NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In these notes, the terms "DuPont" or "Company" used herein mean DuPont de Nemours, Inc. and its consolidated subsidiaries. The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the interim statements reflect all adjustments (including normal recurring accruals) which are considered necessary for the fair statement of the results for the periods presented. Results from interim periods should not be considered indicative of results for the full year. These interim Consolidated Financial Statements should also be read in conjunction with the audited Consolidated Financial Statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, collectively referred to as the "2021 Annual Report." The interim Consolidated Financial Statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained.
Mobility & Materials Intended Divestitures
On February 17, 2022, DuPont entered into a Transaction Agreement (the "Transaction Agreement") with Celanese Corporation ("Celanese") to divest a majority of the historic Mobility & Materials segment, including the Engineering Polymers business line and select product lines within the Advanced Solutions and Performance Resins business lines, (the “M&M Divestiture”). The transaction is expected to close around the end of 2022, subject to customary closing conditions and regulatory approvals. In addition, on February 18, 2022, the Company announced it is advancing the process to divest its Delrin® acetal homopolymer (H-POM) business, subject to entry into a definitive agreement and satisfaction of customary closing conditions. The Delrin® divestiture together with the M&M Divestiture discussed above (the "M&M Divestitures") represents a strategic shift that will have a major impact on DuPont's operations and results. See Note 4 for more information.
The financial position of DuPont as of March 31, 2022 and December 31, 2021 present the businesses to be divested as part of the M&M Divestiture and the divestiture of Delrin® (the "M&M Businesses") as discontinued operations. The results of operations for the three months ended March 31, 2022 and 2021 present the financial results of the M&M Businesses as discontinued operations. The cash flows and comprehensive income related to the M&M Businesses have not been segregated and are included in the interim Consolidated Statements of Cash Flows and interim Consolidated Statements of Comprehensive Income, respectively, for all periods presented. Unless otherwise indicated, the information in the notes to the interim Consolidated Financial Statements refer only to DuPont's continuing operations and do not include discussion of balances or activity of the M&M Businesses. See Note 4 to the interim Consolidated Financial Statements for additional information.
The Auto Adhesives & Fluids, MultibaseTM and Tedlar® product lines previously within the historic Mobility & Materials segment (the "Retained Businesses") are not included in the scope of the intended divestitures. The Retained Businesses are reported in Corporate & Other. The reporting changes have been retrospectively applied for all periods presented.
N&B Transaction
On February 1, 2021, DuPont completed the separation and distribution of the Nutrition & Biosciences business segment (the "N&B Business"), and the merger of Nutrition & Biosciences, Inc. (“N&B”), a DuPont subsidiary formed to hold the N&B Business, with a subsidiary of International Flavors & Fragrances Inc. ("IFF"). The distribution was effected through an exchange offer (the “Exchange Offer”) and the consummation of the Exchange Offer was followed by the merger of N&B with a wholly owned subsidiary of IFF, with N&B surviving the merger as a wholly owned subsidiary of IFF (the “N&B Merger” and, together with the Exchange Offer, the “N&B Transaction”). See Note 4 for more information.
The results of operations of DuPont for the three months ended March 31, 2021 present the historical financial results of N&B as discontinued operations. The cash flows and comprehensive income related to N&B have not been segregated and are included in the interim Consolidated Statements of Cash Flows and interim Consolidated Statements of Comprehensive Income, respectively, for the three months ended March 31, 2021. Unless otherwise indicated, the information in the notes to the interim Consolidated Financial Statements refer only to DuPont's continuing operations and do not include discussion of balances or activity of N&B.
NOTE 2 - RECENT ACCOUNTING GUIDANCE
Accounting Guidance Issued But Not Adopted at March 31, 2022
In October 2021, the FASB issued Accounting Standards Update No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which requires contract assets and contract liabilities (i.e., unearned revenue) acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers. Historically, the Company has recognized contract assets and contract liabilities at the acquisition date based on fair value estimates in accordance with ASC 805, Business Combinations. ASU 2021-08 is effective for interim and annual periods beginning after December 15, 2022 on a prospective basis, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2021-08 to its Consolidated Financial Statements in connection with any future anticipated business combinations.
NOTE 3 - ACQUISITIONS
Intended Rogers Corporation Acquisition
On November 2, 2021, the Company announced that it had entered into a definitive agreement to acquire all the outstanding shares of Rogers Corporation (“Rogers”) for about $5.2 billion (the “Intended Rogers Acquisition”). The acquisition is expected to close late in the second quarter or early in the third quarter of 2022, pending receipt of regulatory approvals and satisfaction of customary closing conditions. When complete, the acquisition of Rogers is expected to broaden the Company’s presence in the electronic materials market. Rogers is complementary to and aligned strategically with the Company’s existing Electronics & Industrial business.
Laird Performance Materials Acquisition
On July 1, 2021, DuPont completed the acquisition (the "Laird PM Acquisition") of 100% of the ownership interest of Laird Performance Materials (“Laird PM”) from Advent International for aggregate, adjusted cash consideration of approximately $2,404 million. The cash consideration paid included a net upward adjustment of approximately $100 million for acquired cash and net working capital, amongst other items. Laird PM is reported within the Interconnect Solutions business of the Electronics & Industrial segment. The Company accounted for the acquisition in accordance with ASC 805, which requires the assets acquired and liabilities assumed to be recognized on the balance sheet at their fair values as of the acquisition date. The Company will finalize the amounts recognized as it obtains the information necessary to complete the analysis, but no later than one year from the date of the acquisition. There were no material updates to the purchase accounting and purchase price allocation for the three months ended March 31, 2022. For additional information regarding the acquisition of Laird PM, see Note 3, "Acquisitions," in the 2021 Annual Report.
NOTE 4 - DIVESTITURES
Mobility & Materials Intended Divestitures
On February 17, 2022, DuPont entered into the Transaction Agreement to divest a majority of its historic Mobility & Materials segment, specifically the Engineering Polymers business line and select product lines within the Advanced Solutions and Performance Resins business lines, to Celanese (the “M&M Divestiture”) for $11.0 billion in cash, subject to customary transaction adjustments in accordance with the Transaction Agreement. Closing is expected around the end of 2022, subject to customary closing conditions and regulatory approvals. The Company also announced on February 18, 2022 that its Board of Directors approved the divestiture of the Delrin® acetal homopolymer (H-POM) business, subject to entry into a definitive agreement and satisfaction of customary closing conditions, (the Delrin® business together with the M&M Divestiture businesses, the "M&M Businesses”). As of March 31, 2022, the Company anticipates a closing date for the sale of Delrin® within a year.
The Company has determined that the M&M Businesses meet the criteria to be classified as held for sale and that the sale represents a strategic shift that will have a major effect on the Company’s operations and results.
The results of operations of the M&M Businesses are presented as discontinued operations as summarized below:
| | | | | | | | |
| Three Months Ended March 31, |
| In millions | 2022 | 2021 |
| Net sales | $ | 1,042 | | $ | 959 | |
| Cost of sales | 782 | | 651 | |
| Research and development expenses | 15 | | 17 | |
| Selling, general and administrative expenses | 51 | | 61 | |
| Amortization of intangibles | 28 | | 42 | |
| | |
| Acquisition, integration and separation costs | 96 | | — | |
| Equity in earnings of nonconsolidated affiliates | (1) | | 3 | |
| Sundry income (expense) - net | — | | (3) | |
| Income from discontinued operations before income taxes | 69 | | 188 | |
| (Benefit from) Provision for income taxes on discontinued operations | (219) | | 33 | |
| Income from discontinued operations, net of tax | 288 | | 155 | |
| Net income from discontinued operations attributable to noncontrolling interests | 2 | | 6 | |
| Income from discontinued operations attributable to DuPont stockholders, net of tax | $ | 286 | | $ | 149 | |
The following table presents depreciation, amortization, and capital expenditures of the discontinued operations related to the M&M Businesses:
| | | | | | | | |
| Three Months Ended March 31, |
| In millions | 2022 | 2021 |
| Depreciation and amortization | $ | 45 | | $ | 73 | |
Capital expenditures 1 | $ | 27 | | $ | 16 | |
| | |
1.Total capital expenditures are presented on a cash basis.
The following table summarizes the major classes of assets and liabilities of the M&M Businesses classified as held for sale presented as discontinued operations at March 31, 2022 and December 31, 2021:
| | | | | | | | |
| In millions | March 31, 2022 | December 31, 2021 |
| Assets | | |
| Cash and cash equivalents | $ | 39 | | $ | 39 | |
| Accounts and notes receivable - net | 632 | | 552 | |
| Inventories | 880 | | 776 | |
| Other current assets | 80 | | 59 | |
| Property, plant and equipment - net | 1,202 | | 1,213 | |
| Goodwill | 2,566 | | 2,597 | |
| Other intangible assets | 2,184 | | 2,220 | |
| Investments and noncurrent receivables | 56 | | 62 | |
| Deferred income tax assets | 24 | | 27 | |
| Deferred charges and other assets | 112 | | 119 | |
| Total assets of discontinued operations | $ | 7,775 | | $ | 7,664 | |
| Liabilities | | |
| Accounts payable | $ | 569 | | $ | 510 | |
| Income taxes payable | 21 | | 77 | |
| Accrued and other current liabilities | 117 | | 157 | |
| | |
| Deferred income tax liabilities | 484 | | 515 | |
| Pension and other post employment benefits - noncurrent | 90 | | 90 | |
| Other noncurrent liabilities | 54 | | 64 | |
| Total liabilities of discontinued operations | $ | 1,335 | | $ | 1,413 | |
M&M Divestiture to Celanese Transaction Agreement
In accordance with Transaction Agreement, consummation of the transaction is subject to the satisfaction or waiver of certain customary mutual closing conditions, including (i) the absence of an injunction in certain agreed jurisdictions that would prohibit consummation of the Transaction and (ii) the expiration or termination of the required waiting, notice or review periods and approvals or clearances under the Hart-Scott-Rodino Act, as amended, and certain other approvals under non-U.S. regulatory laws, as applicable, including, without limitation, the European Union, China, Brazil, Mexico, South Korea and Turkey. The Transaction Agreement contains certain termination rights, including, among others, for each of DuPont and Celanese, if the Transaction is not consummated on or before February 17, 2023, subject to two extensions of three months each if all closing conditions have been satisfied other than those related to the receipt of regulatory approvals and those to be satisfied at closing.
