Corteva, Inc. - Quarter Report: 2020 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-38710
Corteva, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 82-4979096 | ||||||
(State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||
974 Centre Road, | Wilmington, | Delaware | 19805 | (302) | 485-3000 | ||
(Address of Principal Executive Offices) (Zip Code) | (Registrant’s Telephone Number, including area code) | ||||||
Commission File Number 1-815
E. I. du Pont de Nemours and Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 51-0014090 | ||||||
(State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||
974 Centre Road, | Wilmington, | Delaware | 19805 | (302) | 485-3000 | ||
(Address of Principal Executive Offices) (Zip Code) | (Registrant’s Telephone Number, including area code) | ||||||
Securities registered pursuant to Section 12(b) of the Act for Corteva, Inc.:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | CTVA | New York Stock Exchange |
Securities registered pursuant to Section 12(b) of the Act for E. I. du Pont de Nemours and Company:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
$3.50 Series Preferred Stock | CTAPrA | New York Stock Exchange |
$4.50 Series Preferred Stock | CTAPrB | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Corteva, Inc. Yes x No o
E. I. du Pont de Nemours and Company Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)
Corteva, Inc. Yes x No o
E. I. du Pont de Nemours and Company Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Corteva, Inc. | Large Accelerated Filer | x | Accelerated Filer o | Non-Accelerated Filer | o | Smaller reporting company o | Emerging growth company o |
E. I. du Pont de Nemours and Company | Large Accelerated Filer | o | Accelerated Filer o | Non-Accelerated Filer | x | Smaller reporting company o | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Corteva, Inc. ☐
E. I. du Pont de Nemours and Company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Corteva, Inc. Yes ☐ No x
E. I. du Pont de Nemours and Company Yes ☐ No x
Corteva, Inc. had 748,370,000 shares of common stock, par value $0.01 per share, outstanding at April 30, 2020.
E. I. du Pont de Nemours and Company had 200 shares of common stock, par value $0.30 per share, outstanding at April 30, 2020, all of which are held by Corteva, Inc.
E. I. du Pont de Nemours and Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q (as modified by a grant of no-action relief dated February 12, 2018) and is therefore filing this form with reduced disclosure format.
CORTEVA, INC.
E. I. DU PONT DE NEMOURS AND COMPANY
Table of Contents
Page | |||
1
Explanatory Note
On June 1, 2019, Corteva, Inc. became an independent, publicly traded company through the previously announced separation (the “Separation”) of the agriculture business of DowDuPont. The separation was effectuated through a pro rata distribution (the “Corteva Distribution”) of all of the then-issued and outstanding shares of common stock, par value $0.01 per share, of Corteva, Inc., which was then a wholly-owned subsidiary of DowDuPont, to holders of record of DowDuPont common stock as of the close of business on May 24, 2019.
Corteva owns 100% of the outstanding common stock of EID, and EID owns, directly or indirectly, 100% of DAS. EID is a subsidiary of Corteva, Inc. and continues to be a reporting company, subject to the requirements of the Securities Exchange Act of 1934, as amended.
Unless otherwise indicated or the context otherwise requires, references in this Quarterly Report on Form 10-Q to:
• "Corteva" or "the company" refers to Corteva, Inc. and its consolidated subsidiaries (including EID);
• "EID" refers to E. I. du Pont de Nemours and Company and its consolidated subsidiaries or E. I. du Pont de Nemours and Company excluding its consolidated subsidiaries, as the context may indicate;
• "DowDuPont" refers to DowDuPont Inc., and its subsidiaries prior to the Separation of Corteva defined below;
• "Historical Dow" refers to the Dow Chemical Company and its consolidated subsidiaries prior to the Internal Reorganization defined below;
• "Historical DuPont" refers to EID prior to the Internal Reorganization, defined below;
• "Internal Reorganizations" refers to the series of internal reorganization and realignment steps undertaken by EID and Historical Dow to realign its business into three groups: agriculture, materials science and specialty products. These steps include:
1. | the April 1, 2019 transfer of the assets and liabilities aligned with EID’s material science businesses including EID’s ethylene and ethylene copolymers business, excluding its ethylene acrylic elastomers business, (“EID ECP”) to DowDuPont, which were ultimately conveyed by DowDuPont to Dow; |
2. | the May 1, 2019 distribution of EID legal entities containing the assets and liabilities of EID’s specialty products business (the “EID Specialty Products Entities”) to DowDuPont; |
3. | the May 2, 2019 conveyance of Dow Ag Entities to EID; and |
4. | the May 31, 2019 contribution of EID to Corteva, Inc. Refer to the company’s Annual Report on Form 10-K for the year ended December 31, 2019 for further information. |
• "Dow Distribution" refers to the separation of DowDuPont's materials science business into a separate and independent public company, effective as of 5:00 pm ET on April 1, 2019, by way of a distribution of Dow Inc. through a pro rata dividend in-kind of all of the then-issued and outstanding shares of Dow’s common stock, par value $0.01 per share, to holders of DowDuPont's common stock, as of the close of business on March 21, 2019;
• "Distributions" refers to the Dow Distribution and the Corteva Distribution;
• "Merger” refers to the all-stock merger of equals strategic combination between Historical Dow and EID;
• "Merger Effectiveness Time” refers to August 31, 2017 at 11:59 pm ET;
• "Dow" refers to Dow Inc. after the Dow Distribution;
• "DuPont" refers to DuPont de Nemours, Inc. after the Separation of Corteva; and
• "DAS" refers to the agriculture business of Historical Dow, Dow AgroSciences.
On June 1, 2019, DowDuPont Inc. changed its registered name to DuPont de Nemours, Inc. Beginning on June 3, 2019, Corteva's common stock is traded on the New York Stock Exchange under the ticker symbol "CTVA".
This Quarterly Report on Form 10-Q is a combined report being filed separately by Corteva, Inc. and EID. The information in this Quarterly Report on Form 10-Q is equally applicable to Corteva, Inc. and EID, except where otherwise indicated.
The separate EID financial statements and footnotes for areas that differ from Corteva, are included within this Quarterly Report on Form 10-Q and begin on page 64. Footnotes of EID that are identical to that of Corteva are cross-referenced accordingly.
2
PART I. FINANCIAL INFORMATION
Item 1. | CONSOLIDATED FINANCIAL STATEMENTS |
Corteva, Inc.
Consolidated Statements of Operations (Unaudited)
(In millions, except per share amounts) | Three Months Ended March 31, | |||||
2020 | 2019 | |||||
Net sales | $ | 3,956 | $ | 3,396 | ||
Cost of goods sold | 2,269 | 2,211 | ||||
Research and development expense | 280 | 299 | ||||
Selling, general and administrative expenses | 757 | 735 | ||||
Amortization of intangibles | 163 | 101 | ||||
Restructuring and asset related charges - net | 70 | 61 | ||||
Integration and separation costs | — | 212 | ||||
Other income - net | 1 | 31 | ||||
Interest expense | 10 | 59 | ||||
Income (loss) from continuing operations before income taxes | 408 | (251 | ) | |||
Provision for (benefit from) income taxes on continuing operations | 127 | (67 | ) | |||
Income (loss) from continuing operations after income taxes | 281 | (184 | ) | |||
Income from discontinued operations after income taxes | 1 | 360 | ||||
Net income | 282 | 176 | ||||
Net income attributable to noncontrolling interests | 10 | 12 | ||||
Net income attributable to Corteva | $ | 272 | $ | 164 | ||
Basic earnings per share of common stock: | ||||||
Basic earnings (loss) per share of common stock from continuing operations | $ | 0.36 | $ | (0.26 | ) | |
Basic earnings per share of common stock from discontinued operations | — | 0.48 | ||||
Basic earnings per share of common stock | $ | 0.36 | $ | 0.22 | ||
Diluted earnings per share of common stock: | ||||||
Diluted earnings (loss) per share of common stock from continuing operations | $ | 0.36 | $ | (0.26 | ) | |
Diluted earnings per share of common stock from discontinued operations | — | 0.48 | ||||
Diluted earnings per share of common stock | $ | 0.36 | $ | 0.22 | ||
See Notes to the Consolidated Financial Statements beginning on page 8.
3
Corteva, Inc.
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
(In millions) | Three Months Ended March 31, | |||||
2020 | 2019 | |||||
Net income | $ | 282 | $ | 176 | ||
Other comprehensive loss - net of tax: | ||||||
Cumulative translation adjustments | (672 | ) | (72 | ) | ||
Adjustments to pension benefit plans | — | (3 | ) | |||
Adjustments to other benefit plans | 3 | — | ||||
Derivative instruments | 6 | 1 | ||||
Total other comprehensive loss | (663 | ) | (74 | ) | ||
Comprehensive (loss) income | (381 | ) | 102 | |||
Comprehensive income attributable to noncontrolling interests - net of tax | 10 | 12 | ||||
Comprehensive (loss) income attributable to Corteva | $ | (391 | ) | $ | 90 | |
See Notes to the Consolidated Financial Statements beginning on page 8.
4
Corteva, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(In millions, except share amounts) | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||
Assets | |||||||||
Current assets | |||||||||
Cash and cash equivalents | $ | 1,963 | $ | 1,764 | $ | 1,759 | |||
Marketable securities | 10 | 5 | 5 | ||||||
Accounts and notes receivable - net | 6,775 | 5,528 | 6,507 | ||||||
Inventories | 4,401 | 5,032 | 5,019 | ||||||
Other current assets | 1,530 | 1,190 | 1,318 | ||||||
Assets of discontinued operations - current | — | — | 9,453 | ||||||
Total current assets | 14,679 | 13,519 | 24,061 | ||||||
Investment in nonconsolidated affiliates | 64 | 66 | 77 | ||||||
Property, plant and equipment - net of accumulated depreciation (March 31, 2020 - $3,406; December 31, 2019 - $3,326; March 31, 2019 - $2,970) | 4,358 | 4,546 | 4,521 | ||||||
Goodwill | 10,027 | 10,229 | 10,203 | ||||||
Other intangible assets | 11,241 | 11,424 | 11,961 | ||||||
Deferred income taxes | 273 | 287 | 294 | ||||||
Other assets | 2,336 | 2,326 | 2,368 | ||||||
Assets of discontinued operations - non-current | — | — | 56,617 | ||||||
Total Assets | $ | 42,978 | $ | 42,397 | $ | 110,102 | |||
Liabilities and Equity | |||||||||
Current liabilities | |||||||||
Short-term borrowings and finance lease obligations | $ | 1,996 | $ | 7 | $ | 3,201 | |||
Accounts payable | 3,021 | 3,702 | 3,120 | ||||||
Income taxes payable | 143 | 95 | 195 | ||||||
Accrued and other current liabilities | 4,039 | 4,434 | 4,061 | ||||||
Liabilities of discontinued operations - current | — | — | 3,501 | ||||||
Total current liabilities | 9,199 | 8,238 | 14,078 | ||||||
Long-Term Debt | 614 | 115 | 6,297 | ||||||
Other Noncurrent Liabilities | |||||||||
Deferred income tax liabilities | 911 | 920 | 1,523 | ||||||
Pension and other post employment benefits - noncurrent | 6,186 | 6,377 | 5,554 | ||||||
Other noncurrent obligations | 1,989 | 2,192 | 2,064 | ||||||
Liabilities of discontinued operations - non-current | — | — | 5,512 | ||||||
Total noncurrent liabilities | 9,700 | 9,604 | 20,950 | ||||||
Commitments and contingent liabilities | |||||||||
Stockholders’ equity | |||||||||
Common stock, $0.01 par value; 1,666,667,000 shares authorized; issued at March 31, 2020 - 748,369,000; and December 31, 2019 - 748,577,000 | 7 | 7 | |||||||
Additional paid-in capital | 27,906 | 27,997 | |||||||
Divisional equity | 78,005 | ||||||||
Accumulated deficit | (155 | ) | (425 | ) | |||||
Accumulated other comprehensive loss | (3,933 | ) | (3,270 | ) | (3,434 | ) | |||
Total Corteva stockholders’ equity | 23,825 | 24,309 | 74,571 | ||||||
Noncontrolling interests | 254 | 246 | 503 | ||||||
Total equity | 24,079 | 24,555 | 75,074 | ||||||
Total Liabilities and Equity | $ | 42,978 | $ | 42,397 | $ | 110,102 | |||
See Notes to the Consolidated Financial Statements beginning on page 8.
5
Corteva, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions) | Three Months Ended March 31, | |||||
2020 | 2019 | |||||
Operating activities | ||||||
Net income | $ | 282 | $ | 176 | ||
Adjustments to reconcile net income to cash used for operating activities: | ||||||
Depreciation and amortization | 283 | 726 | ||||
Provision for (benefit from) deferred income tax | 26 | (220 | ) | |||
Net periodic pension benefit | (102 | ) | (75 | ) | ||
Pension contributions | (28 | ) | (50 | ) | ||
Net loss (gain) on sales of property, businesses, consolidated companies and investments | 46 | (65 | ) | |||
Restructuring and asset related charges - net | 70 | 106 | ||||
Amortization of inventory step-up | — | 205 | ||||
Other net loss | 138 | 92 | ||||
Changes in operating assets and liabilities - net | (2,645 | ) | (2,436 | ) | ||
Cash used for operating activities | (1,930 | ) | (1,541 | ) | ||
Investing activities | ||||||
Capital expenditures | (128 | ) | (663 | ) | ||
Proceeds from sales of property, businesses and consolidated companies - net of cash divested | 11 | 125 | ||||
Proceeds from sales of ownership interests in nonconsolidated affiliates | — | 21 | ||||
Purchases of investments | (67 | ) | (16 | ) | ||
Proceeds from sales and maturities of investments | 58 | 36 | ||||
Other investing activities - net | (4 | ) | (5 | ) | ||
Cash used for investing activities | (130 | ) | (502 | ) | ||
Financing activities | ||||||
Net change in borrowings (less than 90 days) | 1,619 | 814 | ||||
Proceeds from debt | 875 | 1,000 | ||||
Payments on debt | (1 | ) | (284 | ) | ||
Repurchase of common stock | (50 | ) | — | |||
Proceeds from exercise of stock options | 14 | 35 | ||||
Dividends paid to stockholders | (97 | ) | — | |||
Distributions to DowDuPont | — | (317 | ) | |||
Contributions from Dow | — | 88 | ||||
Other financing activities | (16 | ) | (24 | ) | ||
Cash provided by financing activities | 2,344 | 1,312 | ||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (117 | ) | 20 | |||
Increase (decrease) in cash, cash equivalents and restricted cash | 167 | (711 | ) | |||
Cash, cash equivalents and restricted cash at beginning of period | 2,173 | 5,024 | ||||
Cash, cash equivalents and restricted cash at end of period1 | $ | 2,340 | $ | 4,313 | ||
1. See page 19 for reconciliation of cash and cash equivalents and restricted cash presented in interim Condensed Consolidated Balance Sheets to total cash, cash equivalents and restricted cash presented in the interim Condensed Consolidated Statements of Cash Flows.
See Notes to the Consolidated Financial Statements beginning on page 8.
6
Corteva, Inc.
Consolidated Statements of Equity (Unaudited)
(In millions) | Common Stock | Additional Paid-in Capital | Divisional Equity | Retained Earnings (Accumulated deficit) | Accumulated Other Comp Loss | Treasury Stock | Non-controlling Interests | Total Equity | ||||||||||||||||
2019 | ||||||||||||||||||||||||
Balance at January 1, 2019 | $ | — | $ | — | $ | 78,020 | $ | — | $ | (3,360 | ) | $ | — | $ | 493 | $ | 75,153 | |||||||
Net income | 164 | 12 | 176 | |||||||||||||||||||||
Other comprehensive loss | (74 | ) | (74 | ) | ||||||||||||||||||||
Distributions to DowDuPont | (317 | ) | (317 | ) | ||||||||||||||||||||
Issuance of DowDuPont stock | 35 | 35 | ||||||||||||||||||||||
Share-based compensation | 18 | 18 | ||||||||||||||||||||||
Contributions from Dow | 88 | 88 | ||||||||||||||||||||||
Other - net | (3 | ) | (2 | ) | (5 | ) | ||||||||||||||||||
Balance at March 31, 2019 | $ | — | $ | — | $ | 78,005 | $ | — | $ | (3,434 | ) | $ | — | $ | 503 | $ | 75,074 | |||||||
(In millions) | Common Stock | Additional Paid-in Capital | Divisional Equity | (Accumulated deficit) Retained Earnings | Accumulated Other Comp Loss | Treasury Stock | Non-controlling Interests | Total Equity | ||||||||||||||
2020 | ||||||||||||||||||||||
Balance at January 1, 2020 | $ | 7 | $ | 27,997 | $ | (425 | ) | $ | (3,270 | ) | $ | — | $ | 246 | $ | 24,555 | ||||||
Net income | 272 | 10 | 282 | |||||||||||||||||||
Other comprehensive loss | (663 | ) | (663 | ) | ||||||||||||||||||
Common dividends ($0.13 per share) | (97 | ) | (97 | ) | ||||||||||||||||||
Issuance of Corteva stock | 14 | 14 | ||||||||||||||||||||
Share-based compensation | 2 | 2 | ||||||||||||||||||||
Common Stock Repurchase | (50 | ) | (50 | ) | ||||||||||||||||||
Other - net | 40 | (2 | ) | (2 | ) | 36 | ||||||||||||||||
Balance at March 31, 2020 | $ | 7 | $ | 27,906 | $ | (155 | ) | $ | (3,933 | ) | $ | — | $ | 254 | $ | 24,079 | ||||||
See Notes to the Consolidated Financial Statements beginning on page 8.
7
Corteva, Inc. | ||
Notes to the Consolidated Financial Statements (Unaudited) | ||
Table of Contents
Note | Page | |
8
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year. These interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2019, collectively referred to as the “2019 Annual Report.” The interim Consolidated Financial Statements include the accounts of the company and all of its subsidiaries in which a controlling interest is maintained.
