EIDP, Inc. 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 nine months ended September 30, 2020. EID is wholly owned by Corteva and operates through Corteva’s two reportable segments: Seed and Crop Protection. The financial statements are unaudited and include continuing operations following the 2019 separation of EID’s former materials science and specialty products businesses.
EID’s standalone results are generally the same as Corteva’s consolidated operating results, but differ primarily because EID reports preferred stock and a related-party loan payable to Corteva. All amounts below are in millions unless otherwise noted.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $1,863 | $1,911 | $11,010 | $10,863 |
| Income from continuing operations after tax | $(404) | $(557) | $595 | $(281) |
| Net income attributable to EID | $(404) | $(524) | $585 | $(984) |
| Operating EBITDA, non-GAAP | $(179) | $(207) | $1,851 | $1,763 |
| Cash used in operating activities | Not separately provided | Not separately provided | $(1,283) | $(2,321) |
Q3 sales declined 3%, despite 7% volume growth and 2% local-price growth, primarily because of an 11% currency headwind and a 1% negative portfolio impact. The nine-month sales increase of 1% reflected 4% volume growth and 2% local-price growth, partly offset by a 4% currency headwind and a 1% portfolio impact.
- Seed: Q3 sales decreased 23% to $523, while nine-month sales increased 3% to $6,516. Q3 results reflected timing shifts in North American seed sales, currency pressure and lower local price. Nine-month segment operating EBITDA rose to $1,255 from pro forma $1,066.
- Crop Protection: Q3 sales increased 9% to $1,340, driven by 16% volume growth and 5% local-price growth, partly offset by currency. Nine-month sales were approximately flat at $4,494, while segment operating EBITDA declined to $677 from pro forma $789 because of currency, higher input costs and increased R&D investment.
- Margins and expenses: COGS was 70% of sales in Q3 versus 71% in the prior-year quarter and 58% for the nine months versus 61%. Approximate gross margins were 30% and 42%, respectively. R&D was 15% of Q3 sales and 8% of nine-month sales. SG&A was 32% of Q3 sales and 21% of nine-month sales.
- Taxes: EID reported a Q3 tax benefit of $122 on a pretax loss of $526, or a 23.2% effective tax rate. The nine-month tax provision was $68 on pretax income of $663, or a 10.3% effective tax rate, aided by tax adjustments including a $51 benefit related to the 2017 Tax Cuts and Jobs Act foreign tax provisions.
Liquidity, debt and cash flow
| Balance-sheet metric | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $2,768 | $1,764 |
| Marketable securities | $152 | $5 |
| Accounts and notes receivable | $5,627 | $5,528 |
| Inventories | $4,374 | $5,032 |
| Short-term borrowings and finance leases | $2,142 | $7 |
| Long-term debt | $1,102 | $115 |
| Long-term debt owed to Corteva | $3,712 | $4,021 |
EID’s cash, cash equivalents and marketable securities totaled $2,920. Including the related-party loan, EID had approximately $6,956 of debt obligations at quarter-end; the related-party balance is eliminated in Corteva’s consolidated financial statements. EID had approximately $6.4 billion of committed and uncommitted unused credit lines, in addition to a $1.3 billion receivable repurchase facility expiring in December 2020.
In May 2020, EID issued $500 of 1.70% senior notes due 2025 and $500 of 2.30% senior notes due 2030. Seasonal working-capital requirements contributed to increased short-term borrowings, including $1,175 outstanding under the receivable repurchase facility and $926 of commercial paper. The company drew $500 under a revolving credit facility in March 2020 during COVID-19-related market volatility and repaid it in June.
For the nine months, EID used $1,283 in operating cash flow, $445 in investing cash flow and generated $2,741 in financing cash flow. Capital expenditures were $301. Cash flow benefited from lower integration and separation costs and lower pension contributions, but working-capital changes remained a significant use of cash. Pension and other post-employment benefit liabilities were $5,904 at September 30, 2020.
Material changes versus the prior comparable period
- Nine-month income from continuing operations improved to $595 from a $281 loss, while net income attributable to EID improved to $585 from a $984 loss.
- Q3 remained loss-making, but the continuing-operations loss narrowed to $404 from $557.
- Integration and separation costs fell to zero from $152 in Q3 and $694 for the nine months of 2019.
- Interest expense declined to $30 from $58 in Q3 and to $117 from $181 for the nine months.
- Restructuring and asset-related charges increased to $298 for the nine months from $167, including $158 of non-cash accelerated prepaid royalty amortization.
- Amortization of intangibles increased to $501 from $314 for the nine months, primarily because germplasm assets were changed from indefinite-lived to definite-lived assets with a 25-year useful life.
- Cash used in operations improved from $2,321 to $1,283, while financing cash flow increased because of the 2020 debt offering and the absence of 2019 separation-related cash transfers.
- The 2019 comparison includes discontinued operations, including a $1,102 goodwill impairment and other charges related to businesses transferred to DowDuPont. Accordingly, some year-over-year comparisons are not fully comparable.
Guidance, outlook and unusual items
Management expected full-year 2020 net sales to increase approximately 1% to 2% from 2019. Operating EBITDA was expected to range from a 4% decline to a 1% increase, and operating earnings per share was expected to range from a 13% decline to a 1% increase. The outlook excluded potential operational disruptions, major demand or customer-payment changes, and further COVID-19-related currency impacts.
The Execute to Win productivity program is expected to generate approximately $185 of pretax restructuring charges, including $125 of asset-related charges and $60 of severance costs. The company had recorded $134 through September 30, expected approximately $85 of future cash payments, and targeted approximately $130 of run-rate savings by 2023. The $1 billion share-repurchase authorization remained active; $83 had been spent during the first nine months and approximately $892 remained available at September 30.
COVID-19 had caused currency pressure, weaker oil and gas demand, lower ethanol demand and temporary supply-chain disruptions. Management stated that operations remained substantially functional, but continued uncertainty could affect demand, customer credit, commodity prices, liquidity costs and asset valuations. A COVID-19-related impairment review found no goodwill or tradename impairment at September 30, although the tradename was considered at higher risk if assumptions deteriorate.
Environmental and litigation exposures remain important. Environmental remediation accruals were $342, with reasonably possible exposure of up to $610 above the accrued amount. Legacy PFOA/PFAS matters, the Chemours indemnification dispute, post-MDL personal-injury claims and governmental investigations remain outstanding. Management generally characterized material liability as remote or not expected to be material, but acknowledged that ultimate liabilities could materially affect results or cash flows in the period recognized.
Most important facts for investors to verify
- Confirm the distinction between EID standalone debt, including the $3,712 related-party loan, and Corteva consolidated debt, which excludes that intercompany balance.
- Assess the sustainability of positive nine-month earnings given the Q3 loss, substantial seasonal working-capital use and reliance on short-term funding.
- Evaluate the effect of currency, commodity prices, ethanol demand, planted acreage and COVID-19 developments on the full-year guidance.
- Review the non-GAAP reconciliations, especially restructuring charges, accelerated royalty amortization, intangible amortization, tax benefits and pro forma 2019 adjustments.
- Monitor environmental accruals, PFAS/PFOA litigation, Chemours indemnification disputes and the potential exposure above recorded liabilities.
- Track completion of the productivity program, expected $130 run-rate savings by 2023 and the remaining share-repurchase authorization.