N&B Transaction
On February 1, 2021, DuPont completed the separation and distribution of the N&B Business, and merger of N&B, a subsidiary DuPont formed to hold the N&B Business, with a subsidiary of IFF. The distribution was effected through an exchange offer where, on the terms and subject to the conditions of the Exchange Offer, eligible participating DuPont stockholders had the option to tender all, some or none of their shares of common stock, par value $0.01 per share, of DuPont (the “DuPont Common Stock”) for a number of shares of common stock, par value $0.01 per share, of N&B (the “N&B Common Stock”) and which resulted in all shares of N&B Common Stock being distributed to DuPont stockholders that participated in the Exchange Offer. The consummation of the Exchange Offer was followed by the merger of N&B with a wholly owned subsidiary of IFF, with N&B surviving the merger as a wholly owned subsidiary of IFF (the “N&B Merger” and, together with the Exchange Offer, the “N&B Transaction”). The N&B Transaction was subject to IFF shareholder approval, customary regulatory approvals, tax authority rulings including a favorable private letter ruling from the U.S. Internal Revenue Service which confirms the N&B Transaction to be free of U.S. federal income tax, and expiration of the public exchange offer. DuPont does not have an ownership interest in IFF as a result of the N&B Transaction.
In the Exchange Offer, DuPont accepted approximately 197.4 million shares of its common stock in exchange for about 141.7 million shares of N&B Common Stock as of the date of the N&B Transaction. As a result, DuPont reduced its common stock outstanding by 197.4 million shares of DuPont Common Stock. In the N&B Merger, each share of N&B Common Stock was automatically converted into the right to receive one share of IFF common stock, par value $0.125 per share, based on the terms of the N&B Merger Agreement.
The results of operations of N&B are presented as discontinued operations as summarized below:
| | | | | |
| Three Months Ended March 31, 2021 |
| In millions |
| Net sales | $ | 507 | |
| Cost of sales | 352 | |
| Research and development expenses | 21 | |
| Selling, general and administrative expenses | 44 | |
| Amortization of intangibles | 38 | |
| Restructuring and asset related charges - net | 1 | |
| Acquisition, integration and separation costs | 149 | |
| Sundry income (expense) - net | (2) | |
| Interest expense | 13 | |
| Loss from discontinued operations before income taxes | (113) | |
| Benefit from income taxes on discontinued operations | (21) | |
| Loss from discontinued operations, net of tax | (92) | |
| Non-taxable gain on split-off | 4,954 | |
| Income from discontinued operations attributable to DuPont stockholders, net of tax | $ | 4,862 | |
The following table presents depreciation, amortization, and capital expenditures of the discontinued operations related to N&B:
| | | | | |
| Three Months Ended March 31, 2021 |
| In millions |
| Depreciation and amortization | $ | 63 | |
| Capital expenditures | $ | 27 | |
| |
In connection with and in accordance with the terms of the N&B Transaction, prior to consummation of the Exchange Offer and the N&B Merger, DuPont received a one-time cash payment of approximately $7.3 billion, (the "Special Cash Payment").
The Company recognized a non-taxable gain of approximately $4,954 million on the N&B Transaction. The gain is recorded in "Income from discontinued operations, net of tax" in the Company's interim Consolidated Statements of Operations for the three months ended March 31, 2021.
N&B Transaction Agreements
In connection with the N&B Transaction, effective December 15, 2019, the Company, as previously discussed, entered into the following agreements: N&B Separation and Distribution Agreement, N&B Merger Agreement, and N&B Employee Matters Agreement. In connection with the closing of the N&B Transaction, and effective February 1, 2021, the Company entered into the following agreements: N&B IP Cross-License Agreement and N&B Tax Matters Agreement.
Acquisition, Integration and Separation Costs
Acquisition, integration and separation costs primarily consist of financial advisory, information technology, legal, accounting, consulting, and other professional advisory fees. The Company recorded costs of $8 million and $6 million for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, these costs were primarily associated with the execution of activities related to strategic initiatives including the acquisition of Laird PM and the Intended Rogers Acquisition. For the three months ended March 31, 2021, these costs were primarily associated with the execution of activities related to strategic initiatives, which primarily includes the sale of the Solamet® business unit and the planned divestiture of the Biomaterials business unit. These costs are recorded within "Acquisition, integration and separation costs" within the interim Consolidated Statements of Operations. Costs associated with the M&M Divestitures of $96 million for the three months ended March 31, 2022 are reported within discontinued operations as noted above.
Discontinued Operations Activity
The Company recorded income from discontinued operations, net of tax of $276 million and $5,012 million for the three months ended March 31, 2022 and 2021, respectively.
Discontinued operations activity consists of the following:
| | | | | | | | |
| Income from discontinued operations, net of tax | Three Months Ended March 31, |
| In millions | 2022 | 2021 |
| M&M Divestitures | $ | 288 | | $ | 155 | |
| N&B Transaction | — | | 4,862 | |
Other 1 | (12) | | (5) | |
| Income from discontinued operations, net of tax | $ | 276 | | $ | 5,012 | |
1.Primarily related to the binding Memorandum of Understanding (“MOU”) between Chemours, Corteva, E. I. du Pont de Nemours and Company ("EID") and the Company. For additional information on these matters, refer to Note 16.
Biomaterials
In October 2020, the Company entered into a definitive agreement to sell its Biomaterials business unit, which includes the Company's equity method investment in DuPont Tate & Lyle Bio Products, for $240 million. The sale of the Biomaterials business unit is subject to customary closing conditions and is expected to close mid-2022. The results of operations of the Biomaterials business unit are reported in Corporate & Other and the financial position is reflected as Held for Sale.
The following table summarizes the carrying value of the major assets and liabilities of the Biomaterials business unit as of March 31, 2022 and as of December 31, 2021:
| | | | | | | | |
| In millions | March 31, 2022 | December 31, 2021 |
| Assets | | |
| Accounts and notes receivable - net | $ | 23 | | $ | 27 | |
| Inventories | 56 | | 48 | |
| Investments and noncurrent receivables | 151 | | 158 | |
| Property, plant and equipment - net | 12 | | 12 | |
| Assets held for sale | $ | 242 | | $ | 245 | |
| Liabilities | | |
| Accounts payable | $ | 28 | | $ | 21 | |
| Accrued and other current liabilities | 2 | | 3 | |
| Other noncurrent obligations | 1 | | 1 | |
| Liabilities related to assets held for sale | $ | 31 | | $ | 25 | |
NOTE 5 - REVENUE
Revenue Recognition
Products
Substantially all of DuPont's revenue is derived from product sales. Product sales consist of sales of DuPont's products to supply manufacturers and distributors. DuPont considers purchase orders, which in some cases are governed by master supply agreements, to be a contract with a customer. Contracts with customers are considered to be short-term when the time between order confirmation and satisfaction of the performance obligations is equal to or less than one year.
Disaggregation of Revenue
The Company disaggregates its revenue from contracts with customers by segment and business or major product line and geographic region, as the Company believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash flows.
| | | | | | | | |
| Net Trade Revenue by Segment and Business or Major Product Line | Three Months Ended March 31, |
| In millions | 2022 | 2021 |
| Industrial Solutions | $ | 500 | | $ | 458 | |
| Interconnect Solutions | 460 | | 330 | |
| Semiconductor Technologies | 576 | | 512 | |
| Electronics & Industrial | $ | 1,536 | | $ | 1,300 | |
| Safety Solutions | $ | 654 | | $ | 637 | |
| Shelter Solutions | 422 | | 360 | |
| Water Solutions | 353 | | 331 | |
| Water & Protection | $ | 1,429 | | $ | 1,328 | |
Retained Businesses 1 | $ | 266 | | $ | 256 | |
Other 2 | 43 | | 133 | |
Corporate & Other | $ | 309 | | $ | 389 | |
| Total | $ | 3,274 | | $ | 3,017 | |
1. Retained Businesses includes the Auto Adhesives & Fluids, MultibaseTM and Tedlar® businesses.
2. Net sales reflected in Other include activity of Biomaterials and previously divested businesses.
| | | | | | | | |
| Net Trade Revenue by Geographic Region | Three Months Ended March 31, |
| In millions | 2022 | 2021 |
| U.S. & Canada | $ | 1,049 | | $ | 892 | |
EMEA 1 | 577 | | 558 | |
| Asia Pacific | 1,545 | | 1,475 | |
| Latin America | 103 | | 92 | |
| Total | $ | 3,274 | | $ | 3,017 | |
1.Europe, Middle East and Africa.
Contract Balances
From time to time, the Company enters into arrangements in which it receives payments from customers based upon contractual billing schedules. The Company records accounts receivables when the right to consideration becomes unconditional. Contract liabilities primarily reflect deferred revenue from advance payment for product that the Company has received from customers. The Company classifies deferred revenue as current or noncurrent based on the timing of when the Company expects to recognize revenue.
Revenue recognized in the first three months of 2022 and 2021 from amounts included in contract liabilities at the beginning of the period was insignificant.
| | | | | | | | |
| Contract Balances | March 31, 2022 | December 31, 2021 |
| In millions |
Accounts and notes receivable - trade 1 | $ | 1,789 | | $ | 1,643 | |
| | |
Deferred revenue - current 2, 3 | $ | 34 | | $ | 25 | |
| | |
1.Included in "Accounts and notes receivable - net" in the Condensed Consolidated Balance Sheets.
2.Included in "Accrued and other current liabilities" in the Condensed Consolidated Balance Sheets.
3.Noncurrent deferred revenue balances in the current and comparative periods were not material.
NOTE 6 - RESTRUCTURING AND ASSET RELATED CHARGES - NET
Charges for restructuring programs and asset related charges, which includes asset impairments, were $101 million for the three months ended March 31, 2022 and $2 million for the three months ended March 31, 2021. These charges were recorded in "Restructuring and asset related charges - net" in the interim Consolidated Statements of Operations. The total liability related to restructuring programs was $27 million at March 31, 2022 and $43 million at December 31, 2021, recorded in "Accrued and other current liabilities" in the Condensed Consolidated Balance Sheets. Restructuring activity consists of the following programs:
2021 Restructuring Actions
In October 2021, the Company approved targeted restructuring actions to capture near-term cost reductions (the "2021 Restructuring Actions"). The Company recorded pre-tax restructuring charges of $53 million inception-to-date, consisting of severance and related benefit costs of $31 million and asset related charges of $22 million.
Total liabilities related to the 2021 Restructuring Actions were $18 million at March 31, 2022 and $25 million at December 31, 2021, respectively, and recorded in "Accrued and other current liabilities" in the Condensed Consolidated Balance Sheets. The Company expects actions related to this program to be substantially complete by the first half of 2022.
