EIDP, Inc. quarterly report, Q3 FY2022

EIDP, Inc. Form 10-Q Summary

Business context and reporting period

EIDP, Inc. (EID) filed a combined Form 10-Q with its parent, Corteva, Inc., for the quarter and nine months ended September 30, 2022. Corteva owns 100% of EID’s common stock. EID’s operations are substantially the same as Corteva’s agricultural business, comprising the Seed and Crop Protection segments. EID’s standalone results differ primarily because EID retains preferred stock and a related-party loan payable to Corteva.

The financial statements are unaudited and prepared under U.S. GAAP. Comparisons are primarily with the three and nine months ended September 30, 2021.

Financial performance and key metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Net sales	$2,777 million	$2,371 million	$13,630 million	$12,176 million
EID net income attributable to EID	$(339) million	$24 million	$1,185 million	$1,578 million
Income from continuing operations after tax	$(333) million	$27 million	$1,232 million	$1,637 million
Operating EBITDA, non-GAAP	$96 million	$(51) million	$2,854 million	$2,314 million
Segment operating EBITDA	$128 million	$(11) million	$2,937 million	$2,420 million
Cash used in operating activities	Not separately provided	Not separately provided	$(2,152) million	$(838) million

Sales increased 17% in the third quarter and 12% year to date. Q3 sales benefited from 13% price growth and 9% volume growth, offset by 4% unfavorable currency and 1% portfolio impact. Nine-month sales benefited from 10% price growth and 6% volume growth, offset by 4% unfavorable currency.

Seed: Q3 sales rose 17% to $862 million, while segment operating EBITDA was $(224) million versus $(217) million. Nine-month sales increased 5% to $7,333 million and segment operating EBITDA increased 4% to $1,585 million.
Crop Protection: Q3 sales rose 17% to $1,915 million and segment operating EBITDA increased 71% to $352 million. Nine-month sales increased 22% to $6,297 million and segment operating EBITDA increased 51% to $1,352 million.
Margins and costs: Q3 cost of goods sold was 68% of sales versus 66% in the prior-year quarter; nine-month cost of goods sold was 58% versus 57%. Higher input, freight and logistics costs were partly offset by pricing and productivity actions. Management expected supply-chain and inflationary pressures to continue, with possible easing on a year-over-year basis in late 2023.
Cash flow: Nine-month operating cash use increased to $2.152 billion from $838 million, primarily because of higher receivables, inventories and deferred-revenue changes. Capital expenditures were $460 million versus $413 million.

Liquidity, debt and capital allocation

At September 30, 2022, EID reported cash and cash equivalents of $2.199 billion and marketable securities of $119 million.
EID reported total debt of approximately $3.919 billion, consisting of $1.576 billion of short-term borrowings, $1.277 billion of long-term debt and $1.066 billion of long-term related-party debt payable to Corteva. The related-party balance was $2.162 billion at December 31, 2021.
EID had $5.5 billion of committed and available revolving credit facilities, including facilities maturing in 2025, 2027 and 2023. The company also had a $500 million receivable repurchase facility expiring in December 2022 and approximately $85 million of unused foreign-currency bank credit lines.
The company was in compliance with the revolving-credit covenant requiring total indebtedness to total capitalization not to exceed 0.60.
Corteva repurchased $800 million of common stock during the first nine months and authorized an additional $2 billion repurchase program in September 2022. Common dividends paid during the period were $311 million at the Corteva consolidated level. EID also paid preferred dividends.

