CORTEVA INC Cautionary Statements About Forward-Looking Statements
This report contains certain estimates and forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which are intended to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and may be identified by their use of words like "plans," "expects," "will," "anticipates," "believes," "intends," "projects," "estimates" or other words of similar meaning. All statements that address expectations or projections about the future, including statements aboutCorteva's strategy for growth, product development, regulatory approval, market position, anticipated benefits of recent acquisitions, timing of anticipated benefits from restructuring actions, outcome of contingencies, such as litigation and environmental matters, expenditures, and financial results, as well as expected benefits from, the separation ofCorteva from DuPont, are forward-looking statements. Forward-looking statements and other estimates are based on certain assumptions and expectations of future events which may not be accurate or realized. Forward-looking statements and other estimates also involve risks and uncertainties, many of which are beyondCorteva's control. While the list of factors presented below is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect onCorteva's business, results of operations and financial condition. Some of the important factors that could causeCorteva's actual results to differ materially from those projected in any such forward-looking statements include: (i) failure to successfully develop and commercializeCorteva's pipeline; (ii) effect of competition and consolidation inCorteva's industry; (iii) failure to obtain or maintain the necessary regulatory approvals for someCorteva's products; (iv) failure to enforceCorteva's intellectual property rights or defend against intellectual property claims asserted by others; (v) effect of competition from manufacturers of generic products; (vi) impact ofCorteva's dependence on third parties with respect to certain of its raw materials or licenses and commercialization; (vii) costs of complying with evolving regulatory requirements and the effect of actual or alleged violations of environmental laws or permit requirements; (viii) effect of the degree of public understanding and acceptance or perceived public acceptance ofCorteva's biotechnology and other agricultural products; (ix) effect of changes in agricultural and related policies of governments and international organizations; (x) effect of industrial espionage and other disruptions toCorteva's supply chain, information technology or network systems; (xi) competitor's establishment of an intermediary platform for distribution ofCorteva's products; (xii) effect of volatility inCorteva's input costs; (xiii) failure to raise capital through the capital markets or short-term borrowings on terms acceptable toCorteva ; (xiv) failure ofCorteva's customers to pay their debts toCorteva , including customer financing programs; (xv) failure to realize the anticipated benefits of the internal reorganizations taken by DowDuPont in connection with the spin-off ofCorteva , including failure to benefit from significant cost synergies; (xvi) risks related to the indemnification obligations of legacy EID liabilities in connection with the separation ofCorteva ; (xvii) increases in pension and other post-employment benefit plan funding obligations; (xviii) effect of compliance with laws and requirements and adverse judgments on litigation; (xix) risks related toCorteva's global operations; (xx) effect of climate change and unpredictable seasonal and weather factors; (xxi) effect of counterfeit products; (xxii) failure to effectively manage acquisitions, divestitures, alliances and other portfolio actions; (xxiii) risks related to non-cash charges from impairment of goodwill or intangible assets; (xxiv) risks related to COVID-19; (xxv) risks related to oil and commodity markets; and (xxvi) other risks related to the Separation from DowDuPont. Additionally, there may be other risks and uncertainties thatCorteva is unable to currently identify or thatCorteva does not currently expect to have a material impact on its business. Where, in any forward-looking statement or other estimate, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations ofCorteva's management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished.Corteva disclaims and does not undertake any obligation to update or revise any forward-looking statement, except as required by applicable law. A detailed discussion of some of the significant risks and uncertainties which may cause results and events to differ materially from such forward-looking statements is included in the section titled "Risk Factors" (Part II, Item 1A of this quarterly report on Form 10-Q). 41
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Table of Contents Recent Developments COVID-19 Pandemic OnMarch 11, 2020 , theWorld Health Organization ("WHO") declared the novel coronavirus disease ("COVID-19") a pandemic. Since the early days of the coronavirus outbreak,Corteva has taken steps to help protect the health and safety of its employees, customers, vendors, and stakeholders.Corteva has engaged crisis management teams at the country, regional and global level, and its Integrated Health Services Pandemic & Infectious Disease Planning Team has been monitoring the situation and developing guidelines and protocols that have been communicated to all of its employees globally. Overwhelmingly, countries andU.S. states have considered agriculture an "essential business"; therefore,Corteva is not subject to many of the restrictions imposed by the government, particularly on non-essential businesses, which, in