2020 Restructuring Program
In the first quarter of 2020, the Company approved restructuring actions designed to capture near-term cost reductions and to further simplify certain organizational structures in anticipation of the N&B Transaction (the "2020 Restructuring Program"). The Company recorded pre-tax restructuring charges of $159 million inception-to-date, consisting of severance and related benefit costs of $107 million and asset related charges of $52 million.
Total liabilities related to the 2020 Restructuring Program were $5 million at March 31, 2022 and $11 million at December 31, 2021, respectively, and recorded in "Accrued and other current liabilities" in the Condensed Consolidated Balance Sheets. Actions related to the 2020 Restructuring Program are substantially complete.
Equity Method Investment Impairment Related Charges
In connection with the M&M Divestitures described in Note 4, a portion of an equity method investment was reclassified to “Assets of discontinued operations” within the Condensed Consolidated Balance Sheet. The reclassification served as a triggering event requiring the Company to perform an impairment analysis on the retained portion of the equity method investment held within “Investments and noncurrent receivables” on the Condensed Consolidated Balance Sheet. The fair value of the retained equity method investment was estimated using a discounted cash flow model (a form of the income approach). The Company's assumptions in estimating fair value utilize Level 3 inputs and include, but are not limited to, projected revenue, gross margins, EBITDA margins, the weighted average costs of capital, and terminal growth rates. The Company determined the fair value of the retained equity method investment was below the carrying value and had no expectation the fair value would recover in the short-term due to the current economic environment. As a result, management concluded the impairment was other-than-temporary and recorded an impairment charge of $94 million in “Restructuring and asset related charges - net” in the interim Consolidated Statements of Operations related to the Electronics & Industrial segment. No impairment was required to be recorded for the portion of the equity method investment included within “Assets of discontinued operations.”
NOTE 7 - SUPPLEMENTARY INFORMATION
| | | | | | | | | | |
| Sundry Income (Expense) - Net | Three Months Ended March 31, | |
| In millions | 2022 | 2021 | | |
| Non-operating pension and other post-employment benefit costs | $ | 7 | | $ | 6 | | | |
| Interest income | 1 | | 4 | | | |
Net (loss) gain on divestiture and sales of other assets and investments 1 | (1) | | 27 | | | |
Foreign exchange losses, net | (5) | | (6) | | | |
| | | | |
Miscellaneous income (expenses) - net 2 | 1 | | (12) | | | |
| Sundry income (expense) - net | $ | 3 | | $ | 19 | | | |
1. The three months ended March 31, 2021 reflects income of $24 million related to the gain on sale of assets within the Electronics & Industrial segment.
2. The three months ended March 31, 2021 includes an impairment charge of approximately $15 million related to an asset sale, whose book value was adjusted to fair value when it was classified as held for sale.
Cash, Cash Equivalents and Restricted Cash
In connection with the cost sharing arrangement entered into as part of the MOU, as defined in Note 16, the Company is contractually obligated to make deposits into an escrow account to address potential future PFAS costs. At March 31, 2022, the Company had restricted cash of $53 million included within non-current “Restricted cash and cash equivalents” in the Condensed Consolidated Balance Sheets, the majority of which is attributable to the MOU cost sharing arrangement. Additional information regarding the MOU and the escrow account can be found in Note 16.
Accrued and Other Current Liabilities
"Accrued and other current liabilities" in the Condensed Consolidated Balance Sheets were $978 million at March 31, 2022 and $1,040 million at December 31, 2021. Accrued payroll, which is a component of "Accrued and other current liabilities," was $291 million at March 31, 2022 and $436 million at December 31, 2021. No other component of "Accrued and other current liabilities" was more than 5 percent of total current liabilities at March 31, 2022 and at December 31, 2021.
NOTE 8 - INCOME TAXES
Each year the Company files hundreds of tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. The ultimate resolution of such uncertainties is not expected to have a material impact on the Company's results of operations.
The Company's effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to tax attributes. The effective tax rate on continuing operations for the first quarter of 2022 was 16.8 percent, compared with an effective tax rate of (0.3) percent for the first quarter of 2021. The effective tax rate differential for the first quarter of 2022 was principally the result of a $94 million impairment charge of an equity method investment which resulted in a tax benefit of $29 million. The effective tax rate for the first quarter of 2021 was principally the result of a $59 million tax benefit related to the step-up in tax basis in the goodwill of the Company's European regional headquarters legal entity.
In connection with the integration of Laird PM, the Company completed certain internal restructurings that were determined to be tax free under the applicable sections of the Internal Revenue Code. If the aforementioned 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 liability.
Certain internal distributions and reorganizations that occurred during 2021 and 2020 in preparation for the N&B Transaction and the external distribution in 2021 qualified as tax-free transactions under the applicable sections of the Internal Revenue Code. If the aforementioned 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 liability. Under the N&B Tax Matters Agreement, the Company would generally be allocated such liability and not be indemnified, unless certain non-qualifying actions are undertaken by N&B or IFF. To the extent that the Company is responsible for any such liability, there could be a material adverse impact on the Company's business, financial condition, results of operations and cash flows in future reporting periods.
As a result of the M&M Businesses meeting the held for sale criteria in the first quarter of 2022, the Company recorded a net deferred tax benefit of $239 million in connection with certain anticipated internal stock restructurings. These restructurings involve both legal entities within the M&M Businesses and legal entities which are expected to remain with DuPont. The aforementioned net deferred tax benefit is included in “Income from discontinued operations, net of tax” in the interim Consolidated Statements of Operations. See Note 4 for additional information on the M&M Divestitures.
NOTE 9 - EARNINGS PER SHARE CALCULATIONS
The following tables provide earnings per share calculations for the three months ended March 31, 2022 and 2021:
| | | | | | | | |
| Net Income for Earnings Per Share Calculations - Basic & Diluted | Three Months Ended March 31, |
| In millions | 2022 | 2021 |
| Income from continuing operations, net of tax | $ | 232 | | $ | 386 | |
| Net income (loss) from continuing operations attributable to noncontrolling interests | 18 | | (2) | |
| | |
| | |
| Income from continuing operations attributable to common stockholders | $ | 214 | | $ | 388 | |
| | |
| | |
| Income from discontinued operations, net of tax | 276 | | 5,012 | |
| Net income from discontinued operations attributable to noncontrolling interests | 2 | | 6 | |
| Income from discontinued operations attributable to common stockholders | 274 | | 5,006 | |
| Net income attributable to common stockholders | $ | 488 | | $ | 5,394 | |
| | | | | | | | |
| Earnings Per Share Calculations - Basic | Three Months Ended March 31, |
| Dollars per share | 2022 | 2021 |
| |
| | |
| Earnings from continuing operations attributable to common stockholders | $ | 0.42 | | $ | 0.64 | |
| Earnings from discontinued operations, net of tax | 0.54 | | 8.28 | |
Earnings attributable to common stockholders 1 | $ | 0.95 | | $ | 8.92 | |
| | | | | | | | |
| Earnings Per Share Calculations - Diluted | Three Months Ended March 31, |
| Dollars per share | 2022 | 2021 |
| Earnings from continuing operations attributable to common stockholders | $ | 0.42 | | $ | 0.64 | |
| Earnings from discontinued operations, net of tax | 0.53 | | 8.26 | |
Earnings attributable to common stockholders 1 | $ | 0.95 | | $ | 8.90 | |
| | | | | | | | |
Share Count Information | Three Months Ended March 31, |
| Shares in millions | 2022 | 2021 |
| Weighted-average common shares - basic | 512.0 | | 604.8 | |
| Plus dilutive effect of equity compensation plans | 1.8 | | 1.5 | |
| | |
| Weighted-average common shares - diluted | 513.8 | | 606.3 | |
Stock options, restricted stock units, and performance-based restricted stock units excluded from EPS calculations 2 | 2.0 | | 2.2 | |
1.Earnings per share amounts are computed independently for income from continuing operations, income from discontinued operations and net income attributable to common stockholders. As a result, the per share amounts from continuing operations and discontinued operations may not equal the total per share amounts for net income attributable to common stockholders.
2.These outstanding options to purchase shares of common stock, restricted stock units, and performance-based restricted stock units were excluded from the calculation of diluted earnings per share because the effect of including them would have been antidilutive.
NOTE 10 - ACCOUNTS AND NOTES RECEIVABLE - NET
| | | | | | | | |
| In millions | March 31, 2022 | December 31, 2021 |
Accounts receivable – trade 1 | $ | 1,764 | | $ | 1,612 | |
| Notes receivable – trade | 25 | | 31 | |
Other 2 | 538 | | 516 | |
| Total accounts and notes receivable - net | $ | 2,327 | | $ | 2,159 | |
1.Accounts receivable – trade is net of allowances of $34 million at March 31, 2022 and $28 million at December 31, 2021. Allowances are equal to the estimated uncollectible amounts and current expected credit loss. That estimate is based on historical collection experience, current economic and market conditions, and review of the current status of customers' accounts.
2.Other includes receivables in relation to value added tax, indemnification assets, and general sales tax and other taxes. No individual group represents more than ten percent of total receivables.
NOTE 11 - INVENTORIES
| | | | | | | | |
| In millions | March 31, 2022 | December 31, 2021 |
| Finished goods | $ | 1,290 | | $ | 1,201 | |
Work in process | 475 | | 446 | |
| Raw materials | 360 | | 323 | |
| Supplies | 113 | | 116 | |
| Total inventories | $ | 2,238 | | $ | 2,086 | |
NOTE 12 - PROPERTY, PLANT, AND EQUIPMENT
| | | | | | | | | | | | | | | | | | |
| Estimated Useful Lives (Years) | March 31, 2022 | | December 31, 2021 |
| In millions |
| Land and land improvements | 1 | - | 25 | $ | 429 | | | $ | 440 | |
| Buildings | 1 | - | 50 | 1,950 | | | 1,954 | |
| Machinery, equipment, and other | 1 | - | 25 | 6,538 | | | 6,467 | |
| Construction in progress | | | | 966 | | | 1,034 | |
| Total property, plant and equipment | | | | $ | 9,883 | | | $ | 9,895 | |
| Total accumulated depreciation | | | | $ | 4,215 | | | $ | 4,142 | |
| Total property, plant and equipment - net | | | | $ | 5,668 | | | $ | 5,753 | |
| | | | | | | | |
| Three Months Ended March 31, |
| In millions | 2022 | 2021 |
| Depreciation expense | $ | 144 | | $ | 130 | |
NOTE 13 - NONCONSOLIDATED AFFILIATES
The Company's investments in companies accounted for using the equity method ("nonconsolidated affiliates") are recorded in "Investments and noncurrent receivables" in the Condensed Consolidated Balance Sheets. The Company's net investment in nonconsolidated affiliates at March 31, 2022 and December 31, 2021 is $719 million and $817 million, respectively. In the first quarter of 2022, the Company recorded an other-than-temporary impairment on an equity method investment. See Note 6 for more information.
