EIDP, Inc. Form 10-Q Summary
Business context and reporting period
E. I. du Pont de Nemours and Company (“EID” or “EIDP”) filed a combined Form 10-Q with Corteva, Inc. for the quarter and six months ended June 30, 2020. EID is a wholly owned subsidiary of Corteva and reports substantially the same agriculture operations, comprising the Seed and Crop Protection segments. EID’s standalone statements differ primarily because they include preferred stock and a related-party loan payable to Corteva.
The filing reflects Corteva’s June 1, 2019 separation from DowDuPont. Historical EID materials science and specialty products businesses are presented as discontinued operations for prior periods.
Financial performance and key metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Net sales | $5,191 million | $5,556 million | $9,147 million | $8,952 million |
| Income from continuing operations after tax | $742 million | $460 million | $999 million | $276 million |
| Net income attributable to EID | $739 million | $(626) million | $989 million | $(460) million |
| Effective tax rate | 8.7% | 36.4% | 16.0% | 41.5% |
| Operating EBITDA | $1,265 million | $1,486 million | $2,084 million | $2,031 million |
- Second-quarter sales declined 7%, driven by a 4% volume decline, 3% unfavorable currency impact and 1% portfolio impact, partly offset by a 1% price increase.
- First-half sales increased 2%, reflecting 4% volume growth and 1% local-price growth, partly offset by a 3% currency headwind.
- Second-quarter Seed sales declined 4% to $3,538 million and Crop Protection sales declined 11% to $1,653 million. First-half Seed sales increased 6% to $5,993 million, while Crop Protection sales declined 4% to $3,154 million.
- Second-quarter operating EBITDA declined 15% to $1,265 million, primarily because volume declines, currency and higher selling costs outweighed pricing and productivity benefits. First-half operating EBITDA increased 3% on a pro forma comparable basis.
- Reported COGS was 54% of sales in the quarter and 56% for the first half, compared with 55% and 59%, respectively, in the prior-year periods. SG&A was 19% of sales in both first-half periods and increased to 19% from 17% in the second quarter.
Cash flow, balance sheet, debt and liquidity
- Cash used in operating activities was $920 million in the first six months of 2020, compared with $1,107 million used in the prior-year period. Cash used in investing activities was $252 million, including $202 million of capital expenditures.
- Cash provided by financing activities was $2,265 million, resulting in a $998 million increase in cash, cash equivalents and restricted cash to $3,171 million at June 30, 2020.
- Cash, cash equivalents and marketable securities totaled $2,869 million. Total debt was $2,631 million, excluding EID’s $3,842 million related-party loan payable to Corteva.
- EID issued $500 million of 1.70% senior notes due 2025 and $500 million of 2.30% senior notes due 2030. The proceeds may be used for general corporate purposes, pension contributions and debt repayment.
- Short-term borrowings and finance lease obligations were $1,529 million, including $671 million of commercial paper and $800 million outstanding under a receivable repurchase facility. The facility is secured by $841 million of customer notes receivable and expires in December 2020.
- The company had approximately $6.3 billion of committed and uncommitted unused credit lines and was in compliance with its 0.60 total-debt-to-total-capitalization covenant. The $500 million revolving-credit draw made in March 2020 in response to COVID-19 market volatility had been repaid by June 30.
- EID’s standalone balance sheet included $3,842 million of long-term debt owed to Corteva, with an interest rate of 1.80%, and $239 million of preferred stock.
Material changes versus the prior comparable period
- Continuing-operations earnings improved materially because the 2019 period included substantial integration and separation costs, discontinued-operation losses and related tax effects. EID reported no integration and separation costs in 2020 versus $330 million in the second quarter and $542 million in the first half of 2019.
- Restructuring and asset-related charges increased to $179 million in the second quarter and $249 million in the first half, versus $60 million and $121 million, respectively, in 2019. The 2020 charges included $138 million in second-quarter and $148 million in first-half accelerated prepaid royalty amortization.
- Amortization expense increased to $176 million in the quarter and $339 million in the first half, primarily because germplasm assets were changed from indefinite-lived to 25-year definite-lived assets in late 2019.
- Interest expense declined to $45 million in the quarter and $87 million in the first half from $64 million and $123 million, respectively, primarily because of lower average debt balances and interest rates. EID’s expense includes interest on the related-party loan.
- COVID-19 caused currency pressure, weaker oil and ethanol markets and some temporary sourcing and logistics disruptions. Management stated that these disruptions had not materially affected results through June 30, 2020.
Guidance, outlook, risks and unusual items
- Management projected full-year 2020 net sales growth of approximately 1% to 2% versus 2019. Operating EBITDA guidance was down 4% to up 1%, and operating EPS guidance was down 13% to up 1% versus 2019.
- The outlook excludes potential operational disruptions, significant demand or customer-credit deterioration and further COVID-19-related currency acceleration. Management stated that the duration and financial impact of the pandemic remain uncertain.
- The company approved the Execute to Win productivity program, with expected pretax charges of approximately $185 million, including $125 million of asset-related charges and $60 million of severance. It recorded $104 million through June 30, expects approximately $86 million of future cash payments and targets $130 million of run-rate savings by 2023.
- COVID-19 triggered an interim impairment assessment of Seed and Crop Protection reporting units and the tradename. No goodwill or tradename impairment was recorded, but the tradename’s fair value approximated carrying value and remains at elevated risk if assumptions deteriorate.
- Environmental remediation liabilities totaled $350 million, with reasonably possible exposure of up to $620 million above the accrued amount. The company also faces legacy PFOA/PFAS litigation, environmental matters and indemnification disputes, including Chemours arbitration scheduled for June 2021.
- Corteva received a Canadian Competition Bureau information order and an FTC subpoena concerning alleged anticompetitive conduct in crop protection and seed markets. Management considered material liability remote at the filing date.
- The company maintained a $1 billion share-repurchase authorization and repurchased 1.865 million shares for $50 million during the first half. Quarterly common dividends were $0.13 per share; EID also paid preferred dividends.
Most important facts for investors to verify
- Whether COVID-19, ethanol-market weakness, commodity prices, planted acreage, currency movements or customer credit losses cause results to fall outside the 2020 outlook.
- The sustainability of first-half Seed growth and whether Crop Protection volume, competitive pressure and Latin American timing normalize.
- Future impairment risk for the tradename and other intangible assets, particularly if forecast cash flows, discount rates or currency assumptions worsen.
- Actual restructuring cash payments and the realization of the targeted $130 million annualized productivity savings by 2023.
- Debt maturity, commercial-paper and receivable-repurchase-facility exposure, including refinancing needs when the $1.3 billion facility expires in December 2020.
- Potential cash and earnings effects of environmental remediation, PFAS/PFOA claims, Chemours indemnification proceedings and other legacy liabilities.
- The distinction between Corteva consolidated debt and EID standalone debt, including EID’s $3.842 billion related-party loan payable to Corteva.