Corteva, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. This combined filing also reports E. I. du Pont de Nemours and Company (EID), a Corteva subsidiary. Unless noted, figures below are Corteva consolidated and in U.S. dollars.
Business context and results
Corteva is an agricultural inputs company with Seed and Crop Protection segments. The company became an independent public company in June 2019. Prior-period comparisons reflect continuing operations; certain businesses divested in 2019 are reported as discontinued operations.
- Net sales: $3.956 billion, up 16% from $3.396 billion. Management attributed the increase mainly to 17% higher volume and 3% higher local price, partly offset by 3% unfavorable currency and a 1% portfolio impact.
- Segments: Seed sales were $2.455 billion, up 25%; Crop Protection sales were $1.501 billion, up 5%. Segment operating EBITDA was $581 million for Seed and $238 million for Crop Protection. The company separately reported non-GAAP Operating EBITDA of $794 million, versus $518 million pro forma in Q1 2019; these EBITDA measures have different definitions.
- Profit: Income from continuing operations after tax was $281 million, compared with a $184 million loss. Net income attributable to Corteva was $272 million versus $164 million; Q1 2019 included $360 million of after-tax discontinued-operations income. Continuing-operations diluted EPS was $0.36 versus a loss of $0.26.
- Costs and margins: Cost of goods sold was $2.269 billion, or 57% of sales, versus $2.211 billion, or 65%. The prior-year cost included $205 million of inventory step-up amortization. R&D was $280 million (7% of sales); SG&A was $757 million (19%). Intangible amortization rose to $163 million from $101 million.
- Cash flow: Operating cash used was $1.930 billion versus $1.541 billion, mainly reflecting seasonal working-capital needs. Investing cash used was $130 million versus $502 million, including capital expenditures of $128 million versus $663 million. Financing provided $2.344 billion versus $1.312 billion. Ending cash, cash equivalents and restricted cash was $2.340 billion.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $1.973 billion; total debt was $2.610 billion, compared with $122 million at year-end 2019. The company had access to approximately $5.8 billion of unused committed and uncommitted credit lines, in addition to a $1.3 billion receivables repurchase facility. It drew $500 million on a revolving credit facility in March amid commercial-paper market volatility and reported compliance with its debt covenant.
- Balance sheet: Total assets were $42.978 billion and total equity was $24.079 billion at March 31, 2020. Receivables were $6.775 billion and inventories were $4.401 billion.
Material changes versus the prior comparable period
- Sales and both segment sales increased, supported by early deliveries and demand, particularly in North America and EMEA. Seed EBITDA increased to $581 million from $325 million pro forma; Crop Protection EBITDA rose to $238 million from $220 million pro forma.
- Continuing-operations earnings improved, while Q1 2019 reported net income was materially supported by discontinued-operations income. Integration and separation costs fell to zero from $212 million.
- Debt increased sharply from year-end 2019 to fund seasonal working capital and capital expenditures. Operating cash use also increased year over year.
- Other comprehensive loss was $663 million, primarily from foreign-currency translation, compared with $74 million in Q1 2019.
Outlook, management commentary, risks and unusual items
- COVID-19 and outlook: Management said Q1 effects on consolidated results were not material, although localized sourcing and logistics disruptions occurred. Corteva suspended its previously issued full-year 2020 corporate outlook because of COVID-related economic and market volatility. It cited uncertainty around demand, planted area, commodity prices, ethanol use, currencies, supply chains and customer collections.
- Productivity program: Newly approved Execute to Win actions are expected to generate approximately $185 million of pre-tax charges, including $125 million of asset-related charges and $60 million of severance costs. About $90 million of future cash payments are anticipated; management expects $130 million of annual run-rate savings by 2023. The company recorded $63 million of program charges in Q1.
- Unusual items: Results included a $53 million loss related to the expected sale of the La Porte site, net after-tax exchange losses of $78 million, and $10 million of accelerated prepaid royalty amortization. Management also reported approximately $70 million of cost synergies for the quarter.
- Environmental and litigation exposure: Accrued environmental remediation and restoration obligations were $359 million; reasonably possible exposure above accruals was estimated at up to $630 million. In a legacy PFOA personal-injury trial, a jury awarded $40 million compensatory damages and $10 million for loss of consortium; EID planned post-trial motions and an appeal. The filing says additional liabilities are uncertain and could affect results or cash flows, while management generally did not expect the described proceedings to have a material adverse effect.
- Other risks: Risks include COVID-related disruption and impairment, weaker ethanol and corn demand, foreign-exchange volatility, customer credit, regulatory and product risks, and legacy-liability indemnification. A Canadian Competition Bureau inquiry was ongoing; Corteva said it was cooperating and considered material liability remote.
- Capital returns: Corteva paid a $0.13-per-share dividend and repurchased $50 million of shares in Q1. Its $1 billion repurchase authorization had approximately $925 million remaining at March 31.
Important facts for investors to verify
- How COVID-19, ethanol demand, corn prices and customer purchasing affect full-year sales, cash flow and asset recoverability, particularly after management suspended guidance.
- Whether seasonal working-capital outflows reverse and whether increased short-term borrowing remains manageable; review debt maturities, available facilities and covenant headroom.
- Progress, cash costs and timing of the $185 million restructuring plan and the stated $130 million run-rate savings target.
- Developments in environmental accruals and indemnification recoveries, the PFOA verdict and appeal, and other legacy litigation.
- Comparability of Q1 2019 results, including discontinued operations and pro forma segment EBITDA, and the differing definitions of reported Operating EBITDA and segment operating EBITDA.