EIDP, Inc. quarterly report, Q3 FY2019

EIDP, Inc. Form 10-Q Summary — Third Quarter 2019

Business context and reporting period

This combined quarterly report covers EIDP, Inc. and its parent, Corteva, Inc., for the three and nine months ended September 30, 2019. Corteva became an independent public company on June 1, 2019, following the separation of DowDuPont’s agriculture business. EID remains Corteva’s wholly owned subsidiary and predecessor for historical periods. The business operates globally through two reportable segments: Seed and Crop Protection.

The financial statements reflect significant internal reorganizations, discontinued operations, common-control combination accounting for Dow AgroSciences, and the separation from DowDuPont. Comparisons with 2018 therefore require caution.

Financial performance and key metrics

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Net sales	$1,911 million	$1,947 million	$10,863 million	$11,472 million
Loss from continuing operations after tax	$(527) million	$(5,642) million	$(228) million	$(5,705) million
Net loss attributable to Corteva	$(494) million	$(5,121) million	$(938) million	$(4,534) million
Basic loss per share	$(0.66)	$(6.83)	$(1.25)	$(6.05)
Segment operating EBITDA	$(176) million	$(213) million	$1,855 million	$2,131 million

Q3 sales declined 2%, reflecting a 3% increase in volume more than offset by a 3% decline in local price and a 2% currency headwind. Nine-month sales declined 5%, primarily due to lower volume and unfavorable currency effects.

Seed sales were $681 million in Q3, up 24%, driven by delayed North American planting and resulting sales shifts; nine-month sales were $6,347 million, down 5%.
Crop Protection sales were $1,230 million in Q3, down 12%, primarily from lower Latin American volume and delayed Brazilian soybean-season sales; nine-month sales were $4,516 million, down 5%.
Q3 segment operating EBITDA was a loss of $295 million for Seed and income of $119 million for Crop Protection. Nine-month EBITDA was $1,066 million and $789 million, respectively.
Cost of goods sold was 71% of sales in Q3 and 61% for the nine months, compared with 76% and 69%, respectively, in 2018. The improvement principally reflected the declining amortization of merger-related inventory fair-value step-up, which was fully amortized by September 30, 2019.
Research and development expense declined to $289 million in Q3 and $857 million for the nine months, primarily due to cost synergies. SG&A was $646 million in Q3 and $2,318 million for the nine months.

Cash flow, liquidity and debt

Cash used in operating activities was $2.303 billion for the nine months, compared with $2.780 billion in 2018.
Capital expenditures were $1.015 billion, and cash used in investing activities was $964 million.
Cash provided by financing activities was $761 million, resulting in a $2.624 billion decrease in cash, cash equivalents and restricted cash. Ending cash, cash equivalents and restricted cash was $2.400 billion, including $1.980 billion of cash and cash equivalents.
Corteva reported cash, cash equivalents and marketable securities of $2.097 billion and total debt of $3.720 billion at September 30, 2019. EID’s standalone balance sheet included $4.037 billion of related-party debt owed to Corteva, resulting in total EID debt of approximately $7.757 billion including short-term borrowings and long-term debt.
EID’s related-party loan from Corteva bears interest at 3.68% and generated $39 million of Q3 interest expense and $69 million for the nine months.
Committed credit facilities totaled $7.3 billion, of which $6.142 billion was available at September 30, 2019. The company was in compliance with its 0.60 total-debt-to-total-capitalization covenant.
Management stated that operating cash flow, commercial paper, credit facilities, receivable financing and capital-market access should be adequate for operations, seasonal working capital, capital spending and pension obligations.

Material changes versus the prior comparable period

The 2018 comparison includes a $4.503 billion noncash goodwill impairment charge; no comparable continuing-operations goodwill impairment was recorded in 2019.
Q3 2019 restructuring and asset-related charges declined to $46 million from $235 million. The 2019 amount primarily included a $54 million noncash impairment of Seed-related intangible assets, partly offset by an $8 million restructuring benefit.
Nine-month integration and separation costs were $694 million, broadly consistent with $697 million in 2018; Q3 costs declined to $152 million from $253 million.
Interest expense declined substantially because of debt redemptions and repayments. EID redeemed or repaid approximately $6.6 billion of debt-related obligations in the second quarter, including the Make Whole Notes, a term loan and Special Mandatory Redemption notes.
Discontinued operations generated a $22 million after-tax benefit in Q3 2019 versus $526 million of income in Q3 2018. For the nine months, discontinued operations produced a $695 million loss versus $1.2 billion of income in 2018, including a $1.102 billion noncash goodwill impairment and a $63 million equity-method investment impairment related to businesses transferred to DuPont.
Management reported approximately $100 million of cost synergies in Q3 and $300 million for the nine months. The DowDuPont synergy program had generated $866 million of cumulative restructuring charges and was expected to be substantially complete by year-end 2019.

Outlook, commentary, risks and unusual items

The filing does not provide a clear formal full-year earnings or revenue guidance figure. Management emphasized continued cost synergies, productivity actions, new product launches and an approximately $145 million investment to expand Spinosyns fermentation capacity by 30% over the next several years. A $1 billion share repurchase authorization remained outstanding; $25 million was used to repurchase and retire 824,000 shares during Q3. A $0.13 per-share dividend was declared for payment in December 2019.

Key operating pressures included weather-related planting delays, reduced planted area, competitive pricing and grower incentives, higher Crop Protection input costs, currency weakness—particularly the Brazilian real—and delayed Brazilian soybean-season demand.
Goodwill and intangible-asset valuations remain sensitive to future cash flows, discount rates, terminal growth assumptions, regulatory developments and economic conditions. The Seed reporting unit had an estimated excess fair value of approximately 10% over carrying value following the 2019 realignment.
Environmental and litigation exposure remains significant. Environmental remediation accruals were $349 million, with reasonably possible additional exposure of up to $720 million above accrued amounts.
Legacy EID matters include PFAS/PFOA litigation and investigations, the Chemours indemnification dispute, and ongoing government investigations concerning the La Porte facility. Management generally characterized material adverse outcomes as remote or not expected to be material, but acknowledged that liabilities could be material in the period recognized.
Other risks include regulatory approval and product-registration requirements, intellectual-property disputes, generic competition, customer credit losses, seasonal working-capital needs, supply-chain and cybersecurity disruptions, pension funding requirements, foreign exchange, climate and weather variability, and LIBOR transition risk.

Important facts for investors to verify

Reconcile EID standalone results with Corteva consolidated results, particularly the $4.037 billion related-party loan and associated interest expense.
Assess recurring operating performance excluding separation costs, restructuring charges, inventory step-up amortization, impairments, foreign exchange effects and unusual tax items.
Monitor Seed’s limited goodwill headroom, intangible-asset impairment risk and the sustainability of reported cost synergies.
Review seasonal cash needs, customer-financing exposure, receivable collateralization and the December 2019 maturity of the $1.3 billion receivable repurchase facility.
Evaluate environmental accrual sufficiency, indemnification recoverability from Chemours, DuPont and Dow, and the potential impact of legacy PFAS/PFOA matters.
Verify future sales timing in Brazil and Latin America, currency sensitivity, crop conditions, regulatory approvals and the effect of pricing pressure on margins.