Basis of Presentation
Certain reclassifications of prior year's data have been made to conform to current year's presentation. On April 1, 2019, EID completed the transference of the assets and liabilities aligned with EID’s materials science business, including EID’s ethylene and ethylene copolymers business, excluding its ethylene acrylic elastomers business, (“EID ECP”) to separate legal entities (the “Materials Science Entities”) that were ultimately conveyed by DowDuPont to Dow. On May 1, 2019, EID completed the transfer of the assets and liabilities aligned with the EID’s specialty products business to separate legal entities (“EID Specialty Products Entities”), which were then distributed to DowDuPont.
In accordance with GAAP, the financial position and results of operations of EID ECP and the EID Specialty Products Entities are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. The sum of the individual earnings per share amounts from continuing operations and discontinued operations may not equal the total company earnings per share amounts due to rounding. The cash flows, comprehensive (loss) income, and equity related to EID ECP and the EID Specialty Products Entities have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows, Consolidated Statements of Comprehensive Income (Loss), and Consolidated Statements of Equity, respectively, for all periods presented. Amounts related to EID ECP and the EID Specialty Products Entities are consistently included or excluded from the Notes to the interim Consolidated Financial Statements based on the respective financial statement line item. See Note 3 - Divestitures and Other Transactions, for additional information.
Prior to the Corteva Distribution, these combined financial statements were derived from the consolidated financial statements and accounting records of EID as well as the carve-out financial statements of DAS. The DAS carve-out financial statements reflect the historical results of operations, financial position, and cash flows of Historical Dow's Agricultural Sciences Business and include allocations of certain expenses for services from Historical Dow, including, but not limited to, general corporate expenses related to finance, legal, information technology, human resources, ethics and compliance, shared services, employee benefits and incentives, insurance, and stock-based compensation. These expenses were allocated on the basis of direct usage when identifiable, with the remainder allocated under the basis of headcount or other measures. Beginning in the second quarter 2019, the financial statements are presented on a consolidated basis.
The company's Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 consist of Corteva, Inc. and its consolidated subsidiaries. The company's Condensed Consolidated Balance Sheet at March 31, 2019 consists of the combined balances of Historical EID and DAS. The Balance Sheets will be referred to as the "Condensed Consolidated Balance Sheets" throughout this document.
The company's Consolidated Statements of Operations (the "Consolidated Statements of Operations") for all periods prior to April 30, 2019 consist of the combined results of operations for Historical EID and DAS. The Consolidated Statements of Operations for all periods after May 1, 2019 represent the consolidated balances of the company. Intercompany balances and transactions with Historical EID and DAS have been eliminated.
During the first quarter 2020, the company recorded an increase of $40 million to Additional Paid-in Capital relating to net assets recorded as transferred as part of the 2019 Internal Reorganizations that were retained.
9
NOTE 2 - RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326): Credit Losses - Measurement of Credit Losses on Financial Statements, which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The amortized cost basis of financial assets should be reduced by expected credit losses to present the net carrying value in the financial statements at the amount expected to be collected. The measurement of expected credit losses is based on past events, historical experience, current conditions and forecasts that affect the collectability of the financial assets. Additionally, credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses.
The company adopted the guidance in the first quarter of 2020. The primary impact of adoption related to the credit losses on accounts and notes receivable, which is applied using a cumulative-effect adjustment in the period of adoption, and prior periods are not restated. The adoption of ASU 2016-13 did not have a material impact on the company’s financial position, results of operations or cash flows. See Note 10 - Accounts and Notes Receivable - Net, to the Consolidated Financial Statements for additional information.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which provides guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. Accordingly, this amendment added unit of account guidance in Topic 606 when an entity is assessing whether the collaborative arrangement, or a part of the arrangement, is within the scope of Topic 606. In addition, the amendment provides certain guidance on presenting the collaborative arrangement transaction together with Topic 606. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and early adoption is permitted. This ASU is to be applied retrospectively to the date of initial application of Topic 606. The company adopted this guidance on January 1, 2020 and it did not have a material impact on the company’s financial position, results of operations or cash flows.
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848), which provides companies with optional financial reporting alternatives to reduce the cost and complexity associated with the accounting for contracts and hedging relationships affected by reference rate reform. The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of ASU 2020-04 did not have a material impact on the company's financial position, results of operations or cash flows, and will apply to future changes.
Accounting Guidance Issued But Not Adopted as of March 31, 2020
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which was part of the FASB’s Simplification Initiative to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced, while maintaining or improving the usefulness of the information provided to users of financial statements. This ASU amends ASC 740, Income Taxes, by removing certain exceptions to the general principles, and clarifying and amending current guidance. The new standard is effective for fiscal years, and periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, however all amended guidance must be adopted in the same period and should be reflected as of the beginning of the annual period if initially adopted and applied during an interim period. The company is currently evaluating the impact of adopting this guidance.
10
NOTE 3 - DIVESTITURES AND OTHER TRANSACTIONS
Separation Agreements
In connection with the Distributions, DuPont, Corteva, and Dow (together, the “Parties” and each a “Party”) have entered into certain agreements to effect the Separation, provide for the allocation of DowDuPont’s assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) among the Parties, and provide a framework for Corteva's relationship with Dow and DuPont following the separations and Distributions (collectively, the "Separation Agreements"). For further details on the Separation Agreements, refer to the 2019 Annual Report.
DuPont
Pursuant to the Separation Agreements, DuPont and Corteva indemnifies the other against certain litigation, environmental, tax, workers' compensation and other liabilities that arose prior to the Corteva Distribution. The term of this indemnification is generally indefinite and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments. In connection with the recognition of liabilities related to these matters, the company records an indemnification asset when recovery is deemed probable. At March 31, 2020, the indemnification assets are $25 million within accounts and notes receivable - net and $54 million within other assets in the interim Condensed Consolidated Balance Sheet. At March 31, 2020, the indemnification liabilities are $8 million within accrued and other current liabilities and $69 million within other noncurrent obligations in the interim Condensed Consolidated Balance Sheet.
Dow
Pursuant to the Separation Agreements, Dow and Corteva indemnifies the other against certain litigation, environmental, tax and other liabilities that arose prior to the Corteva Distribution. The term of this indemnification is generally indefinite and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments. In connection with the recognition of liabilities related to these matters, the company records an indemnification asset when recovery is deemed probable. At March 31, 2020, the indemnification assets are $30 million within accounts and notes receivable - net in the interim Condensed Consolidated Balance Sheet. At March 31, 2020, the indemnification liabilities are $158 million within accrued and other current liabilities and $13 million within other noncurrent obligations in the interim Condensed Consolidated Balance Sheet.
EID ECP Divestiture
As discussed in Note 1 - Summary of Significant Accounting Policies, on April 1, 2019, EID completed the transfer of the entities and related assets and liabilities of EID ECP to Dow.
As a result, the financial results of EID ECP are reflected as discontinued operations, as summarized below:
(In millions) | Three Months Ended March 31, 2019 | ||
Net sales | $ | 362 | |
Cost of goods sold | 259 | ||
Research and development expense | 4 | ||
Selling, general and administrative expenses | 9 | ||
Amortization of intangibles | 23 | ||
Restructuring and asset related charges - net | 2 | ||
Integration and separation costs | 44 | ||
Other income - net | 2 | ||
Income from discontinued operations before income taxes | 23 | ||
Provision for income taxes on discontinued operations | 4 | ||
Income from discontinued operations after income taxes | $ | 19 | |
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The following table presents the depreciation, amortization of intangibles, and capital expenditures of the discontinued operations related to EID ECP:
(In millions) | Three Months Ended March 31, 2019 | ||
Depreciation | $ | 28 | |
Amortization of intangibles | $ | 23 | |
Capital expenditures | $ | 16 | |
The carrying amount of major classes of assets and liabilities classified as assets and liabilities of discontinued operations at March 31, 2019 related to EID ECP consist of the following:
(In millions) | March 31, 2019 | ||
Cash and cash equivalents | $ | 32 | |
Accounts and notes receivable - net | 221 | ||
Inventories | 448 | ||
Other current assets | 25 | ||
Total current assets of discontinued operations | 726 | ||
Investment in nonconsolidated affiliates | 109 | ||
Property, plant and equipment - net | 753 | ||
Goodwill | 3,585 | ||
Other intangible assets | 1,118 | ||
Deferred income taxes | 15 | ||
Other assets | 5 | ||
Non-current assets of discontinued operations | 5,585 | ||
Total assets of discontinued operations | $ | 6,311 | |
Short-term borrowings and finance lease obligations | 2 | ||
Accounts payable | 187 | ||
Income tax payable | 9 | ||
Accrued and other current liabilities | 26 | ||
Total current liabilities of discontinued operations | 224 | ||
Long-term Debt | 2 | ||
Deferred income tax liabilities | 374 | ||
Pension and other post employment benefits - noncurrent | 5 | ||
Other noncurrent obligations | 4 | ||
Non-current liabilities of discontinued operations | 385 | ||
Total liabilities of discontinued operations | $ | 609 | |
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EID Specialty Products Divestiture
As discussed in Note 1 - Summary of Significant Accounting Policies, on May 1, 2019, the company completed the transfer of the entities and related assets and liabilities of EID Specialty Products Entities to DuPont.
As a result, the financial results of the EID Specialty Products Entities are reflected as discontinued operations, as summarized below:
(In millions) | Three Months Ended March 31, 2019 | ||
Net sales | $ | 3,816 | |
Cost of goods sold | 2,535 | ||
Research and development expense | 153 | ||
Selling, general and administrative expenses | 401 | ||
Amortization of intangibles | 201 | ||
Restructuring and asset related charges - net | 43 | ||
Integration and separation costs | 164 | ||
Other income - net | 120 | ||
Income from discontinued operations before income taxes | 439 | ||
Provision for income taxes on discontinued operations | 98 | ||
Income from discontinued operations after income taxes | $ | 341 | |
The following table presents the depreciation, amortization of intangibles, and capital expenditures of the discontinued operations related to the EID Specialty Products Entities:
(In millions) | Three Months Ended March 31, 2019 | ||
Depreciation | $ | 216 | |
Amortization of intangibles | $ | 201 | |
Capital expenditures | $ | 423 | |
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The carrying amount of major classes of assets and liabilities classified as assets and liabilities of discontinued operations at March 31, 2019 related to the EID Specialty Products Entities consist of the following:
(In millions) | March 31, 2019 | ||
Cash and cash equivalents | $ | 2,042 | |
Marketable securities | 13 | ||
Accounts and notes receivable - net | 2,722 | ||
Inventories | 3,640 | ||
Other current assets | 310 | ||
Total current assets of discontinued operations | 8,727 | ||
Investment in nonconsolidated affiliates | 1,192 | ||
Property, plant and equipment - net | 8,061 | ||
Goodwill | 28,194 | ||
Other intangible assets | 12,822 | ||
Deferred income taxes | 106 | ||
Other assets | 657 | ||
Non-current assets of discontinued operations | 51,032 | ||
Total assets of discontinued operations | $ | 59,759 | |
Short-term borrowings and finance lease obligations | 16 | ||
Accounts payable | 2,075 | ||
Income taxes payable | 47 | ||
Accrued and other current liabilities | 1,139 | ||
Total current liabilities of discontinued operations | 3,277 | ||
Long-term Debt | 25 | ||
Deferred income tax liabilities | 3,408 | ||
Pension and other post employment benefits - noncurrent | 1,084 | ||
Other noncurrent obligations | 610 | ||
Non-current liabilities of discontinued operations | 5,127 | ||
Total liabilities of discontinued operations | $ | 8,404 | |
NOTE 4 - REVENUE
Revenue Recognition
Products
Substantially all of Corteva's revenue is derived from product sales. Product sales consist of sales of Corteva's products to farmers, distributors, and manufacturers. Corteva considers purchase orders, which in some cases are governed by master supply agreements, to be a contract with a customer. Contracts with customers are considered to be short-term when the time between order confirmation and satisfaction of the performance obligations is equal to or less than one year. However, the company has some long-term contracts which can span multiple years.
Licenses of Intellectual Property
Corteva enters into licensing arrangements with customers under which it licenses its intellectual property. Revenue from the majority of intellectual property licenses is derived from sales-based royalties. Revenue for licensing agreements that contain sales-based royalties is recognized at the later of (i) when the subsequent sale occurs or (ii) when the performance obligation to which some or all of the royalty has been allocated is satisfied.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. At March 31, 2020, the company had remaining performance obligations related to material rights granted to customers for contract renewal options of $106 million ($108 million and $100 million at December 31, 2019 and March 31, 2019, respectively). The company expects revenue to be recognized for the remaining performance obligations over the next 1 year to 6 years.
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Contract Balances
Contract liabilities primarily reflect deferred revenue from prepayments under contracts with customers where the company receives advance payments for products to be delivered in future periods. Corteva classifies deferred revenue as current or noncurrent based on the timing of when the company expects to recognize revenue. Contract assets primarily include amounts related to contractual rights to consideration for completed performance not yet invoiced. Accounts receivable are recorded when the right to consideration becomes unconditional.
Contract Balances | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||
(In millions) | |||||||||
Accounts and notes receivable - trade1 | $ | 5,779 | $ | 4,396 | $ | 5,060 | |||
Contract assets - current2 | $ | 20 | $ | 20 | $ | 18 | |||
Contract assets - noncurrent3 | $ | 49 | $ | 49 | $ | 46 | |||
Deferred revenue - current4 | $ | 1,996 | $ | 2,584 | $ | 2,057 | |||
Deferred revenue - noncurrent5 | $ | 104 | $ | 108 | $ | 103 | |||
1. | Included in accounts and notes receivable - net in the interim Condensed Consolidated Balance Sheets. |
2. | Included in other current assets in the interim Condensed Consolidated Balance Sheets. |
3. | Included in other assets in the interim Condensed Consolidated Balance Sheets. |
4. | Included in accrued and other current liabilities in the interim Condensed Consolidated Balance Sheets. |
5. | Included in other noncurrent obligations in the interim Condensed Consolidated Balance Sheets. |
Revenue recognized during the three months ended March 31, 2020 from amounts included in deferred revenue at the beginning of the period was $822 million ($677 million in the three months ended March 31, 2019).
Disaggregation of Revenue
Corteva's operations are classified into two reportable segments: Seed and Crop Protection. The company disaggregates its revenue by major product line and geographic region, as the company believes it best depicts the nature, amount and timing of its revenue and cash flows. Net sales by major product line are included below:
Three Months Ended March 31, | ||||||
(In millions) | 2020 | 2019 | ||||
Corn | $ | 1,864 | $ | 1,468 | ||
Soybean | 181 | 131 | ||||
Other oilseeds | 248 | 225 | ||||
Other | 162 | 143 | ||||
Seed | 2,455 | 1,967 | ||||
Herbicides | 823 | 771 | ||||
Insecticides | 378 | 377 | ||||
Fungicides | 229 | 220 | ||||
Other | 71 | 61 | ||||
Crop Protection | 1,501 | 1,429 | ||||
Total | $ | 3,956 | $ | 3,396 | ||
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Sales are attributed to geographic regions based on customer location. Net sales by geographic region and segment are included below:
Seed | Three Months Ended March 31, | |||||
(In millions) | 2020 | 2019 | ||||
North America1 | $ | 1,290 | $ | 913 | ||
EMEA2 | 881 | 804 | ||||
Latin America | 216 | 178 | ||||
Asia Pacific | 68 | 72 | ||||
Total | $ | 2,455 | $ | 1,967 | ||
Crop Protection | Three Months Ended March 31, | |||||
(In millions) | 2020 | 2019 | ||||
North America1 | $ | 475 | $ | 479 | ||
EMEA2 | 586 | 560 | ||||
Latin America | 218 | 187 | ||||
Asia Pacific | 222 | 203 | ||||
Total | $ | 1,501 | $ | 1,429 | ||
1. | Represents U.S. & Canada. |
2. | Europe, Middle East, and Africa ("EMEA"). |
NOTE 5 - RESTRUCTURING AND ASSET RELATED CHARGES - NET
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. Of the $185 million, approximately $110 million relates to crop protection, $15 million relates to seed, and $60 million relates to corporate expenses. 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 Execute to Win Productivity Program charges related to the segments, as well as corporate expenses, were as follows:
Three Months Ended March 31, | |||
(In millions) | 2020 | ||
Seed | $ | 3 | |
Crop Protection | 18 | ||
Corporate expenses | 42 | ||
Total | $ | 63 | |
A reconciliation of the December 31, 2019 to the March 31, 2020 liability balances related to the Execute to Win Productivity Program is summarized below:
(In millions) | Severance and Related Benefit Costs | Asset Related Charges | Total | ||||||
Balance at December 31, 2019 | $ | — | $ | — | $ | — | |||
Charges to income from continuing operations for the three months ended March 31, 2020 | 42 | 21 | 63 | ||||||
Asset write-offs | — | (15 | ) | (15 | ) | ||||
Balance at March 31, 2020 | $ | 42 | $ | 6 | $ | 48 | |||
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In addition to the above, the company has recorded asset retirement obligations of $27 million as of March 31, 2020. The asset retirement obligations relate to the company’s required demolition and removal for buildings and equipment at third party leased sites and will be recognized as asset related charges over the remaining useful lives of the related assets. The company’s leases require these assets be removed from leased land within 12-24 months of operations being ceased. The company expects operations will cease in 2020 and the assets will be removed within the contractual timeframe.
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont and EID approved post-merger restructuring actions under the DowDuPont Cost Synergy Program (the “Synergy Program”), adopted at the time by the DowDuPont Board of Directors. The Synergy Program was designed to integrate and optimize the organization following the Merger and in preparation for the Distributions. The company recorded pre-tax restructuring charges of $842 million inception-to-date under the Synergy Program, consisting of severance and related benefit costs of $319 million, contract termination costs of $193 million, and asset write-downs and write-offs of $330 million. The company does not anticipate any additional material charges under the Synergy Program. Actions associated with the Synergy Program, including employee separations, were substantially complete by the end of 2019.
