Corteva, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Corteva became an independent public company on June 1, 2019; its shares began regular-way trading as CTVA on June 3. Comparative periods include predecessor and carve-out results, and several businesses transferred out before the separation are reported as discontinued operations. Seasonality and these structural changes limit straightforward period comparisons.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $5.556 billion | $5.731 billion | $8.952 billion | $9.525 billion |
| Income from continuing operations after tax | $483 million | $375 million | $299 million | Loss of $63 million |
| Net income (loss) attributable to Corteva | Loss of $608 million | $694 million | Loss of $444 million | $587 million |
| Basic EPS, continuing operations | $0.63 | $0.49 | $0.37 | Loss of $0.11 |
| Basic EPS, total | Loss of $0.81 | $0.92 | Loss of $0.59 | $0.78 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | Use of $1.088 billion | Use of $1.590 billion |
Q2 sales fell 3%; first-half sales fell 6%. Management attributed weakness chiefly to weather-related planting delays and flooding in North America, unfavorable currency, and competitive soybean pricing. Weather-related North American declines reduced first-half continuing pre-tax income by an estimated $350 million. Q2 cost of goods sold was 55% of sales versus 64% a year earlier; first-half cost of goods sold was 59% versus 68%, largely reflecting lower merger-related inventory step-up amortization. These percentages imply gross margins of approximately 45% and 41%, respectively, versus 36% and 32% in the comparable periods.
Q2 continuing pre-tax income was $753 million, with a 35.9% effective tax rate; first-half continuing pre-tax income was $502 million, with a 40.4% rate. Separation-related state tax changes and foreign tax provisions increased tax expense, partly offset by other tax benefits. Integration and separation costs rose to $330 million in Q2 and $542 million in the first half. Interest expense declined to $34 million in Q2 and $93 million in the first half, primarily because of lower average debt.
Segment operating EBITDA was $1.486 billion in Q2, compared with $1.581 billion pro forma in Q2 2018; first-half EBITDA was $2.031 billion versus $2.344 billion pro forma. Seed Q2 sales and EBITDA were $3.699 billion and $1.036 billion, respectively, with EBITDA down 11%; Crop Protection sales and EBITDA were $1.857 billion and $450 million, with EBITDA up 6%. First-half EBITDA declined 15% in Seed and 10% in Crop Protection. The company reported about $200 million of realized cost synergies in the first half.
At June 30, cash and cash equivalents were $2.077 billion and marketable securities were $6 million. Total debt was $2.175 billion, including $2.058 billion of short-term borrowings and finance lease obligations and $117 million of long-term debt. Available committed and uncommitted credit lines were approximately $6.9 billion; Corteva reported compliance with its credit-facility covenant. First-half capital expenditures were $834 million. Current assets were $14.521 billion and current liabilities were $8.614 billion.
Material changes and unusual items
- Corteva completed its separation from DuPont on June 1, 2019. The filing also reflects earlier transfers of the EID ECP and specialty-products businesses; results for those businesses are presented as discontinued operations.
- Discontinued operations produced a Q2 after-tax loss of $1.077 billion and a first-half loss of $717 million. This included a $1.102 billion non-cash goodwill impairment and a $63 million impairment of an equity-method investment related to specialty products. Consequently, continuing operations were profitable while total company results were losses.
- Debt repayments and redemptions materially changed the capital structure. EID repaid its $3.0 billion term loan, redeemed $1.530 billion of make-whole notes and $2.0 billion of special-mandatory-redemption notes, and recorded a $13 million early-extinguishment loss. Repayments were funded with operating cash and contributions from DowDuPont.
- First-half cash used in operations was $1.088 billion; cash used in investing was $674 million and cash used in financing was $685 million. The filing attributes the year-over-year improvement in operating cash use mainly to working-capital benefits.
Outlook, risks and contingencies
- No full-year revenue or earnings guidance is provided in the supplied filing text. Management said it expects to achieve $1.2 billion of merger-related cost synergies; approximately $200 million had been realized in the first half. The synergy program was expected to be substantially complete by year-end 2019, with approximately $160 million of future cash payments anticipated.
- The board authorized a $1 billion share-repurchase program without an expiration date; the company expected to complete it over three years. A $0.13-per-share dividend was declared, payable September 13, 2019.
- Management cited weather and seasonal variability, competitive and generic-product pressure, currency movements, input costs, regulatory approvals, product pipeline execution, customer credit and financing, and separation/integration execution as material risks.
- Environmental remediation accruals were $357 million. Management said reasonably possible exposure could be as much as $725 million above the accrued amount, reflecting estimation uncertainty. The company also disclosed legacy PFAS/PFOA matters, including pending litigation and indemnification arrangements with Chemours, DuPont and Dow. Management stated litigation outcomes are uncertain; adverse developments could materially affect results or cash flows.
- Corteva retained approximately $5.8 billion of pension and other post-employment benefit obligations. The filing also describes the Chemours lawsuit challenging liability allocations under the separation agreement and ongoing investigations and litigation involving legacy sites and the La Porte facility.
Most important facts for investors to verify
- Whether North American weather-related planting and sales impacts persist, and how they affect full-year results and receivables.
- Whether segment performance, especially Seed margins, recovers and announced synergies translate into durable savings after separation costs.
- The cash-flow and liquidity effects of seasonal customer financing, receivables programs, capital spending and debt obligations.
- Potential additional environmental, PFAS/PFOA, litigation and indemnification costs relative to recorded accruals and recovery assumptions.
- The recurring earnings profile after excluding discontinued operations, the specialty-products impairment, inventory step-up amortization, and separation and restructuring costs.