EID, Inc. 2019 Form 10-K Summary
Business context and reporting period
E. I. du Pont de Nemours and Company (“EID”) filed reduced-format information within Corteva, Inc.’s combined Form 10-K for the fiscal year ended December 31, 2019. EID is wholly owned by Corteva and remains a separate reporting company with publicly traded $3.50 Series and $4.50 Series preferred stock. The filing covers the full fiscal year, not only the fourth quarter.
Corteva became an independent public company on June 1, 2019 following its separation from DowDuPont. The agriculture business consists primarily of seed and crop protection operations, including EID’s Pioneer and Crop Protection businesses and Dow AgroSciences. EID’s 2019 financial statements include successor accounting following the 2017 DowDuPont merger and the common-control combination of Dow AgroSciences; predecessor and successor periods are not fully comparable.
Key financial metrics
| Metric | 2019 | 2018 | Change or commentary |
|---|---|---|---|
| Net sales | $13.846 billion | $14.287 billion | Down 3%, primarily from currency; volume was approximately flat |
| Loss from continuing operations before taxes | $(422) million | $(6.806) billion | 2018 included a $4.503 billion goodwill impairment charge |
| Loss from continuing operations after taxes | $(351) million | $(6.775) billion | EID result includes higher interest expense than Corteva |
| Net loss attributable to EID | $(1.030) billion | $(5.055) billion | Includes $(671) million of discontinued-operations loss in 2019 |
| Cash flow from operating activities | $996 million | $483 million | Improved due primarily to lower pension contributions and lower separation costs |
| Capital expenditures | $1.163 billion | $1.501 billion | 2020 expected range: $500 million to $600 million |
| Cash, cash equivalents and marketable securities | $1.769 billion | $2.275 billion | Lower following debt repayments and redemptions |
| Total debt excluding related-party debt | $122 million | $7.938 billion | Material reduction following 2019 repayments |
| Related-party debt payable to Corteva | $4.021 billion | Not applicable | Interest rate of 3.27%; 2019 interest expense was $106 million |
| Total assets | $42.397 billion | $108.683 billion | 2018 included substantial discontinued-operation assets |
| Total equity | $20.528 billion | $75.153 billion | 2019 reflects the separation and internal reorganizations |
Gross margin improved on a reported basis because inventory step-up amortization declined to $272 million from $1.554 billion. Reported cost of goods sold was 62% of sales in 2019 versus 70% in 2018. Pro forma operating EBITDA, a non-GAAP measure, was $2.106 billion for the segments, compared with $2.213 billion in 2018. Seed operating EBITDA declined to $1.040 billion from $1.139 billion, while crop protection operating EBITDA declined slightly to $1.066 billion from $1.074 billion.
Working capital was $5.281 billion at December 31, 2019, compared with $3.740 billion at December 31, 2018. EID and Corteva had $6.0 billion of committed revolving credit facilities, all available at year-end, and approximately $6.4 billion of committed and uncommitted unused credit lines. EID’s long-term credit ratings were investment grade: A-/A-2 from S&P, A3/P-2 from Moody’s, and A/F1 from Fitch, all with stable outlooks.
Material changes versus the prior comparable period
- Sales declined 3%, primarily because of unfavorable Brazilian real and euro currency effects. North American weather-related planting delays reduced soybean area and spring crop-protection applications.
- Seed sales declined 3% to $7.590 billion and seed operating EBITDA declined 9%. Crop protection sales declined 3% to $6.256 billion and operating EBITDA declined 1%.
- Operating cash generation increased to $996 million from $483 million, principally because 2018 included a $1.1 billion discretionary pension contribution.
- EID repaid or redeemed approximately $6.6 billion of debt in 2019, including $1.530 billion of Make Whole Notes, a $3.0 billion term loan, and $2.0 billion of Special Mandatory Redemption notes. Total second-quarter cash payments related to the Make Whole Notes and term loan were approximately $4.6 billion.
- Integration and separation costs declined to $744 million from $992 million. Restructuring and asset-related charges declined to $222 million from $694 million.
- 2019 included $144 million of non-cash seed-related impairment charges, including $54 million related to heritage Dow AgroSciences intangible assets and $90 million related to Roundup Ready 2 Xtend-related in-process research and development. No goodwill impairment was recorded in continuing operations in 2019.
- Discontinued operations generated a $671 million after-tax loss in 2019, primarily due to a $1.102 billion goodwill impairment charge related to divested specialty-products businesses and other tax adjustments.
- Beginning October 1, 2019, germplasm assets were changed from indefinite-lived to definite-lived with a 25-year useful life. Amortization expense is expected to increase by approximately $250 million annually.
Guidance, outlook, risks and unusual items
Management expected 2020 net sales to increase 4% to 5%, with minimal currency impact, supported by more normalized North American conditions and continued adoption of new products. Operating EBITDA was expected to increase approximately 12% and operating earnings per share approximately 5%. Management also expected 2020 capital expenditures of $500 million to $600 million.
Management accelerated the transition toward Enlist E3 soybeans and related Enlist herbicides. Use of Roundup Ready 2 Yield and Roundup Ready 2 Xtend traits is expected to decline significantly beginning in 2021. This decision is expected to produce approximately $160 million of non-cash accelerated prepaid-royalty amortization in 2020 and approximately $500 million over five years.
Key risks include agricultural seasonality and weather, foreign-exchange volatility, commodity and raw-material costs, competition and generic products, regulatory approvals for biotechnology and crop-protection products, intellectual-property challenges, dependence on third-party licenses and suppliers, customer credit losses, cybersecurity and supply-chain disruptions, and the ability to realize separation and cost synergies.
The company realized approximately $350 million of cost synergies in 2019 and remained on track for $1.2 billion through 2021. It also authorized a $1 billion share-repurchase program and repurchased $25 million of shares in 2019. EID’s 2020 expected contributions included approximately $60 million to pension plans other than the principal U.S. pension plan and approximately $240 million to OPEB plans.
Environmental remediation accruals were $336 million at year-end, with reasonably possible exposure of up to $620 million above the accrued amount. The filing also describes ongoing PFAS/PFOA, environmental, product-liability, antitrust and other litigation, including the Chemours indemnification dispute and investigations related to the La Porte, Texas facility. Management generally assessed material liability as remote or not expected, but adverse outcomes could materially affect cash flows and results.
Most important facts for an investor to verify
- Confirm the distinction between EID standalone results and Corteva consolidated results, particularly EID’s $4.021 billion related-party loan and $106 million of related interest expense.
- Assess whether the 2020 sales, EBITDA and earnings-per-share guidance was achieved and whether North American planting conditions normalized.
- Monitor Enlist E3 adoption, the reduction in licensed Roundup Ready traits, and the resulting prepaid-royalty amortization charges.
- Evaluate the sensitivity of seed goodwill and intangible assets to forecasts, discount rates and market conditions; seed goodwill had only approximately 12% excess fair value over carrying value.
- Review liquidity during peak seasonal working-capital requirements, including availability and terms of the $1.3 billion 2020 receivable repurchase facility.
- Review the company’s environmental accruals, indemnification assets and the ability of Chemours, DuPont and Dow to satisfy indemnification obligations.
- Consider comparability limitations caused by the DowDuPont merger, push-down accounting, common-control combination, discontinued operations and separation-related allocations.