certain cases, includes ordering businesses to close or limit operations or people to stay at home. While the company's business has experienced some localized operating disruptions, particularly around sourcing and logistics, these disruptions have been temporary and have not materially impacted the company's financial results. Additionally, the company has implemented mitigating strategies to limit the impact of supply chain disruptions, including leveraging the company's ability to use a multi-sourcing strategy and source key raw materials from multiple suppliers and countries. Furthermore, the company implemented remote work arrangements for non-essential employees and restricted business travel effective mid-March, and to date, these arrangements have not materially affected the company's ability to maintain its business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. The global health crisis caused by COVID-19 and the related government actions and stay at home orders have negatively impacted economic activity and increased political instability across the globe. The company has observed declining demand and price reductions in the oil and gas sector as business and consumer activity decelerates across the globe, which has impacted the price of corn. When COVID-19 is demonstrably contained, the company anticipates a rebound in economic activity, depending on the rate, pace, and effectiveness of the containment efforts deployed by various national, state, and local governments.Corteva will continue to actively monitor the situation and may take further actions altering its business operations that it determines are in the best interests of its stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on the company's business, including the effects on its customers, employees, and prospects, or on its financial results for the remainder of fiscal 2020 and beyond. With the increasing uncertainty in global markets, the company will continue to monitor various factors that could impact mid-term forecasted cash flows of the business, including, but not limited to currency fluctuations, expectations of future planted area (as influenced by consumer demand and ethanol markets) and relative commodity prices, which could trigger an assessment of recoverability of goodwill and other indefinite and definite-lived intangible assets. Execute to Win Productivity Program During the first quarter of 2020,Corteva approved restructuring actions designed to improve productivity through optimizing certain operational and organizational structures primarily related to the Execute to Win Productivity Program. As a result of these actions, the company expects to record total pre-tax restructuring charges of approximately$185 million , comprised of approximately$125 million of asset related charges (of which$30 million relates to asset retirement obligations), and$60 million of severance and related benefit costs. The restructuring actions associated with this charge are expected to be substantially complete in 2020. During the three months endedMarch 31, 2020 , the company recorded pre-tax charges of$63 million , recognized in restructuring and asset related charges - net in the company's interim Consolidated Statement of Operations comprised of$21 million of asset related charges and$42 million of severance and related benefit costs. Future cash payments related to this charge are anticipated to be approximately$90 million , primarily related to the payment of severance and related benefits and asset retirement obligations. The company expects$130 million of savings to be achieved on a run rate basis by 2023. Share Buyback Plan OnJune 26, 2019 ,Corteva, Inc. announced that its Board of Directors authorized a$1 billion share repurchase program to purchaseCorteva, Inc.'s common stock, par value$0.01 per share, without an expiration date. The program is expected to be completed in three years. The timing, price and volume of purchases will be based on market conditions, relevant securities laws and other factors. During the three months endedMarch 31, 2020 , the company purchased and retired 1,865,000 shares in the open market for a total cost of$50 million , with the last purchase completed onMarch 10, 2020 . 42
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Overview
The following is a summary of results from continuing operations for the three
months ended
• The company reported net sales of
same quarter last year, reflecting a 17 percent increase in volume and a 3
percent increase in local price, partially offset by a 3 percent decline
in currency and a 1 percent impact from portfolio.
• Cost of goods sold ("COGS") totaled
2020, up from $2,211 million in the first quarter of 2019, primarily
driven by increased volumes. The three months ended March 31, 2019
included $205 million of amortization of inventory step-up.
• Restructuring and asset related charges - net were $70 million in the
first quarter of 2020, an increase from
2019.
• There were no integration and separation costs in the first quarter of
2020, as compared to $212 million in the first quarter of 2019.
• Income from continuing operations after income taxes was
compared to a loss of $(184) million in the same quarter last year.
• Operating EBITDA was
months ended
in
cost-improvement actions more than offset currency headwinds. Refer to
page 51 for further discussion of the company's Non-GAAP financial
measures.
• The company realized cost synergies of approximately
three months ended
In addition to the financial highlights above, the following events occurred during or subsequent to the first quarter of 2020:
• The company repurchased
share repurchase program announced in the second quarter of 2019.