The Synergy Program (benefits) charges related to the segments, as well as corporate expenses, were as follows:
Three Months Ended March 31, | ||||||
(In millions) | 2020 | 2019 | ||||
Seed | $ | (3 | ) | $ | 24 | |
Crop Protection | — | 27 | ||||
Corporate expenses | — | 11 | ||||
Total | $ | (3 | ) | $ | 62 | |
The below is a summary of (benefits) charges incurred related to the Synergy Program for the three months ended March 31, 2020 and 2019:
Three Months Ended March 31, | ||||||
(In millions) | 2020 | 2019 | ||||
Severance and related benefit costs | $ | — | $ | 14 | ||
Contract termination charges | — | 20 | ||||
Asset related (benefits) charges | (3 | ) | 28 | |||
Total restructuring and asset related (benefits) charges - net | $ | (3 | ) | $ | 62 | |
A reconciliation of the December 31, 2019 to the March 31, 2020 liability balances related to the Synergy Program is summarized below:
(In millions) | Severance and Related Benefit Costs | Costs Associated with Exit and Disposal Activities1 | Asset Related (Benefits) Charges | Total | ||||||||
Balance at December 31, 2019 | $ | 29 | $ | 40 | $ | — | $ | 69 | ||||
Payments | (6 | ) | — | 2 | (4 | ) | ||||||
Asset write-offs | — | — | (2 | ) | (2 | ) | ||||||
Balance at March 31, 2020 | $ | 23 | $ | 40 | $ | — | $ | 63 | ||||
1. | Relates primarily to contract terminations charges. |
Other Asset Related Charges
During the three months ended March 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.
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NOTE 6 - RELATED PARTIES
Services Provided by and to Historical Dow and its affiliates
Following the Merger and prior to the Dow Distribution, Corteva reports transactions with Historical Dow and its affiliates as related party transactions.
Purchases from Historical Dow and its affiliates were $42 million for the three months ended March 31, 2019.
Transactions with DowDuPont
In February 2019, the DowDuPont Board declared first quarter dividends per share of DowDuPont common stock payable on March 15, 2019. EID declared and paid distributions to DowDuPont of $317 million for the three months ended March 31, 2019, primarily to fund a portion of DowDuPont's dividend payment.
In addition, at March 31, 2019, EID had a payable to DowDuPont of $103 million included in accounts payable in the interim Condensed Consolidated Balance Sheet related to its estimated tax liability for the period beginning with the Merger through the date of the Dow Distribution, during which time the parties filed a consolidated United States ("U.S.") tax return. See Note 8 - Income Taxes, for additional information.
NOTE 7 - SUPPLEMENTARY INFORMATION
Other Income - Net | Three Months Ended March 31, | |||||
(In millions) | 2020 | 2019 | ||||
Interest income | $ | 18 | $ | 16 | ||
Equity in losses of affiliates - net | (1 | ) | — | |||
Net loss on sales of businesses and other assets1 | (46 | ) | (13 | ) | ||
Net exchange losses | (61 | ) | (27 | ) | ||
Non-operating pension and other post employment benefit credit2 | 91 | 51 | ||||
Miscellaneous income (expenses) - net | — | 4 | ||||
Other income - net | $ | 1 | $ | 31 | ||
1. | Includes a loss of $(53) million relating to the expected sale of the La Porte site, for which the company signed an agreement during the three months ended March 31, 2020 and a loss of $(24) million relating to DAS’s sale of a joint venture related to synergy actions for the three months ended March 31, 2019. |
2. | Includes non-service related components of net periodic benefit credits (costs) (interest cost, expected return on plan assets, amortization of unrecognized (gain) loss, and settlement loss). |
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The following table summarizes the impacts of the company's foreign currency hedging program on the company's results of operations. The company routinely uses foreign currency exchange contracts to offset its net exposures, by currency, related to the foreign currency-denominated monetary assets and liabilities. 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 on net monetary asset positions. The hedging program gains (losses) are largely taxable (tax deductible) in the U.S., whereas the offsetting exchange gains (losses) on the remeasurement of the net monetary asset positions are often not taxable (tax deductible) in their local jurisdictions. The net pre-tax exchange gains (losses) are recorded in other income - net and the related tax impact is recorded in (benefit from) provision for income taxes on continuing operations in the Consolidated Statements of Operations.
(In millions) | Three Months Ended March 31, | |||||
2020 | 2019 | |||||
Subsidiary Monetary Position Losses | ||||||
Pre-tax exchange losses | $ | (226 | ) | $ | (10 | ) |
Local tax benefits (expenses) | 23 | (10 | ) | |||
Net after-tax impact from subsidiary exchange losses | $ | (203 | ) | $ | (20 | ) |
Hedging Program Gains (Losses) | ||||||
Pre-tax exchange gains (losses) | $ | 165 | $ | (17 | ) | |
Tax (expenses) benefits | (40 | ) | 4 | |||
Net after-tax impact from hedging program exchange gains (losses) | $ | 125 | $ | (13 | ) | |
Total Exchange Losses | ||||||
Pre-tax exchange losses | $ | (61 | ) | $ | (27 | ) |
Tax expenses | (17 | ) | (6 | ) | ||
Net after-tax exchange losses | $ | (78 | ) | $ | (33 | ) |
Cash, cash equivalents and restricted cash
The following table provides a reconciliation of cash and cash equivalents and restricted cash (included in other current assets) presented in the Condensed Consolidated Balance Sheets to the total cash, cash equivalents and restricted cash presented in the Condensed Consolidated Statements of Cash Flows.
(In millions) | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||
Cash and cash equivalents | $ | 1,963 | $ | 1,764 | $ | 1,759 | |||
Restricted cash | 377 | 409 | 438 | ||||||
Total cash, cash equivalents and restricted cash | 2,340 | 2,173 | 2,197 | ||||||
Cash and cash equivalents of discontinued operations1 | — | — | 2,074 | ||||||
Restricted cash of discontinued operations2 | — | — | 42 | ||||||
Total cash, cash equivalents and restricted cash | $ | 2,340 | $ | 2,173 | $ | 4,313 | |||
1. | Refer to Note 3 - Divestitures and Other Transactions, for additional information. |
2. | Amount included in other current assets within assets of discontinued operations - current. Refer to Note 3 - Divestitures and Other Transactions, for additional information. |
EID entered into a trust agreement in 2013 (as amended and restated in 2017), establishing and requiring EID to fund a trust (the "Trust") for cash obligations under certain non-qualified benefit and deferred compensation plans upon a change in control event as defined in the Trust agreement. Under the Trust agreement, the consummation of the Merger was a change in control event. Restricted cash at March 31, 2020, December 31, 2019, and March 31, 2019 is related to the Trust.
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NOTE 8 - INCOME TAXES
For periods between the Merger Effectiveness Time and the Corteva Distribution, Corteva and its subsidiaries were included in DowDuPont's consolidated federal income tax group and consolidated tax return. Generally, the consolidated tax liability of the DowDuPont U.S. tax group for each year was apportioned among the members of the consolidated group based on each member’s separate taxable income. Corteva, DuPont and Dow intend that to the extent Federal and/or State corporate income tax liabilities are reduced through the utilization of tax attributes of the other, settlement of any receivable and payable generated from the use of the other party’s sub-group attributes will be in accordance with a tax matters agreement. See Note 3 - Divestitures and Other Transactions, for further information related to indemnifications between Corteva, Dow and DuPont.
Each year the company files hundreds of tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the company. As a result, there is an uncertainty in income taxes recognized in the company's financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. The ultimate resolution of such uncertainties is not expected to have a material impact on the company's results of operations.
During the three months ended March 31, 2019, the company recognized a tax charge of $32 million to provision for (benefit from) income taxes on continuing operations related to U.S. state blended tax rate changes associated with the Internal Reorganizations.
During the three months ended March 31, 2019, the company recognized a tax benefit of $102 million to provision for (benefit from) income taxes on continuing operations, related to an internal legal entity restructuring associated with the Internal Reorganizations.
For further discussion of pre-tax and after-tax impacts of the company's foreign currency hedging program and net monetary asset programs, refer to Note 7 - Supplementary Information.
NOTE 9 - EARNINGS PER SHARE OF COMMON STOCK
On June 1, 2019, the date of the Corteva Distribution, 748,815,000 shares of the company’s common stock were distributed to DowDuPont shareholders of record as of May 24, 2019.
The following tables provide earnings per share calculations for the periods indicated below:
Net Income for Earnings Per Share Calculations - Basic and Diluted | Three Months Ended March 31 | |||||
(In millions) | 2020 | 2019 | ||||
Income (loss) from continuing operations after income taxes | $ | 281 | $ | (184 | ) | |
Net income attributable to continuing operations noncontrolling interests | 10 | 8 | ||||
Income (loss) from continuing operations available to Corteva common stockholders | 271 | (192 | ) | |||
Income from discontinued operations, net of tax | 1 | 360 | ||||
Net income attributable to discontinued operations noncontrolling interests | — | 4 | ||||
Income from discontinued operations available to Corteva common stockholders | 1 | 356 | ||||
Net income available to common stockholders | $ | 272 | $ | 164 | ||
Earnings Per Share Calculations - Basic | Three Months Ended March 31 | |||||
(Dollars per share) | 2020 | 2019 | ||||
Earnings (loss) per share of common stock from continuing operations | $ | 0.36 | $ | (0.26 | ) | |
Earnings per share of common stock from discontinued operations | — | 0.48 | ||||
Earnings per share of common stock | $ | 0.36 | $ | 0.22 | ||
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Earnings Per Share Calculations - Diluted | Three Months Ended March 31 | |||||
(Dollars per share) | 2020 | 2019 | ||||
Earnings (loss) per share of common stock from continuing operations | $ | 0.36 | $ | (0.26 | ) | |
Earnings per share of common stock from discontinued operations | — | 0.48 | ||||
Earnings per share of common stock | $ | 0.36 | $ | 0.22 | ||
Share Count Information | Three Months Ended March 31 | |||
(Shares in millions) | 2020 | 2019 | ||
Weighted-average common shares - basic1 | 749.9 | 749.4 | ||
Plus dilutive effect of equity compensation plans2 | 2.6 | — | ||
Weighted-average common shares - diluted | 752.5 | 749.4 | ||
Potential shares of common stock excluded from EPS calculations3 | 9.1 | — | ||
1. | Share amounts for all periods prior to the Corteva Distribution were based on 748.8 million shares of Corteva, Inc. common stock distributed to holders of DowDuPont's common stock on June 1, 2019, plus 0.6 million of additional shares in which accelerated vesting conditions have been met. |
2. | Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. |
3. | These outstanding potential shares of common stock were excluded from the calculation of diluted earnings per share because the effect of including them would have been anti-dilutive. |
NOTE 10 - ACCOUNTS AND NOTES RECEIVABLE - NET
(In millions) | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||
Accounts receivable – trade1 | $ | 5,367 | $ | 4,225 | $ | 4,683 | |||
Notes receivable – trade2 | 412 | 171 | 377 | ||||||
Other3 | 996 | 1,132 | 1,447 | ||||||
Total accounts and notes receivable - net | $ | 6,775 | $ | 5,528 | $ | 6,507 | |||
1. | Accounts receivable – trade is net of allowances of $203 million at March 31, 2020, $174 million at December 31, 2019, and $148 million at March 31, 2019. Allowances are equal to the estimated expected credit losses. The estimate at March 31, 2020 was developed using a loss-rate method. The estimate at December 31, 2019 and March 31, 2019 is based on historical collection experience, current economic and market conditions, and review of the current status of customers' accounts. |
2. | Notes receivable – trade primarily consists of receivables for deferred payment loan programs for the sale of seed products to customers. These loans have terms of one year or less and are primarily concentrated in North America. The company maintains a rigid pre-approval process for extending credit to customers in order to manage overall risk and exposure associated with credit losses. As of March 31, 2020, December 31, 2019, and March 31, 2019 there were no additional exposures requiring a reserve in excess of what is already reserved, nor were there any significant impairments related to current loan agreements. |
3. | Other includes receivables in relation to indemnification assets, value added tax, general sales tax and other taxes. No individual group represents more than 10 percent of total receivables. In addition, Other includes amounts due from nonconsolidated affiliates of $140 million, $119 million, and $135 million as of March 31, 2020, December 31, 2019, and March 31, 2019, respectively. |
Accounts and notes receivable are carried at the expected amount to be collected, which approximates fair value. The company establishes the allowance for doubtful receivables using a loss-rate method where the loss rate is developed using past events, historical experience, current conditions and forecasts that affect the collectability of the financial assets.
The following table summarizes changes in the allowance for doubtful receivables for the three months ended March 31, 2020:
(In millions) | |||
Balance at December 31, 2019 | $ | 174 | |
Additions charged to expenses | 60 | ||
Write-offs charged against allowance | (1 | ) | |
Recoveries collected | (30 | ) | |
Balance at March 31, 2020 | $ | 203 | |
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The company enters into various factoring agreements with third-party financial institutions to sell its trade receivables under both recourse and non-recourse agreements in exchange for cash proceeds. These financing arrangements result in a transfer of the company's receivables and risks to the third-party. As these transfers qualify as true sales under the applicable accounting guidance, the receivables are derecognized from the Consolidated Balance Sheets upon transfer, and the company receives a payment for the receivables from the third-party within a mutually agreed upon time period. For arrangements involving an element of recourse, which is typically provided through a guarantee of accounts in the event of customer default, the guarantee obligation is measured using market data from similar transactions and reported as a current liability in the Consolidated Balance Sheets.
Trade receivables sold under these agreements were $15 million and $3 million for the three months ended March 31, 2020 and 2019. The trade receivables sold that remained outstanding under these agreements which include an element of recourse as of March 31, 2020, December 31, 2019, and March 31, 2019 were $43 million, $171 million, and $25 million, respectively. The net proceeds received are included in cash provided by operating activities in the Consolidated Statements of Cash Flows. The difference between the carrying amount of the trade receivables sold and the sum of the cash received is recorded as a loss on sale of receivables in other income - net in the Consolidated Statements of Operations. The loss on sale of receivables was $2 million and $1 million for the three months ended March 31, 2020 and 2019, respectively. The guarantee obligations recorded as of March 31, 2020, December 31, 2019, and March 31, 2019 in the interim Condensed Consolidated Balance Sheets were not material. See Note 14 - Commitments and Contingent Liabilities for additional information on the company’s guarantees.
NOTE 11 - INVENTORIES
(In millions) | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||
Finished products | $ | 2,721 | $ | 2,684 | $ | 3,266 | |||
Semi-finished products | 1,260 | 1,850 | 1,350 | ||||||
Raw materials and supplies | 420 | 498 | 403 | ||||||
Total inventories | $ | 4,401 | $ | 5,032 | $ | 5,019 | |||
As a result of the Merger, a fair value step-up of $2,297 million was recorded for inventories. During the three months ended March 31, 2019, the company recognized $205 million of these costs in cost of goods sold within loss from continuing operations before income taxes.
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NOTE 12 - OTHER INTANGIBLE ASSETS
The gross carrying amounts and accumulated amortization of other intangible assets by major class are as follows:
(In millions) | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||||||||||||||||||||
Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
Intangible assets subject to amortization (Definite-lived): | |||||||||||||||||||||||||||
Germplasm1 | $ | 6,265 | $ | (126 | ) | $ | 6,139 | $ | 6,265 | $ | (63 | ) | $ | 6,202 | |||||||||||||
Customer-related | 1,956 | (293 | ) | 1,663 | 1,977 | (268 | ) | 1,709 | $ | 1,977 | $ | (182 | ) | $ | 1,795 | ||||||||||||
Developed technology | 1,463 | (409 | ) | 1,054 | 1,463 | (370 | ) | 1,093 | 1,411 | (202 | ) | 1,209 | |||||||||||||||
Trademarks/trade names | 166 | (88 | ) | 78 | 166 | (86 | ) | 80 | 172 | (86 | ) | 86 | |||||||||||||||
Favorable supply contracts | 475 | (231 | ) | 244 | 475 | (207 | ) | 268 | 475 | (135 | ) | 340 | |||||||||||||||
Other2 | 400 | (218 | ) | 182 | 404 | (213 | ) | 191 | 530 | (289 | ) | 241 | |||||||||||||||
Total other intangible assets with finite lives | 10,725 | (1,365 | ) | 9,360 | 10,750 | (1,207 | ) | 9,543 | 4,565 | (894 | ) | 3,671 | |||||||||||||||
Intangible assets not subject to amortization (Indefinite-lived): | |||||||||||||||||||||||||||
IPR&D | 10 | — | 10 | 10 | — | 10 | 146 | — | 146 | ||||||||||||||||||
Germplasm1 | 6,265 | — | 6,265 | ||||||||||||||||||||||||
Trademarks / trade names | 1,871 | — | 1,871 | 1,871 | — | 1,871 | 1,871 | — | 1,871 | ||||||||||||||||||
Other | — | — | — | — | — | — | 8 | — | 8 | ||||||||||||||||||
Total other intangible assets | 1,881 | — | 1,881 | 1,881 | — | 1,881 | 8,290 | — | 8,290 | ||||||||||||||||||
Total | $ | 12,606 | $ | (1,365 | ) | $ | 11,241 | $ | 12,631 | $ | (1,207 | ) | $ | 11,424 | $ | 12,855 | $ | (894 | ) | $ | 11,961 | ||||||
1. | Beginning on October 1, 2019, the company changed its indefinite life assertion of the germplasm assets to definite lived with a useful life of 25 years. This change is the result of a more focused development effort of new seed products coupled with an intent to out license select germplasm on a non-exclusive basis. Prior to changing the useful life of the germplasm assets, the company tested the assets for impairment under ASC 350 - Intangibles, Goodwill and Other, concluding the assets were not impaired. |
2. | Primarily consists of sales and farmer networks, marketing and manufacturing alliances and noncompetition agreements. |
The aggregate pre-tax amortization expense from continuing operations for definite-lived intangible assets was $163 million and $101 million for the three months ended March 31, 2020 and 2019, respectively. The estimated aggregate pre-tax amortization expense from continuing operations for the remainder of 2020 and each of the next five years is approximately $495 million, $649 million, $628 million, $546 million, $532 million and $495 million, respectively.