The Company maintained an ownership interest in eight nonconsolidated affiliates at March 31, 2022.
Sales to nonconsolidated affiliates represented less than 2 percent of total net sales for the three months ended March 31, 2022 and 2021, respectively. Purchases from nonconsolidated affiliates represented less than 4 percent of “Cost of sales” for the three months ended March 31, 2022 and approximately 4 percent for the three months ended March 31, 2021.
NOTE 14 - GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amounts of goodwill during the three months ended March 31, 2022 were as follows:
| | | | | | | | | | | | | | |
| In millions | Electronics & Industrial | Water & Protection | Corporate & Other | Total |
| Balance at December 31, 2021 | $ | 9,583 | | $ | 6,801 | | $ | 597 | | $ | 16,981 | |
| | | | |
Currency Translation Adjustment | (38) | | (62) | | (3) | | (103) | |
| | | | |
| Balance at March 31, 2022 | $ | 9,545 | | $ | 6,739 | | $ | 594 | | $ | 16,878 | |
The Company tests goodwill for impairment annually during the fourth quarter, or more frequently when events or changes in circumstances indicate that fair value is below carrying value.
During the first quarter of 2022, in conjunction with the announcement of the M&M Divestitures, the Company realigned the Retained Businesses previously within the historic Mobility & Materials segment to a new operating segment within Corporate & Other (the "2022 Realignment"). The announcement of the M&M Divestitures and 2022 Realignment served as triggering events requiring the Company to perform impairment analyses related to goodwill carried by certain reporting units as of March 1, 2022. Goodwill impairment analyses were performed for reporting units impacted in the historic Mobility & Materials segment prior to the realignment, and no impairments were identified. As part of the 2022 Realignment, the Company assessed and re-defined certain reporting units effective March 1, 2022, including a reallocation of goodwill on a relative fair value basis, as applicable, to the newly identified reporting units and M&M Divestitures disposal groups. Goodwill impairment analyses were performed for the new reporting units reported within Corporate & Other impacted by the 2022 Realignment and no impairments were identified. The fair value of each reporting unit and M&M Divestitures disposal groups tested was estimated using a combination of a discounted cash flow model and/or market approach. The Company's assumptions in estimating fair value include, but are not limited to, projected revenue, gross margins, EBITDA margins, the weighted average costs of capital, the terminal growth rates, and derived multiples from comparable market transactions.
During the first quarter of 2021, in conjunction with the closing of the N&B Transaction, the Company changed its management and reporting structure (the “2021 Segment Realignment”), which served as a triggering event requiring the Company to perform an impairment analysis related to goodwill carried by certain reporting units as of February 1, 2021, prior to the realignment. As part of the 2021 Segment Realignment, the Company assessed and re-defined certain reporting units effective February 1, 2021, including reallocation of goodwill on a relative fair value basis, as applicable, to reporting units impacted. Goodwill impairment analyses were then performed for reporting units impacted and no impairments were identified. The fair value of each reporting unit tested was estimated using a combination of a discounted cash flow model and market approach. The Company's assumptions in estimating fair value include, but are not limited to, projected revenue, gross margins, EBITDA margins, the weighted average costs of capital, the terminal growth rates, and derived multiples from comparable market transactions.
The Company's analyses above used the discounted cash flow model (a form of the income approach) utilizing Level 3 unobservable inputs. The Company’s significant assumptions in these analyses include, but are not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate, and tax rates. The Company’s estimates of future cash flows are based on current regulatory and economic climates, recent operating results, and planned business strategies. These estimates could be negatively affected by changes in federal, state, or local regulations or economic downturns. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from the Company’s estimates. If the Company’s ongoing estimates of future cash flows are not met, the Company may have to record additional impairment charges in future periods. As referenced, the Company also uses a form of the market approach. As such, the Company believes the current assumptions and estimates utilized are both reasonable and appropriate.
Other Intangible Assets
The gross carrying amounts and accumulated amortization of other intangible assets by major class are as follows:
| | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | December 31, 2021 |
| In millions | Gross
Carrying
Amount | Accum Amort | Net | Gross Carrying Amount | Accum Amort | Net |
| Intangible assets with finite lives: | | | | | | |
| Developed technology | $ | 2,366 | | $ | (1,161) | | $ | 1,205 | | $ | 2,374 | | $ | (1,124) | | $ | 1,250 | |
| Trademarks/tradenames | 1,122 | | (515) | | 607 | | 1,125 | | (500) | | 625 | |
| Customer-related | 5,734 | | (2,343) | | 3,391 | | 5,806 | | (2,296) | | 3,510 | |
| Other | 113 | | (80) | | 33 | | 113 | | (80) | | 33 | |
| Total other intangible assets with finite lives | $ | 9,335 | | $ | (4,099) | | $ | 5,236 | | $ | 9,418 | | $ | (4,000) | | $ | 5,418 | |
| Intangible assets with indefinite lives: | | | | | | |
| Trademarks/tradenames | 804 | | — | | 804 | | 804 | | — | | 804 | |
| Total other intangible assets | 804 | | — | | 804 | | 804 | | — | | 804 | |
| Total | $ | 10,139 | | $ | (4,099) | | $ | 6,040 | | $ | 10,222 | | $ | (4,000) | | $ | 6,222 | |
As part of the 2022 Realignment, the Company reallocated its intangible assets with indefinite lives to align with the new segment structure. This served as a triggering event requiring the Company to perform an impairment analysis related to intangible assets with indefinite lives carried by its historic Mobility & Materials segment as of March 1, 2022, prior to the realignment. Subsequent to the realignment the Company realigned intangible assets with indefinite lives as applicable to align the intangible assets with indefinite lives with the new segment structure. Impairment analyses were then performed for the intangible assets with indefinite lives reported in Corporate & Other. No impairments were identified as a result of the analyses described above.
As part of the 2021 Segment Realignment, the Company reallocated its intangible assets with indefinite lives to align with the new segment structure. This served as a triggering event requiring the Company to perform an impairment analysis related to intangible assets with indefinite lives carried by its segments as of February 1, 2021, prior to the realignment. Subsequent to the realignment, the Company realigned intangible assets with indefinite lives as applicable to align the intangible assets with indefinite lives with the new segment structure. Impairment analyses were then performed for the intangible assets with indefinite lives carried by the segments after the realignment. No impairments were identified as a result of the analyses described above.
The following table provides the net carrying value of other intangible assets by segment:
| | | | | | | | |
| Net Intangibles by Segment | March 31, 2022 | December 31, 2021 |
| In millions |
| Electronics & Industrial | $ | 3,325 | | $ | 3,429 | |
| Water & Protection | 2,619 | | 2,686 | |
| Corporate & Other | 96 | | 107 | |
| Total | $ | 6,040 | | $ | 6,222 | |
Total estimated amortization expense for the remainder of 2022 and the five succeeding fiscal years is as follows:
| | | | | |
| Estimated Amortization Expense | |
| In millions | |
| Remainder of 2022 | $ | 449 | |
| 2023 | $ | 590 | |
| 2024 | $ | 559 | |
| 2025 | $ | 518 | |
| 2026 | $ | 490 | |
| 2027 | $ | 441 | |
NOTE 15 - SHORT-TERM BORROWINGS, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
The following tables summarizes the Company's short-term borrowings and finance lease obligations and long-term debt:
| | | | | | | | |
Short-term borrowings In millions | March 31, 2022 | December 31, 2021 |
Commercial paper 1 | $ | 404 | | $ | 150 | |
| Long-term debt due within one year | 1 | | — | |
| Total short-term borrowings and finance lease obligations | $ | 405 | | $ | 150 | |
1. The weighted-average interest rate on commercial paper was 0.89 percent at March 31, 2022 and 0.34 percent at December 31, 2021.
| | | | | | | | | | | | | | |
| Long-Term Debt | March 31, 2022 | December 31, 2021 |
| In millions | Amount | Weighted Average Rate | Amount | Weighted Average Rate |
Promissory notes and debentures 1 | | | | |
| Final maturity 2023 | $ | 2,800 | | 3.92 | % | $ | 2,800 | | 3.89 | % |
| Final maturity 2025 | 1,850 | | 4.49 | % | 1,850 | | 4.49 | % |
| Final maturity 2026 and thereafter | 6,050 | | 5.13 | % | 6,050 | | 5.13 | % |
| Other facilities: | | | | |
| Finance lease obligations | 2 | | | 2 | | |
| Less: Unamortized debt discount and issuance costs | 67 | | | 70 | | |
Less: Long-term debt due within one year | 1 | | | — | | |
| Total | $ | 10,634 | | | $ | 10,632 | | |
1. Represents senior unsecured notes (the "2018 Senior Notes"), which are senior unsecured obligations of the Company.
Principal Payments of long-term debt for the remainder of 2022 and the five succeeding fiscal years are as follows:
| | | | | | | | | | | | | | |
| Maturities of Long-Term Debt for Next Five Years at March 31, 2022 | Total |
| In millions |
| Remainder of 2022 | $ | — | |
| 2023 | $ | 2,800 | |
| 2024 | $ | — | |
| 2025 | $ | 1,850 | |
| 2026 | $ | — | |
| 2027 | $ | — | |
The estimated fair value of the Company's long-term borrowings was determined using Level 2 inputs within the fair value hierarchy, as described in Note 22. Based on quoted market prices for the same or similar issues, or on current rates offered to the Company for debt of the same remaining maturities, the fair value of the Company's long-term borrowings, not including long-term debt due within one year, was $11,709 million and $12,595 million at March 31, 2022 and December 31, 2021, respectively.
Available Committed Credit Facilities
The following table summarizes the Company's credit facilities:
| | | | | | | | | | | | | | | | | |
| Committed and Available Credit Facilities at March 31, 2022 | | |
| In millions | Effective Date | Committed Credit | Credit Available | Maturity Date | Interest |
Revolving Credit Facility, Five-year | May 2019 | $ | 3,000 | | $ | 2,990 | | May 2024 | Floating Rate |
364-day Revolving Credit Facility | April 2021 | 1,000 | | 1,000 | | April 2022 | Floating Rate |
| Total Committed and Available Credit Facilities | | $ | 4,000 | | $ | 3,990 | | | |
Intended Rogers Acquisition
On November 22, 2021, the Company entered into a two-year senior unsecured committed term loan agreement in the amount of $5.2 billion (the "2021 Term Loan Facility"). The 2021 Term Loan Facility is intended to fund the Intended Rogers Acquisition. The debt covenants and default provisions in the 2021 Term Loan Facility are consistent with those of the Five-Year Revolving Credit Facility and the $1 billion Revolving Credit Facility.