• The company announced it is suspending its full year 2020 Corporate
Outlook in light of the COVID-19 crisis and volatility it is creating in
the global markets. Refer to page 60 for further discussion.
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Selected Financial Data
Three Months Ended
In millions, except per share amounts March 31,
2020 2019
Net sales $ 3,956 $ 3,396
Cost of goods sold $ 2,269 $ 2,211
Percent of net sales 57 % 65 %
Research and development expense $ 280 $ 299
Percent of net sales 7 %
9 %
Selling, general and administrative expenses$ 757 $
735
Percent of net sales 19 %
22 %
Effective tax rate on continuing operations 31.1 %
26.7 %
Income (loss) from continuing operations after income taxes
$ 281 $
(184 )
Income (loss) from continuing operations available to
$ 271 $
(192 )
Basic earnings (loss) per share of common stock from continuing operations
$ 0.36 $ (0.26 ) Diluted earnings (loss) per share of common stock from continuing operations$ 0.36 $ (0.26 ) 44
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Table of Contents Results of OperationsNet Sales Net sales were$3,956 million and$3,396 million for the three months endedMarch 31, 2020 and 2019, respectively. The increase was primarily driven by a 17 percent increase in volume and a 3 percent increase in price, partially offset by a 3 percent decrease in currency and a 1 percent impact from portfolio. Volume gains were primarily driven by earlier seed deliveries due to improved weather conditions and the anticipated recovery of planted area inNorth America , strong early demand in EMEA due to perceived supply concerns from COVID-19, and strong demand for new products in crop protection. Pricing gains were largely driven by increased pricing to offset currency inLatin America and improved mix from new products in bothNorth America andLatin America . Unfavorable currency impacts were primarily driven by the Brazilian Real and the European Euro. The portfolio impact was due to prior year divestitures inNorth America andAsia Pacific . Three Months Ended March 31, 2020 2019 Net Sales Net Sales ($ Millions) % ($ Millions) % Worldwide$ 3,956 100 %$ 3,396 100 % North America 1,765 45 % 1,392 41 % EMEA 1,467 37 % 1,364 40 % Latin America 434 11 % 365 11 % Asia Pacific 290 7 % 275 8 % Q1 2020 vs. Q1 2019 Percent Change Due To: Net Sales Change Local Price & Portfolio / $ In millions $ % Product Mix Volume Currency Other North America $ 373 27 % 2 % 26 % - % (1 )% EMEA 103 8 % 2 % 9 % (3 )% - % Latin America 69 19 % 11 % 19 % (11 )% - % Asia Pacific 15 5 % 2 % 8 % (3 )% (2 )% Total $ 560 16 % 3 % 17 % (3 )% (1 )% Cost of Goods Sold COGS was$2,269 million and$2,211 million for the three months endedMarch 31, 2020 and 2019, respectively. The increase was primarily driven by higher volumes in both seed and crop protection and higher unit costs for crop protection, partially offset by favorable product mix in seed, ongoing cost synergies and productivity, and the lack of amortization of inventory step-up for the three months endedMarch 31, 2020 , as compared to$205 million recognized for the three months endedMarch 31, 2019 . COGS as a percentage of net sales was 57 percent and 65 percent for the three months endedMarch 31, 2020 and 2019, respectively. The amortization of inventory step-up was 6 percent of net sales for the three months endedMarch 31, 2019 . Research and Development Expense R&D expense was$280 million (7 percent of net sales) and$299 million (9 percent of net sales) for the three months endedMarch 31, 2020 and 2019, respectively. The decrease was driven primarily driven by ongoing cost synergies and productivity efforts and actions taken to assess and reduce spending in the first quarter of 2020. Selling, General and Administrative Expenses SG&A expenses were$757 million (19 percent of net sales) and$735 million (22 percent of net sales) for the three months endedMarch 31, 2020 and 2019, respectively. The increase was primarily driven by higher commissions and selling expenses due to higher volumes and increases in bad debt expense, partially offset by the settlement of a legal matter in the prior year, ongoing cost synergies and productivity efforts, and lower promotion and advertising expense. 45
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Amortization of Intangibles Intangible asset amortization was$163 million and$101 million for the three months endedMarch 31, 2020 and 2019, respectively. The increase was primarily driven by amortization of germplasm assets, which changed from an indefinite lived intangible asset to definite lived with a useful life of 25 years in the fourth quarter of 2019. See Note 12 - Other Intangible Assets, to the interim Consolidated Financial Statements for additional information. Restructuring and Asset Related Charges - Net Restructuring and asset related charges - net were$70 million and$61 million for the three months endedMarch 31, 2020 and 2019, respectively. The charges in the first quarter of 2020 primarily related to severance and related benefit costs and asset related charges under the Execute to Win Productivity Program, and there were no cash payments made during the three months endedMarch 31, 2020 . The charges in the first quarter of 2019 primarily related to asset related charges, contract termination charges, and severance and related benefit costs under the DowDuPont Cost Synergy Program. In addition, during the three months endedMarch 31, 2020 , the company recognized$10 million in restructuring and asset related charges, net in the interim consolidated statement of operations, from non-cash accelerated prepaid royalty amortization expense related to Roundup Ready 2 Yield® and Roundup Ready 2 Xtend® herbicide tolerance traits.