Material changes versus the prior comparable period

Revenue growth was strong, but reported profitability declined on a GAAP basis because of substantially higher restructuring charges, lower other income, currency losses, increased interest expense and higher operating costs.
EID’s Q3 net loss attributable to EID was $339 million versus income of $24 million in Q3 2021. Nine-month net income attributable to EID fell to $1.185 billion from $1.578 billion.
Other income declined to $23 million in Q3 and $89 million year to date, from $378 million and $1.013 billion, respectively. The prior-year amounts benefited from larger pension and other post-employment benefit credits and an equity-investment mark-to-market gain.
Restructuring and asset-related charges increased to $152 million in Q3 and $300 million year to date, versus $26 million and $261 million in the prior-year periods.
The company’s cash position declined by approximately $2.2 billion from year-end, while borrowings increased to fund seasonal working capital and capital expenditures.
In August 2022, the company transferred approximately $1.1 billion of pension obligations and related assets to an insurer, recording a noncash pretax settlement charge of approximately $25 million and a $110 million actuarial gain in accumulated other comprehensive income.

Guidance, outlook and management commentary

Management affirmed full-year 2022 net sales guidance of $17.2 billion to $17.5 billion.
Operating EBITDA guidance was increased to $3.0 billion to $3.1 billion.
Operating earnings per share guidance was $2.45 to $2.60.
Management expected approximately $305 million to $330 million of 2022 restructuring and other charges. Total 2022 restructuring actions were expected to generate $210 million to $220 million of run-rate savings by 2025 and be substantially complete in 2023.
The company announced its withdrawal from Russia. Russia represented approximately 2% of annual net sales; additional pretax charges of up to $20 million remained possible, primarily related to government receivables.
Corteva signed an agreement to acquire Symborg, a microbiological technology company, with closing expected in 2022. The preliminary purchase price allocation was expected during the fourth quarter.

Risks, contingencies and unusual items

Key operating risks include inflation and availability of raw materials, freight and logistics constraints, foreign-exchange volatility, agricultural commodity and planting conditions, regulatory approvals, product liability, competition, cybersecurity, climate and weather events, and the Russia-Ukraine conflict.
Legacy PFAS, PFOA, environmental and product-liability matters remain significant contingencies. Management stated that liabilities could exceed recorded amounts, but it could not estimate possible losses beyond accrued amounts.
At September 30, 2022, environmental accruals totaled $483 million, with potential exposure above accruals estimated at $596 million. Indemnification assets totaled $245 million. These amounts reflect management estimates and are subject to substantial uncertainty.
Under the PFAS memorandum of understanding with Chemours and DuPont, Corteva and DuPont share certain qualified costs with Chemours, subject to stated thresholds and limits. The company made required escrow deposits through September 30, 2022.
The FTC and ten state attorneys general filed an antitrust lawsuit against Corteva and a competitor on September 29, 2022. Private class actions were also filed. The company stated that it believes the claims are without merit.
Lorsban-related litigation resulted in a $40 million compensatory jury verdict and $250,000 loss-of-consortium award in the Abbot case; the company was pursuing post-trial relief and appeal. An estimated settlement reserve was included in Q3 significant items.
EID’s remaining criminal proceedings concerning the 2014 La Porte, Texas release included a trial scheduled for March 2023.
The company reported no goodwill impairment from its 2022 business-unit reorganization, but impairment testing depends on forecasts, discount rates, commodity prices and other market assumptions.

Most important facts for investors to verify

Whether full-year sales, Operating EBITDA and operating EPS guidance of $17.2 billion–$17.5 billion, $3.0 billion–$3.1 billion and $2.45–$2.60, respectively, was subsequently achieved.
The sustainability of Crop Protection pricing, volume growth and margin improvement amid input-cost, logistics and currency pressures.
The amount and timing of remaining restructuring charges, cash payments and projected savings.
The company’s ability to restore positive operating cash flow after $2.152 billion of nine-month cash use and to manage seasonal customer financing needs.
Changes in short-term borrowings, the December 2022 receivable repurchase facility and the May 2023 revolving-credit maturity.
Developments in PFAS, environmental, Lorsban, FTC antitrust and La Porte proceedings, including liabilities exceeding recorded accruals.
The financial impact and closing terms of the Symborg acquisition and the continuing Russia exit.