with applicable laws and regulations or appropriately resolve these challenges could subject it to administrative, civil and criminal remedies including fines, penalties, disgorgement, injunctions and recalls of the Company’s products, and damage to the Company’s reputation.
Governmental policies, including antitrust and competition law, trade restrictions, regulations related to medical applications and devices, food safety regulations, sustainability requirements, traceability and other government regulations and mandates, can impact the Company’s ability to execute this strategy successfully. See also “A significant percentage of the Company’s net sales are generated from the Company’s international operations and are subject to the economic, political, regulatory, foreign exchange and other risks.”
Failure to maintain a streamlined operating model and sustain operational improvements may reduce the Company’s profitability or adversely impact the Company’s business, results of operations, financial condition and cash flows.
The Company’s profitability and margin growth will depend in part on the Company’s ability to maintain a streamlined operating model and drive sustainable improvements, through actions and projects, such as consolidation of manufacturing facilities, transitions to cost-competitive regions and product line rationalizations. A variety of factors may adversely affect the Company’s ability to realize the targeted cost synergies, including failure to successfully optimize the Company’s facilities footprint, the failure to take advantage of the Company’s global supply chain, the failure to identify and eliminate duplicative programs, and the failure to otherwise integrate Historical EID’s or Historical Dow’s respective specialty products businesses, including their technology platforms. There can be no assurance that DuPont is be able to achieve or sustain any or all of the cost savings generated from restructuring actions.
The Company’s U.S. and non-U.S. tax liabilities will be dependent, in part, upon the distribution of income among various jurisdictions in which DuPont operates.
The Company’s future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in tax laws, regulations and judicial rulings (or changes in the interpretation thereof), changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, changes in the amount of earnings permanently reinvested offshore, the results of audits and examinations of previously filed tax returns and continuing assessments of the Company’s tax exposures and various other governmental enforcement initiatives. The Company’s tax expense includes estimates of tax reserves and reflects other estimates and assumptions, including assessments of future earnings of the Company which could impact the valuation of the Company’s deferred tax assets. Changes in tax laws or regulations, including further regulatory developments arising from U.S. tax reform legislation as well as multi-jurisdictional changes enacted in response to the action items provided by the Organization for Economic Co-operation and Development (OECD), will increase tax uncertainty and impact the Company’s provision for income taxes.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
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ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Wilmington, Delaware. The Company's manufacturing, processing, marketing and research and development facilities, as well as regional purchasing offices and distribution centers are located throughout the world. Additional information with respect to the Company's property, plant and equipment and leases is contained in Notes 12, 17 and 24 to the Consolidated Financial Statements.
The Company has investments in property, plant and equipment related to global manufacturing operations. Collectively there are approximately 195 principal sites in total. The number of manufacturing sites by reportable segment and geographic area around the world at December 31, 2019 is as follows:
Geographic Region | Elect. & Imaging | Nutrition & Biosciences | Transp. & Industrial | Safety & Const. | Non-Core | Total 2 | ||||||
Asia Pacific | 17 | 15 | 15 | 11 | 3 | 61 | ||||||
EMEA 1 | 4 | 41 | 8 | 6 | 1 | 60 | ||||||
Latin America | — | 13 | 2 | — | — | 15 | ||||||
U.S. & Canada | 12 | 21 | 20 | 13 | 7 | 73 | ||||||
Total | 33 | 90 | 45 | 30 | 11 | 209 | ||||||
1.. Europe, Middle East, and Africa ("EMEA").
2. | Sites that are used by multiple segments are included more than once in the figures above. |
The Company's principal sites include facilities which, in the opinion of management, are suitable and adequate for their use and have sufficient capacity for the Company's current needs and expected near-term growth. Properties are primarily owned by the Company; however, certain properties are leased. No title examination of the properties has been made for the purpose of this report and certain properties are shared with other tenants under long-term leases.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are 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 16 to the Consolidated Financial Statements, which also includes discussion of the allocation of liabilities in connection with the Distributions.
Litigation
See Note 16 to the Consolidated Financial Statements.
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 description is included per Regulation S-K, Item 103(5)(c) of the Securities Exchange Act of 1934.
Divested Neoprene Facility, La Place, Louisiana - EPA Compliance Inspection
In 2016, the EPA conducted a focused compliance investigation at the Denka Performance Elastomer LLC (“Denka”) neoprene manufacturing facility in La Place, Louisiana. Historical EID sold the neoprene business, including this manufacturing facility, to Denka in the fourth quarter of 2015. Subsequent to this inspection, the U.S. Environmental Protection Agency (“EPA)”, the U.S. Department of Justice (“DOJ”), the Louisiana Department of Environmental Quality (“DEQ”), the Company (originally through Historical EID), and Denka began discussions in the spring of 2017 relating to the inspection conclusions and allegations of noncompliance arising under the Clean Air Act, including leak detection and repair. DuPont, Denka, EPA, DOJ and DEQ are continuing these discussions, which include potential settlement options.