See Note 5 - Restructuring and Asset Related Charges, Net, to the interim Consolidated Financial Statements for additional information.
Integration and Separation Costs Integration and separation costs were$212 million for the three months endedMarch 31, 2019 . These costs primarily consisted of financial advisory, information technology, legal, accounting, consulting, and other professional advisory fees associated with the preparation and execution of activities related to the Distributions and the integration of EID's Pioneer and Crop Protection businesses with DAS. Other Income - Net Other income - net was$1 million and$31 million for the three months endedMarch 31, 2020 and 2019, respectively. The decrease was primarily due to higher net exchange losses and higher losses on asset sales, including a$53 million loss related to the expected sale of the La Porte site, for which the company signed an agreement during the three months endedMarch 31, 2020 , as compared to a$24 million loss related to DAS's sale of a joint venture related to synergy actions in the three months endedMarch 31, 2019 . This decrease was partially offset by an increase in non-operating pension and other post employment benefit credits. The company routinely uses forward exchange contracts to offset its net exposures, by currency denominated monetary assets and liabilities of its operations. The objective of this program is to maintain an approximately balanced position in foreign currencies in order to minimize, on an after-tax basis, the effects of exchange rate changes. The net pre-tax exchange gains and losses are recorded in other income - net and the related tax impact is recorded in provision for (benefit from) income taxes on continuing operations in the interim Consolidated Statement of Operations. The after-tax net exchange losses were$(78) million and$(33) million for the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively. The increase in net exchange loss was primarily driven by currency devaluations for the Ukrainian Hryvnia, Argentine Peso and the Mexican Peso.
See Note 7 - Supplementary Information, to the interim Consolidated Financial Statements for additional information.
Interest Expense Interest expense was$10 million and$59 million for the three months endedMarch 31, 2020 and 2019, respectively. The change was primarily driven by lower average long-term debt balances as a result of the redemption/repayment transactions in the second quarter of 2019. Provision for (Benefit from) Income Taxes on Continuing Operations The company's provision for income taxes on continuing operations was$127 million for the three months endedMarch 31, 2020 on pre-tax income from continuing operations of$408 million , resulting in an effective tax rate of 31.1 percent. The effective tax rate was unfavorably impacted by the tax impact of certain net exchange losses recognized on the re-measurement of the net monetary asset positions which were not tax-deductible in their local jurisdictions, as well as tax charges related to the issuance of stock-based compensation. 46
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The company's benefit from income taxes on continuing operations was$(67) million for the three months endedMarch 31, 2019 on a pre-tax loss from continuing operations of$(251) million , resulting in an effective tax rate of 26.7 percent. The effective tax rate was favorably impacted by a tax benefit of$102 million related to an internal legal entity restructuring associated with the Internal Reorganizations. The effective tax rate was unfavorably impacted non-tax-deductible amortization of the fair value step-up in inventories as a result of the Merger, as well as the impact of integration and separation costs, including a$32 million tax charge associated withU.S. state blended tax rate changes. Other unfavorable effective tax rate impacts included the tax impact of certain net exchange losses recognized on the re-measurement of the net monetary asset positions which were not tax-deductible in their local jurisdictions, as well as geographic mix of earnings. Income from Discontinued Operations After Tax Income from discontinued operations after tax was$1 million and$360 million for the three months endedMarch 31, 2020 and 2019, respectively. The three months endedMarch 31, 2019 reflects the operations of EID ECP and the EID Specialty Product Entities. Refer to Note 3 - Divestitures and Other Transactions for further information. EID Analysis of Operations As discussed in Note 1 - Basis of Presentation, to the EID Consolidated Financial Statements, EID is a subsidiary ofCorteva, Inc. and continues to be a reporting company, subject to the requirements of the Exchange Act. The below relates to EID only and is presented to provide an Analysis of Operations, only for the differences betweenEID and Corteva, Inc. Interest Expense EID's interest expense was$42 million and$59 