Corteva, Inc. quarterly report, Q3 FY2020

Corteva, Inc. — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in millions of dollars unless stated otherwise. Corteva is an agriculture company operating through Seed and Crop Protection segments. The combined filing also includes E. I. du Pont de Nemours and Company (EID); figures below are Corteva consolidated figures unless otherwise noted.

Financial performance

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Net sales	$1,863	$1,911	$11,010	$10,863
Net income (loss) attributable to Corteva	$(392)	$(494)	$640	$(938)
Diluted EPS from continuing operations	$(0.52)	$(0.69)	$0.85	$(0.32)
Cash from (used for) operating activities	Not separately presented for the quarter	$(1,237)	$(2,303)

• Q3 sales declined 3%: volume rose 7% and local price rose 2%, offset by an 11% currency headwind and a 1% negative portfolio impact. For the first nine months, sales increased 1%, with volume up 4% and local price up 2%, partly offset by currency down 4% and portfolio down 1%.
• Cost of goods sold was 70% of sales in Q3 versus 71% a year earlier, and 58% year to date versus 61%. Lower costs reflected currency benefits, productivity and synergies; the year-to-date comparison also benefited from the prior-year inventory step-up amortization.
• Q3 GAAP loss from continuing operations after tax was $390, versus a $527 loss. Nine-month continuing-operations income after tax was $657, compared with a $228 loss.
• Operating EBITDA, a non-GAAP measure, was a loss of $179 in Q3 versus a loss of $207; year-to-date it was $1,851 versus $1,763 on a pro forma basis. Segment operating EBITDA totaled $1,932 year to date; this differs from company Operating EBITDA because of corporate costs and measure definitions.
• Q3 Seed sales fell to $523 from $681, while Crop Protection sales increased to $1,340 from $1,230. Year to date, Seed sales were $6,516 and Crop Protection sales were $4,494.

Liquidity, debt and cash flow

• At September 30, cash, cash equivalents and marketable securities totaled $2,920; total debt was $3,244. Debt rose from $122 at year-end 2019, primarily reflecting seasonal funding needs and a May debt offering.
• Current assets were $14,088 and current liabilities $7,734. The company had approximately $6.4 billion of committed and uncommitted unused credit lines, plus a $1.3 billion receivable repurchase facility expiring in December 2020.
• Nine-month investing cash use was $445, including $301 of capital expenditures. Financing provided $2,695, including $2,434 of debt proceeds. Operating cash use improved from the prior year, but remained substantial, driven in part by seasonal working-capital needs.
• In May 2020 EID issued $500 of 1.70% notes due 2025 and $500 of 2.30% notes due 2030. Corteva drew $500 on a revolving facility in March amid market volatility and repaid it in June. The company reported compliance with its debt covenant.

Changes, outlook and notable items

• Compared with 2019, integration and separation costs were nil in 2020 (versus $152 in Q3 and $694 year to date). Conversely, year-to-date restructuring and asset-related charges increased to $298 from $167.
• 2020 restructuring charges included $158 of non-cash accelerated prepaid royalty amortization and $134 under the Execute to Win productivity program. The company expects total program charges of about $185, approximately $85 of future cash payments, and $130 of annualized savings by 2023.
• Management forecast full-year 2020 sales growth of approximately 1%–2%, Operating EBITDA change of down 4% to up 1%, and Operating EPS change of down 13% to up 1% versus 2019. The outlook excludes potential further COVID-19 disruptions, significant demand or customer-payment changes, and additional currency acceleration. These are non-GAAP outlook measures that the company said it could not reconcile to GAAP without unreasonable effort.
• Management said temporary COVID-related sourcing and logistics disruptions had not materially affected results to date, but warned that the pandemic, currency movements, commodity and ethanol demand, planting expectations and customer credit could affect future results. The company performed an interim impairment review after COVID-related forecast changes; goodwill headroom exceeded 15% for each reporting unit, with no goodwill impairment, but the indefinite-lived tradename was considered at higher risk if assumptions deteriorate.
• Environmental remediation liabilities accrued were $342, with reasonably possible exposure up to $610 above the accrual. Litigation includes legacy PFAS/PFOA matters, a $50 jury verdict in a 2020 personal-injury case (subject to post-trial motions and appeal), and ongoing disputes and indemnification arrangements involving Chemours. The filing states outcomes are uncertain; environmental costs above accruals could materially affect results, financial condition or cash flows.
• Other notable items include a $53 loss related to the expected sale of the La Porte site, $124 of nine-month after-tax foreign-exchange losses, and a $51 tax benefit from a return-to-accrual adjustment. Corteva had repurchased approximately $200 of shares through October 30, 2020 and expected to complete its $1 billion authorization by the end of 2021.

Important facts for investors to verify

• Whether seasonal working-capital outflows reverse and operating cash generation improves, particularly given customer financing and receivables exposure.
• Whether full-year sales, Operating EBITDA and Operating EPS guidance is achieved as currency, crop prices, ethanol demand and planting conditions evolve.
• Repayment or refinancing of seasonal borrowings and the December 2020 expiration of the receivable repurchase facility; monitor debt and liquidity against the covenant.
• Potential changes in environmental remediation exposure, PFAS/PFOA litigation outcomes, and the collectability or scope of related indemnifications.
• Whether cost savings materialize as planned and whether the tradename or other assets require impairment if forecast assumptions weaken.