EIDP, Inc. Form 10-Q Summary — Second Quarter 2019
Business Context and Reporting Period
EIDP, Inc. filed a combined Form 10-Q with Corteva, Inc. for the quarter and six months ended June 30, 2019. Corteva became an independent public company on June 1, 2019, following its separation from DowDuPont. Corteva owns 100% of EIDP, and EIDP remains a reporting company with reduced disclosure. Historical EIDP results, together with Dow AgroSciences, are presented as the predecessor agriculture business. Current operations consist primarily of Seed and Crop Protection activities.
The 2019 financial statements reflect significant internal reorganizations, debt redemptions, discontinued operations and the Corteva separation. Prior-period information was revised or presented on a combined basis where applicable.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $5.556 billion, down 3% | $8.952 billion, down 6% |
| Income from continuing operations after tax | $460 million | $276 million |
| Net loss attributable to EIDP | $626 million | $460 million |
| Loss from discontinued operations after tax | $1.077 billion | $717 million |
| Cash used in operating activities | Not separately provided | $1.107 billion |
| Capital expenditures | Not separately provided | $834 million |
| Cash, cash equivalents and marketable securities | Not separately provided | $2.083 billion at June 30, 2019 |
| Total debt, including related-party debt | Not separately provided | $6.335 billion at June 30, 2019 |
For EIDP standalone, continuing-operations income before tax was $723 million for the quarter and $472 million for the six months. The corresponding effective tax rates were 36.4% and 41.5%. EIDP reported interest expense of $64 million for the quarter and $123 million for the six months, including $30 million of interest on a $4.160 billion related-party loan from Corteva.
Combined continuing-operations margins were approximately 8.7% for the quarter and 3.3% for the six months, based on income after tax divided by net sales. Segment operating EBITDA was $1.486 billion for the quarter and $2.031 billion for the six months, compared with $1.581 billion and $2.344 billion, respectively, on a comparable pro forma basis in 2018.
Material Changes Versus the Prior Comparable Period
- Quarterly net sales declined $175 million, primarily due to weather-related North American planting delays, unfavorable currency and soybean pricing pressure. Six-month sales declined $573 million, with North American weather reducing continuing-operations pretax income by approximately $350 million.
- Seed sales declined 4% in the quarter and 8% for the six months; Seed operating EBITDA declined 11% and 15%, respectively, due to lower North American volume, competitive pricing and currency.
- Crop Protection sales declined 1% in the quarter and 2% for the six months, while quarterly operating EBITDA increased 6%; first-half operating EBITDA declined 10% because of currency, North American volume weakness and higher input costs.
- Continuing-operations income after tax improved from $375 million to $460 million in the quarter and from a $63 million loss to $276 million of income for the six months. The improvement primarily reflected substantially lower merger-related inventory step-up amortization.
- Cost of goods sold declined to 55% of sales from 64% in the quarter and to 59% from 68% for the six months. Inventory step-up amortization was $52 million in the quarter and $257 million for the six months, versus $676 million and $1.315 billion, respectively, in 2018.
- Integration and separation costs increased to $330 million in the quarter and $542 million for the six months, from $249 million and $444 million, respectively.
- Cash used in operating activities improved to $1.107 billion from $1.590 billion, while capital expenditures increased to $834 million from $668 million.
Debt, Liquidity and Capital Allocation
- EIDP redeemed approximately $1.530 billion of Make Whole Notes, repaid a $3.0 billion term loan and redeemed $2.0 billion of Special Mandatory Redemption notes during the second quarter. Total payments related to the Make Whole Notes and term loan were approximately $4.6 billion; the SMR redemption required an additional $2.0 billion.
- Corteva had $2.175 billion of consolidated debt excluding EIDP’s $4.160 billion related-party loan; EIDP’s standalone balance sheet reported total debt of approximately $6.335 billion.
- Available committed credit facilities were approximately $6.494 billion, including two revolving facilities totaling $6.0 billion and a $1.3 billion receivable repurchase facility with $523 million available at June 30, 2019. The company also reported approximately $378 million of unused uncommitted bank lines.
- At June 30, 2019, $817 million of notes receivable were pledged against $777 million of borrowings under the receivable repurchase facility. The company was in compliance with its maximum 0.60 total-debt-to-total-capitalization covenant.
- Management stated that operating cash flow, capital markets access, commercial paper and committed facilities should provide adequate liquidity for seasonal working capital, capital spending and pension obligations.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear quantitative full-year revenue or earnings guidance figure. Management highlighted approximately $200 million of realized cost synergies in the first half of 2019 and a $1.2 billion merger-related cost-synergy commitment.
- The Synergy Program generated $122 million of restructuring charges in the first half and had approximately $160 million of anticipated future cash payments. Actions were expected to be substantially complete by the end of 2019.
- Discontinued operations produced a $1.077 billion quarterly after-tax loss and a $717 million first-half loss, primarily due to a $1.102 billion noncash goodwill impairment and a $63 million impairment of an equity-method investment associated with divested specialty-products businesses.
- Management announced a $1 billion share-repurchase authorization without an expiration date, expected to be completed over approximately three years, and a $0.13-per-share dividend payable September 13, 2019.
- Environmental remediation accruals were $357 million, with reasonably possible exposure up to $725 million above the accrued amount. The company also retained or received indemnification arrangements involving DuPont, Dow and Chemours.
- Key contingencies include PFAS/PFOA litigation and investigations, Chemours indemnification disputes, environmental matters, product liability, regulatory approvals, intellectual-property claims, customer credit exposure, pension obligations and the La Porte plant investigations, which could result in sanctions or criminal penalties.
- The business remains highly seasonal and exposed to weather, crop acreage, currency, agricultural commodity prices, input costs, competitive pricing, regulatory changes and supply-chain or cybersecurity disruptions.
Most Important Facts for Investors to Verify
- Reconcile EIDP standalone results with Corteva consolidated results, particularly the $4.160 billion related-party loan and the differing interest expense and equity balances.
- Assess normalized operating performance excluding discontinued operations, the $1.102 billion goodwill impairment, inventory step-up amortization, separation costs and restructuring charges.
- Verify the sustainability of Seed and Crop Protection volumes and margins after North American weather disruptions and competitive soybean pricing pressure.
- Review liquidity requirements created by seasonal customer financing, the December 2019 maturity of the receivable repurchase facility and the company’s access to commercial paper and revolving credit.
- Evaluate potential cash exposure from environmental remediation, PFAS/PFOA matters, Chemours disputes, indemnifications and pension obligations.
- Confirm execution of the separation, cost-synergy program, share repurchases and dividend policy, including their effects on future cash flow and leverage.