New Jersey Directive PFAS
On March 25, 2019, the New Jersey Department of Environmental Protection (“NJDEP”) issued a Directive and Notice to Insurers to a number of companies, including Chemours, DowDuPont, Historical EID, and certain DuPont subsidiaries. NJDEP’s allegations relate to former operations of Historical EID involving poly- and perfluoroalkyl substances, (“PFAS”), including PFOA and PFOA- replacement products. The NJDEP seeks past and future costs of investigating, monitoring, testing, treating, and remediating New Jersey’s drinking water and waste systems, private drinking water wells and natural resources including groundwater, surface water, soil, sediments and biota. The Directive seeks certain information as to future costs and information related to the historic uses of PFAS and replacement chemicals including “information ranging from use and discharge of the chemicals through wastewater treatment plants, air emissions, and sales of products containing the chemicals to current development, manufacture, use and release of newer chemicals in the state.”
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
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DuPont de Nemours, Inc. | ||
PART II | ||
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On August 31, 2017, Historical Dow's common stock, par value $2.50 per share, and Historical EID's common stock, par value $0.30 per share, were voluntarily delisted from the New York Stock Exchange ("NYSE") in connection with the Merger. See Note 3 to the Consolidated Financial Statements for additional information on the Merger. Historical Dow common stock and Historical EID common stock were suspended from trading on the NYSE prior to the open of trading on September 1, 2017.
DowDuPont's common stock, par value $0.01 per share, commenced trading on the New York Stock Exchange ("NYSE") (the principal Market for the Company's common stock) under ticker symbol "DWDP" on September 1, 2017. On June 1, 2019, the Company completed at 1-for-3 reverse stock split of its outstanding common stock, thereby reducing the number of authorized shares for common stock from 5,000,000,000 to 1,666,666,667 shares. Also on June 1, 2019, the Company changed its registered name from "DowDuPont Inc." to "DuPont de Nemours, Inc." doing business as "DuPont." Beginning on June 3, 2019, the Company's common stock is traded on the NYSE under the ticker symbol "DD."
At December 31, 2019, there were 81,409 stockholders of record. At January 31, 2020, there were 80,891 stockholders of record.
See Part III, Item 11. Executive Compensation for information relating to the Company’s equity compensation plans.
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of the Company’s common stock by the Company during the three months ended December 31, 2019:
Issuer Purchases of Equity Securities | Total number of shares purchased as part of the Company's publicly announced share repurchase program 1 | Approximate dollar value of shares that may yet be purchased under the Company's publicly announced share repurchase program 1 (In millions) | ||||||||
Period | Total number of shares purchased | Average price paid per share | ||||||||
October 2019 | 2,061,379 | 66.70 | 2,061,379 | 1,402 | ||||||
November 2019 | 1,713,612 | 68.56 | 1,713,612 | 1,284 | ||||||
December 2019 | 526,772 | 64.12 | 526,772 | 1,250 | ||||||
Fourth quarter 2019 | 4,301,763 | $ | 67.12 | 4,301,763 | $ | 1,250 | ||||
1. | On June 1, 2019, the Company announced a $2 billion share buyback program, which expires on June 1, 2021. |
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Stockholder Return
The form of the chart presented below is in accordance with the requirements of the U.S. Securities and Exchange Commission. Stockholders are cautioned against drawing any conclusions from the data contained therein, as past results are not necessarily indicative of future performance. The chart illustrates the cumulative total return of the Company's stock following completion of the Merger based on a presumed investment of $100 on September 1, 2017 and a presumption that all dividends were reinvested. The historical stock prices of DuPont presented in the chart have been adjusted to reflect the impact of the Distributions and the Reverse Stock Split. The Company elected to display the closing price on May 31, 2019, the day preceding the Corteva Distribution, in order to provide the reader a more useful baseline for the Company's performance as a specialty products company after consummation of the Distributions. The chart does not reflect the Company's forecast of future financial performance.
Cumulative Total Return | September 1, 2017 | December 29, 2017 | December 31, 2018 | May 31, 2019 3 | December 31, 2019 | ||||||||||
DuPont 1 | $ | 100.00 | $ | 106.60 | $ | 81.92 | $ | ||||||||