Corteva, Inc. 10-Q Summary — Quarter Ended March 31, 2019
Important scope note: Corteva itself had no business operations, assets or liabilities at March 31, 2019, other than formation-related items. The financial statements and results in this filing are those of predecessor E. I. du Pont de Nemours and Company (“Historical DuPont”), whose operations then included agriculture, materials science and specialty products. They do not represent Corteva as a standalone agriculture company.
Business context and reporting period
The filing covers the three months ended March 31, 2019, compared with the same period in 2018. DowDuPont completed the separation of Dow on April 1, 2019; the Corteva distribution was expected on June 1, 2019. Following internal reorganizations, Historical DuPont expected its subsequent-period reporting to reflect the businesses allocated to Corteva, with certain transferred businesses presented as discontinued operations.
Financial performance and liquidity
- Revenue: Net sales were $6.288 billion, down 6.1% from $6.699 billion. The filing attributes the decline mainly to lower North American volumes, principally in agriculture, lower Asia Pacific volumes in transportation and advanced polymers, and unfavorable currency in EMEA; pricing gains partly offset these factors. Agriculture sales fell to $2.108 billion from $2.343 billion.
- Profit and margins: Income from continuing operations before tax was $49 million, versus a $189 million loss. Net income attributable to Historical DuPont was $85 million, versus a $228 million loss. Cost of goods sold was 67.4% of sales versus 72.4%, implying gross margins of 32.6% and 27.6%, respectively. Lower inventory step-up amortization was a major contributor to the COGS improvement. Integration and separation costs increased to $405 million from $255 million.
- Taxes and unusual items: The company recorded a $40 million income tax benefit on $49 million of pretax income; the reported effective tax rate was negative 81.6%, favorably affected by a $102 million benefit from internal legal-entity restructuring. Sundry income of $157 million included a $55 million asset-sale gain and a $66 million non-operating pension and post-employment benefit credit, partly offset by $32 million of foreign-exchange losses.
- Cash flow: Operating activities used $1.422 billion, compared with $1.975 billion used in 2018. Management cited lower tax payments and higher customer prepayments. Investing activities used $514 million, including $625 million of capital expenditures; investing activities provided $382 million in the prior-year quarter. Financing activities provided $1.226 billion, versus $694 million used, primarily reflecting increased borrowings and lower distributions to DowDuPont. Cash, cash equivalents and restricted cash ended the quarter at $4.276 billion.
- Debt and liquidity: Total debt was $9.525 billion at March 31, up from $7.972 billion at December 31, 2018. Cash, cash equivalents and marketable securities were $3.814 billion, down from $4.500 billion. The company reported access to approximately $6.3 billion of committed and uncommitted unused credit lines and stated it expected operating cash generation and capital-market access to meet anticipated needs. It was in compliance with its term-loan financial covenant at quarter-end.
- Balance sheet: Total assets were $101.837 billion and total equity was $69.835 billion at March 31. Accounts receivable rose to $6.768 billion from $5.534 billion at year-end, while inventories declined to $7.147 billion from $7.407 billion.
Material changes versus the prior comparable period
- Sales declined by $411 million; lower sales volumes and currency effects were partly offset by pricing gains.
- Net income improved by $306 million, from a $221 million consolidated loss to $89 million of consolidated income. Results benefited from lower inventory step-up amortization, improved sundry income and the tax benefit from internal restructuring; higher separation costs were a partial offset.
- Operating cash use improved by $553 million, though the quarter remained cash-flow negative, consistent with seasonal working-capital needs.
- Debt rose by approximately $1.553 billion from December 31, 2018, while cash and marketable securities fell by approximately $686 million.
Outlook, risks and contingencies
- Separation and costs: The filing expected the Corteva distribution on June 1, 2019. Integration and separation costs were expected to remain significant in 2019. The Synergy Program was expected to incur total pretax restructuring charges of $695 million to $755 million; approximately $300 million to $350 million of future cash payments were anticipated, with actions substantially complete by year-end 2019. No standalone Corteva financial guidance is provided in this filing.
- Post-quarter impairment: Following the specialty-products distribution and related review, the company expected aggregate noncash impairment charges of $800 million to $1.3 billion, primarily goodwill, in the quarter ended June 30, 2019, classified in discontinued operations. The filing cited weaker industrial biosciences projections, including slowed biomaterials demand and challenging U.S. bioethanol conditions.
- Subsequent debt actions: Historical DuPont redeemed $1.530 billion of notes on April 22 and repaid its $3 billion term loan on May 2. The $4.6 billion total payment was funded with cash from operations and a $4.1 billion, five-year related-party revolving loan from Corteva at 4.275%. Historical DuPont anticipated an approximately $18 million early-extinguishment loss. It also redeemed $2 billion of 2020 notes on May 17, funded by a DowDuPont contribution.
- Weather and seasonality: Agricultural seed deliveries in North America were delayed by weather. The filing notes that weather, seasonal working-capital needs and customer financing can affect sales, cash flows and borrowing levels.
- Legal and environmental exposure: The company accrued $384 million for probable environmental remediation and restoration costs; reasonably possible additional exposure was estimated at up to $790 million above the accrual. Chemours indemnified the company for certain matters, subject to the relevant agreements and reservations. PFOA, GenX/PFAS and other environmental proceedings remain ongoing; management did not expect certain described PFOA liabilities to be material, but stated broader litigation outcomes are uncertain. Chemours filed a sealed complaint against Historical DuPont, Corteva and DowDuPont on May 13, 2019 concerning the separation agreement.
- Other risks: Disclosed risks include separation execution and costs, regulatory approvals, competition and generic products, product development, intellectual property, third-party supply and licensing relationships, environmental and product litigation, foreign exchange and trade conditions, cybersecurity, and adverse weather.
Important facts for investors to verify
- Use the predecessor-company financials with caution: they include businesses and assets that were not part of Corteva after the separation, and are not standalone Corteva historical results.
- Confirm the final separation perimeter, distribution completion, and the effects of common-control accounting and discontinued-operations presentation on subsequent comparative statements.
- Assess the composition and sustainability of the quarter’s earnings improvement, particularly the inventory step-up reduction, $102 million tax benefit, asset-sale gain, pension credit and elevated separation costs.
- Track seasonal cash conversion, receivables and customer prepayments, capital spending, and the effect of post-quarter debt repayments and the $4.1 billion related-party loan on Corteva’s capital structure.
- Monitor the expected $800 million to $1.3 billion impairment, environmental accruals and potential excess exposure, and developments in Chemours-related and other litigation.