EIDP, Inc. (E. I. du Pont de Nemours and Company) — Q1 2021 Form 10-Q Summary
Reporting period: Three months ended March 31, 2021, compared with the three months ended March 31, 2020. The filing is a combined report for Corteva, Inc. and EID. Corteva owns 100% of EID; EID’s standalone results are substantially the same as Corteva’s, except primarily for preferred stock, related-party debt and related interest expense.
Business context
EID operates through Corteva’s two reportable segments: Seed and Crop Protection. EID continues as a separate reporting company and filed using the reduced-disclosure format permitted for a wholly owned subsidiary.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $4.178 billion | $3.956 billion | Up 6% |
| Income from continuing operations before taxes | $776 million | $376 million | Up $400 million |
| Income from continuing operations after taxes | $602 million | $257 million | Up $345 million |
| Net income attributable to EID | $591 million | $250 million | Up $341 million |
| Cash used in operating activities | $1.946 billion | $1.922 billion | Higher use of $24 million |
| Capital expenditures | $137 million | $128 million | Up $9 million |
| Cash, cash equivalents and marketable securities | $2.518 billion | $1.973 billion | Up $545 million year over year |
| Total debt, including related-party debt | $5.364 billion | $6.482 billion | Down $1.118 billion year over year |
Sales growth reflected approximately 3% volume growth and 3% price growth. Seed sales increased 2% to $2.492 billion, while Crop Protection sales increased 12% to $1.686 billion. Segment operating EBITDA was $938 million versus $819 million, and operating EBITDA was $904 million versus $794 million.
Approximate margins were: gross margin 42% in Q1 2021 versus 43% in Q1 2020; income from continuing operations after tax margin 14.4% versus 6.5%; and operating EBITDA margin 21.6% versus 20.1%. The gross-margin comparison was pressured by higher input, freight and logistics costs.
The effective tax rate on continuing operations improved to 22.4% from 31.6%. Interest expense declined to $22 million from $42 million, including lower interest on EID’s related-party loan from Corteva.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $2.404 billion at March 31, 2021; marketable securities were $114 million.
- EID had $1.250 billion of short-term borrowings and $1.102 billion of long-term debt, plus $3.012 billion of long-term related-party debt payable to Corteva.
- Operating cash flow remained negative because of seasonal working-capital needs, particularly a $2.012 billion increase in accounts and notes receivable.
- Investing activities provided $36 million, while financing activities provided $817 million, including $828 million of net short-term borrowings and $419 million of debt proceeds, partly offset by $447 million of related-party debt repayments.
- Corteva reported approximately $6.4 billion of unused committed and uncommitted credit lines. The company was in compliance with its revolving-credit covenant requiring total indebtedness to total capitalization not to exceed 0.60.
Material changes versus the prior comparable period
- Revenue growth was broad-based, led by Crop Protection, with particularly strong demand for new herbicide and insecticide products.
- Profit growth benefited from higher prices and volumes, lower SG&A, reduced exchange losses and a substantially lower tax rate.
- Other income increased to $337 million from $1 million, primarily because of a $325 million non-operating pension and other post-employment benefit credit. This was a significant contributor to reported earnings and is excluded from operating EBITDA.
- Restructuring and asset-related charges increased to $100 million from $70 million. Q1 2021 charges included $89 million from the new 2021 restructuring actions.
- Accounts and notes receivable increased to $6.792 billion from $4.926 billion at December 31, 2020, reflecting seasonal working-capital requirements. Inventories decreased to $4.321 billion from $4.882 billion.
- Cash, cash equivalents and marketable securities declined from $3.795 billion at December 31, 2020 to $2.518 billion at March 31, 2021, while debt increased from $4.564 billion to $5.364 billion, primarily to fund seasonal working capital.
Guidance, outlook and management commentary
- Management increased its 2021 net-sales outlook to approximately 3%–4% growth.
- Management reaffirmed its 2021 outlook for operating EBITDA growth of approximately 15%–20% and operating EPS growth of approximately 23%–30%.
- The 2021 restructuring program is expected to generate approximately $70 million of run-rate savings by 2023. Total pre-tax restructuring charges are expected to be approximately $130 million–$170 million, with approximately $80 million–$100 million of future cash payments, substantially completed in 2021.
- The company expects approximately $130 million of non-cash accelerated prepaid royalty amortization expense during 2021.
- Management cited higher raw-material, freight and logistics costs and continued supply-chain constraints, although product availability and customer deliveries were generally maintained.
Risks, contingencies and unusual items
- Legacy PFAS and PFOA litigation and environmental matters remain significant uncertainties. Under the January 2021 memorandum of understanding with Chemours and DuPont, Corteva and DuPont together may bear up to $2 billion of qualified PFAS expenses and escrow contributions, subject to specified allocation arrangements.
- Environmental remediation accruals were $333 million, with reasonably possible exposure of up to $577 million above accrued amounts. Management stated that losses related to certain PFOA matters could exceed accrued amounts but are not currently estimable.
- The company recorded $21 million of PFOA-related liabilities and a $16 million indemnification asset at March 31, 2021. It also paid $16 million during the quarter related to the Ohio MDL settlement.
- EID and a former employee were indicted in January 2021 in connection with the 2014 La Porte, Texas methyl mercaptan release. The trial was scheduled for March 2022; management stated it would vigorously defend the charges.
- COVID-19, weather, commodity and input-cost inflation, currency movements, regulatory approvals, product liability, competition, customer credit risk and supply-chain disruption could materially affect results.
- A 10% further deterioration in the Argentine peso-to-U.S.-dollar exchange rate was estimated to reduce pre-tax earnings by approximately $20 million.
Most important facts for an investor to verify
- Whether sales growth, pricing and new-product adoption support the increased 2021 outlook despite input-cost and logistics pressures.
- The sustainability of earnings excluding the $325 million non-operating pension and OPEB credit and other unusual items.
- Seasonal working-capital cash consumption, customer receivable collections and the resulting need for short-term borrowings.
- The final economic exposure from PFAS, PFOA, environmental remediation, indemnification and related litigation.
- Progress, cash costs and realized savings from the 2021 restructuring program.
- Execution of the $1 billion share-repurchase program and the effect of capital allocation on liquidity and debt.