EIDP, Inc. 2023 Q3 Form 10-Q Summary
Business context and reporting period
EIDP, Inc. filed a reduced-disclosure Form 10-Q for the quarter and nine months ended September 30, 2023. Corteva, Inc. owns 100% of EIDP’s common stock. EIDP’s operations and reporting segments are substantially the same as Corteva’s: Seed and Crop Protection. EIDP differs principally through its preferred stock, related-party debt with Corteva, and standalone interest expense and tax effects.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $2,590 million, down 7% | $13,519 million, down 1% |
| Income from continuing operations after tax | $(317) million | $1,155 million |
| Net income attributable to EIDP | $(320) million | $979 million |
| Income from discontinued operations after tax | $(3) million | $(174) million |
| Effective tax rate | 28.9% | 17.1% |
| Cash used in operating activities | Not separately reported for the quarter | $(2,615) million |
| Cash used in investing activities | Not separately reported for the quarter | $(1,773) million |
| Cash provided by financing activities | Not separately reported for the quarter | $3,614 million |
Third-quarter gross margin, based on reported net sales less cost of goods sold, was approximately 36.4%, compared with approximately 32.4% in the prior-year quarter. Nine-month gross margin was approximately 44.1%, compared with approximately 41.9% in the prior-year period. Research and development expense was $335 million in the quarter and $980 million year to date; selling, general and administrative expense was $670 million and $2,441 million, respectively.
Segment operating EBITDA was $46 million in the third quarter and $3,079 million for the first nine months. Seed generated $878 million of third-quarter sales and $7,837 million year to date, while Crop Protection generated $1,712 million and $5,682 million, respectively. Segment operating EBITDA for Seed was $(138) million in the quarter and $1,972 million year to date; Crop Protection contributed $184 million and $1,107 million, respectively.
At September 30, 2023, EIDP reported cash and cash equivalents of $2,254 million, marketable securities of $108 million, total assets of $43,327 million, total debt of approximately $5,899 million, and total equity of $25,558 million. Debt included $3,609 million of short-term borrowings and $2,290 million of long-term debt. EIDP also had $115 million of short-term related-party borrowings owed to Corteva and a $217 million receivable from Corteva under the Master In-House Banking Agreement.
Material changes versus the prior comparable period
- Third-quarter sales declined primarily because of a 15% volume decrease, partly offset by a 2% price increase, favorable currency, and portfolio effects. Year-to-date sales reflected a 10% volume decline, a 9% price increase, and a 2% unfavorable currency impact.
- Crop Protection was the principal weakness: third-quarter sales fell 11% and segment operating EBITDA fell 48%, driven by destocking, delayed purchases, lower pricing, and higher input costs. Seed sales increased 2% and Seed segment operating EBITDA improved from $(224) million to $(138) million in the quarter.
- Interest expense increased to $60 million in the quarter and $193 million year to date from $32 million and $76 million, respectively, due to higher rates, increased borrowings, and the May 2023 debt offering.
- Other expense was $149 million in the quarter and $354 million year to date, compared with other income of $23 million and $89 million in the prior-year periods. Drivers included pension and post-employment costs, settlement reserves, and foreign-exchange losses.
- Cash used in operations increased from $2,152 million to $2,615 million year to date, primarily because of working-capital movements, including payments to growers and lenders and the use of customer prepayments.
- Investing cash outflows increased to $1,773 million, mainly because of the $1,456 million net cash cost of the Stoller and Symborg acquisitions completed March 1, 2023.
- Total debt increased substantially from $1,307 million at December 31, 2022, primarily because of seasonal short-term borrowing and the May 2023 issuance of $600 million of 4.50% notes due 2026 and $600 million of 4.80% notes due 2033.
Guidance, outlook, unusual items, and risks
Management affirmed the consolidated Corteva full-year 2023 outlook, which is applicable to the underlying business but is not an EIDP standalone forecast: net sales of $17.0 billion to $17.3 billion, Operating EBITDA of $3.25 billion to $3.45 billion, and operating earnings per share of $2.50 to $2.70. The outlook assumes no extreme weather, major operational disruption, significant deterioration in customer demand or credit, or further material currency and inflation effects.
On November 5, 2023, management approved additional Crop Protection network optimization. Expected aggregate pre-tax restructuring and asset-related charges are $410 million to $460 million, including $165 million to $175 million of fourth-quarter asset impairments. Expected future cash payments are $90 million to $120 million, with actions substantially complete in 2024 and estimated run-rate savings of approximately $100 million by 2025. The filing also states that the earlier 2022 restructuring actions are expected to produce $210 million to $220 million of run-rate savings by 2025.
Significant unusual items included $174 million of after-tax discontinued-operations charges year to date, primarily related to legacy PFAS matters; $156 million of estimated Lorsban-related settlement expense; $41 million of acquisition-related costs; and $95 million of restructuring and asset-related charges. The company recorded approximately $150 million of net pre-tax exchange losses associated with the Argentine peso during the first nine months. A further 10% deterioration in the official peso-to-U.S.-dollar rate could reduce pre-tax earnings by approximately $15 million.
In September 2023, the company and other settling parties funded a $1.185 billion Nationwide Water District PFAS settlement fund. Final court approval was not yet obtained at September 30, 2023. The filing identifies continuing exposure to PFAS, environmental remediation, Lorsban, antitrust, intellectual-property, customer-credit, regulatory, climate, weather, geopolitical, supply-chain, and foreign-currency risks. Environmental accruals were $508 million, with potential exposure above accrued amounts estimated at $640 million; these figures exclude certain additional uncertainties noted in the filing.
EIDP’s disclosure controls and procedures were assessed as effective, and the filing reports no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Nationwide Water District PFAS settlement receives final approval and the ultimate allocation of liabilities among EIDP, Corteva, DuPont, and Chemours.
- The final amount and timing of the Crop Protection restructuring charges, impairments, cash payments, and anticipated savings.
- Whether Crop Protection volume, pricing, destocking, competitive pressure, and input-cost trends improve in the fourth quarter and in 2024.
- The sustainability of liquidity given negative year-to-date operating cash flow, seasonal working-capital needs, and the increase in short-term debt.
- The maturity and refinancing implications of commercial paper, the $500 million 364-day facility, and the 2026 and 2033 senior notes.
- The ultimate outcomes and cash exposure from PFAS, environmental, Lorsban, FTC, antitrust, intellectual-property, and other legal proceedings.
- The effect of foreign-exchange movements, particularly the Argentine peso, on earnings, cash balances, taxes, and reported equity.