Corteva, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed February 14, 2020. The filing also provides unaudited quarterly data, including the three months ended December 31, 2019. Corteva became an independent, publicly traded agriculture company on June 1, 2019, combining EID’s seed and crop protection businesses with Dow AgroSciences. The annual comparison with 2018 is affected by business separations and other transactions; certain 2017 periods are identified as predecessor/successor and are not directly comparable.
Financial results and liquidity
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Net sales | $13.846 billion | $14.287 billion | Down 3%; currency reduced sales 3%, while volume and local price/mix were approximately flat overall. |
| Loss from continuing operations after tax | $270 million | $6.775 billion | Improved substantially; 2018 included a $4.503 billion goodwill impairment and higher inventory step-up amortization. |
| Net loss attributable to Corteva | $959 million | $5.065 billion | 2019 included a $671 million after-tax loss from discontinued operations. |
| Basic and diluted EPS | Continuing operations: $(0.38); total: $(1.28) | Continuing operations: $(9.08); total: $(6.76) | 2018 figures were heavily affected by impairment and separation-related items. |
| Operating cash flow | $1.070 billion | $483 million | Higher mainly due to lower pension contributions and integration/separation costs; working-capital changes partly offset the improvement. |
| Capital expenditures | $1.163 billion | $1.501 billion | Management forecast $500–$600 million for 2020. |
| Cash and marketable securities | $1.769 billion | $2.275 billion | Includes $1.5 billion held by foreign subsidiaries. |
| Total debt | $122 million | $7.938 billion | Sharp decline following debt redemptions and repayment transactions. |
| Working capital | $5.281 billion | $3.740 billion | Year-end 2018 included substantial discontinued-operation balances, limiting comparability. |
Reported cost of goods sold was $8.575 billion, or 62% of sales, versus $9.948 billion, or 70%, in 2018. This comparison benefited from inventory step-up amortization falling to $272 million from $1.554 billion. On a pro forma basis, COGS was 61% of sales versus 59% in 2018, reflecting higher seed and crop protection input costs, partly offset by synergies. Research and development was $1.147 billion (8% of sales), down from $1.355 billion; SG&A was $3.065 billion (22% of sales), slightly above 2018. Interest expense declined to $136 million from $337 million.
Pro forma Operating EBITDA, a non-GAAP measure, was $1.987 billion, down from $2.072 billion. Pro forma operating EPS was $1.43 versus $1.52. These measures exclude significant items and are not substitutes for GAAP results.
Fourth-quarter results
For the quarter ended December 31, 2019, net sales were $2.983 billion versus $2.815 billion in the prior-year quarter. Loss from continuing operations after tax was $42 million versus $1.070 billion; net loss attributable to Corteva was $21 million versus $531 million. Continuing-operations EPS was $(0.06) versus $(1.43). The filing’s quarterly table identifies a $34 million tax benefit in fourth-quarter 2019 related to release of a Swiss valuation allowance. The 2018 quarter included significant impairment, restructuring, integration, and tax items.
Segments and material changes
| Segment | 2019 net sales | 2018 net sales | 2019 pro forma segment Operating EBITDA |
|---|---|---|---|
| Seed | $7.590 billion | $7.842 billion | $1.040 billion, down 9% |
| Crop protection | $6.256 billion | $6.445 billion | $1.066 billion, down 1% |
North American weather-related planting delays reduced planted soybean area and caused lost spring crop-protection applications. Currency, particularly the Brazilian real and euro, also pressured results. New product demand and gains in some markets partly offset these impacts; North American competitive pricing, incentives, and higher input costs weighed on performance.
Synergies of approximately $350 million were realized in 2019; management said it remained on track for $1.2 billion through 2021. Integration and separation costs were $744 million, down from $992 million. Restructuring and asset-related charges were $222 million. Corteva recorded $144 million of non-cash seed intangible impairments in 2019 and no goodwill impairment; 2018 included a $4.503 billion goodwill impairment charge in continuing operations and a $1.102 billion goodwill impairment in discontinued operations.
Outlook, risks and contingencies
- 2020 outlook: Management expected net sales to rise 4–5%, Operating EBITDA to increase approximately 12%, and Operating EPS to increase approximately 5%, with minimal year-over-year currency impact. The outlook assumed more normal North American conditions, continued new-product penetration, synergies, and productivity actions. Forward-looking non-GAAP measures were not reconciled to GAAP because certain items could not be predicted without unreasonable effort.
- Portfolio and royalties: Corteva accelerated its Enlist E3 soybean platform transition, expecting to reduce Roundup Ready 2 Yield and Roundup Ready 2 Xtend volumes beginning in 2021. Management forecast approximately $160 million of non-cash accelerated royalty amortization in 2020 and about $500 million over five years. Germplasm amortization was also expected to increase annual expense by approximately $250 million.
- Operating risks: Key exposures include weather and climate, commodity and input-cost volatility, foreign exchange, competition and generic products, regulatory approvals and public acceptance of biotechnology, third-party supply and trait licenses, customer credit, cybersecurity and supply-chain disruption. The filing noted uncertainty about the potential effects of the coronavirus identified in China in late 2019.
- Environmental and legal matters: Environmental remediation accruals were $336 million, with reasonably possible exposure up to $620 million above the accrual. Litigation includes legacy PFAS/PFOA matters, the Chemours dispute over separation liabilities and indemnification, and investigations concerning the 2014 La Porte plant release. Management generally did not expect these matters to materially affect financial position or liquidity, but stated that outcomes could produce material costs in a period recognized. Corteva reported $479 million of indemnification assets under separation agreements; recovery depends in part on the counterparties’ ability and obligation to pay.
- Other balance-sheet considerations: The seed reporting unit’s estimated fair value exceeded carrying value by approximately 12%, leaving it relatively more exposed to future impairment. Defined-benefit pension and other post-employment obligations, tax assessments, and separation-related indemnities are subject to significant estimation and funding uncertainty.
Important facts for investors to verify
- Review the full-year and quarterly results alongside pro forma comparisons: reported figures include separation, discontinued-operation, inventory step-up, impairment, and other unusual items.
- Track delivery of the 2020 sales, EBITDA, and EPS outlook, including the assumed recovery in North American planting and the pace of Enlist E3 adoption.
- Monitor actual synergy realization against the $1.2 billion through-2021 target and the effect of higher amortization and accelerated prepaid royalties.
- Check liquidity through seasonal working-capital peaks, customer financing programs, and access to the $6.0 billion committed revolving facilities; confirm covenant compliance and debt levels.
- Follow developments in environmental and legacy litigation, indemnification recoveries from DuPont, Dow, and Chemours, and the potential for liabilities to exceed recorded accruals.
- Note that management and the auditor excluded Dow AgroSciences from the 2019 internal-control assessment; the business represented approximately 20% of assets and 40% of 2019 continuing-operations sales.