EIDP, Inc. quarterly report, Q2 FY2021

EIDP, Inc. Form 10-Q Summary

Business Context and Reporting Period

E. I. du Pont de Nemours and Company (“EID”) is a wholly owned subsidiary of Corteva, Inc. and remains a separate reporting company. The combined Form 10-Q covers the quarter and six months ended June 30, 2021, with comparable periods ended June 30, 2020. EID’s operating businesses are reported through Corteva’s two segments: Seed and Crop Protection.

EID’s standalone results are substantially similar to Corteva’s consolidated results, except primarily for EID’s preferred stock, related-party debt owed to Corteva, and associated interest expense. All amounts below are in millions unless otherwise noted.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30, 2021	Three Months Ended June 30, 2020	Six Months Ended June 30, 2021	Six Months Ended June 30, 2020
Net sales	$5,627	$5,191	$9,805	$9,147
Income from continuing operations after tax	$1,008	$742	$1,610	$999
Net income attributable to EID	$963	$739	$1,554	$989
Operating EBITDA, non-GAAP	$1,461	$1,236	$2,365	$2,030
Interest expense	$20	$45	$42	$87
Cash used in operating activities	Not separately reported	Not separately reported	$(663)	$(920)

Second-quarter net sales increased 8%, driven by 5% volume growth, a 2% favorable currency effect, and a 1% local-price increase. First-half sales increased 7%, reflecting 4% volume growth, a 2% local-price increase, and a 1% favorable currency effect.

Second-quarter operating EBITDA increased 18% on a consolidated basis, while first-half operating EBITDA increased 17%. Operating EBITDA is a non-GAAP measure and excludes items including amortization, non-operating benefit credits, foreign-exchange effects, and significant items.

Reported EID net income was affected by $45 million of after-tax losses from discontinued operations in the second quarter and $55 million in the first half, primarily related to legacy PFAS environmental matters and related settlements.

Margins, Segments, and Material Changes

Cost of goods sold represented 53% of sales in the second quarter, compared with 54% in the prior-year quarter; first-half COGS represented 55% of sales versus 56% in 2020.
Seed sales increased 7% in the second quarter to $3,780 and 5% in the first half to $6,272. Seed operating EBITDA increased 17% in the quarter and 13% in the first half, with margin improvement of more than 260 basis points and 200 basis points, respectively.
Crop Protection sales increased 12% in the second quarter to $1,847 and 12% in the first half to $3,533. Crop Protection operating EBITDA increased 20% in the quarter and 26% in the first half, with margin improvement of more than 130 basis points and 220 basis points, respectively.
Cost pressures included higher raw-material, input, freight, logistics, and commission costs. Productivity actions and pricing more than offset these pressures in reported operating results.
Other income increased to $298 in the second quarter and $635 in the first half, compared with $89 and $90, respectively, in the prior-year periods. The increase primarily reflected higher non-operating pension and other post-employment benefit credits.
The effective tax rate on continuing operations increased to 21.8% in the second quarter from 8.7% for EID and to 22.0% for the first half from 16.0%. The 2021 periods included net tax benefits of $18 million in the quarter and $25 million in the first half related to prior-year tax positions.

Liquidity, Debt, and Cash Flow

At June 30, 2021, cash and cash equivalents were $2,861; marketable securities were $39; and cash, cash equivalents, and marketable securities totaled $2,900.
Total consolidated debt was $1,778, including $677 of short-term borrowings and $1,101 of long-term debt. EID separately reported $2,745 of long-term related-party debt owed to Corteva, compared with $3,459 at December 31, 2020.
EID used $663 in operating cash flow during the first half, $17 in investing cash flow, and $7 in financing cash flow. Capital expenditures were $269.
The company had approximately $6.4 billion of unused committed and uncommitted credit lines at June 30, 2021, plus a $1 billion receivables repurchase facility. The company was in compliance with its debt covenant requiring total indebtedness to total capitalization not to exceed 0.60.
Management stated that liquidity should be adequate for operations, seasonal working capital, capital spending, pension obligations, and funding requirements under the PFAS memorandum of understanding.

Guidance, Outlook, and Management Commentary

Management increased 2021 guidance to approximately 7%–8% net sales growth, 20%–25% growth in Operating EBITDA, and 33%–40% growth in operating earnings per share.
2021 restructuring charges are expected to total approximately $130–$170, with approximately $80–$100 of related future cash payments. The actions are expected to be substantially complete in 2021 and are expected to generate approximately $70 of run-rate savings by 2023.
The company expects approximately $130 of non-cash accelerated prepaid royalty amortization expense in 2021 and increased expected 2021 capital expenditures to $600–$650.
During the first half, the company repurchased $550 of common stock and paid $192 of common dividends. Subsequent to quarter-end, Corteva authorized an additional $1.5 billion repurchase program and increased the quarterly dividend from $0.13 to $0.14 per share.

Risks, Contingencies, and Unusual Items

Legacy PFAS and PFOA matters remain significant. Under the January 2021 memorandum of understanding, Chemours, DuPont, and Corteva share qualified PFAS expenses and fund an escrow arrangement. DuPont and Corteva’s aggregate share under the arrangement is limited to $2 billion, subject to specified allocation terms.
At June 30, 2021, environmental remediation liabilities totaled $335, with reasonably possible exposure of up to $569 above accrued amounts. Management stated that losses in excess of accruals could materially affect results, liquidity, financial condition, and cash flows.
During the first half, EID recorded $37 of charges related to the Chemours memorandum of understanding and $11 related to the Delaware PFAS settlement. The July 2021 Delaware settlement provides for a collective $50 payment, of which EID’s stated share is $12.5, subject to the applicable indemnification arrangements.
The company faces ongoing PFAS litigation involving water contamination, natural-resource damages, personal injury, environmental remediation, and alleged fraudulent conveyance. Many potential losses are not currently estimable.
Other risks include COVID-19 variants, supply-chain and logistics constraints, inflation in raw materials, agricultural commodity and weather volatility, foreign-exchange exposure, regulatory approvals, competition and antitrust inquiries, environmental compliance, customer credit risk, and intellectual-property claims.
CEO James C. Collins, Jr. announced his retirement from all company positions by December 31, 2021. The company identified CEO transition risk as a material risk factor.
A criminal proceeding related to the 2014 La Porte, Texas release incident remains pending, with trial scheduled for March 2022.

Most Important Facts for Investors to Verify

Whether the increased 2021 sales, EBITDA, and operating EPS guidance is achieved despite input-cost, freight, logistics, currency, and agricultural-market pressures.
The sustainability of segment margin expansion after excluding pension credits, restructuring charges, royalty amortization, and other non-GAAP adjustments.
The ultimate cost and timing of PFAS, environmental, litigation, and indemnification obligations, including the potential exposure above recorded environmental accruals.
EID’s related-party debt repayment schedule, interest burden, and dependence on Corteva for capital-structure support.
Operating cash conversion, particularly the effect of seasonal receivables, customer financing programs, deferred revenue, and working-capital requirements.
The execution and cash costs of the 2021 restructuring program and the achievement of projected $70 run-rate savings by 2023.
The outcome of the CEO succession process, regulatory and antitrust proceedings, and the effect of any new agricultural-industry regulations.