May 2020 Debt Offering
On May 1, 2020, the Company completed an underwritten public offering of senior unsecured notes (the “May 2020 Notes”) in the aggregate principal amount of $2 billion of 2.169 percent fixed rate Notes due May 1, 2023 (the “May 2020 Debt Offering”). The consummation of the N&B Transaction triggered the special mandatory redemption feature of the May 2020 Debt Offering. The Company redeemed the May 2020 Notes on May 13, 2021 and funded the redemption with proceeds from the Special Cash Payment.
Term Loan Facilities
On February 1, 2021, the Company terminated its fully drawn $3 billion term loan facilities. The termination triggered the repayment of the aggregate outstanding principal amount of $3 billion, plus accrued and unpaid interest through and including January 31, 2021. The Company funded the repayment with proceeds from the Special Cash Payment.
Revolving Credit Facilities
On April 12, 2022, the Company entered into a new $2.5 billion five-year revolving credit facility (the "2022 Five-Year Revolving Credit Facility"). As of the effectiveness of the 2022 Five-Year Revolving Credit Facility, the Company's prior $3 billion Five-Year Revolving Credit Facility entered in May 2019 was terminated. The 2022 Five-Year Revolving Credit Facility is generally expected to remain undrawn, and serve as a backstop to the Company's commercial paper and letter of credit issuance.
On April 12, 2022, the Company entered into an updated $1 billion 364-day revolving credit facility (the "2022 $1B Revolving Credit Facility") as the $1.0 billion 364-day revolving credit facility entered in April 2021 (the "2021 $1B Revolving Credit Facility") had an expiration date in mid-April 2022. As of the effectiveness of the 2022 $1B Revolving Credit Facility, the 2021 $1B Revolving Credit Facility was terminated.
Uncommitted Credit Facilities and Outstanding Letters of Credit
Unused bank credit lines on uncommitted credit facilities were approximately $750 million at March 31, 2022. These lines are available to support short-term liquidity needs and general corporate purposes including letters of credit. Outstanding letters of credit were approximately $153 million at March 31, 2022. These letters of credit support commitments made in the ordinary course of business.
Debt Covenants and Default Provisions
The Company's indenture covenants include customary limitations on liens, sale and leaseback transactions, and mergers and consolidations, subject to certain limitations. The 2018 Senior Notes also contain customary default provisions. The 2021 Term Loan Facility, the Five-Year Revolving Credit Facility and the 2021 $1B Revolving Credit Facility contain a financial covenant requiring that the ratio of Total Indebtedness to Total Capitalization for the Company and its consolidated subsidiaries not exceed 0.60. At March 31, 2022, the Company was in compliance with this financial covenant. There were no material changes to the debt covenants and default provisions at March 31, 2022.
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES
Litigation, Environmental Matters, and Indemnifications
The Company and certain subsidiaries are involved in various lawsuits, claims and environmental actions that have arisen in the normal course of business with respect to product liability, patent infringement, governmental regulation, contract and commercial litigation, as well as possible obligations to investigate and mitigate the effects on the environment of the disposal or release of certain substances at various sites. In addition, in connection with divestitures and the related transactions, the Company from time to time has indemnified and has been indemnified by third parties against certain liabilities that may arise in connection with, among other things, business activities prior to the completion of the respective transactions. The term of these indemnifications, which typically pertain to environmental, tax and product liabilities, is generally indefinite. The Company records liabilities for ongoing and indemnification matters when the information available indicates that it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated.
As of March 31, 2022, the Company has recorded indemnification assets of $20 million within "Accounts and notes receivable - net" and $232 million within "Deferred charges and other assets" and indemnification liabilities of $107 million within "Accrued and other current liabilities" and $177 million within "Other noncurrent obligations" within the Condensed Consolidated Balance Sheets.
The Company’s accruals discussed below for indemnification liabilities related to the binding Memorandum of Understanding (“MOU”) between Chemours, Corteva, EID and the Company and to the DowDuPont ("DWDP") Separation and Distribution Agreement and the Letter Agreement between the Company and Corteva (together the “Agreements”), are included in the balances above.
PFAS Stray Liabilities: Future Eligible PFAS Costs
On July 1, 2015, EID, a Corteva subsidiary since June 1, 2019, completed the separation of EID’s Performance Chemicals segment through the spin-off of Chemours to holders of EID common stock (the “Chemours Separation”). On June 1, 2019, the Company completed the separation of its agriculture business through the spin-off of Corteva, Inc. (“Corteva”), including Corteva’s subsidiary EID.
On January 22, 2021, the Company, Corteva, EID and Chemours entered into the MOU pursuant to which the parties have agreed to release certain claims that had been raised by Chemours including any claims arising out of or resulting from the process and manner in which EID structured or conducted the Chemours Separation, and any other claims that challenge the Chemours Separation or the assumption of Chemours Liabilities (as defined in the Chemours Separation Agreement) by Chemours and the allocation thereof, subject in each case to certain exceptions set forth in the MOU. In connection with the MOU, the confidential arbitration process regarding certain claims by Chemours was terminated in February 2021. The parties have further agreed not to bring any future, additional claims regarding the Chemours Separation Agreement or the MOU outside of arbitration.
Pursuant to the MOU, the parties have agreed to share certain costs associated with potential future liabilities related to alleged historical releases of certain PFAS out of pre-July 1, 2015 conduct (“eligible PFAS costs”) until the earlier to occur of (i) December 31, 2040, (ii) the day on which the aggregate amount of Qualified Spend, as defined in the MOU, is equal to $4 billion or (iii) a termination in accordance with the terms of the MOU. PFAS refers to per- or polyfluoroalkyl substances, which include perfluorooctanoic acids and its ammonium salts (“PFOA”).
The parties have agreed that, during the term of this sharing arrangement, Qualified Spend up to $4 billion will be borne 50 percent by Chemours and 50 percent, up to a cap of $2 billion, by the Company and Corteva. The Company and Corteva will split their 50 percent of Qualified Spend in accordance with the Agreements. After the term of this arrangement, Chemours’ indemnification obligations under the Chemours Separation Agreement would continue unchanged, subject in each case to certain exceptions set forth in the MOU.
In order to support and manage any potential future eligible PFAS costs, the parties also agreed to establish an escrow account. The MOU provides that (1) no later than each of September 30, 2021 and September 30, 2022, Chemours shall deposit $100 million into an escrow account and DuPont and Corteva shall together deposit $100 million in the aggregate into an escrow account and (2) no later than September 30 of each subsequent year through and including 2028, Chemours shall deposit $50 million into an escrow account and DuPont and Corteva shall together deposit $50 million in the aggregate into an escrow account. Subject to the terms and conditions set forth in the MOU, each party may be permitted to defer funding in any year (excluding 2021). Additionally, if on December 31, 2028, the balance of the escrow account (including interest) is less than $700 million, Chemours will make 50 percent of the deposits and DuPont and Corteva together will make 50 percent of the deposits necessary to restore the balance of the escrow account to $700 million. Such payments will be made in a series of
consecutive annual equal installments commencing on September 30, 2029 pursuant to the escrow account replenishment terms as set forth in the MOU. As of September 30, 2021, the initial escrow deposit was completed by all parties in accordance with the MOU. At March 31, 2022 and December 31, 2021, DuPont's $50 million deposit into the escrow account is reflected in "Restricted cash and cash equivalents" on the Condensed Consolidated Balance Sheet.
Under the Agreements, Divested Operations and Businesses ("DDOB") liabilities of EID not allocated to or retained by Corteva or the Company are categorized as relating to either (i) PFAS Stray Liabilities, if they arise out of actions related to or resulting from the development, testing, manufacture or sale of PFAS; or (ii) Non-PFAS Stray Liabilities, (and together with PFAS Stray Liabilities, the “EID Stray Liabilities”).
The Agreements provide that the Company and Corteva will each bear specified amounts plus an additional $200 million of Indemnifiable Losses, described below, in relation to certain EID Stray Liabilities. The Agreements further provide that the Company and Corteva will each bear 50 percent, $150 million each, of the first $300 million of total Indemnifiable Losses related to PFAS Stray Liabilities. When the companies meet their respective $150 million threshold, Indemnifiable Losses related to PFAS Stray Liabilities will be borne 71 percent by DuPont and 29 percent by Corteva. Indemnifiable Losses up to $150 million incurred for PFAS Stray Liabilities are credited against each company’s $200 million threshold.
Whenever Corteva or DuPont meets its $200 million threshold, the other would generally bear all Non-PFAS Stray Liabilities until meeting its $200 million threshold. Thereafter, DuPont will bear 71 percent and Corteva will bear 29 percent of Indemnifiable Losses related to Non-PFAS Stray Liabilities.
Indemnifiable Losses, as defined in the DWDP Separation and Distribution Agreement, include, among other things, attorneys’, accountants’, consultants’ and other professionals’ fees and expenses incurred in the investigation or defense of EID Stray Liabilities.
In connection with the MOU and the Agreements, the Company has recognized the following indemnification liabilities related to eligible PFAS costs:
| | | | | | | | | | | |
| Indemnified Liabilities Related to the MOU |
| In millions | March 31, 2022 | December 31, 2021 | Balance Sheet Classification |
| Current indemnified liabilities | $ | 41 | | $ | 37 | | Accrued and other current liabilities |
| Long-term indemnified liabilities | $ | 86 | | $ | 89 | | Other noncurrent obligations |
Total indemnified liabilities accrued under the MOU 1, 2 | $ | 127 | | $ | 126 | | |
| | | |
1.As of March 31, 2022 and December 31, 2021, total indemnified liabilities accrued include $108 million and $112 million, respectively, related to Chemours environmental remediation activities at their site in Fayetteville, North Carolina under the Consent Order between Chemours and the North Carolina Department of Environmental Quality (the "NC DEQ").
2.In addition to the above, as of December 31, 2021, the Company had recognized a liability of $12.5 million related to the settlement agreement between Chemours, Corteva and DuPont and Delaware's Attorney General, discussed below.
Future charges associated with the MOU would be recognized over the term of the agreement as a component of income from discontinued operations to the extent liabilities become probable and estimable.