million for the three months endedMarch 31, 2020 and 2019, respectively, and driven by the items noted on page 46, under the header "Interest Expense", partially offset by interest expense incurred on the related party loan betweenEID and Corteva, Inc. See Note 2 - Related Party Transactions, to the EID Consolidated Financial Statements for further information. Provision for (Benefit from) Income Taxes on Continuing Operations For the three months endedMarch 31, 2020 , EID had an effective tax rate of 31.6 percent on pre-tax income from continuing operations of$376 million , driven by the items noted on page 46, under the header "Provision for (Benefit from) Income Taxes on Continuing Operations" and a tax benefit related to the interest expense incurred on the related party loan betweenEID and Corteva, Inc. See Note 2 - Related Party Transactions, to the EID Consolidated Financial Statements for further information. Corporate Outlook The overall impact of COVID-19 on the company's consolidated results of operations for the three months endedMarch 31, 2020 was not material and was limited to localized operating disruptions (as previously discussed on page 42). However, given the economic volatility caused by COVID-19 and related government actions, the company is suspending the previously issued corporate outlook for the full year 2020, included in the company's 2019 Annual Report. As noted in the Liquidity and Capital Resources discussion, on pages 54 - 56, and Note 13 - Short-Term Borrowings, Long-Term Debt and Available Credit Facilities , to the interim Consolidated Financial Statements, the company maintains sufficient access to liquidity via commercial paper markets,$6 billion in revolving credit facilities, and$2 billion in cash and cash equivalents. With the increasing uncertainty in global markets, the company will continue to monitor near-term operating conditions with a focus on business continuity and any potential adverse effects on the company's financial results from lower demand for the company's products, such as declines in corn volumes related to lower corn commodity prices stemming from a drop in the use of corn for ethanol production, that could trigger an assessment of the recoverability of goodwill and other indefinite and definite-lived intangible assets. 47
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Supplemental Unaudited Pro Forma Financial Information The following supplemental unaudited pro forma statements of operations (the "unaudited pro forma statements of operations") forCorteva give effect to the Merger, the debt retirement transactions related to paying off or retiring portions of EID's existing debt liabilities (as discussed in Note 13 - Short-Term Borrowings, Long-Term Debt and Available Credit Facilities, to the interim Consolidated Financial Statements), and the separation and distribution to DowDuPont stockholders of all the outstanding shares ofCorteva common stock as if they had been consummated onJanuary 1, 2016 . For the periods presented below,Corteva's results for all periods prior to the Business Realignment and Internal Reorganization consist of the combined results of operations for Historical EID and DAS, andCorteva's results for all periods after the Business Realignment and Internal Reorganization represent the consolidated balances of the company. The unaudited pro forma statements of operations below were prepared in accordance with Article 11 of Regulation S-X, and events that are not expected to have a continuing impact on the combined results (e.g., inventory step-up costs) are excluded. One-time transaction-related costs incurred prior to, or concurrent with, the closing of the Merger, the debt redemptions/repayments, and the Corteva Distribution are not included in the unaudited pro forma combined statements of operations throughMarch 31, 2019 . The unaudited pro forma combined statements of operations do not reflect restructuring or integration activities or other costs following the separation and distribution transactions that may be incurred to achieve cost or growth synergies ofCorteva . As no assurance can be made that these costs will be incurred or the growth synergies will be achieved, no adjustment has been made. The unaudited pro forma statements of operations have been presented for informational purposes only and are not necessarily indicative of whatCorteva's results of operations actually would have been had the above transactions been completed onJanuary 1, 2016 . In addition, the unaudited pro forma statements of operations do not purport to project the future operating results of the company. The unaudited pro forma statements of operations were based on and should be read in conjunction with the audited Consolidated Financial Statements and Notes contained within the company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . 48
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