EIDP, Inc. quarterly report, Q2 FY2022

EID, Inc. 2022 Q2 Form 10-Q Summary

Business Context and Reporting Period

E. I. du Pont de Nemours and Company (EID) filed a combined Form 10-Q with its parent, Corteva, Inc., for the quarter and six months ended June 30, 2022. Corteva owns 100% of EID’s common stock. EID’s standalone results generally match Corteva’s consolidated operating results, but differ primarily because EID has publicly held preferred stock and a related-party loan payable to Corteva.

The business operates through two reportable segments: Seed and Crop Protection. The financial statements are unaudited and prepared under U.S. GAAP.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30	Six Months Ended June 30
Net sales	$6.252 billion, versus $5.627 billion	$10.853 billion, versus $9.805 billion
EID income from continuing operations after tax	$995 million, versus $1.008 billion	$1.565 billion, versus $1.610 billion
EID net income attributable to EID	$965 million, versus $963 million	$1.524 billion, versus $1.554 billion
Segment operating EBITDA	$1.749 billion, versus $1.493 billion	$2.809 billion, versus $2.431 billion
Operating cash flow	Not separately reported for the quarter	$(1.633) billion, versus $(663) million

Reported net sales increased 11% in both the quarter and first half. Second-quarter growth reflected a 9% price increase and 4% volume increase, partly offset by a 2% unfavorable currency effect. First-half growth reflected a 9% price increase and 5% volume increase, partly offset by a 3% unfavorable currency effect.

Second-quarter cost of goods sold was $3.323 billion, or 53% of sales, compared with $3.010 billion, also 53% of sales. First-half cost of goods sold was $6.047 billion, or 56% of sales, compared with $5.430 billion, or 55% of sales. Higher input, freight and logistics costs were partly offset by pricing and productivity actions.

Second-quarter EID operating results benefited from strong price execution, volume gains and productivity actions. Segment operating EBITDA increased 17% year over year, while Seed EBITDA increased 10% and Crop Protection EBITDA increased 38%. Management reported that Seed’s operating EBITDA margin improved by approximately 170 basis points and Crop Protection’s by more than 200 basis points.

Six-month operating cash flow was pressured by working-capital needs, including a $2.331 billion increase in receivables, a $2.450 billion reduction in deferred revenue and higher customer-related financing requirements. Investing cash flow was $(435) million, including $318 million of capital expenditures. Financing cash flow was $118 million, reflecting new borrowings and debt proceeds partly offset by debt repayments and EID’s repayment of $805 million of related-party debt.

Liquidity, Debt and Capital Allocation

At June 30, 2022, cash and cash equivalents were $2.401 billion and marketable securities were $254 million.
EID standalone debt included $712 million of short-term borrowings and finance lease obligations, $1.283 billion of long-term debt and $1.377 billion of long-term related-party debt payable to Corteva.
The related-party loan was scheduled to mature in 2024 and had an outstanding balance of $1.377 billion, bearing interest at 4.12% at June 30, 2022.
Corteva and EID had $5.5 billion of committed and available revolving credit facilities, including facilities maturing in 2025, 2027 and 2023. The company was in compliance with the 0.60 total-debt-to-total-capitalization covenant.
The company also had approximately $5.9 billion of committed and uncommitted unused credit lines, plus a $500 million receivable repurchase facility expiring in December 2022; no borrowings were outstanding under that facility at quarter-end.
Corteva repurchased $600 million of common stock during the first half and paid $203 million of common dividends. Management stated that approximately $800 million was returned to shareholders during the first half.