In 2004, EID settled a West Virginia state court class action, Leach v. E. I. du Pont de Nemours and Company, which alleged that PFOA from EID’s former Washington Works facility had contaminated area drinking water supplies and affected the health of area residents. Members of the Leach class have standing to pursue personal injury claims for just six health conditions that an expert panel appointed under the Leach settlement reported in 2012 had a “probable link” (as defined in the settlement) with PFOA: pregnancy-induced hypertension, including preeclampsia; kidney cancer; testicular cancer; thyroid disease; ulcerative colitis; and diagnosed high cholesterol. In 2017, Chemours and EID each paid $335 million to settle the multi-district litigation in the U.S. District Court for the Southern District of Ohio (“Ohio MDL”), thereby resolving claims of about 3,550 plaintiffs alleging injury from exposure to PFOA in drinking water. The 2017 settlement did not resolve claims of Leach class members who did not have claims in the Ohio MDL or whose claims are based on diseases first diagnosed after February 11, 2017. Since the 2017 settlement about 100 additional cases alleging personal injury, including kidney and testicular cancer claims, were filed or noticed and pending in the Ohio MDL.
On January 21, 2021, EID and Chemours entered into settlement agreements with plaintiffs’ counsel representing the Ohio MDL plaintiffs providing for a settlement of cases and claims in the Ohio MDL, except as noted below (the “Settlement”). The total settlement amount was $83 million in cash with each of the Company and EID contributing $27 million and Chemours contributing $29 million. At June 30, 2021 the Company had paid in full its $27 million contribution. The Settlement was entered into solely by way of compromise and settlement and is not in any way an admission of liability or fault by the Company, Corteva, EID or Chemours. In connection with the Settlement, in April 2021 the plaintiffs filed a motion to terminate the Ohio MDL. The case captioned “Abbott v. E. I. du Pont de Nemours and Company” is a personal injury action that is not included in the Settlement of the Ohio MDL. DuPont was not named party in the Leach case or the Ohio MDL and is not a named party in the Abbott case.
As of March 31, 2022, there are various cases alleging damages due to PFAS which are discussed below. Such actions often include additional claims based on allegations that the transfer by EID of certain PFAS liabilities to Chemours resulted in a fraudulent conveyance or voidable transaction. With the exception of the fraudulent conveyance claims, which are excluded from the MOU, legal fees, expenses, costs, and any potential liabilities for eligible PFAS costs presented by the following matters will be shared as defined in the MOU between Chemours, EID, Corteva and DuPont.
Beginning in April 2019, several dozen lawsuits alleging water contamination from the use of PFAS-containing aqueous firefighting foams (“AFFF”) were filed against EID and Chemours, in addition to 3M and other AFFF manufacturers. The majority of these lawsuits were consolidated in a multi-district litigation docket in federal court in South Carolina (the “SC MDL”). Since then, the SC MDL has grown and contains approximately 2,400 cases. Most of the actions in the SC MDL identify DuPont as a defendant only for fraudulent transfer claims related to the Chemours Separation and the DowDuPont separations. Generally, the SC MDL contains multiple types of lawsuits including, but not limited to, approximately 2,160 personal injury cases, state attorneys general natural resource damages cases, and water provider contamination cases. Three of the water provider contamination cases have been selected by the court as bellwether cases. The court has encouraged all parties to discuss resolution of the water provider category of cases. Consistent with the court’s instruction and under the mutual obligations of the MOU, Chemours, Corteva/EID and DuPont, together, are engaged with plaintiffs’ counsel on these cases. DuPont has never made or sold AFFF, perfluorooctanesulfonic acid ("PFOS") or PFOS containing products.
There are also state attorneys general lawsuits against DuPont, outside of the SC MDL. These also claim environmental contamination by certain PFAS compounds but distinct from AFFF. Generally, the states raise common law tort claims and seek economic impact damages for alleged harm to natural resources, punitive damages, present and future costs to cleanup contamination from certain PFAS compounds, and to abate the alleged nuisance. Most of these actions include fraudulent transfer claims related to the Chemours Separation and the DowDuPont separations.
In July 2021, Chemours, Corteva (for itself and EID) and DuPont reached a resolution with the State of Delaware that avoids litigation and addresses potential natural resources damages from known historical and current releases by the companies in or affecting Delaware. The resolution releases these potential state claims arising from the environmental impacts of various chemicals, including PFAS, across all current and historical locations. Consistent with the MOU, Chemours will bear 50 percent or $25 million of the $50 million settlement and Corteva and DuPont will each bear $12.5 million. The Company paid its portion of the settlement in January 2022. The settlement also calls for a potential Supplemental Payment to Delaware up to a total of $25 million funded 50 percent by Chemours and 50 percent by Corteva and DuPont, jointly, under certain circumstances which are not deemed probable.
Chemours, Corteva, DuPont and certain of their respective Dutch entities, received a civil summons filed before the Court of Rotterdam, the Netherlands, on behalf of four municipalities neighboring the Chemours Dordrecht facility. The municipalities are seeking liability declarations relating to the Dordrecht site’s current and historical PFAS operations and emissions.
In addition to the above matters, the Company is a named party in various other legal matters that make claims related to PFAS, for which the costs of litigation and future liabilities, if any, are eligible PFAS costs under the MOU and Indemnification Losses under the Agreements. These matters include lawsuits filed by water districts and private water companies in New Jersey and California generally alleging contamination of water systems.
There are pending cases that make claims related to PFAS that have been filed against Chemours and Corteva/EID in which the Company is not a named party, but for which the costs of litigation and future liabilities, if any, are or may be eligible PFAS costs under the MOU and Indemnification Losses under the Agreements.
While Management believes it has appropriately estimated the liability associated with eligible PFAS matters and Indemnifiable Losses as of the date of this report, it is reasonably possible that the Company could incur additional eligible PFAS costs and Indemnifiable Losses in excess of the amounts accrued. These additional costs could have a significant effect on the Company’s financial condition and/or cash flows in the period in which they occur; however, costs qualifying as Qualified Spend are limited by the terms of the MOU.
Other Litigation Matters
In addition to the matters described above, the Company is party to claims and lawsuits arising out of the normal course of business with respect to product liability, patent infringement, governmental regulation, contract and commercial litigation, and other actions. Certain of these actions may purport to be class actions and seek damages in very large amounts. As of March 31, 2022, the Company has liabilities of $18 million associated with these other litigation matters. It is the opinion of the Company’s management that the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, financial condition and cash flows of the Company. In accordance with its accounting policy for litigation matters, the Company will expense litigation defense costs as incurred, which could be significant to the Company’s financial condition and/or cash flows in the period.
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. At March 31, 2022, the Company had accrued obligations of $208 million for probable environmental remediation and restoration costs. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the Condensed Consolidated Balance Sheets. It is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration.
The accrued environmental obligations include the following:
| | | | | | | | | | | |
| Environmental Accrued Obligations |
| In millions | March 31, 2022 | December 31, 2021 | Potential exposure above the amount accrued 1 |
| Environmental remediation liabilities not subject to indemnity | $ | 43 | | $ | 43 | | $ | 102 | |
| | | |
| Environmental remediation indemnified liabilities: | | | |
Indemnifications related to Dow and Corteva 2 | 45 | | 46 | | 66 | |
MOU related obligations (discussed above) 3 | 120 | | 116 | | 66 | |
| Total environmental related liabilities | $ | 208 | | $ | 205 | | $ | 234 | |
1.The environmental accrual represents management’s best estimate of the costs for remediation and restoration with respect to environmental matters, although it is reasonably possible that the ultimate cost with respect to these particular matters could range above the amount accrued.
2.Pursuant to the DWDP Separation and Distribution Agreement, the Company is required to indemnify Dow and Corteva for certain Non-PFAS clean-up responsibilities and associated remediation costs.
3.The MOU related obligations are included in the Indemnified Liabilities Related to the MOU presented above. In November 2021, Chemours received additional notices from the NC DEQ related to potential PFAS contamination of groundwater. The Company is unable to reasonably estimate the potential impact on its indemnification liability due to the inherent uncertainties given the early stage of the process.
NOTE 17 - LEASES
The lease cost for operating leases were as follows:
| | | | | | | | | | |
| Three Months Ended March 31, | |
| In millions | 2022 | 2021 | | |
| Operating lease costs | $ | 27 | | $ | 27 | | | |
Operating cash flows from operating leases were $27 million for the three months ended March 31, 2022 and 2021.
New operating lease assets and liabilities entered into during the three months ended March 31, 2022 and 2021 were $12 million and $14 million, respectively. Supplemental balance sheet information related to leases was as follows:
| | | | | | | | |
| In millions | March 31, 2022 | December 31, 2021 |
Operating Leases | | |
Operating lease right-of-use assets 1 | $ | 419 | | $ | 422 | |
Current operating lease liabilities 2 | 93 | | 92 | |
Noncurrent operating lease liabilities 3 | 332 | | 337 | |
Total operating lease liabilities | $ | 425 | | $ | 429 | |
1.Included in "Deferred charges and other assets" in the Condensed Consolidated Balance Sheet.
2.Included in "Accrued and other current liabilities" in the Condensed Consolidated Balance Sheet.
3.Included in "Other noncurrent obligations" in the Condensed Consolidated Balance Sheet.
Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide the lessor’s implicit rate, the Company uses its incremental borrowing rate at the commencement date in determining the present value of lease payments.
| | | | | | | | |
| Lease Term and Discount Rate for Operating Leases | March 31, 2022 | December 31, 2021 |
| Weighted-average remaining lease term (years) | 7.58 | 8.50 |
| Weighted average discount rate | 1.80 | % | 2.01 | % |
Maturities of lease liabilities were as follows:
| | | | | |
| Maturity of Lease Liabilities at March 31, 2022 | Operating Leases |
| In millions |
| Remainder of 2022 | $ | 78 | |
| 2023 | 86 | |
| 2024 | 71 | |
| 2025 | 49 | |
| 2026 | 35 | |
| 2027 and thereafter | 148 | |
| Total lease payments | $ | 467 | |
| Less: Interest | 42 | |
| Present value of lease liabilities | $ | 425 | |
The Company has leases in which it is the lessor, with the largest being a result of the N&B transaction. In connection with the N&B Transaction, DuPont entered into leasing agreements with IFF, whereby DuPont is leasing certain properties, including office spaces and R&D laboratories to IFF. These leases are classified as operating leases and lessor income and related expenses are not significant to the Company's Condensed Consolidated Balance Sheet or interim Consolidated Statement of Operations. Lease agreements where the Company is the lessor have final expirations through 2036.
NOTE 18 - STOCKHOLDERS' EQUITY
Share Repurchase Program
On June 1, 2019, the Company's Board of Directors approved a $2 billion share buyback program ("2019 Share Buyback Program"), which expired on June 1, 2021. At the expiry of the 2019 Share Buyback Program, the Company had repurchased and retired a total of 29.9 million shares at a cost of $2 billion.
