EIDP, Inc. Form 10-Q Summary — First Quarter 2020
Business context and reporting period
EIDP, Inc. (EID), a wholly owned subsidiary of Corteva, Inc., filed a combined Form 10-Q for the quarter ended March 31, 2020. EID reports the agriculture operations consisting of the Seed and Crop Protection segments. The filing presents continuing operations after the 2019 separation of EID’s former materials science and specialty products businesses, which are classified as discontinued operations.
Comparisons with the first quarter of 2019 are affected by the separation, internal reorganizations, discontinued operations, and pro forma adjustments. EID files using the reduced disclosure format permitted for its reporting status.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $3,956 million | $3,396 million |
| Income from continuing operations after tax | $257 million | $(184) million |
| Net income attributable to EID | $250 million | $166 million |
| Operating EBITDA, non-GAAP | $794 million | $518 million pro forma |
| Effective tax rate on continuing operations | 31.6% | 26.7% |
| Cash used in operating activities | $1,922 million | $1,541 million |
| Cash used in investing activities | $130 million | $502 million |
| Cash provided by financing activities | $2,336 million | $1,312 million |
Net sales increased 16%, driven by a 17% volume increase and a 3% local price increase, partly offset by 3% unfavorable currency and a 1% portfolio impact. Seed sales rose to $2,455 million from $1,967 million, while Crop Protection sales rose to $1,501 million from $1,429 million.
Cost of goods sold was $2,269 million, or 57% of sales, compared with 65% in the prior-year quarter. The improvement primarily reflects the absence of $205 million of inventory step-up amortization recorded in Q1 2019, favorable seed mix, and productivity actions. R&D was $280 million, or 7% of sales, and SG&A was $757 million, or 19% of sales.
Segment operating EBITDA was $581 million for Seed and $238 million for Crop Protection, compared with pro forma amounts of $325 million and $220 million, respectively, in Q1 2019. Management reported approximately $70 million of cost synergies in the quarter.
Liquidity, debt, and cash flow
At March 31, 2020, EID had $1,973 million of cash, cash equivalents, and marketable securities and total debt of approximately $6,482 million, including $1,996 million of short-term borrowings and $614 million of long-term debt at the consolidated Corteva level, plus a $3,872 million related-party loan payable to Corteva. The related-party loan bears interest at 3.27% and matures in 2024.
Operating cash flow was negative $1.9 billion, primarily because of seasonal working-capital requirements and the absence of cash flows from businesses divested in 2019. Financing cash flow included increased short-term borrowings and debt proceeds. Cash and restricted cash totaled $2,340 million at quarter-end.
EID and Corteva had access to approximately $5.8 billion of committed and uncommitted unused credit lines, including $6 billion of revolving credit facilities. In March 2020, the company drew $500 million under a three-year revolving facility in response to COVID-19-related volatility and higher commercial-paper borrowing costs. The company remained in compliance with its debt covenant requiring total indebtedness to total capitalization not to exceed 0.60.
Material changes versus the prior comparable period
- Continuing-operations income after tax improved to $257 million from a $184 million loss.
- Net sales increased $560 million, or 16%, with the strongest growth in Seed and North America.
- Operating EBITDA increased to $794 million from $518 million on a pro forma basis.
- Integration and separation costs declined to zero from $212 million.
- Interest expense declined to $42 million from $59 million, primarily because of lower debt balances following 2019 debt repayment transactions, partially offset by interest on EID’s related-party loan.
- Cash used in operations increased by $381 million, reflecting higher seasonal working-capital needs.
- Short-term borrowings increased materially to $1,996 million from $7 million at December 31, 2019.
- Accumulated other comprehensive loss increased to $3,933 million from $3,270 million, principally because of foreign-currency translation losses.
Outlook, commentary, risks, and unusual items
The company suspended its previously issued full-year 2020 corporate outlook because of uncertainty related to COVID-19 and global market volatility. Agriculture was generally treated as essential, and first-quarter operating disruptions were described as localized and not material; however, the filing states that the future effects of the pandemic cannot be reliably predicted.
Management identified risks from supply-chain and logistics disruptions, weaker commodity and corn prices, reduced ethanol demand, customer credit deterioration, foreign-currency volatility, higher financing costs, and possible impairment of goodwill and intangible assets. The filing also notes that early demand may not persist.
In Q1 2020, EID recorded $70 million of restructuring and asset-related charges, including $63 million under the Execute to Win Productivity Program and $10 million of accelerated prepaid royalty amortization. Total expected restructuring charges under the program are approximately $185 million, with approximately $90 million of future cash payments and expected run-rate savings of $130 million by 2023.
The company recorded a $53 million loss related to the expected sale of the La Porte site and $61 million of net foreign-exchange losses in other income. Environmental liabilities accrued at March 31, 2020 totaled $359 million, with reasonably possible exposure of up to $630 million above the accrued amount. The filing also discusses ongoing PFAS/PFOA litigation, environmental proceedings, indemnification disputes, and an appeal by Chemours; management generally characterizes material liability as remote or not expected to be material, subject to significant uncertainty.
Controls and procedures were evaluated as effective, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19 causes sustained declines in planted area, corn demand, ethanol demand, product volumes, pricing, or customer collections.
- The timing and magnitude of the suspended 2020 outlook and any later reinstatement or revision.
- The availability and cost of commercial paper, revolving credit, and receivable-repurchase financing as seasonal working-capital needs continue.
- The increase in leverage, including the $3.872 billion EID related-party loan and $1.996 billion of short-term borrowings.
- Actual restructuring charges, cash payments, and achievement of the projected $130 million run-rate savings by 2023.
- Potential impairment of goodwill and intangible assets if forecasts, currency rates, commodity prices, or demand deteriorate.
- The outcome and potential exposure from PFAS/PFOA, environmental, Chemours, La Porte, and other legacy-liability matters.
- The comparability of reported 2019 results, given discontinued operations, pro forma adjustments, separation costs, and inventory step-up amortization.