Corteva, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. This combined filing covers Corteva and its wholly owned subsidiary E. I. du Pont de Nemours and Company (EID); figures below are Corteva consolidated unless stated otherwise. Prior-year comparisons are affected by the 2019 separation and discontinued operations.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $5.191 billion | $5.556 billion | $9.147 billion | $8.952 billion |
| Income from continuing operations, after tax | $766 million | $483 million | $1.047 billion | $299 million |
| Net income (loss) attributable to Corteva | $760 million | $(608) million | $1.032 billion | $(444) million |
| Diluted EPS from continuing operations | $1.01 | $0.63 | $1.37 | $0.37 |
| Operating EBITDA, non-GAAP | $1.236 billion | $1.452 billion | $2.030 billion | $1.970 billion |
- Q2 sales fell 7% year over year, reflecting lower volume and unfavorable currency, partly offset by price. First-half sales rose 2%, on 4% higher volume and 1% higher local price, partly offset by currency.
- Q2 cost of goods sold was 54% of sales versus 55% a year earlier; first-half cost of goods sold was 56% versus 59%. Lower currency costs, productivity and the absence of prior-year inventory step-up amortization contributed to the improvement.
- Q2 operating EBITDA declined as volume, selling costs and currency pressures outweighed pricing and productivity. First-half operating EBITDA increased modestly. The filing separately reports Q2 segment operating EBITDA of $1.265 billion; the company-wide non-GAAP measure is $1.236 billion.
- Cash used in operating activities was $869 million in the first half, compared with $1.088 billion in the prior-year period. Investing used $252 million, including $202 million of capital expenditures; financing provided $2.214 billion.
- At June 30, cash and cash equivalents were $2.809 billion and marketable securities were $60 million. Total debt was $2.631 billion, including $1.529 billion of short-term borrowings and finance lease obligations. Unused committed and uncommitted credit lines were approximately $6.3 billion; the $1.3 billion receivables repurchase facility is additional.
- Current assets were $14.422 billion and current liabilities $7.529 billion. The company reported $24.801 billion in total equity. Short-term borrowing costs averaged 1.0% at quarter-end.
Material changes versus prior comparable periods
- Q2 sales declined, while first-half sales increased. Seed first-half sales rose 6%; Crop Protection first-half sales declined 4%. Q2 declines included North American seed deliveries shifting into Q1 and a normalized Latin American Crop Protection season compared with 2019.
- Continuing-operations earnings improved, but reported net income comparisons also reflect large 2019 discontinued-operation losses, including a $1.102 billion goodwill impairment in discontinued operations. These prior-year items make net income less comparable than continuing-operations results.
- Integration and separation costs were zero in 2020, versus $330 million in Q2 2019 and $542 million in the first half of 2019. Interest expense also declined, to $14 million in Q2 and $24 million in the first half.
- Restructuring and asset-related charges rose to $179 million in Q2 and $249 million in the first half. These included non-cash accelerated amortization of prepaid royalties of $138 million in Q2 and $148 million in the first half.
- Debt increased from $122 million at December 31, 2019, principally reflecting seasonal working-capital financing and a May issuance of $1 billion in senior notes: $500 million due 2025 at 1.70% and $500 million due 2030 at 2.30%.
Outlook, commentary and risks
- Management’s 2020 outlook called for sales growth of approximately 1%–2%, Operating EBITDA ranging from down 4% to up 1%, and operating EPS ranging from down 13% to up 1% versus 2019. The outlook excludes potential further COVID-19 disruptions, material demand or payment changes, and additional currency acceleration; non-GAAP outlook measures were not reconciled to GAAP.
- The company expected approximately $130 million of annualized savings from its Execute to Win productivity program by 2023. It expected total pre-tax program charges of about $185 million, with $86 million of future cash payments anticipated.
- Management said agriculture was generally treated as essential during the pandemic and temporary operating disruptions had not materially affected results through the reporting date. However, COVID-19 had weakened oil and gas demand and corn-related markets, and uncertainty remained around demand, currencies, planted area, logistics and customer ability to pay.
- COVID-related changes to projections triggered interim impairment assessments. No goodwill impairment was recorded; reporting-unit fair values exceeded carrying values by more than 15%. The indefinite-lived tradename’s fair value approximated carrying value, but management flagged it as more exposed to future impairment if assumptions deteriorate.
- Environmental remediation liabilities accrued were $350 million; management said reasonably possible exposure could be up to $620 million above the accrual. The filing describes extensive legacy PFAS/PFOA litigation and indemnification arrangements. A 2020 PFOA-related jury verdict included $40 million compensatory damages and $10 million loss-of-consortium damages; EID planned post-trial motions and appeal. The company also disclosed FTC and Canadian Competition Bureau inquiries, which it was cooperating with and considered unlikely to result in material liability.
- Other risks include agricultural weather and commodity-price volatility, regulatory approvals, competition, intellectual-property issues, customer credit exposure, pension funding needs, and potential supply-chain and market disruptions.
Important facts for investors to verify
- Whether sales, volumes and margins recover as seasonal delivery timing normalizes, particularly in North America seed and Latin America Crop Protection.
- Whether management achieves its 2020 guidance and projected productivity savings, given currency, COVID-19, ethanol and corn-market uncertainties.
- The cash-flow and debt implications of seasonal working capital, customer financing, the receivables repurchase facility and the new senior notes.
- Whether impairment assumptions remain supportable, especially for the tradename asset, and whether accelerated prepaid royalty charges recur.
- The ultimate exposure, indemnification recoveries and cash timing for environmental remediation, PFAS/PFOA matters and other legacy liabilities.