In the first quarter of 2021, the Company's Board of Directors authorized a $1.5 billion share buyback program, which expires on June 30, 2022 ("2021 Share Buyback Program"). As of March 31, 2022, the Company completed the program, and repurchased and retired a total of 19.6 million shares for $1.5 billion under the 2021 Share Buyback Program.
In February 2022, the Company's Board of Directors authorized an additional $1.0 billion share buyback program which expires on March 31, 2023, (the "2022 Share Buyback Program"). As of March 31, 2022, the Company had not repurchased shares under the 2022 Share Buyback Program.
Accumulated Other Comprehensive Loss
The following table summarizes the activity related to each component of accumulated other comprehensive loss ("AOCL") for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Loss | | Cumulative Translation Adj | Pension and OPEB | Derivative Instruments | Total |
| In millions |
| 2021 | | | | | |
| Balance at January 1, 2021 | | $ | 470 | | $ | (425) | | $ | (1) | | $ | 44 | |
| Other comprehensive (loss) income before reclassifications | | (477) | | 8 | | — | | (469) | |
Amounts reclassified from accumulated other comprehensive loss | | — | | 4 | | — | | 4 | |
| Split-off of N&B reclassification adjustment | | 184 | | 73 | | 1 | | 258 | |
| Net other comprehensive (loss) income | | $ | (293) | | $ | 85 | | $ | 1 | | $ | (207) | |
| Balance at March 31, 2021 | | $ | 177 | | $ | (340) | | $ | — | | $ | (163) | |
| 2022 | | | | | |
| Balance at January 1, 2022 | | $ | (88) | | $ | 73 | | $ | 56 | | $ | 41 | |
| Other comprehensive (loss) income before reclassifications | | (265) | | (6) | | 11 | | (260) | |
Amounts reclassified from accumulated other comprehensive loss | | — | | (1) | | — | | (1) | |
| Net other comprehensive (loss) income | | $ | (265) | | $ | (7) | | $ | 11 | | $ | (261) | |
| Balance at March 31, 2022 | | $ | (353) | | $ | 66 | | $ | 67 | | $ | (220) | |
The tax effects on the net activity related to each component of other comprehensive income (loss) were not significant for the three months ended March 31, 2022 and 2021.
A summary of the reclassifications out of AOCL for the three months ended March 31, 2022 and 2021 is provided as follows:
| | | | | | | | | | | |
| Reclassifications Out of Accumulated Other Comprehensive Loss | Three Months Ended March 31, | Income Classification |
| In millions | 2022 | 2021 |
| | | |
| | | |
| | | |
| Cumulative translation adjustments | $ | — | | $ | 184 | | See (1) below |
| Pension and other post-employment benefit plans | $ | (1) | | $ | 106 | | See (1) below |
| Tax (benefit) expense | — | | (29) | | See (1) below |
After tax | $ | (1) | | $ | 77 | | |
| Derivative instruments | $ | — | | $ | 1 | | See (1) below |
| Total reclassifications for the period, after tax | $ | (1) | | $ | 262 | | |
1. The activity for the three months ended March 31, 2022 is classified within the "Sundry income (expense) - net". The activity for the three months ended March 31, 2021 is classified almost entirely within "Income (loss) from discontinued operations, net of tax" as part of the N&B Transaction, with a portion classified within "Sundry income (expense) - net" and "Provision for income taxes on continuing operations" as part of continuing operations.
NOTE 19 - PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS
A summary of the Company's pension plans and other post-employment benefits can be found in Note 19 to the Consolidated Financial Statements included in the Company’s 2021 Annual Report.
The following sets forth the components of the Company's net periodic benefit (credit) cost for defined benefit pension plans:
| | | | | | | | |
| Net Periodic Benefit (Credit) Cost for All Plans | Three Months Ended March 31, |
| In millions | 2022 | 2021 |
Service cost 1 | $ | 12 | | $ | 15 | |
Interest cost 2 | 14 | | 11 | |
Expected return on plan assets 3 | (27) | | (28) | |
Amortization of prior service credit 4 | (1) | | (1) | |
Amortization of unrecognized net loss 5 | 1 | | 3 | |
Curtailment/settlement 6 | — | | 2 | |
| Net periodic benefit (credit) cost - total | $ | (1) | | $ | 2 | |
| Less: Net periodic benefit credit - discontinued operations | (3) | | — | |
| Net periodic benefit cost - continuing operations | $ | 2 | | $ | 2 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
1. The service cost from continuing operations was $9 million and $8 million for the three months ended March 31, 2022 and 2021, respectively, for significant plans.
2. The interest cost from continuing operations was $13 million and $10 million for the three months ended March 31, 2022 and 2021, respectively, for significant plans.
3. The expected return on plan assets from continuing operations was $21 million and $20 million for the three months ended March 31, 2022 and 2021, respectively, for significant plans.
4. The amortization of prior service credit from continuing operations was immaterial for the three months ended March 31, 2022 and a $1 million gain for the three months ended March 31, 2021, for significant plans.
5. The amortization of unrecognized net loss from continuing operations was $1 million and $3 million for the three months ended March 31, 2022 and 2021, respectively, for significant plans.
6. The curtailment and settlement loss from continuing operations was immaterial for the three months ended March 31, 2022 and $2 million for the three months ended March 31, 2021, for significant plans.
The continuing operations portion of the net periodic benefit (credit) cost, other than the service cost component, is included in "Sundry income (expense) - net" in the interim Consolidated Statements of Operations.
DuPont expects to make additional contributions in the aggregate of approximately $65 million by year-end 2022.
NOTE 20 - STOCK-BASED COMPENSATION
A summary of the Company's stock-based compensation plans can be found in Note 20 to the Consolidated Financial Statements included in the Company's 2021 Annual Report.
In the second quarter of 2020, the stockholders of DuPont approved the DuPont 2020 Equity and Incentive Plan (the "2020 Plan") which allows the Company to grant options, share appreciation rights, restricted shares, restricted stock units ("RSUs"), share bonuses, other share-based awards, cash awards, or any combination of the foregoing. Under the 2020 Plan, a maximum of 17 million shares of common stock are available for award as of March 31, 2022.
DuPont recognized share-based compensation expense in continuing operations of $19 million and $15 million for the three months ended March 31, 2022 and 2021, respectively. The income tax benefits related to stock-based compensation arrangements were $4 million and $3 million for the three months ended March 31, 2022 and 2021, respectively.
In the first quarter of 2022, the Company granted 0.7 million RSUs, 0.5 million stock options and 0.3 million PSUs. The weighted-average fair values per share associated with the grants were $75.12 per RSU, $17.41 per stock option and $81.55 per PSU. The stock options had a weighted-average exercise price per share of $75.05.
NOTE 21 - FINANCIAL INSTRUMENTS
The following table summarizes the fair value of financial instruments at March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Financial Instruments | March 31, 2022 | December 31, 2021 |
| In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value |
Cash equivalents | $ | 587 | | $ | — | | $ | — | | $ | 587 | | $ | 841 | | $ | — | | $ | — | | $ | 841 | |
Restricted cash equivalents 1 | $ | 62 | | $ | — | | $ | — | | $ | 62 | | $ | 65 | | $ | — | | $ | — | | $ | 65 | |
| | | | | | | | |
| | | | | | | | |
| Total cash and restricted cash equivalents | $ | 649 | | $ | — | | $ | — | | $ | 649 | | $ | 906 | | $ | — | | $ | — | | $ | 906 | |
Long-term debt including debt due within one year | $ | (10,634) | | $ | — | | $ | (1,075) | | $ | (11,709) | | $ | (10,632) | | $ | — | | $ | (1,963) | | $ | (12,595) | |
| Derivatives relating to: | | | | | | | | |
Net investment hedge 2 | — | | 89 | | — | | 89 | | — | | 74 | | — | | 74 | |
Foreign currency 3,4 | — | | 25 | | (26) | | (1) | | — | | 5 | | (10) | | (5) | |
| Total derivatives | $ | — | | $ | 114 | | $ | (26) | | $ | 88 | | $ | — | | $ | 79 | | $ | (10) | | $ | 69 | |
1.At March 31, 2022 there was $9 million of restricted cash classified as "Other current assets" and $53 million classified as "Restricted cash and cash equivalents" in the Condensed Consolidated Balance Sheets. At December 31, 2021 there was $12 million of restricted cash classified as "Other current assets" and $53 million classified as "Restricted cash and cash equivalents" in the Condensed Consolidated Balance Sheet. See Note 7 for more information on restricted cash.
2.Classified as "Deferred charges and other assets" in the Condensed Consolidated Balance Sheets.
3.Classified as "Other current assets" and "Accrued and other current liabilities" in the Condensed Consolidated Balance Sheets.
4.Presented net of cash collateral where master netting arrangements allow.
Derivative Instruments
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the Company enters into contractual arrangements (derivatives) to reduce its exposure to foreign currency, interest rate and commodity price risks. The Company has established a variety of derivative programs to be utilized for financial risk management. These programs reflect varying levels of exposure coverage and time horizons based on an assessment of risk.
Derivative programs have procedures and controls and are approved by the Corporate Financial Risk Management Committee, consistent with the Company's financial risk management policies and guidelines. Derivative instruments used are forwards, options, futures and swaps.
The Company's financial risk management procedures also address counterparty credit approval, limits and routine exposure monitoring and reporting. The counterparties to these contractual arrangements are major financial institutions and major commodity exchanges. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company utilizes collateral support annex agreements with certain counterparties to limit its exposure to credit losses. The Company anticipates performance by counterparties to these contracts and therefore no material loss is expected. Market and counterparty credit risks associated with these instruments are regularly reported to management.
The notional amounts of the Company's derivative instruments were as follows:
| | | | | | | | |
| Notional Amounts | March 31, 2022 | December 31, 2021 |
| In millions |
| Derivatives designated as hedging instruments: | | |
| Net investment hedge | $ | 1,000 | | $ | 1,000 | |
| Derivatives not designated as hedging instruments: | | |
Foreign currency contracts 1 | $ | 170 | | $ | (625) | |
| | |
1.Presented net of contracts bought and sold.
Derivatives Designated in Hedging Relationships
Net Foreign Investment Hedge
In the second quarter of 2021, the Company entered into a fixed-for-fixed cross currency swaps with an aggregate notional amount totaling $1 billion to hedge the variability of exchange rate impacts between the U.S. Dollar and Euro. Under the terms of the cross-currency swap agreement, the Company notionally exchanged $1 billion at an interest rate of 4.73% for €819 million at a weighted average interest rate of 3.26%. The cross-currency swap is designated as a net investment hedge and expires on November 15, 2028.