NOTE 13 - SHORT-TERM BORROWINGS, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
The following tables summarize Corteva's short-term borrowings and finance lease obligations and long-term debt:
Short-term borrowings and finance lease obligations | |||||||||
(In millions) | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||
Commercial paper | $ | 1,918 | $ | — | $ | 2,587 | |||
Repurchase facility | 30 | — | 19 | ||||||
Other loans - various currencies | 45 | 2 | 80 | ||||||
Long-term debt payable within one year | 1 | 1 | 479 | ||||||
Finance lease obligations payable within one year | 2 | 4 | 36 | ||||||
Total short-term borrowings and finance lease obligations | $ | 1,996 | $ | 7 | $ | 3,201 | |||
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The estimated fair value of the company's short-term borrowings, including interest rate financial instruments, was determined using Level 2 inputs within the fair value hierarchy. Based on quoted market prices for the same or similar issues, or on current rates offered to the company for debt of the same remaining maturities, the fair value of the company's short-term borrowings and finance lease obligations was approximately carrying value.
The weighted-average interest rate on short-term borrowings outstanding at March 31, 2020, December 31, 2019, and March 31, 2019 was 2.0%, 6.7% and 2.6%, respectively. The decrease in the weighted-average interest rate was primarily due to lower average commercial paper interest.
Repurchase Facility
In February 2020, the company entered into a new committed receivable repurchase facility of up to $1.3 billion (the "2020 Repurchase Facility") which expires in December 2020. Under the 2020 Repurchase Facility, Corteva may sell a portfolio of available and eligible outstanding customer notes receivables to participating institutions and simultaneously agree to repurchase at a future date. The 2020 Repurchase Facility is considered a secured borrowing with the customer notes receivable inclusive of those that are sold and repurchased, equal to 105 percent of the outstanding amounts borrowed utilized as collateral. Borrowings under the 2020 Repurchase Facility have an interest rate of LIBOR + 0.75 percent.
As of March 31, 2020, $32 million of notes receivable, recorded in accounts and notes receivable - net, were pledged as collateral against outstanding borrowings under the 2020 Repurchase Facility of $30 million, recorded in short-term borrowings and finance lease obligations on the interim Condensed Consolidated Balance Sheet.
Revolving Credit Facilities
In November 2018, EID entered into a $3.0 billion 5-year revolving credit facility and a $3.0 billion 3-year revolving credit facility (the “Revolving Credit Facilities”). The Revolving Credit Facilities became effective May 2019. Corteva, Inc. became a party at the time of the Corteva Distribution. The Revolving Credit Facilities may serve as a substitute to the company's commercial paper program, and can be used, from time to time, for general corporate purposes including, but not limited to, the funding of seasonal working capital needs. The Revolving Credit Facilities contain customary representations and warranties, affirmative and negative covenants and events of default that are typical for companies with similar credit ratings. Additionally, the Revolving Credit Facilities contain a financial covenant requiring that the ratio of total indebtedness to total capitalization for Corteva and its consolidated subsidiaries not exceed 0.60.
In March 2020, the Company drew down $500 million under the $3.0 billion 3-year revolving credit facility as a result of the volatility and increased borrowing costs of commercial paper resulting from the unstable market conditions caused by the novel coronavirus ("COVID-19"). Unused commitments under the 3-year revolving credit facility were $2.5 billion as of March 31, 2020. The company elected a 6 month LIBOR interest rate option for the $500 million borrowing. Borrowings outstanding under the 3-year revolving credit facility as of March 31, 2020 bore interest at an all-in-rate of 1.99% per annum.
Under the Revolving Credit Facilities, all amounts borrowed, absence any event of default, are not required to be repaid until the commitment termination date which is May 2022 for the 3-year revolving credit facility and May 2024 for the 5-year revolving credit facility, despite the interest rate option elected. As a result, borrowings under the Revolving Credit Facilities as of March 31, 2020 are reflected as long-term debt in the interim Condensed Consolidated Balance Sheet.
The fair value of the company’s long-term borrowings, including debt due within one year, was $612 million, $119 million, and $6,830 million as of March 31, 2020, December 31, 2019, and March 31, 2019, respectively, and was determined using quoted market prices for the same or similar issues, or current rates offered to the company for debt of the same remaining maturities (Level 2 inputs).
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NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
Guarantees
Indemnifications
In connection with acquisitions and divestitures as of March 31, 2020, the company has indemnified respective parties against certain liabilities that may arise in connection with these transactions and business activities prior to the completion of the transactions. The term of these indemnifications, which typically pertain to environmental, tax and product liabilities, is generally indefinite. In addition, the company indemnifies its duly elected or appointed directors and officers to the fullest extent permitted by Delaware law, against liabilities incurred as a result of their activities for the company, such as adverse judgments relating to litigation matters. If the indemnified party were to incur a liability or have a liability increase as a result of a successful claim, pursuant to the terms of the indemnification, the company would be required to reimburse the indemnified party. The maximum amount of potential future payments is generally unlimited. See pages 26 and 11 for additional information relating to the indemnification obligations under the Chemours Separation Agreement and the Corteva Separation Agreement.
Obligations for Customers and Other Third Parties
The company has directly guaranteed various debt obligations under agreements with third parties related to customers and other third parties. At March 31, 2020, December 31, 2019 and March 31, 2019, the company had directly guaranteed $90 million, $97 million, and $294 million, respectively, of such obligations. These amounts represent the maximum potential amount of future (undiscounted) payments that the company could be required to make under the guarantees in the event of default by the guaranteed party. Of the total maximum future payments at March 31, 2020, less than $1 million had terms greater than a year. The maximum future payments also include $17 million, $16 million, and $12 million of guarantees related to the various factoring agreements that the company enters into with its customer to sell its trade receivables at March 31, 2020, December 31, 2019 and March 31, 2019, respectively. See Note 10 - Accounts and Notes Receivable, Net, for additional information.
The maximum future payments include agreements with lenders to establish programs that provide financing for select customers. The terms of the guarantees are equivalent to the terms of the customer loans that are primarily made to finance customer invoices. The total accounts receivable balance outstanding on these agreements was $125 million, $27 million and $63 million at March 31, 2020, December 31, 2019 and March 31, 2019, respectively.
The company assesses the payment/performance risk by assigning default rates based on the duration of the guarantees. These default rates are assigned based on the external credit rating of the counterparty or through internal credit analysis and historical default history for counterparties that do not have published credit ratings. For counterparties without an external rating or available credit history, a cumulative average default rate is used.
Litigation
The company is subject to various legal proceedings, including, but not limited to, product liability, intellectual property, antitrust, commercial, property damage, personal injury, environmental and regulatory matters arising out of the normal course of its current businesses or legacy EID businesses unrelated to Corteva’s current businesses but allocated to Corteva as part of the separation of Corteva from DuPont. It is not possible to predict the outcome of these various proceedings. Although considerable uncertainty exists, management does not anticipate that the ultimate disposition of these matters will have a material adverse effect on the company's results of operations, consolidated financial position or liquidity. However, the ultimate liabilities could be material to results of operations and the cash flows in the period recognized.
Indemnifications under Separation Agreements
The company has entered into various agreements where the company is indemnified for certain liabilities. In connection with the recognition of liabilities related to these matters, the company records an indemnification asset when recovery is deemed probable. See Note 3 - Divestitures and Other Transactions, for additional information related to indemnifications.
Chemours/Performance Chemicals
On July 1, 2015, EID completed the separation of its Performance Chemicals segment through the spin-off of all of the issued and outstanding stock of The Chemours Company (the "Chemours Separation"). In connection with the Chemours Separation, EID and The Chemours Company ("Chemours") entered into a Separation Agreement (the "Chemours Separation Agreement"). Pursuant to the Chemours Separation Agreement and the amendment to the Chemours Separation Agreement, Chemours indemnifies the company against certain litigation, environmental, workers' compensation and other liabilities that arose prior to the distribution. The term of this indemnification is generally indefinite and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments.
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Concurrent with the MDL Settlement (as discussed below), EID and Chemours amended the Chemours Separation Agreement to provide for a limited sharing of potential future PFOA liabilities for five years, which began on July 6, 2017. During the five years, Chemours will annually pay the first $25 million of future PFOA liabilities and, if that amount is exceeded, EID will pay any excess amount up to the next $25 million, with Chemours annually bearing any excess liabilities above that amount. At the end of the five years, this limited sharing agreement will expire, and Chemours’ indemnification obligations under the Chemours Separation Agreement will continue unchanged. As part of this amendment, Chemours also agreed that it would not contest its liability for PFOA liabilities on the basis of certain ostensible defenses it had previously raised, including defenses relating to punitive damages, and would waive any such defenses with respect to PFOA liabilities. Chemours has, however, retained defenses as to whether any particular PFOA claim is within the scope of the indemnification provisions of the Chemours Separation Agreement. There have been no charges incurred by the company under this amendment through March 31, 2020.
On May 13, 2019, Chemours filed a complaint in the Delaware Court of Chancery ("Chancery Court") against DuPont, Corteva, and EID alleging, among other things, that the litigation and environmental liabilities allocated to Chemours under the Chemours Separation Agreement were underestimated and asking that the Court either limit the amount of Chemours’ indemnification obligations or, alternatively, order the return of the $3.91 billion dividend Chemours paid to EID prior to its separation. On June 3, 2019, the defendants moved to dismiss the complaint on the grounds that the Chemours Separation Agreement requires arbitration of all disputes relating to that agreement. On March 30, 2020, the Chancery Court granted the motion to dismiss made by DuPont, Corteva, and EID. Chemours filed its notice of appeal of the Chancery Court's decision on April 17, 2020. The company believes the probability of liability with respect to Chemours' suit continues to be remote. For additional information regarding environmental indemnification, see discussion on page 29.
At March 31, 2020, the indemnification assets pursuant to the Chemours Separation Agreement are $60 million within accounts and notes receivable - net and $294 million within other assets along with the corresponding liabilities of $60 million within accrued and other current liabilities and $294 million within other noncurrent obligations in the interim Condensed Consolidated Balance Sheet.
Corteva Separation Agreement
On April 1, 2019, in connection with the Dow Distribution, Corteva, DuPont and Dow entered into the Corteva Separation Agreement, the Tax Matters Agreement, the Employee Matters Agreement, and certain other agreements (collectively, the “Corteva Separation Agreements”). The Corteva Separation Agreements allocate among Corteva, DuPont and Dow certain liabilities and obligations among the parties and provides for indemnification obligation among the parties. Under the Corteva Separation Agreements, DuPont will indemnify Corteva against certain litigation, environmental, workers' compensation and other liabilities that arose prior to the Corteva Distribution and (ii) Dow indemnifies Corteva against certain litigation and other liabilities that relate to the Historical Dow business, but were transferred over as part of DAS, and Corteva indemnifies DuPont and Dow for certain liabilities. The term of this indemnification is generally indefinite with exceptions, and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments. See Note 3 - Divestitures and Other Transactions, for additional information relating to the Separation
DuPont
Under the Corteva Separation Agreement, certain legacy EID liabilities from discontinued and/or divested operations and businesses of EID (including Performance Chemicals) (a “stray liability”) were allocated to Corteva or DuPont. For those stray liabilities allocated to Corteva (which may include a specified amount of liability associated with that liability), Corteva is responsible for liabilities in an amount up to that specified amount plus an additional $200 million and, for those stray liabilities allocated to DuPont (which may include a specified amount of liability associated with that liability), DuPont is responsible for liabilities up to a specified amount plus an additional $200 million. Once each company has met the $200 million threshold, Corteva and DuPont will share future liabilities proportionally on the basis of 29% and 71%, respectively; provided, however, that for PFAS, DuPont will manage such liabilities with Corteva and DuPont sharing the costs on a 50% - 50% basis starting from $1 and up to $300 million (with such amount, up to $150 million, to be credited to each company’s $200 million threshold) and once the $300 million threshold is met, then the companies will share proportionally on the basis of 29% and 71% respectively, subject to a $1 million de minimis requirement.
Litigation related to legacy EID businesses unrelated to Corteva’s current businesses
While it is reasonably possible that the company could incur liabilities related to the litigation related to legacy EID businesses, unrelated to Corteva's current business, as described below, any such liabilities are not expected to be material.
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PFAS, PFOA, PFOS and Other Related Liabilities
For purposes of this report, the term PFOA means collectively perfluorooctanoic acid and its salts, including the ammonium salt and does not distinguish between the two forms, and PFAS, which means per- and polyfluoroalkyl substances, including PFOA, PFOS (perfluorooctanesulfonic acid), GenX and other perfluorinated chemicals and compounds ("PFCs").
EID is a party to various legal proceedings relating to the use of PFOA by its former Performance Chemicals segment. While it is reasonably possible that EID could incur liabilities related to PFOA in excess of amounts accrued, any such liabilities are not expected to be material. As discussed, EID is indemnified by Chemours under the Chemours Separation Agreement, as amended. The company has recorded a liability of $20 million and an indemnification asset of $20 million at March 31, 2020, related to testing drinking water in and around certain former EID sites and offering treatment or an alternative supply of drinking water if tests indicate the presence of PFOA in drinking water at or greater than the national health advisory level established from time to time by the EPA.
Leach Settlement and MDL Settlement
EID has residual liabilities under its 2004 settlement of a West Virginia state court class action, Leach v. EID, which alleged that PFOA from EID’s former Washington Works facility had contaminated area drinking water supplies and affected the health of area residents. The settlement class has about 80,000 members. In addition to relief that was provided to class members years ago, the settlement requires EID to continue providing PFOA water treatment to six area water districts and private well users and to fund, through an escrow account, up to $235 million for a medical monitoring program for eligible class members. As of March 31, 2020, approximately $2 million had been disbursed from the account since its establishment in 2012 and the remaining balance is approximately $1 million.
The Leach settlement permits class members to pursue personal injury claims for six health conditions (and no others) that an expert panel appointed under the settlement reported in 2012 had a “probable link” (as defined in the settlement) with PFOA: pregnancy-induced hypertension, including preeclampsia; kidney cancer; testicular cancer; thyroid disease; ulcerative colitis; and diagnosed high cholesterol. After the panel reported its findings, approximately 3,550 personal injury lawsuits were filed in federal and state courts in Ohio and West Virginia and consolidated in multi-district litigation in the U.S. District Court for the Southern District of Ohio (“MDL”). The MDL was settled in early 2017 for $670.7 million in cash, with Chemours and EID (without indemnification from Chemours) each paying half.
Post-MDL Settlement PFOA Personal Injury Claims
The MDL settlement did not resolve claims of plaintiffs who did not have claims in the MDL or whose claims are based on diseases first diagnosed after February 11, 2017. At March 31, 2020, approximately 60 lawsuits were pending alleging personal injury, mostly kidney or testicular cancer, from exposure to PFOA through air or water, with nearly all part of the MDL or were not filed on behalf of Leach class members. The first two trials concluded in February 2020. The first trial, a kidney cancer case, resulted in a hung jury, while the second, a testicular cancer case, resulted in a jury verdict of $40 million in compensatory damages and $10 million for loss of consortium. Following entry of the judgment by the court, EID intends to file post-trial motions to reduce the verdict, and to appeal the verdict on the basis of procedural and substantive legal errors made by the trial court. EID believes the merits of the appeal will be successful in reducing the jury verdict or eliminating its liability, in whole or part. Six additional cases are scheduled for trial in August 2020.
Other PFOA Matters
EID is a party to other PFOA lawsuits that do not involve claims for personal injury. Chemours, pursuant to the Chemours Separation Agreement, is generally defending and indemnifying, with reservation, EID but Chemours has refused the tender of Corteva, Inc.'s defense in the limited actions in which Corteva, Inc. has been named. Chemours has refused to indemnify Corteva, Inc. and EID against any fraudulent conveyance claims associated with these matters. Corteva believes that Chemours is obligated to indemnify Corteva, Inc. under the Chemours Separation Agreement.
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New York. EID is a defendant in about 60 lawsuits, including a putative class action, brought by persons who live in and around Hoosick Falls, New York. These lawsuits assert claims for medical monitoring and property damage based on alleged PFOA releases from manufacturing facilities owned and operated by co-defendants in Hoosick Falls and allege that EID and 3M supplied some of the materials used at these facilities. EID is also one of more than ten defendants in a lawsuit brought by the Town of East Hampton, New York alleging PFOA and PFOS contamination of the town’s well water. Additionally, EID was served with complaints filed by six water districts in Nassau County, New York alleging that the drinking water they provide to customers is contaminated with PFAS and seeking reimbursement for clean-up costs.
New Jersey. At March 31, 2020, two lawsuits were pending, one brought by a local water utility and the second a putative class action, against EID alleging that PFOA from EID’s former Chambers Works facility contaminated drinking water sources. The putative class action was voluntarily dismissed without prejudice by the plaintiff.
In late March of 2019, the New Jersey State Attorney General filed four lawsuits against EID, Chemours, 3M and others alleging that operations at and discharges from former EID sites in New Jersey (Chambers Works, Pompton Lakes, Parlin and Repauno) damaged the State’s natural resources. Two of these lawsuits (those involving the Chambers Works and Parlin sites) allege contamination from PFAS. The Ridgewood Water District in New Jersey filed suit in the first quarter 2019 against EID, 3M, Chemours, and Dyneon alleging losses related to the investigation, remediation and monitoring of polyfluorinated surfactants, including PFOA, in water supplies.
Alabama / Others. EID is one of more than thirty defendants in a lawsuit by the Alabama water utility alleging contamination from PFCs, including PFOA, used by co-defendant carpet manufacturers to make their products more stain and grease resistant. In addition, the states of Michigan, New Hampshire, South Dakota, and Vermont recently filed lawsuits against EID, Chemours, 3M and others, claiming, among other things, PFC (including PFOA) contamination of groundwater and drinking water. The complaints seek reimbursement for past and future costs to investigate and remediate the alleged contamination and compensation for the loss of value and use of the state’s natural resources.
Ohio. EID is a defendant in three lawsuits: an action by the State of Ohio based on alleged damage to natural resources, a putative nationwide class action brought on behalf of anyone who has detectable levels of PFAS in their blood serum, and an action by the City of Dayton claiming losses related to the investigation, remediation and monitoring of PFAS in water supplies.