Material Changes Versus the Prior Comparable Period

Sales increased 11%, but EID income from continuing operations after tax declined 1% for the quarter and 3% for the first half.
Operating EBITDA increased substantially, but GAAP earnings were affected by lower non-operating pension and other post-employment benefit credits, higher foreign-exchange losses and higher interest expense.
Other income declined to $49 million in the quarter from $298 million and to $66 million for the first half from $635 million, primarily because of lower pension-related credits and higher exchange losses.
Operating cash use increased to $1.633 billion from $663 million, reflecting substantially higher working-capital investment.
Total cash, cash equivalents and marketable securities declined to approximately $2.7 billion from $4.5 billion at December 31, 2021, while total debt increased to approximately $2.0 billion from $1.1 billion.
The company implemented a global business-unit organization model in April 2022. The reorganization did not change reportable segments and resulted in no goodwill impairment charge.

Guidance, Outlook and Unusual Items

Management increased its 2022 outlook to net sales of $17.2 billion to $17.5 billion, Operating EBITDA of $2.95 billion to $3.10 billion and Operating Earnings Per Share of $2.45 to $2.60. These are non-GAAP measures that the company could not fully reconcile to GAAP without unreasonable effort.

The 2022 restructuring actions, including the Russia exit, generated $56 million of pretax restructuring and other charges during the quarter and first half.
Excluding the Russia exit, additional restructuring and other charges of $295 million to $350 million were expected through June 2023, with $180 million to $210 million of related future cash payments.
Management expects the restructuring actions to generate $210 million to $220 million of run-rate savings by 2025 and to be substantially complete in 2023.
The Russia exit generated $38 million of restructuring charges, plus $1 million of inventory write-offs and $6 million of settlement costs. Additional Russia-related pretax charges of up to $30 million were possible.
Discontinued operations produced after-tax losses of $30 million in the quarter and $40 million for the first half, primarily related to PFAS environmental remediation at the legacy Fayetteville Works facility.
On July 22, 2022, the board approved a 7.1% increase in the common dividend from $0.14 to $0.15 per share. Management also expected approximately $1 billion of 2022 share repurchases.

Risks, Contingencies and Other Matters

Key operating risks include inflation and availability of raw materials, freight and logistics constraints, currency volatility, agricultural demand and acreage changes, weather and climate conditions, regulatory approvals, competition, supply-chain and cybersecurity disruptions, and customer credit risk.
The Russia-Ukraine conflict created risks relating to supply disruptions, sanctions, logistics, foreign exchange, collections and demand. Russia represented approximately 2% of annual net sales.
Legacy PFAS, PFOA, PFOS and GenX matters remain significant contingencies. Management stated that liabilities could exceed recorded accruals but could not estimate losses beyond accrued amounts.
At June 30, 2022, environmental accruals totaled $482 million, with potential exposure above accrued amounts estimated at $600 million. These figures exclude certain possible effects of subsequent regulatory developments.
Under the PFAS memorandum of understanding, Corteva and DuPont together could bear up to $2 billion of qualified expenses and escrow contributions, subject to specified cost-sharing arrangements and thresholds.
The Federal Trade Commission informed Corteva staff in May 2022 that they would recommend pursuing an enforcement action concerning certain crop-protection business practices. Corteva stated that it believes any lawsuit would be without merit.
Additional litigation includes Lorsban-related personal injury claims, environmental proceedings, water-system claims and cases involving legacy EID sites. The filing states that reasonably possible losses in excess of accruals may be material, although amounts are not currently estimable.
EID’s disclosure controls and procedures were determined to be effective as of June 30, 2022, with no material changes to internal control over financial reporting.

Investor Verification Priorities

Verify the sustainability of the increased 2022 sales, Operating EBITDA and operating EPS guidance amid inflation, currency and supply-chain pressures.
Assess whether negative operating cash flow and higher receivables reflect seasonal working capital or a persistent deterioration in cash conversion.
Monitor debt levels, commercial paper usage, the EID related-party loan maturity and compliance with revolving-credit covenants.
Track restructuring charges, future cash payments and whether projected savings of $210 million to $220 million are achieved.
Evaluate the potential financial impact of PFAS, environmental, Lorsban and FTC matters beyond recorded accruals and indemnification recoveries.
Reconcile EID standalone results with Corteva consolidated results, particularly preferred-stock obligations, related-party interest and debt, and noncontrolling interests.