The Company has made an accounting policy election to account for the net investment hedge using the spot method. The Company has also elected to amortize the excluded components in interest expense in the related quarterly accounting period that such interest is accrued. The cross-currency swap is marked to market at each reporting date and any unrealized gains or losses are included in unrealized currency translation adjustments within AOCL, net of amounts associated with excluded components which are recognized in interest expense in the interim Consolidated Statements of Operations.
Derivatives not Designated in Hedging Relationships
Foreign Currency Contracts
The Company routinely uses forward exchange contracts to reduce its net exposure, by currency, related to foreign currency-denominated monetary assets and liabilities of its operations so that exchange gains and losses resulting from exchange rate changes are minimized. The netting of such exposures precludes the use of hedge accounting; however, the required revaluation of the forward contracts and the associated foreign currency-denominated monetary assets and liabilities intends to achieve a minimal earnings impact, after taxes. The Company may use foreign currency exchange contracts to offset a portion of the Company's exposure to certain foreign currency-denominated revenues so that gains and losses on the contracts offset changes in the USD value of the related foreign currency-denominated revenues.
Effect of Derivative Instruments
Foreign currency derivatives not designated as hedges are used to offset foreign exchange gains or losses resulting from the underlying exposures of foreign currency-denominated assets and liabilities. The amount charged on a pre-tax basis related to foreign currency derivatives not designated as a hedge, which was included in “Sundry income (expense) - net” in the interim Consolidated Statements of Operations, was a loss of $29 million and $20 million for the three months ended March 31, 2022 and 2021, respectively. The income statement effects of other derivatives were immaterial.
NOTE 22 - FAIR VALUE MEASUREMENTS
Fair Value Measurements on a Recurring Basis
The following tables summarize the basis used to measure certain assets and liabilities at fair value on a recurring basis:
| | | | | | | |
Basis of Fair Value Measurements on a Recurring Basis at March 31, 2022 | Significant Other Observable Inputs
(Level 2) | | |
| In millions |
| Assets at fair value: | | | |
Cash equivalents and restricted cash equivalents 1 | $ | 649 | | | |
| | | |
Derivatives relating to: 2 | | | |
| Net investment hedge | 89 | | | |
Foreign currency contracts 3 | 42 | | | |
| Total assets at fair value | $ | 780 | | | |
| Liabilities at fair value: | | | |
Long-term debt including debt due within one year 4 | $ | 11,709 | | | |
Derivatives relating to: 2 | | | |
| | | |
Foreign currency contracts 3 | 43 | | | |
| Total liabilities at fair value | $ | 11,752 | | | |
1. Treasury bills, time deposits, and money market funds included in "Cash and cash equivalents" and money market funds included in "Other current assets" in the Condensed Consolidated Balance Sheets and held at amortized cost, which approximates fair value.
2. See Note 21 for the classification of derivatives in the Condensed Consolidated Balance Sheets.
3. Asset and liability derivatives subject to an enforceable master netting arrangement with the same counterparty are presented on a net basis in the Condensed Consolidated Balance Sheets. The offsetting counterparty and cash collateral netting amounts for foreign currency contracts were $17 million for both assets and liabilities as of March 31, 2022.
4. Fair value is based on quoted market prices for the same or similar issues, or on current rates offered to the company for debt of the same remaining maturities and terms.
| | | | | |
Basis of Fair Value Measurements on a Recurring Basis at December 31, 2021 | Significant Other Observable Inputs
(Level 2) |
| In millions |
| Assets at fair value: | |
Cash equivalents and restricted cash equivalents 1 | $ | 906 | |
| |
Derivatives relating to: 2 | |
| Net investment hedge | 74 | |
Foreign currency contracts 3 | 11 | |
| Total assets at fair value | $ | 991 | |
| Liabilities at fair value: | |
Long-term debt including debt due within one year 4 | $ | 12,595 | |
Derivatives relating to: 2 | |
Foreign currency contracts 3 | 16 | |
| Total liabilities at fair value | $ | 12,611 | |
1. Treasury bills, time deposits, and money market funds included in "Cash and cash equivalents" and money market funds included in "Other current assets" in the Condensed Consolidated Balance Sheets and held at amortized cost, which approximates fair value.
2. See Note 21 for the classification of derivatives in the Condensed Consolidated Balance Sheets.
3. Asset and liability derivatives subject to an enforceable master netting arrangement with the same counterparty are presented on a net basis in the Condensed Consolidated Balance Sheets. The offsetting counterparty and cash collateral netting amounts were $6 million for both assets and liabilities as of December 31, 2021.
4. Fair value is based on quoted market prices for the same or similar issues, or on current rates offered to the company for debt of the same remaining maturities and terms.
Fair Value Measurements on a Nonrecurring Basis
In the first quarter of 2022, the Company recorded an other-than-temporary impairment, classified as Level 3 measurements, on an equity method investment. See Note 6 for further discussion of these fair value measurements.
NOTE 23 - SEGMENTS AND GEOGRAPHIC REGIONS
Effective February 2022, the revenues and certain expenses of the M&M Businesses are classified as discontinued operations in the current and historical periods. In addition, the Retained Businesses previously reported in the historic Mobility & Materials segment are reported in Corporate & Other. These reporting changes have been retrospectively applied for all periods presented.
Mobility & Material businesses costs classified as discontinued operations include only direct operating expenses incurred by the M&M Businesses which the Company will cease to incur upon the close of the M&M Divestitures. Indirect costs, such as those related to corporate and shared service functions previously allocated to the M&M Businesses, do not meet the criteria for discontinued operations and remain reported within continuing operations. A portion of these indirect costs include costs related to activities the Company will continue to undertake post-closing of the M&M Divestiture, and for which it will be reimbursed (“Future Reimbursable Indirect Costs”). Future Reimbursable Indirect Costs are reported within continuing operations but are excluded from operating EBITDA as defined below. The remaining portion of these indirect costs is not subject to future reimbursement (“Stranded Costs”). Stranded Costs are reported within continuing operations in Corporate & Other and are included within Operating EBITDA.
The Company's measure of profit/loss for segment reporting purposes is Operating EBITDA as this is the manner in which the Company's chief operating decision maker ("CODM") assesses performance and allocates resources. The Company defines Operating EBITDA as earnings (i.e., “Income from continuing operations before income taxes") before interest, depreciation, amortization, non-operating pension / OPEB benefits / charges, and foreign exchange gains / losses, excluding Future Reimbursable Indirect Costs, and adjusted for significant items. Reconciliations of these measures are provided on the following pages.
The reporting changes have been retrospectively reflected in the segment results for all periods presented.
| | | | | | | | | | | | | | |
| Segment Information | Electronics. & Industrial | Water & Protection | Corporate & Other 1 | Total |
| In millions |
| Three months ended March 31, 2022 | | | | |
| Net sales | $ | 1,536 | | $ | 1,429 | | $ | 309 | | $ | 3,274 | |
Operating EBITDA 2 | $ | 476 | | $ | 341 | | $ | 1 | | $ | 818 | |
Equity in earnings of nonconsolidated affiliates | $ | 10 | | $ | 14 | | $ | 2 | | $ | 26 | |
| Three months ended March 31, 2021 | | | | |
| Net sales | $ | 1,300 | | $ | 1,328 | | $ | 389 | | $ | 3,017 | |
Operating EBITDA 2 | $ | 436 | | $ | 355 | | $ | 12 | | $ | 803 | |
| Equity in earnings of nonconsolidated affiliates | $ | 9 | | $ | 12 | | $ | 2 | | $ | 23 | |
1.Corporate & Other includes activities of the Retained Businesses, Biomaterials and previously divested businesses.
2.A reconciliation of "Income (loss) from continuing operations, net of tax" to Operating EBITDA is provided below.
| | | | | | | | | | | |
| Reconciliation of "Income (loss) from continuing operations, net of tax" to Operating EBITDA for the Three Months Ended March 31, 2022 and 2021 | Three Months Ended March 31, |
| In millions | 2022 | 2021 |
| Income from continuing operations, net of tax | $ | 232 | | $ | 386 | |
| + | Provision for (benefit from) income taxes on continuing operations | 47 | | (1) | |
| Income from continuing operations before income taxes | $ | 279 | | $ | 385 | |
| + | Depreciation and amortization | 297 | | 255 | |
| - | Interest income 1 | 1 | | 4 | |
| + | Interest expense | 118 | | 146 | |
| - | Non-operating pension/OPEB benefit 1 | 7 | | 6 | |
| - | Foreign exchange losses, net 1 | (5) | | (6) | |
| + | Future reimbursable indirect costs | 16 | | 16 | |
| - | Significant items | (111) | | (5) | |
| Operating EBITDA | $ | 818 | | $ | 803 | |
1.Included in "Sundry income (expense) - net."
The following tables summarize the pre-tax impact of significant items by segment that are excluded from Operating EBITDA above:
| | | | | | | | | | | | | | |
| Significant Items by Segment for the Three Months Ended March 31, 2022 | Electronics & Industrial | Water & Protection | Corporate & Other | Total |
| In millions |
Acquisition, integration and separation costs 1 | $ | (1) | | $ | — | | $ | (7) | | $ | (8) | |
Restructuring and asset related charges - net 2 | (1) | | (3) | | (3) | | (7) | |
Asset impairment charges 3 | (94) | | — | | — | | (94) | |
Intended Rogers Acquisition financing fees 4 | — | | — | | (2) | | (2) | |
| Total | $ | (96) | | $ | (3) | | $ | (12) | | $ | (111) | |
1. Acquisition, integration and separation costs related to strategic initiatives including the acquisition of Laird PM and the Intended Rogers Acquisition.
2. Includes restructuring actions and asset related charges. See Note 6 for additional information.
3. Relates to an impairment of an equity method investment. See Note 6 for additional information.
4. Includes acquisition costs associated with the Intended Rogers Acquisition related to the financing agreements, specifically the structuring fees and the amortization of the commitment fees reflected in "Interest Expense".
| | | | | | | | | | | | | | |
| Significant Items by Segment for the Three Months Ended March 31, 2021 | Electronics & Industrial | Water & Protection | Corporate & Other | Total |
| In millions |
Acquisition, integration and separation costs 1 | $ | — | | $ | — | | $ | (6) | | $ | (6) | |
Restructuring and asset related charges - net 2 | — | | — | | (2) | | (2) | |
Gain on divestiture 3 | 2 | | — | | 1 | | 3 | |
| Total | $ | 2 | | $ | — | | $ | (7) | | $ | (5) | |
1. Acquisition, integration and separation costs related to strategic initiatives, which primarily includes the sale of the Solamet® business unit and the planned divestiture of the Biomaterials business unit.
2. Includes Board approved restructuring plans and asset related charges. See Note 6 for additional information.
3. Reflected in "Sundry income (expense) - net."