Aqueous Firefighting Foams. Approximately 530 cases have been filed against 3M and other defendants, including EID
and Chemours, and more recently also including Corteva and DuPont, alleging PFOS or PFOA contamination of soil and
groundwater from the use of aqueous firefighting foams. Most of those cases claim some form of property damage and
seek to recover the costs of responding to this contamination and damages for the loss of use and enjoyment of property
and diminution in value. Most of these cases have been transferred to a multidistrict litigation proceeding in federal district court in South Carolina. Approximately 180 of these personal injury cases were filed on behalf of firefighters who allege personal injuries (primarily, thyroid disease and kidney, testicular and other cancers) as a result of aqueous firefighting foams. Most of these recent cases assert claims that the EID and Chemours separation constituted a fraudulent conveyance. While Chemours is defending EID for all claims except those for fraudulent conveyance, it has declined defense and indemnity to Corteva on all claims.
EID did not make firefighting foams, PFOS, or PFOS products. While EID made surfactants and intermediaries that some manufacturers used in making foams, which may have contained PFOA as an unintended byproduct or an impurity, EID’s products were not formulated with PFOA, nor was PFOA an ingredient of these products. EID has never made or sold PFOA as a commercial product.
Fayetteville Works Facility, North Carolina
Prior to the separation of Chemours, EID introduced GenX as a polymerization processing aid and a replacement for PFOA at the Fayetteville Works facility in Bladen County, North Carolina. The facility is now owned and operated by Chemours, which continues to manufacture and use GenX. In 2017, the facility became and continues to be the subject of inquiries and government investigations relating to the alleged discharge of GenX and certain similar compounds into the air and Cape Fear River.
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EID was served with subpoenas relating to these discharges and in the second quarter 2018, received a subpoena expanding the scope to any PFCs discharged from the Fayetteville Works facility into the Cape Fear River. It is possible that these ongoing inquiries and investigations could result in penalties or sanctions, or that additional litigation will be instituted against Chemours, EID, or both. EID continues to cooperate with the U.S. Attorney’s Office.
At March 31, 2020, several actions are pending in federal court against Chemours and EID relating to PFC discharges from the Fayetteville Works facility. One of these is a consolidated putative class action that asserts claims for medical monitoring and property damage on behalf of putative classes of property owners and residents in areas near or who draw drinking water from the Cape Fear River. Another action is a consolidated action brought by various North Carolina water authorities, including the Cape Fear Public Utility Authority and Brunswick County, that seek actual and punitive damages as well as injunctive relief. The other action is on behalf of about 100 plaintiffs who own wells and property near the Fayetteville Works facility. The plaintiffs seek damages for nuisance allegedly caused by releases of certain PFCs from the site. The plaintiffs’ claims for medical monitoring, punitive damages, public nuisance, trespass, unjust enrichment, failure to warn, and negligent manufacture have all been dismissed.
The company has an indemnification claim against Chemours with respect to current and future inquiries and claims, including lawsuits, related to the foregoing. At March 31, 2020, Chemours, with reservations, is defending and indemnifying EID in the pending civil actions.
Environmental
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. At March 31, 2020, the company had accrued obligations of $359 million for probable environmental remediation and restoration costs, including $51 million for the remediation of Superfund sites. These obligations are included in accrued and other current liabilities and other noncurrent obligations in the interim Condensed Consolidated Balance Sheet. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to $630 million above the amount accrued at March 31, 2020. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the company’s results of operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration.
For a discussion of the allocation of environmental liabilities under the Chemours Separation Agreement and the Corteva Separation Agreement, see the previous discussion on page 26.
The above noted $359 million accrued obligations includes the following:
As of March 31, 2020 | |||||||||
(In millions) | Indemnification Asset | Accrual balance3 | Potential exposure above amount accrued3 | ||||||
Environmental Remediation Stray Liabilities | |||||||||
Chemours related obligations - subject to indemnity1,2 | $ | 164 | $ | 164 | $ | 289 | |||
Other discontinued or divested businesses obligations1 | — | 91 | 223 | ||||||
Environmental remediation liabilities primarily related to DuPont - subject to indemnity from DuPont2 | 34 | 34 | 62 | ||||||
Environmental remediation liabilities not subject to indemnity | — | 70 | 56 | ||||||
Total | $ | 198 | $ | 359 | $ | 630 | |||
1. | Represents liabilities that are subject the $200 million thresholds and sharing arrangements as discussed on page 26, under Corteva Separation Agreement. |
2. | The company has recorded an indemnification asset related to these accruals, including $30 million related to the Superfund sites. |
3. | Accrual balance represents management’s best estimate of the costs of remediation and restoration, although it is reasonably possible that the potential exposure, as indicated, could range above the amounts accrued, as there are inherent uncertainties in these estimates. |
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NOTE 15 - STOCKHOLDERS' EQUITY
Common Stock
On June 1, 2019, Corteva, Inc.'s common stock was distributed to DowDuPont stockholders by way of a pro rata distribution. Each DowDuPont stockholder received one share of Corteva, Inc. common stock for every three shares of DowDuPont common stock held at the close of business on May 24, 2019, the record date of distribution. Corteva, Inc.'s common stock began trading the "regular way" under the ticker symbol "CTVA" on June 3, 2019, the first business day after June 1, 2019. The number of Corteva, Inc. common shares issued on June 1, 2019 was 748,815,000 (par value of $0.01 per share). Information related to the Corteva Distribution and its effect on the company's financial statements are discussed throughout these Notes to the interim Consolidated Financial Statements.
Set forth below is a reconciliation of common stock share activity:
Shares of common stock | Issued | |
Balance January 1, 2020 | 748,577,000 | |
Issued | 1,657,000 | |
Repurchased and retired | (1,865,000 | ) |
Balance March 31, 2020 | 748,369,000 | |
Share Buyback Plan
On June 26, 2019, Corteva, Inc. announced that the Board of Directors of Corteva, Inc. authorized a $1 billion share repurchase program to purchase Corteva, Inc.'s common stock, par value $0.01 per share, without an expiration date. The timing, price and volume of purchases will be based on market conditions, relevant securities laws and other factors.
During the three months ended March 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 on March 10, 2020.
Shares repurchased pursuant to Corteva's share buyback plan are immediately retired upon purchase. Repurchased common stock is reflected as a reduction of stockholders' equity. The company's accounting policy related to its share repurchases is to reduce its common stock based on the par value of the shares and to reduce its retained earnings for the excess of the repurchase price over the par value. Corteva currently has an accumulated deficit balance; therefore, the excess over the par value has been applied to additional paid-in capital. Once Corteva has retained earnings, the excess will be charged entirely to retained earnings.
Noncontrolling Interest
Corteva, Inc. owns 100% of the outstanding common shares of EID. However, EID does have preferred stock outstanding to third parties which is accounted for as a non-controlling interest in Corteva's interim Condensed Consolidated Balance Sheets. Each share of EID Preferred Stock - $4.50 Series and EID Preferred Stock - $3.50 Series issued and outstanding at the effective date of the Corteva Distribution remains issued and outstanding as to EID and was unaffected by the Corteva Distribution.
Below is a summary of the EID Preferred Stock at March 31, 2020, December 31, 2019, and March 31, 2019, which is classified as noncontrolling interests in Corteva's interim Condensed Consolidated Balance Sheets.
Shares in thousands | Number of Shares |
Authorized | 23,000 |
$4.50 Series, callable at $120 | 1,673 |
$3.50 Series, callable at $102 | 700 |
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Other Comprehensive Loss
The changes and after-tax balances of components comprising accumulated other comprehensive loss are summarized below:
(In millions) | Cumulative Translation Adjustment1 | Derivative Instruments | Pension Benefit Plans | Other Benefit Plans | Total | ||||||||||
2019 | |||||||||||||||
Balance January 1, 2019 | $ | (2,793 | ) | $ | (26 | ) | $ | (620 | ) | $ | 79 | $ | (3,360 | ) | |
Other comprehensive loss before reclassifications | (72 | ) | (4 | ) | (4 | ) | — | (80 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss | — | 5 | 1 | — | 6 | ||||||||||
Net other comprehensive (loss) income | (72 | ) | 1 | (3 | ) | — | (74 | ) | |||||||
Balance March 31, 2019 | $ | (2,865 | ) | $ | (25 | ) | $ | (623 | ) | $ | 79 | $ | (3,434 | ) | |
2020 | |||||||||||||||
Balance January 1, 2020 | $ | (1,944 | ) | $ | 2 | $ | (1,247 | ) | $ | (81 | ) | $ | (3,270 | ) | |
Other comprehensive (loss) income before reclassifications | (672 | ) | 1 | (2 | ) | 3 | (670 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss | — | 5 | 2 | — | 7 | ||||||||||
Net other comprehensive (loss) income | (672 | ) | 6 | — | 3 | (663 | ) | ||||||||
Balance March 31, 2020 | $ | (2,616 | ) | $ | 8 | $ | (1,247 | ) | $ | (78 | ) | $ | (3,933 | ) | |
1. | The cumulative translation adjustment loss for the three months ended March 31, 2019 was primarily driven by strengthening of the USD against the European Euro (“EUR”) and the Brazilian Real (“BRL”). The cumulative translation adjustment loss for the three months ended March 31, 2020 was primarily driven by strengthening of the USD against the BRL and the South African Rand ("ZAR"). |
The tax benefit (expense) on the net activity related to each component of other comprehensive (loss) income was as follows:
(In millions) | Three Months Ended March 31, | |||||
2020 | 2019 | |||||
Derivative instruments | $ | 5 | $ | (3 | ) | |
Pension benefit plans - net | (4 | ) | (7 | ) | ||
Benefit from (provision for) income taxes related to other comprehensive income (loss) items | $ | 1 | $ | (10 | ) | |
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A summary of the reclassifications out of accumulated other comprehensive loss is provided as follows:
(In millions) | Three Months Ended March 31, | |||||
2020 | 2019 | |||||
Derivative Instruments1: | $ | 7 | $ | 4 | ||
Tax (benefit) expense2 | (2 | ) | 1 | |||
After-tax | $ | 5 | $ | 5 | ||
Amortization of pension benefit plans: | ||||||
Actuarial losses3 | $ | 1 | 1 | |||
Settlement loss3 | 2 | — | ||||
Total before tax | 3 | 1 | ||||
Tax benefit2 | (1 | ) | — | |||
After-tax | $ | 2 | $ | 1 | ||
Total reclassifications for the period, after-tax | $ | 7 | $ | 6 | ||
1. | Reflected in cost of goods sold. |
2. | Reflected in provision for (benefit from) income taxes from continuing operations. |
3. | These accumulated other comprehensive (loss) income components are included in the computation of net periodic benefit (credit) cost of the company's pension and other benefit plans. See Note 16 - Pension Plans and Other Post Employment Benefits, for additional information. |
NOTE 16 - PENSION PLANS AND OTHER POST EMPLOYMENT BENEFITS
The following sets forth the components of the company's net periodic benefit (credit) cost for defined benefit pension plans and other post employment benefits:
Three Months Ended March 31, | ||||||
(In millions) | 2020 | 2019 | ||||
Defined Benefit Pension Plans: | ||||||
Service cost | $ | 5 | $ | 20 | ||
Interest cost | 141 | 208 | ||||
Expected return on plan assets | (251 | ) | (304 | ) | ||
Amortization of unrecognized loss | 1 | 1 | ||||
Settlement loss | 2 | — | ||||
Net periodic benefit credit - Total | $ | (102 | ) | $ | (75 | ) |
Less: Discontinued operations1 | — | (8 | ) | |||
Net periodic benefit credit - Continuing operations | $ | (102 | ) | $ | (67 | ) |
Other Post Employment Benefits: | ||||||
Service cost | $ | 1 | $ | 2 | ||
Interest cost | 16 | 23 | ||||
Net periodic benefit cost - Continuing operations | $ | 17 | $ | 25 | ||
1. | Includes non-service related components of net periodic benefit credit of $(21) million for the three months ended March 31, 2019. |
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NOTE 17 - FINANCIAL INSTRUMENTS
At March 31, 2020, the company had $1,536 million ($1,293 million and $1,055 million at December 31, 2019 and March 31, 2019, respectively) of held-to-maturity securities (primarily time deposits and money market funds) classified as cash equivalents, as these securities had maturities of three months or less at the time of purchase; and $10 million ($5 million and $5 million at December 31, 2019 and March 31, 2019, respectively) of held-to-maturity securities (primarily time deposits) classified as marketable securities as these securities had maturities of more than three months to less than one year at the time of purchase. The company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. These securities are included in cash and cash equivalents, marketable securities, and other current assets in the Condensed Consolidated Balance Sheets.
Derivative Instruments
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the company enters into contractual arrangements (derivatives) to reduce its exposure to foreign currency, interest rate and commodity price risks. The company has established a variety of derivative programs to be utilized for financial risk management. These programs reflect varying levels of exposure coverage and time horizons based on an assessment of risk.
Derivative programs have procedures and controls and are approved by the Corporate Financial Risk Management Committee, consistent with the company's financial risk management policies and guidelines. Derivative instruments used are forwards, options, futures and swaps. The company has not designated any non-derivatives as hedging instruments.
The company's financial risk management procedures also address counterparty credit approval, limits and routine exposure monitoring and reporting. The counterparties to these contractual arrangements are major financial institutions and major commodity exchanges. The company is exposed to credit loss in the event of nonperformance by these counterparties. The company utilizes collateral support annex agreements with certain counterparties to limit its exposure to credit losses. The company anticipates performance by counterparties to these contracts and therefore no material loss is expected. Market and counterparty credit risks associated with these instruments are regularly reported to management.
The notional amounts of the company's derivative instruments were as follows:
Notional Amounts (In millions) | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||
Derivatives designated as hedging instruments: | |||||||||
Foreign currency contracts | $ | 751 | $ | — | $ | — | |||
Commodity contracts | $ | 418 | $ | 570 | $ | 351 | |||
Derivatives not designated as hedging instruments: | |||||||||
Foreign currency contracts | $ | 644 | $ | 582 | $ | 1,442 | |||
Commodity contracts | $ | 59 | $ | — | $ | 125 | |||
Foreign Currency Risk
The company's objective in managing exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign currency rate changes and to mitigate the exposure of certain investments in foreign subsidiaries against changes in the Euro/USD exchange rate. Accordingly, the company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency-denominated assets, liabilities, commitments, investments and cash flows.
The company uses forward exchange contracts to offset its net exposures, by currency, related to the foreign currency denominated monetary assets and liabilities of its operations. The primary business objective of this hedging program is to maintain an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes, after related tax effects, are minimized.
Commodity Price Risk
Commodity price risk management programs serve to reduce exposure to price fluctuations on purchases of inventory such as corn and soybeans. The company enters into over-the-counter and exchange-traded derivative commodity instruments to hedge the commodity price risk associated with agricultural commodity exposures.
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Derivatives Designated as Cash Flow Hedges
Commodity Contracts
The company enters into over-the-counter and exchange-traded derivative commodity instruments, including options, futures and swaps, to hedge the commodity price risk associated with agriculture commodity exposures.
While each risk management program has a different time maturity period, most programs currently do not extend beyond the next two years. Cash flow hedge results are reclassified into earnings during the same period in which the related exposure impacts earnings. Reclassifications are made sooner if it appears that a forecasted transaction is not probable of occurring.
The following table summarizes the after-tax effect of commodity contract cash flow hedges on accumulated other comprehensive loss:
Three Months Ended March 31, | ||||||
(In millions) | 2020 | 2019 | ||||
Beginning balance | $ | 2 | $ | (26 | ) | |
Additions and revaluations of derivatives designated as cash flow hedges | (22 | ) | (4 | ) | ||
Clearance of hedge results to earnings | 5 | 5 | ||||
Ending balance | $ | (15 | ) | $ | (25 | ) |
At March 31, 2020, an after-tax net loss of $20 million is expected to be reclassified from accumulated other comprehensive loss into earnings over the next twelve months.
Foreign Currency Contracts
The company enters into forward contracts to hedge the foreign currency risk associated with forecasted transactions within certain foreign subsidiaries.
While each risk management program has a different time maturity period, most programs currently do not extend beyond the next two years. Cash flow hedge results are reclassified into earnings during the same period in which the related exposure impacts earnings. Reclassifications are made sooner if it appears that a forecasted transaction is not probable of occurring.
The following table summarizes the after-tax effect of foreign currency cash flow hedges on accumulated other comprehensive loss:
Three Months Ended March 31, | |||
(In millions) | 2020 | ||
Beginning balance | $ | — | |
Additions and revaluations of derivatives designated as cash flow hedges | 16 | ||
Ending balance | $ | 16 | |
At March 31, 2020, an after-tax net gain of $16 million is expected to be reclassified from accumulated other comprehensive loss into earnings over the next twelve months.
Derivatives Designated as Net Investment Hedges
Foreign Currency Contracts
The company has designated €450 million of forward contracts to exchange EUR as net investment hedges. The purpose of these forward contracts is to mitigate FX exposure related to a portion of the Company’s euro net investments in certain foreign subsidiaries against changes in Euro/USD exchange rates. These hedges will expire and be settled in 2023, unless terminated early at the discretion of the Company.
The company elected to apply the spot method in testing for effectiveness of the hedging relationship.
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Derivatives not Designated in Hedging Relationships
Foreign Currency Contracts
The company uses forward exchange contracts to reduce its net exposure, by currency, related to foreign currency-denominated monetary assets and liabilities of its operations so that exchange gains and losses resulting from exchange rate changes are minimized. The netting of such exposures precludes the use of hedge accounting; however, the required revaluation of the forward contracts and the associated foreign currency-denominated monetary assets and liabilities intends to achieve a minimal earnings impact, after taxes.
Commodity Contracts
The company utilizes options, futures and swaps that are not designated as hedging instruments to reduce exposure to commodity price fluctuations on purchases of inventory such as corn and soybeans.
