01—Abstract
Summary
Summary of the 10-K filed February 14, 2020. Cited figures are marked; the original filing is the authoritative source.
Corteva, Inc. (CTVA) completed its separation from DowDuPont (now DuPont de Nemours) on June 1, 2019, becoming a standalone pure-play agriculture company with two segments, seed and crop protection.
For FY2019, net sales were $13,846 milliona, down 3% from $14,287 million, with the decline driven by a 3% currency headwind and flat volume, as weather-related North American planting delays offset strong new product demand and EMEA corn gains. Reported results were weak: net loss attributable to Corteva was $(959) million, or $(1.28) per share, including a $1,102 million goodwill impairment in discontinued operations and $744 million of integration and separation costs. Pro forma operating EBITDA was $1,987 million (down from $2,072 million) and pro forma operating EPS was $1.43 (down from $1.52), which management frames as the more representative measure of ongoing performance.
The balance sheet was substantially de-levered after the separation. Total debt fell to $122 millionb from $7,938 million at year-end 2018, following roughly $4.6 billion of Make Whole and Term Loan repayments and a $2.0 billion Special Mandatory Redemption, with DowDuPont contributions funding much of the paydown. Cash and marketable securities were $1,769 million, and the company holds roughly $6.4 billion of available credit lines.
Management guides 2020 net sales up 4-5%, operating EBITDA up about 12%, and operating EPS up about 5%, supported by the U.S.-China Phase One deal, USMCA, and $1.2 billionc of cumulative cost synergies by 2021 (about $350 million realized in 2019). Key investor risks include a 2019 seed segment excess fair value cushion of only about 12% over carrying value (a potential future impairment risk), an accelerated prepaid royalty amortization of roughly $160 million expected in 2020 as Roundup Ready 2 traits are phased out in favor of Enlist E3, pending PFAS/PFOA litigation and environmental accruals of $336 million (with up to $620 million of potential additional exposure), and indemnification disputes with Chemours. The company also faces a Canadian Competition Bureau inquiry and an ongoing criminal EPA/DOJ investigation related to the La Porte, Texas incident.
02—Key points
Key Highlights
- Net sales of $13.8 billion declined 3% y/y; volume was flat as weather-related North American planting delays offset new product launches and EMEA corn gains, while currency subtracted 3 points.
- GAAP net loss attributable to Corteva was $(959) million ($(1.28) per share), driven by a $1,102 million goodwill impairment in discontinued operations and $744 million of integration and separation costs.
- Pro forma operating EBITDA was $1,987 million (vs. $2,072 million in 2018) and pro forma operating EPS was $1.43 (vs. $1.52), reflecting non-GAAP measures that exclude significant items and amortization of acquired intangibles.
- Total debt was reduced to $122 million from $7.9 billion after separation-related repayments; cash and marketable securities were $1.8 billion, with about $6.4 billion of credit lines available.
- 2020 guidance calls for net sales growth of 4-5%, operating EBITDA up about 12%, and operating EPS up about 5%, with cost synergies of $1.2 billion targeted through 2021.
- Seed reporting unit's fair value exceeds carrying value by only about 12%, creating elevated future goodwill impairment risk; germplasm intangibles were moved to a 25-year amortization life, adding roughly $250 million of annual amortization from 2020.
- Environmental accruals of $336 million with reasonably possible additional exposure up to $620 million, plus PFAS/PFOA litigation and an ongoing criminal EPA/DOJ investigation related to the La Porte plant incident.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 14, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $13.85B$14.29B | −3.1% |
| Cost of Revenue | $8.57B$9.95B | −13.8% |
| Gross Profit | $5.27B$4.34B | +21.5% |
| R&D Expenses | $1.15B$1.35B | −15.4% |
| SG&A Expenses | $3.06B$3.04B | +0.8% |
| Net Income | -$959.00M-$5.07B | +81.1% |
| EPS (Basic) | $-1.28$-6.76 | +81.1% |
| EPS (Diluted) | $-1.28$-6.76 | +81.1% |
| Shares Outstanding (Basic) | 749.50M749.40M | 0.0% |
| Shares Outstanding (Diluted) | 749.50M749.40M | 0.0% |
05—Questions
Frequently Asked Questions
Why did Corteva report a large GAAP net loss in 2019 when management emphasizes positive operating earnings?
The GAAP net loss of $(959) million was driven mainly by a $1,102 million non-cash goodwill impairment recorded in discontinued operations (related to divested EID specialty products), plus $744 million of integration and separation costs and $222 million of restructuring and asset charges. Management's pro forma operating EPS of $1.43 excludes these significant items, the non-operating pension benefit, and amortization of intangibles existing at separation. Investors should weigh both measures, since the excluded items have recurred across 2017-2019.
How will the Roundup Ready 2 trait transition affect future earnings?
Beginning January 1, 2020, Corteva will record accelerated prepaid royalty amortization as a restructuring charge, estimated at about $160 million in 2020 and roughly $500 million over five years. This reflects the planned shift to Enlist E3 soybeans, which will reduce usage of the Roundup Ready 2 Yield and Xtend traits starting in 2021. The charge is non-cash in the period but affects reported GAAP results and reduces near-term earnings quality comparability.
How exposed is Corteva to legacy EID liabilities such as PFAS and PFOA?
Corteva faces litigation over PFOA/PFAS from lawsuits in multiple states, a New Jersey natural resource damages directive, and fire-fighting foam cases. Chemours is currently defending and indemnifying EID in many matters, but has declined to indemnify Corteva directly in several cases and has disputed fraudulent conveyance claims. Chemours also sued in Delaware seeking to limit its indemnity obligations, which the company views as remote. Accrued environmental obligations are $336 million, with potential exposure up to $620 million above accruals, and management considers material impact unlikely but not impossible.
Is Corteva's seed business at risk of a goodwill impairment?
Possibly. At year-end 2019, the seed reporting unit's fair value exceeded its carrying value by only about 12%, versus a much larger cushion for other units. The seed unit carries $5.4 billion of goodwill and about $1.9 billion of indefinite-lived trademarks, and the germplasm asset ($6.2 billion) is now amortized. Adverse changes in pricing, volumes, currency, or discount rates could trigger a future non-cash impairment, and the 2018 charge of $4.5 billion shows the magnitude such a charge could reach.
How did the post-separation capital structure change, and what does it mean for shareholder returns?
Total debt dropped from $7.9 billion to $122 million after DowDuPont-funded repayments and the redemption of Make Whole, Term Loan, and Special Mandatory Redemption notes. The company began paying a $0.13 quarterly dividend in 2019 (total $0.26) and authorized a $1 billion share repurchase program, though only $25 million was used in 2019. Investors should note that the company retains a $457 million valuation allowance and relies on seasonal receivable financing, including a $1.3 billion 2020 repurchase facility, to fund working capital.
06—Continue