Fair Value of Derivative Instruments
Asset and liability derivatives subject to an enforceable master netting arrangement with the same counterparty are presented on a net basis in the interim Condensed Consolidated Balance Sheets. The presentation of the company's derivative assets and liabilities is as follows:
March 31, 2020 | ||||||||||
(In millions) | Balance Sheet Location | Gross | Counterparty and Cash Collateral Netting1 | Net Amounts Included in the Condensed Consolidated Balance Sheet | ||||||
Asset derivatives: | ||||||||||
Derivatives designated as hedging instruments: | ||||||||||
Foreign currency contracts | Other current assets | $ | 36 | $ | — | $ | 36 | |||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign currency contracts | Other current assets | 230 | (110 | ) | 120 | |||||
Total asset derivatives | $ | 266 | $ | (110 | ) | $ | 156 | |||
Liability derivatives: | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign currency contracts | Accrued and other current liabilities | $ | 108 | $ | (103 | ) | $ | 5 | ||
Total liability derivatives | $ | 108 | $ | (103 | ) | $ | 5 | |||
1. | Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
December 31, 2019 | ||||||||||
(In millions) | Balance Sheet Location | Gross | Counterparty and Cash Collateral Netting1 | Net Amounts Included in the Condensed Consolidated Balance Sheet | ||||||
Asset derivatives: | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign currency contracts | Other current assets | $ | 25 | $ | (18 | ) | $ | 7 | ||
Total asset derivatives | $ | 25 | $ | (18 | ) | $ | 7 | |||
Liability derivatives: | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign currency contracts | Accrued and other current liabilities | $ | 43 | $ | (16 | ) | $ | 27 | ||
Total liability derivatives | $ | 43 | $ | (16 | ) | $ | 27 | |||
1. | Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
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March 31, 2019 | ||||||||||
(In millions) | Balance Sheet Location | Gross | Counterparty and Cash Collateral Netting1 | Net Amounts Included in the Condensed Consolidated Balance Sheet | ||||||
Asset derivatives: | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign currency contracts | Other current assets | $ | 45 | $ | (11 | ) | $ | 34 | ||
Total asset derivatives | $ | 45 | $ | (11 | ) | $ | 34 | |||
Liability derivatives: | ||||||||||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign currency contracts | Accrued and other current liabilities | $ | 10 | $ | (10 | ) | $ | — | ||
Total liability derivatives | $ | 10 | $ | (10 | ) | $ | — | |||
1. | Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
Effect of Derivative Instruments
Amount of (Loss) Gain Recognized in OCI1 - Pre-Tax | ||||||
Three Months Ended March 31, | ||||||
(In millions) | 2020 | 2019 | ||||
Derivatives designated as hedging instruments: | ||||||
Net Investment Hedges: | ||||||
Foreign currency contracts | $ | 9 | $ | — | ||
Cash flow hedges: | ||||||
Foreign currency contracts | 19 | $ | — | |||
Commodity contracts | (34 | ) | $ | 1 | ||
Total derivatives designated as hedging instruments | (6 | ) | 1 | |||
Total derivatives | $ | (6 | ) | $ | 1 | |
1. | OCI is defined as other comprehensive income (loss). |
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Amount of Gain (Loss) Recognized in Income - Pre-Tax1 | ||||||
(In millions) | Three Months Ended March 31, | |||||
2020 | 2019 | |||||
Derivatives designated as hedging instruments: | ||||||
Cash flow hedges: | ||||||
Commodity contracts2 | $ | (7 | ) | $ | (4 | ) |
Total derivatives designated as hedging instruments | (7 | ) | (4 | ) | ||
Derivatives not designated as hedging instruments: | ||||||
Foreign currency contracts3 | 165 | (17 | ) | |||
Commodity contracts2 | 9 | 6 | ||||
Total derivatives not designated as hedging instruments | 174 | (11 | ) | |||
Total derivatives | $ | 167 | $ | (15 | ) | |
1. | For cash flow hedges, this represents the portion of the gain (loss) reclassified from accumulated OCI into income during the period. |
2. | Recorded in cost of goods sold. |
3. | Gain recognized in other income - net was partially offset by the related gain on the foreign currency-denominated monetary assets and liabilities of the company's operations. See Note 7 - Supplementary Information, for additional information. |
NOTE 18 - FAIR VALUE MEASUREMENTS
The following tables summarize the basis used to measure certain assets and liabilities at fair value on a recurring basis:
March 31, 2020 | Significant Other Observable Inputs (Level 2) | ||
(In millions) | |||
Assets at fair value: | |||
Cash equivalents and restricted cash equivalents1 | $ | 1,536 | |
Marketable securities | 10 | ||
Derivatives relating to:2 | |||
Foreign currency | 266 | ||
Total assets at fair value | $ | 1,812 | |
Liabilities at fair value: | |||
Derivatives relating to:2 | |||
Foreign currency | 108 | ||
Total liabilities at fair value | $ | 108 | |
December 31, 2019 | Significant Other Observable Inputs (Level 2) | ||
(In millions) | |||
Assets at fair value: | |||
Cash equivalents and restricted cash equivalents1 | $ | 1,293 | |
Marketable securities | 5 | ||
Derivatives relating to:2 | |||
Foreign currency | 25 | ||
Total assets at fair value | $ | 1,323 | |
Liabilities at fair value: | |||
Derivatives relating to:2 | |||
Foreign currency | 43 | ||
Total liabilities at fair value | $ | 43 | |
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March 31, 2019 | Significant Other Observable Inputs (Level 2) | ||
(In millions) | |||
Assets at fair value: | |||
Cash equivalents and restricted cash equivalents1 | $ | 1,055 | |
Marketable securities | 5 | ||
Derivatives relating to:2 | |||
Foreign currency | 45 | ||
Total assets at fair value | $ | 1,105 | |
Liabilities at fair value: | |||
Derivatives relating to:2 | |||
Foreign currency | 10 | ||
Total liabilities at fair value | $ | 10 | |
1. | Time deposits included in cash and cash equivalents and money market funds included in other current assets in the interim Condensed Consolidated Balance Sheets are held at amortized cost, which approximates fair value. |
2. See Note 17 - Financial Instruments for the classification of derivatives in the interim Condensed Consolidated Balance Sheets.
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NOTE 19 - SEGMENT INFORMATION
Segment operating EBITDA is the primary measure of segment profitability used by Corteva’s chief operating decision maker ("CODM"). The company defines segment operating EBITDA as earnings (i.e., income from continuing operations before income taxes) before interest, depreciation, amortization, corporate expenses, non-operating (benefits) costs - net and foreign exchange gains (losses), excluding the impact of significant items. Non-operating (benefits) costs - net consists of non-operating pension and other post-employment benefit (OPEB) costs, tax indemnification adjustments, environmental remediation and legal costs associated with legacy EID businesses and sites. Tax indemnification adjustments relate to changes in indemnification balances, as a result of the application of the terms of the Tax Matters Agreement, between Corteva and Dow and/or DuPont that are recorded by the company as pre-tax income or expense. For purposes of the three months ended March 31, 2019, segment operating EBITDA is calculated on a pro forma basis, as this is the manner in which the CODM assesses performance and allocates resources.
Pro forma adjustments used in the calculation of pro forma segment operating EBITDA for the first quarter of 2019 were determined in accordance with Article 11 of Regulation S-X. These adjustments 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 of Corteva common stock as if they had been consummated on January 1, 2016.
As of and for the Three Months Ended March 31, (In millions) | Seed | Crop Protection | Total | ||||||
2020 | |||||||||
Net sales | $ | 2,455 | $ | 1,501 | $ | 3,956 | |||
Segment operating EBITDA | $ | 581 | $ | 238 | $ | 819 | |||
Segment assets1,2 | $ | 25,857 | $ | 13,251 | $ | 39,108 | |||
2019 | |||||||||
Net sales | $ | 1,967 | $ | 1,429 | $ | 3,396 | |||
Pro forma segment operating EBITDA | $ | 325 | $ | 220 | $ | 545 | |||
Segment assets1 | $ | 30,259 | $ | 9,782 | $ | 40,041 | |||
1. | Segment assets at December 31, 2019 were $25,387 million and $13,492 million for Seed and Crop Protection, respectively. |
2. On June 1, 2019, as a result of changes in reportable segments, $3,382 million of goodwill was reallocated from the Seed reportable segment to the Crop Protection reportable segment. This change was not reflected in segment assets prior to June 1, 2019.
Reconciliation to interim Consolidated Financial Statements
Income (loss) from continuing operations after income taxes to segment operating EBITDA (In millions) | Three Months Ended March 31, | |||||
2020 | 2019 1 | |||||
Income (loss) from continuing operations after income taxes | $ | 281 | $ | (184 | ) | |
Provision for (benefit from) income taxes on continuing operations | 127 | (67 | ) | |||
Income (loss) from continuing operations before income taxes | 408 | (251 | ) | |||
Depreciation and amortization | 283 | 258 | ||||
Interest income | (18 | ) | (16 | ) | ||
Interest expense | 10 | 59 | ||||
Exchange losses - net | 61 | 27 | ||||
Non-operating benefits - net | (73 | ) | (42 | ) | ||
Significant items | 123 | 185 | ||||
Pro forma adjustments | 298 | |||||
Corporate expenses | 25 | 27 | ||||
Segment operating EBITDA | $ | 819 | $ | 545 | ||
1. | Period is presented on a pro forma basis, prepared in accordance with Article 11 of Regulation S-X. |
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Segment assets to total assets (in millions) | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||
Total segment assets | $ | 39,108 | $ | 38,879 | $ | 40,041 | |||
Corporate assets | 3,870 | 3,518 | 3,991 | ||||||
Assets related to discontinued operations1 | — | — | 66,070 | ||||||
Total assets | $ | 42,978 | $ | 42,397 | $ | 110,102 | |||
1. | See Note 3 - Divestitures and Other Transactions for additional information on discontinued operations. |
Significant Pre-tax Charges Not Included in Pro Forma Segment Operating EBITDA
The three months ended March 31, 2020 and 2019, respectively, included the following significant pre-tax charges which are excluded from segment operating EBITDA:
(In millions) | Seed | Crop Protection | Corporate | Total | ||||||||
For the Three Months Ended March 31, 2020 | ||||||||||||
Restructuring and Asset Related Charges - Net 1 | $ | (10 | ) | $ | (18 | ) | $ | (42 | ) | $ | (70 | ) |
Loss on Divestiture2 | — | (53 | ) | — | (53 | ) | ||||||
Total | $ | (10 | ) | $ | (71 | ) | $ | (42 | ) | $ | (123 | ) |
(In millions) | Seed | Crop Protection | Corporate | Total | ||||||||
For the Three Months Ended March 31, 2019 | ||||||||||||
Restructuring and Asset Related Charges - Net 1 | $ | (27 | ) | $ | (23 | ) | $ | (11 | ) | $ | (61 | ) |
Integration Costs 3 | — | — | (100 | ) | (100 | ) | ||||||
Loss on Divestiture 4 | (24 | ) | — | — | (24 | ) | ||||||
Total | $ | (51 | ) | $ | (23 | ) | $ | (111 | ) | $ | (185 | ) |
1. | Includes Board approved restructuring plans and asset related charges as well as accelerated prepaid amortization expense. See Note 5 - Restructuring and Asset Related Charges - Net, for additional information. |
2. | Includes a loss recorded in other income - net related to the expected sale of the La Porte site. |
3. | Integration costs include costs incurred to prepare for and close the Merger as well as post-Merger integration expenses. |
4. | Includes a loss recorded in other income - net related to DAS’s sale of a joint venture related to synergy actions. |
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 about Corteva’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 of Corteva 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 beyond Corteva’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 on Corteva’s business, results of operations and financial condition. Some of the important factors that could cause Corteva’s actual results to differ materially from those projected in any such forward-looking statements include: (i) failure to successfully develop and commercialize Corteva’s pipeline; (ii) effect of competition and consolidation in Corteva’s industry; (iii) failure to obtain or maintain the necessary regulatory approvals for some Corteva’s products; (iv) failure to enforce Corteva’s intellectual property rights or defend against intellectual property claims asserted by others; (v) effect of competition from manufacturers of generic products; (vi) impact of Corteva’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 of Corteva’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 to Corteva’s supply chain, information technology or network systems; (xi) competitor’s establishment of an intermediary platform for distribution of Corteva's products; (xii) effect of volatility in Corteva’s input costs; (xiii) failure to raise capital through the capital markets or short-term borrowings on terms acceptable to Corteva; (xiv) failure of Corteva’s customers to pay their debts to Corteva, including customer financing programs; (xv) failure to realize the anticipated benefits of the internal reorganizations taken by DowDuPont in connection with the spin-off of Corteva, including failure to benefit from significant cost synergies; (xvi) risks related to the indemnification obligations of legacy EID liabilities in connection with the separation of Corteva; (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 to Corteva’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 that Corteva is unable to currently identify or that Corteva 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 of Corteva’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).
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Recent Developments
COVID-19 Pandemic
On March 11, 2020, the World 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 and U.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 ended March 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
On June 26, 2019, Corteva, Inc. announced that its Board of Directors authorized a $1 billion share repurchase program to purchase Corteva, 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 ended March 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 on March 10, 2020.
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Overview
The following is a summary of results from continuing operations for the three months ended March 31, 2020:
• | The company reported net sales of $3,956 million, up 16 percent versus the 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 $2,269 million in the first quarter of 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 $61 million in the first quarter 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 $281 million, as compared to a loss of $(184) million in the same quarter last year. |
• | Operating EBITDA was $794 million, up from $518 million for the three months ended March 31, 2019, as volume increases from strong early demand in North America and Europe, price increases for new products and ongoing 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 $70 million for the three months ended March 31, 2020. |
In addition to the financial highlights above, the following events occurred during or subsequent to the first quarter of 2020:
• | The company repurchased $50 million of shares as part of the $1 billion 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
In millions, except per share amounts | Three Months Ended 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 Corteva common stockholders | $ | 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 | ) | |
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Results of Operations
Net Sales
Net sales were $3,956 million and $3,396 million for the three months ended March 31, 2020 and 2019, respectively. The increase was primarily driven by a 17 percent increase in volume and a 3 percent increase in price, partially offset by a 3 percent decrease in currency and a 1 percent impact from portfolio. Volume gains were primarily driven by earlier seed deliveries due to improved weather conditions and the anticipated recovery of planted area in North America, strong early demand in EMEA due to perceived supply concerns from COVID-19, and strong demand for new products in crop protection. Pricing gains were largely driven by increased pricing to offset currency in Latin America and improved mix from new products in both North America and Latin America. Unfavorable currency impacts were primarily driven by the Brazilian Real and the European Euro. The portfolio impact was due to prior year divestitures in North America and Asia Pacific.
Three Months Ended March 31, | ||||||||||
2020 | 2019 | |||||||||
Net Sales ($ Millions) | % | Net Sales ($ 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 ended March 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 ended March 31, 2020, as compared to $205 million recognized for the three months ended March 31, 2019.
COGS as a percentage of net sales was 57 percent and 65 percent for the three months ended March 31, 2020 and 2019, respectively. The amortization of inventory step-up was 6 percent of net sales for the three months ended March 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 ended March 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 ended March 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.
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Amortization of Intangibles
Intangible asset amortization was $163 million and $101 million for the three months ended March 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 ended March 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 ended March 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 ended March 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 ended March 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 ended March 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 ended March 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 ended March 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 ended March 31, 2020 and March 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 ended March 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 ended March 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.
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The company’s benefit from income taxes on continuing operations was $(67) million for the three months ended March 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 with U.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 ended March 31, 2020 and 2019, respectively. The three months ended March 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 of Corteva, 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 between EID and Corteva, Inc.
Interest Expense
EID’s interest expense was $42 million and $59 million for the three months ended March 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 between EID 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 ended March 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 between EID 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 ended March 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.
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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") for Corteva 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 of Corteva common stock as if they had been consummated on January 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, and Corteva’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 through March 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 of Corteva. 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 what Corteva’s results of operations actually would have been had the above transactions been completed on January 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 ended December 31, 2019.
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Unaudited Pro Forma Statement of Operations | Three Months Ended March 31, 2019 | ||||||||||||||
(In millions, except per share amounts) | Corteva | Merger 1 | Debt Retirement 2 | Separations Related 3 | Pro Forma | ||||||||||
Net sales | $ | 3,396 | $ | — | $ | — | $ | — | $ | 3,396 | |||||
Cost of goods sold | 2,211 | (205 | ) | — | 16 | 2,022 | |||||||||
Research and development expense | 299 | — | — | — | 299 | ||||||||||
Selling, general and administrative expenses | 735 | — | — | 3 | 738 | ||||||||||
Amortization of intangibles | 101 | — | — | — | 101 | ||||||||||
Restructuring and asset related charges - net | 61 | — | — | — | 61 | ||||||||||
Integration and separation costs | 212 | — | — | (112 | ) | 100 | |||||||||
Other income - net | 31 | — | — | — | 31 | ||||||||||
Interest expense | 59 | — | (45 | ) | — | 14 | |||||||||
(Loss) income from continuing operations before income taxes | (251 | ) | 205 | 45 | 93 | 92 | |||||||||
Benefit from income taxes on continuing operations | (67 | ) | 36 | 10 | 1 | (20 | ) | ||||||||
(Loss) income from continuing operations after income taxes | (184 | ) | 169 | 35 | 92 | 112 | |||||||||
Net income from continuing operations attributable to noncontrolling interests | 8 | — | — | — | 8 | ||||||||||
Net (loss) income from continuing operations attributable to Corteva | $ | (192 | ) | $ | 169 | $ | 35 | $ | 92 | $ | 104 | ||||
Per share common data | |||||||||||||||
Earnings per share of common stock from continuing operations - basic | $ | 0.14 | |||||||||||||
Earnings per share of common stock from continuing operations - diluted | $ | 0.14 | |||||||||||||
Weighted-average common shares outstanding - basic | 749.4 | ||||||||||||||
Weighted-average common shares outstanding - diluted | 749.4 | ||||||||||||||
1. | Represents the removal of amortization of EID’s agriculture business’ inventory step-up recognized in connection with the Merger, as the incremental amortization is directly attributable to the Merger and will not have a continuing impact. |
2. | Represents removal of interest expense related to the debt redemptions/repayments. |
3. | Adjustments directly attributable to the separations and distributions of Corteva, Inc. include the following: removal of Telone® Soil Fumigant business (“Telone®”) results (as Telone® did not transfer to Corteva as part of the common control combination of DAS); impact from the distribution agreement entered into between Corteva and Dow that allows for Corteva to become the exclusive distributor of Telone® products for Dow; elimination of one-time transaction costs directly attributable to the Corteva Distribution; the impact of certain manufacturing, leasing and supply agreements entered into in connection with the Corteva Distribution; and the related tax impacts of these items. |
Recent Accounting Pronouncements
See Note 2 - Recent Accounting Guidance, to the interim Consolidated Financial Statements for a description of recent accounting pronouncements.
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Segment Reviews
The company operates in two reportable segments: Seed and Crop Protection. The company’s seed segment is a global leader in developing and supplying advanced germplasm and traits that produce optimum yield for farms around the world. The segment offers trait technologies that improve resistance to weather, disease, insects and weeds, and trait technologies that enhance food and nutritional characteristics, and also provides digital solutions that assist farmer decision-making with a view to optimize product selection and, ultimately, maximize yield and profitability. The segment competes in a wide variety of agricultural markets.
The crop protection segment serves the global agricultural input industry with products that protect against weeds, insects and other pests, and disease, and that improve overall crop health both above and below ground via nitrogen management and seed-applied technologies. The segment is a leader in global herbicides, insecticides, below-ground nitrogen stabilizers and pasture and range management herbicides.
Summarized below are comments on individual segment net sales and segment operating EBITDA for the three months ended March 31, 2020 compared with the same period in 2019. For purposes of the three months ended March 31, 2019, segment operating EBITDA is calculated on a pro forma basis, as this is the manner in which the CODM assesses performance and allocates resources. Pro forma adjustments used in the calculation of pro forma segment operating EBITDA were determined in accordance with Article 11 of Regulation S-X. These adjustments 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 of Corteva common stock as if they had been consummated on January 1, 2016 (refer to supplemental unaudited pro forma financial statements on page 48). The company defines segment operating EBITDA as earnings (i.e., income from continuing operations before income taxes) before interest, depreciation, amortization, corporate expenses, non-operating (benefits) costs - net and foreign exchange gains (losses), excluding the impact of significant items. Non-operating (benefits) costs - net consists of non-operating pension and other post-employment benefit (OPEB) credits, tax indemnification adjustments, environmental remediation and legal costs associated with legacy EID businesses and sites. Tax indemnification adjustments relate to changes in indemnification balances, as a result of the application of the terms of the Tax Matters Agreement, between Corteva and Dow and/or DuPont that are recorded by the company as pre-tax income or expense. See Note 19 to the interim Consolidated Financial Statements for details related to significant pre-tax benefits (charges) excluded from segment operating EBITDA. All references to prices are based on local price unless otherwise specified.
A reconciliation of pro forma segment operating EBITDA to income from continuing operations before income taxes for the three months ended March 31, 2020 and 2019 is included in Note 19 - Segment Information, to the interim Consolidated Financial Statements.
Seed | Three Months Ended March 31, | |||||
In millions | 2020 | 2019 | ||||
Net sales | $ | 2,455 | $ | 1,967 | ||
Segment operating EBITDA 1 | $ | 581 | $ | 325 | ||
1. | The three months ended March 31, 2019 is presented on a Pro Forma Basis, prepared in accordance with Article 11 of Regulation S-X. |
Seed | Q1 2020 vs. Q1 2019 | Percent Change Due To: | |||||||||||
Net Sales Change | Local Price & | Portfolio / | |||||||||||
$ In millions | $ | % | Product Mix | Volume | Currency | Other | |||||||
North America | $ | 377 | 41 | % | 4 | % | 37 | % | — | % | — | % | |
EMEA | 77 | 10 | % | 3 | % | 10 | % | (3 | )% | — | % | ||
Latin America | 38 | 21 | % | 16 | % | 14 | % | (9 | )% | — | % | ||
Asia Pacific | (4 | ) | (6 | )% | 5 | % | (7 | )% | (4 | )% | — | % | |
Total | $ | 488 | 25 | % | 5 | % | 22 | % | (2 | )% | — | % | |
Seed
Seed net sales were $2,455 million in the first quarter of 2020, up from $1,967 million in the first quarter of 2019. The increase was due to a 22 percent increase in volume and a 5 percent increase in local price, partially offset by a 2 percent decline in currency.
Volume gains were primarily driven by earlier deliveries in North America due to improved weather conditions and the anticipated recovery of planted area, as well as strong early demand in EMEA due to perceived supply concerns from COVID-19. The increase in local price was driven by favorable mix in both North America and Latin America as well as changes in route to market in EMEA. Unfavorable currency impacts were primarily due to currencies in Brazil and Europe.
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Segment operating EBITDA was $581 million in the first quarter of 2020, compared to $325 million in the first quarter of 2019 on a pro forma basis. Volume gains in North America, pricing gains on favorable mix, and ongoing cost synergies and productivity efforts more than offset higher commissions, currency headwinds, and higher unit costs due to unfavorable seed yields.
Crop Protection | Three Months Ended March 31, | |||||
In millions | 2020 | 2019 | ||||
Net sales | $ | 1,501 | $ | 1,429 | ||
Segment Operating EBITDA 1 | $ | 238 | $ | 220 | ||
1. | The three months ended March 31, 2019 is presented on a Pro Forma Basis, prepared in accordance with Article 11 of Regulation S-X. |
Crop Protection | Q1 2020 vs. Q1 2019 | Percent Change Due To: | |||||||||||
Net Sales Change | Local Price & | Portfolio / | |||||||||||
$ In millions | $ | % | Product Mix | Volume | Currency | Other | |||||||
North America | $ | (4 | ) | (1 | )% | (4 | )% | 5 | % | — | % | (2 | )% |
EMEA | 26 | 5 | % | — | % | 9 | % | (4 | )% | — | % | ||
Latin America | 31 | 17 | % | 6 | % | 24 | % | (13 | )% | — | % | ||
Asia Pacific | 19 | 9 | % | 1 | % | 13 | % | (2 | )% | (3 | )% | ||
Total | $ | 72 | 5 | % | — | % | 10 | % | (4 | )% | (1 | )% | |
Crop Protection
Crop protection net sales were $1,501 million in the first quarter of 2020, up from $1,429 million in the first quarter of 2019. The increase was due to a 10 percent increase in volume, partially offset by a 4 percent decline in currency and a 1 percent decline related to portfolio actions. Local price was flat.
Volume gains were primarily driven by new product launches, including ArylexTM and EnlistTM herbicides and IsoclastTM insecticide, as well as strong early demand in Latin America and EMEA. Unfavorable currency impacts were primarily due to currencies in Brazil and Europe. The portfolio impact was driven by prior year divestitures in North America and Asia Pacific. Pricing gains in Latin America were offset by increased grower incentive discounts in North America.
Segment operating EBITDA was $238 million in the first quarter of 2020, compared to $220 million in the first quarter of 2019 on a pro forma basis. Gains from new product sales and ongoing cost synergies and productivity efforts were partially offset by higher input costs, unfavorable currency, and portfolio impacts.
Non-GAAP Financial Measures
The company presents certain financial measures that do not conform to U.S. GAAP and are considered non-GAAP measures. These measures include Operating EBITDA and operating earnings per share. Management believes that these non-GAAP measures best reflect the ongoing performance of the company during the periods presented and provide more relevant and meaningful information to investors as they provide insight with respect to ongoing operating results of the company and a more useful comparison of year over year results. These non-GAAP measures supplement the company's U.S. GAAP disclosures and should not be viewed as an alternative to U.S. GAAP measures of performance. Furthermore, such non-GAAP measures may not be consistent with similar measures provided or used by other companies. Reconciliations for these non-GAAP measures to U.S. GAAP are provided below. For the three months ended March 31, 2019 information is on a pro forma basis and these non-GAAP measures are being reconciled to a pro forma GAAP financial measure prepared and presented in accordance with Article 11 of Regulation S-X, which are reconciled to the GAAP reported figures. See Article 11 Pro Forma Combined Statements of Operations on page 48.
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Operating EBITDA is defined as earnings (i.e., income from continuing operations before income taxes) before interest, depreciation, amortization, non-operating (benefits) costs - net and foreign exchange gains (losses), excluding the impact of significant items (including goodwill impairment charges). Non-operating (benefits) costs - net consists of non-operating pension and OPEB credits, tax indemnification adjustments, environmental remediation and legal costs associated with legacy businesses and sites of Historical DuPont. Tax indemnification adjustments relate to changes in indemnification balances, as a result of the application of the terms of the Tax Matters Agreement, between Corteva and Dow and/or DuPont that are recorded by the company as pre-tax income or expense. Operating earnings per share is defined as "Earnings per common share from continuing operations - diluted" excluding the after-tax impact of significant items (including goodwill impairment charges), the after-tax impact of non-operating (benefits) costs - net, and the after-tax impact of amortization expense associated with intangible assets existing as of the Separation from DowDuPont. Although amortization of the company's intangible assets is excluded from these non-GAAP measures, management believes it is important for investors to understand that such intangible assets contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Any future acquisitions may result in amortization of additional intangible assets.
Reconciliation of Income from Continuing Operations after Income Taxes to Operating EBITDA
Three Months Ended March 31, | ||||||
2020 | 2019 | |||||
(In millions) | As Reported | Pro Forma | ||||
Income from continuing operations after income taxes | $ | 281 | $ | 112 | ||
Provision for (benefit from) income taxes on continuing operations | 127 | (20 | ) | |||
Income from continuing operations before income taxes | 408 | 92 | ||||
Depreciation and amortization | 283 | 258 | ||||
Interest income | (18 | ) | (16 | ) | ||
Interest expense | 10 | 14 | ||||
Exchange losses - net | 61 | 27 | ||||
Non-operating benefits - net | (73 | ) | (42 | ) | ||
Significant items charge | 123 | 185 | ||||
Operating EBITDA (Non-GAAP) | $ | 794 | $ | 518 | ||
Significant Items
Three Months Ended March 31, | ||||||
2020 | 2019 | |||||
(In millions) | As Reported | Pro Forma | ||||
Integration costs | $ | — | $ | (100 | ) | |
Restructuring and asset related charges - net | (70 | ) | (61 | ) | ||
Loss on divestitures | (53 | ) | (24 | ) | ||
Total pretax significant items charge | (123 | ) | (185 | ) | ||
Total tax benefit impact of significant items1 | 23 | 92 | ||||
Tax only significant item charge2 | (19 | ) | — | |||
Total significant items charge, after tax | $ | (119 | ) | $ | (93 | ) |
1. | The tax benefit impact of significant items for the three months ended March 31, 2019 includes a net tax charge of $(32) million related to U.S. state blended tax rate changes associated with the Internal Reorganizations and a net tax benefit of $102 million related to an internal legal entity restructuring associated with the Internal Reorganizations. Unless specifically addressed above, the income tax effect on significant items was calculated based upon the enacted tax laws and statutory income tax rates applicable in the tax jurisdiction(s) of the underlying non-GAAP adjustment. |
2. | The three months ended March 31, 2020 includes an after tax charge related to the impact of a state tax valuation allowance in the US based on a change in judgment about the realizability of a deferred tax asset. |
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Reconciliation of Income from Continuing Operations Attributable to Corteva and Earnings Per Share of Common Stock from Continuing Operations - Diluted to Operating Earnings and Operating Earnings Per Share
Three Months Ended March 31, | ||||||
2020 | 2019 | |||||
(In millions) | As Reported | Pro Forma | ||||
Income from continuing operations attributable to Corteva | $ | 271 | $ | 104 | ||
Less: Non-operating benefits - net, after tax | 57 | 31 | ||||
Less: Amortization of intangibles (existing as of Separation), after tax | (114 | ) | (81 | ) | ||
Less: Significant items charge, after tax | (119 | ) | (93 | ) | ||
Operating Earnings (Non-GAAP) | $ | 447 | $ | 247 | ||
Three Months Ended March 31, | ||||||
2020 | 2019 | |||||
As Reported | Pro Forma | |||||
Earnings per share of common stock from continuing operations - diluted | $ | 0.36 | $ | 0.14 | ||
Less: Non-operating benefits - net, after tax | 0.08 | 0.04 | ||||
Less: Amortization of intangibles (existing as of Separation), after tax | (0.15 | ) | (0.11 | ) | ||
Less: Significant items charge, after tax | (0.16 | ) | (0.12 | ) | ||
Operating Earnings Per Share (Non-GAAP) | $ | 0.59 | $ | 0.33 | ||
Diluted Shares Outstanding (in millions) | 752.5 | 749.4 | ||||
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Liquidity and Capital Resources
Information related to the company's liquidity and capital resources can be found in the company’s 2019 Annual Report, Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity & Capital Resources. The discussion below provides the updates to this information for the three months ended March 31, 2020.
(Dollars in millions) | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||
Cash, cash equivalents and marketable securities | $ | 1,973 | $ | 1,769 | $ | 1,764 | |||
Total debt | $ | 2,610 | $ | 122 | $ | 9,498 | |||
The company's cash, cash equivalents and marketable securities at March 31, 2020, December 31, 2019, and March 31, 2019 were $1,973 million, $1,769 million and $1,764 million, respectively. Total debt at March 31, 2020, December 31, 2019, and March 31, 2019 was $2,610 million, $122 million, and $9,498 million, respectively. The increase in debt balances from December 31, 2019 was primarily due to funding the company’s seasonal working capital needs and capital expenditures. See further information in Note 13 - Short-Term Borrowings, Long-Term Debt and Available Credit Facilities, to the interim Consolidated Financial Statements.
The company believes its ability to generate cash from operations and access to capital markets and commercial paper markets will be adequate to meet anticipated cash requirements to fund its operations, including seasonal working capital, capital spending and pension obligations. Corteva's strong financial position, liquidity and credit ratings will provide access as needed to capital markets and commercial paper markets to fund seasonal working capital needs. The company's liquidity needs can be met through a variety of sources, including cash provided by operating activities, commercial paper, syndicated credit lines, bilateral credit lines, long-term debt markets, bank financing and committed receivable repurchase facilities. Corteva considers the borrowing costs and lending terms when selecting the source to fund its operations and working capital needs.
The company had access to approximately $5.8 billion, $6.4 billion, and $4.8 billion in committed and uncommitted unused credit lines at March 31, 2020, December 31, 2019, and March 31, 2019, respectively. In addition to the unused credit facilities, the company has a $1.3 billion 2020 Repurchase Facility (as defined below). These facilities provide support to meet the company’s short-term liquidity needs and for general corporate purposes which may include funding of discretionary and non-discretionary contributions to certain benefit plans, severance payments, repayment and refinancing of debt, working capital, capital expenditures, repurchases and redemptions of securities, and funding Corteva's costs and expenses.
In November 2018, EID entered into a $3.0 billion five-year revolving credit facility and a $3.0 billion three-year revolving credit facility (the “Revolving Credit Facilities”). The Revolving Credit Facilities became effective May 2019 in connection with the termination of the EID $4.5 billion Term Loan Facility and the $3.0 billion Revolving Credit Facility dated May 2014. Corteva, Inc. became a party to the Revolving Credit Facilities upon the Corteva Distribution. In March 2020, EID drew down $500 million under the three-year revolving credit facility to finance its short-term liquidity needs as a result of the volatility and increased borrowing costs of commercial paper resulting from the unstable market conditions caused by COVID-19. The Revolving Credit Facilities contain customary representations and warranties, affirmative and negative covenants and events of default that are typical for companies with similar credit ratings. The Revolving Credit Facilities also contain a financial covenant requiring that the ratio of total indebtedness to total capitalization for Corteva and its consolidated subsidiaries not exceed 0.60. At March 31, 2020 the company was in compliance with these covenants.
The company's indenture covenants include customary limitations on liens, sale and leaseback transactions, and mergers and consolidations affecting manufacturing plants, mineral producing properties or research facilities located in the U.S. and the consolidated subsidiaries owning such plants, properties and facilities subject to certain limitations. The outstanding long-term debt also contains customary default provisions.
The company has meaningful seasonal working capital needs based in part on providing financing to its customers. Working capital is funded through multiple methods including commercial paper, a receivable repurchase facility, the Revolving Credit Facilities, factoring and cash from operations.
In February 2020, in line with seasonal working capital requirements, the company entered into a committed receivable repurchase agreement of up to $1.3 billion (the "2020 Repurchase Facility") which expires in December 2020. Under the 2020 Repurchase Facility, Corteva may sell a portfolio of available and eligible outstanding customer notes receivables to participating institutions and simultaneously agree to repurchase at a future date. See further discussion of this facility in Note 13 - Short-Term Borrowings, Long-Term Debt and Available Credit Facilities, to the interim Consolidated Financial Statements.
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The company has factoring agreements with third-party financial institutions to sell its trade receivables under both recourse and non-recourse agreements in exchange for cash proceeds in an effort to reduce its receivables risk. For arrangements that include an element of recourse, the company provides a guarantee of the trade receivables in the event of customer default. Refer to Note 10 - Accounts and Notes Receivable, Net, to the interim Consolidated Financial Statements for more information.
The company also organizes agreements with third-party financial institutions who directly provide financing for select customers of the company's seed and crop protection products in each region. Terms of the third-party loans are less than a year and programs are renewed on an annual basis. In some cases, the company guarantees a portion of the extension of such credit to such customers. Refer to Note 14 - Commitments and Contingent Liabilities, to the interim Consolidated Financial Statements for more information on the company’s guarantees.
The company's cash, cash equivalents and marketable securities at March 31, 2020, December 31, 2019, and March 31, 2019 are $2.0 billion, $1.8 billion, and $1.8 billion respectively, of which $1.5 billion at March 31, 2020, $1.5 billion at December 31, 2019, and $1.3 billion at March 31, 2019 was held by subsidiaries in foreign countries, including United States territories.
The Tax Cuts and Jobs Act ("The Act") required companies to pay a one-time transition tax on the untaxed earnings of foreign subsidiaries. Upon actual repatriation, such earnings could be subject to withholding taxes, foreign and/or U.S. state income taxes, and taxes resulting from the impact of foreign currency movements. The Act also introduced a 100 percent dividends received deduction regarding earnings of foreign subsidiaries. The cash held by foreign subsidiaries is generally used to finance the subsidiaries' operational activities and future foreign investments. At March 31, 2020, management believed that sufficient liquidity is available in the U.S.
Summary of Cash Flows
Cash used for operating activities was $1.9 billion for the three months ended March 31, 2020 compared to $1.5 billion for the three months ended March 31, 2019. The increase in cash used for operating activities was driven by an increase in working capital requirements and the impact of the absence of net income from EID ECP and EID Specialty Products entities, as a result of the Internal Reorganizations and Business Realignments in 2019, partially offset by a decrease in integration and separation costs and lower deferred tax provisions.
Cash used for investing activities was $0.1 billion for the three months ended March 31, 2020 compared to $0.5 billion used for investing activities for the three months ended March 31, 2019. The change was due primarily to lower capital expenditures driven by the Internal Reorganizations and Business Realignments in 2019 and proceeds from sales of property, businesses, consolidated companies and ownership interests in non-consolidated affiliates.
Cash provided by financing activities was $2.3 billion for the three months ended March 31, 2020 compared to $1.3 billion for the three months ended March 31, 2019. The change was due primarily to higher short-term borrowings, lower payments on long-term debt, the absence of distributions to DowDuPont which in 2019 were used primarily to fund a portion of DowDuPont’s dividend payments partially offset by dividends to Corteva stockholders and repurchases of Corteva common stock.
In February 2020, the company's Board of Directors authorized a common stock dividend of $0.13 per share, payable on March 13, 2020, to shareholders of record on March 3, 2020. In April 2020, the company's Board of Directors authorized a common stock dividend of $0.13 per share, payable on June 15, 2020, to shareholders of record on May 15, 2020.
On June 26, 2019, the company's Board of Directors authorized a $1 billion share repurchase program to purchase Corteva, Inc.'s common stock, par value $0.01 per share, without an expiration date. The program is expected to be completed in three years.
During the three months ended March 31, 2020, the company purchased and retired 1,865,000 shares for a total cost of $50 million. See Note 15 - Stockholders' Equity, to the interim Consolidated Financial Statements for additional information related to the share buyback plan.
EID Liquidity Discussion
As discussed in Note 1 - Basis of Presentation, to the EID Consolidated Financial Statements, EID is a subsidiary of Corteva, 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 a Liquidity discussion, only for the differences between EID and Corteva, Inc.
Cash provided by operating activities
EID’s cash used for operating activities for the three months ended March 31, 2020 was $1.9 billion compared to $1.5 billion for the three months ended March 31, 2019. The change was primarily driven by the items noted above under the header, "Summary of Cash Flows," partially offset by interest incurred on the related party loan between EID and Corteva, Inc.
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Cash used for financing activities
EID’s cash provided by financing activities was $2.3 billion for the three months ended March 31, 2020 compared to $1.3 billion for the three months ended March 31, 2019. The change was due to higher short-term borrowings, lower payments on long-term debt, absence of distributions to DowDuPont which in 2019 which were used to fund a portion of DowDuPont’s dividend payments partially offset by payments on related party long term debt.
See Note 2 - Related Party Transactions, to the EID Consolidated Financial Statements for further information on the related party loan between EID and Corteva, Inc.
Guarantees and Off-Balance Sheet Arrangements
For detailed information related to Guarantees, Indemnifications, and Obligations for Equity Affiliates and Others, see the company’s 2019 Annual Report, Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Off-Balance Sheet Arrangements and Note 14 - Commitments and Contingent Liabilities, to the interim Consolidated Financial Statements.
Contractual Obligations
Information related to the company’s contractual obligations, commercial commitments and expected cash requirements for interest at December 31, 2019 can be found in the company’s 2019 Annual Report, Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Off-Balance Sheet Arrangements. There have been no material changes in the company's contractual obligations since December 31, 2019.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See Note 17 - Financial Instruments, to the interim Consolidated Financial Statements. See also Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, of the company's 2019 Annual Report, for information on the company's utilization of financial instruments and an analysis of the sensitivity of these instruments.
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Item 4. CONTROLS AND PROCEDURES
Corteva, Inc.
a) Evaluation of Disclosure Controls and Procedures
The company maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in the company's reports filed or submitted under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.
As of March 31, 2020, the company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), together with management, conducted an evaluation of the effectiveness of the company's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective.
b) Changes in Internal Control over Financial Reporting
There have been no changes in the company's internal control over financial reporting that occurred during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting.
E. I. du Pont de Nemours and Company
a) Evaluation of Disclosure Controls and Procedures
EID maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in their reports filed or submitted under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.
As of March 31, 2020, EID's CEO and CFO, together with management, conducted an evaluation of the effectiveness of EID's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective.
b) Changes in Internal Control over Financial Reporting
There have been no changes in EID's internal control over financial reporting that occurred during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, EID's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. | LEGAL PROCEEDINGS |
The company is subject to various legal proceedings, including, but not limited to, product liability, intellectual property, antitrust, commercial, property damage, personal injury, environmental and regulatory matters arising out of the normal course of its current businesses or legacy EID businesses unrelated to Corteva’s current businesses but allocated to Corteva as part of the Separation of Corteva from DuPont. Information regarding certain of these matters is set forth below and in Note 14 - Commitments and Contingent Liabilities, to the interim Consolidated Financial Statements.
Litigation related to Corteva’s current businesses
Canadian Competition Bureau Formal Inquiry
On January 30, 2020, the Canadian Competition Bureau (the “Bureau”) filed a court order for the company to produce records and information as part of a formal inquiry under civil sections of Canada’s competition laws. The inquiry is in response to allegations by the Farmers Business Network ("FBN") that Corteva and other seeds and crop protection manufacturers and wholesalers unilaterally or in coordination refused, restricted and/or impaired supply of products to FBN in western Canada. This inquiry follows an informal request for information from the Bureau pursuant to which the company voluntarily provided documents and engaged in discussions with the Bureau outlining how its conduct was and continues to be compliant with Canadian competition laws. Corteva continues to cooperate with the Bureau’s inquiries, but believes the likelihood of material liability is remote.
Litigation related to legacy EID businesses unrelated to Corteva’s current businesses
As discussed below and in Note 14 - Commitments and Contingent Liabilities, to the interim Consolidated Financial Statements, certain of the environmental proceedings and litigation allocated to Corteva as part of the Separation from DuPont relate to the legacy EID businesses, including their use of PFOA, which, for purposes of this report, means collectively perfluorooctanoic acid and its salts, including the ammonium salt and does not distinguish between the two forms, and PFAS, which means per- and polyfluoroalkyl substances, including PFOA, PFOS (perfluorooctanesulfonic acid), GenX and other perfluorinated chemicals and compounds ("PFCs"). While it is reasonably possible that the company could incur liabilities related to these actions, any such liabilities are not expected to be material.
Pursuant to the Separation Agreements, the company is entitled to indemnification for certain liabilities related to legacy EID businesses. On May 13, 2019, Chemours filed a complaint in the Delaware Court of Chancery against DuPont, Corteva, and EID alleging, among other things, that the litigation and environmental liabilities allocated to Chemours under the Chemours Separation Agreement were underestimated and asking that the Court either limit the amount of Chemours’ indemnification obligations or, alternatively, order the return of the $3.91 billion dividend Chemours paid to EID prior to its separation. On March 30, 2020, the Court granted the motion to dismiss made by DuPont, Corteva, and EID. Chemours filed its notice of appeal of the Chancery Court's decision on April 17, 2020. The company believes the probability of liability with respect to Chemours' suit continues to be remote. Further information with respect to this proceeding is set forth in Note 14 - Commitments and Contingent Liabilities, to the interim Consolidated Financial Statements. The company believes the probability of liability with respect to Chemours' suit to be remote.
Environmental Proceedings
The company believes it is remote that the following matters will have a material impact on its financial position, liquidity or results of operations. The descriptions below are included per Item 103(5)(c) of Regulation S-K of the Securities Exchange Act of 1934, as amended.
Related to Corteva's current businesses
La Porte Plant, La Porte, Texas - Crop Protection - Release Incident Investigations
On November 15, 2014, there was a release of methyl mercaptan at EID's La Porte, Texas, facility. The release occurred at the site’s crop protection unit resulting in four employee fatalities inside the unit. The Chemical Safety Board (“CSB”) issued its final report on June 18, 2019, which included recommendations related to the emergency response program at La Porte. Corteva responded to the CSB on September 30, 2019 outlining the actions it has taken to date to address the recommendations for the site and providing its plan to address the CSB’s remaining recommendations. Corteva continues to cooperate with the ongoing criminal U.S. Environmental Protection Agency ("EPA") and the Department of Justice ("DOJ") investigations and is having discussions with the DOJ regarding potential criminal charges and EID's defenses under the U.S. Clean Air Act. These investigations could result in sanctions and criminal penalties against Corteva.
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La Porte Plant, La Porte, Texas - EPA Multimedia Inspection
The EPA conducted a multimedia inspection at the La Porte facility in January 2008. EID, the EPA and the DOJ began discussions in Fall 2011 relating to the management of certain materials in the facility's waste water treatment system, hazardous waste management, flare and air emissions. In March 2020, EID agreed to settle with the EPA and DOJ and pay a $3.4 million civil penalty. The final consent decree is expected to be filed with the federal court in the second quarter of 2020.
Related to legacy EID businesses unrelated to Corteva’s current businesses
Sabine Plant, Orange, Texas - EPA Multimedia Inspection
In June 2012, EID began discussions with the EPA and the DOJ related to a multimedia inspection that the EPA conducted at the Sabine facility in March 2009 and December 2015. The discussions involve the management of materials in the facility's waste water treatment system, hazardous waste management, flare and air emissions, including leak detection and repair. These discussions continue. Under the Separation Agreement, Corteva and DuPont will share any future liabilities proportionally on the basis of 29% and 71%, respectively.
Divested Neoprene Facility, La Place, Louisiana - EPA Compliance Inspection
In 2016, the EPA conducted a focused compliance investigation at the Denka Performance Elastomer LLC (“Denka”) neoprene manufacturing facility in La Place, Louisiana. EID sold the neoprene business, including this manufacturing facility, to Denka in the fourth quarter of 2015. In the spring of 2017, the EPA, the DOJ, the Louisiana Department of Environmental Quality, EID and Denka began discussions relating to the inspection conclusions and allegations of noncompliance arising under the Clean Air Act, including leak detection and repair. These discussions, which include potential settlement options, continue. Under the Separation Agreement, DuPont is defending and indemnifying the company in this matter.
New Jersey Directive PFAS
On March 25, 2019, the New Jersey Department of Environmental Protection (“NJDEP”) issued a Statewide PFAS Directive to several companies, including Chemours, DuPont, and EID. The Directive seeks information relating to the use and environmental release of PFAS and PFAS-replacement chemicals at and from two former EID sites in New Jersey, Chambers Works and Parlin, and a funding source for costs related to the NJDEP’s investigation of PFAS issues and PFAS testing and remediation.
Chemours has agreed, with reservations, to defend and indemnify EID in this matter.
New Jersey Directive Pompton Lakes
On March 27, 2019, the NJDEP issued to Chemours and EID a Natural Resource Damages Directive relating to chemical contamination (non-PFAS) at and around EID’s former Pompton Lakes facility in New Jersey. The Directive alleges that this contamination has harmed the natural resources of New Jersey. It seeks $125,000 as reimbursement for the cost of preparing a natural resource damages assessment, which the State will use to determine the extent of such damage and the amount it expects to seek to restore the affected natural resources to their pre-damage state.
Chemours has agreed, with reservations, to defend and indemnify EID in this matter.
Natural Resource Damage Cases
Since May 2017, several municipal water districts and state attorneys general have filed lawsuits against EID, Corteva, Chemours, 3M, and others, claiming contamination of public water systems by PFCs, including but not limited to PFOA. These actions are currently pending in Alabama, New Hampshire, South Dakota, Vermont, New York, Ohio, Michigan and New Jersey with the municipalities and states seeking economic impact damages for alleged harm to natural resources, punitive damages, present and future costs to cleanup PFOA contamination and the abatement of alleged nuisance with filtration systems. Chemours has accepted the defense and indemnification of EID in these cases subject to a reservation of rights as to product scope and has declined defense and indemnity to Corteva. Furthermore, Chemours declined to defend certain state law and fraudulent conveyance claims.
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Item 1A. RISK FACTORS
The significant factors known to us that could materially adversely affect our business, financial condition, or operating results are described in our most recently filed annual report on Form 10-K under Item 1A - Risk Factors, and are supplemented by the following risk factors below.
Global or regional health pandemics or epidemics, including COVID-19, could negatively impact the company's business, financial condition and results of operations.
Corteva's business, financial condition, and results of operations could be negatively impacted by COVID-19 or other pandemics or epidemics. The severity, magnitude and duration of the current COVID-19 pandemic and future outbreaks is uncertain, rapidly changing and difficult to predict. In 2020, COVID-19 and the related government-imposed restrictions, including stay at home orders, has significantly impacted economic activity and markets around the world, which could negatively impact the company's business, financial condition, and results of operations in numerous ways, including but not limited to those outlined below:
• | Current and future COVID-19 outbreaks and resulting illness, travel restrictions and workforce disruptions could impact Corteva's global supply chain, its operations and its routes to market or those of its suppliers, co-manufacturers, or customers/distributors. These disruptions or the company's failure to effectively respond to them could increase product or distribution costs, alter the timing of recognizing manufacturing costs, or impact the delivery of products to customers. |
• | Government or regulatory responses to pandemics could negatively impact the company's business. Mandatory lockdowns or other restrictions on operations in certain countries have temporarily disrupted the company's ability to operate or distribute its products in these markets. Continuation or expansion of these disruptions could materially adversely impact the company's operations and results. |
• | Reductions to the company’s forecasted profitability and continued global economic decline could trigger potential impairment of the carrying value of goodwill or other indefinite and definite-lived intangible assets. |
• | The instability or unavailability of a farm workforce to harvest agricultural products could impact the company's customers’ ability to monetize their crop and potentially impact the collection of the company's customer receivables. |
• | Continued commodity cost volatility is expected and the company's commodity hedging activities may not sufficiently offset this volatility. Depressed commodity prices may increase the insolvency risk of Corteva's customers in the longer-term, along with reducing the demand for Corteva's products. |
• | The company expects to be negatively impacted by foreign currency exchange rates, as a result of a generally stronger U.S. dollar relative to other currencies in the countries in which the company operates, which could adversely affect the company's reported results of operations and financial condition. |
• | Disruptions or uncertainties related to the COVID-19 outbreak for a sustained period of time could result in delays or modifications to the company's strategic plans and productivity initiatives. |
• | Increased volatility and pricing in the capital and commercial paper markets may continue to impact, the company's access to preferred sources of liquidity resulting in higher borrowing costs. The company cannot assure investors that additional liquidity will be readily available or available on favorable terms. |
• | Increased market volatility may bring unprecedented market conditions making it difficult for the company to adequately forecast customer demand. |
In addition, while Corteva experienced early demand for its products in the first quarter of 2020, the company is unable to predict how long this sustained demand will last or how significant it will be. Therefore, the impact of the recent COVID-19 outbreak and the unprecedented economic conditions resulting from it will have on the company's consolidated results of operations is uncertain, but could still negatively impact the company's business operations, financial performance and results of operations in the future.
Reduction in ethanol demand driven by declines in crude oil and gasoline consumption may negatively impact demand for corn, which would negatively impact the company's business, financial condition and results of operations.
During 2020 global and U.S. crude oil price benchmarks suffered record declines in demand resulting from the COVID-19 pandemic stay-at-home orders and over-supply due to price disputes between Russia and Saudi Arabia. Approximately one-third of U.S. corn is used in the production of ethanol for gasoline and U.S. ethanol producers have shut down their facilities and declared “force majeure” on shipments for corn purchases due to depressed demand, and the ability to substitute with less expensive crude oil. Similar trends with respect to bio-fuels, like ethanol, are occurring globally. A decline in the demand for corn would negatively impact our business, financial condition, and results of operations.
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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table summarizes information with respect to the company's purchase of its common stock during the three months ended March 31, 2020:
Month | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of the Company's Publicly Announced Share Buyback Program1 | Approximate Value of Shares that May Yet Be Purchased Under the Programs(1) (Dollars in millions) | ||||||
February 2020 | 320,477 | $ | 31.22 | 320,477 | ||||||
March 20202 | 1,544,335 | $ | 25.90 | 1,544,335 | ||||||
Total | 1,864,812 | 1,864,812 | $ | 925 | ||||||
1. | On June 26, 2019, Corteva, Inc. announced that its Board of Directors authorized a $1 billion share repurchase program to purchase Corteva, Inc.'s common stock, par value $0.01 per share, without an expiration date. The timing, price and volume of purchases will be based on market conditions, relevant securities laws and other factors. |
2. | The last purchase was completed on March 10, 2020. |
Item 5. OTHER INFORMATION
On June 1, 2019, Corteva, Inc. became an independent, publicly traded company through the previously announced separation (the “Separation”) of the agriculture business of DowDuPont Inc. (“DowDuPont”). The separation was effectuated through a pro rata distribution of all of the then-issued and outstanding shares of common stock, par value $0.01 per share, of Corteva, Inc., which was then a wholly-owned subsidiary of DowDuPont, to holders of record of DowDuPont common stock as of the close of business on May 24, 2019. The Separation is intended to qualify as a tax-free spinoff for United States tax purposes under Section 355 of the Internal Revenue Code.
Previously, DowDuPont was formed on December 9, 2015, to effect an all-stock merger of equals strategic combination between The Dow Chemical Company ("Historical Dow") and EID. On August 31, 2017 at 11:59 pm ET, Historical Dow and Historical EID each merged with wholly-owned subsidiaries of DowDuPont and became subsidiaries of DowDuPont (the “Merger”).
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Item 6. | EXHIBITS |
Exhibit Number | Description | |
Separation and Distribution Agreement by and among DuPont Inc., Dow Inc. and Corteva, Inc. (incorporated by reference to Exhibit No. 2.1 to Amendment 3 to Corteva’s Registration Statement on Form 10, filed on April 16, 2019). | ||
Amended and Restated Certificate of Incorporation of Corteva, Inc. (incorporated by reference to Exhibit No. 3.1 to Corteva’s Current Report on Form 8-K (Commission file number 001-38710), filed on June 3, 2019. | ||
Amended and Restated Bylaws of Corteva, Inc. (incorporated by reference to Exhibit No. 3.1 to Corteva’s Current Report on Form 8-K (Commission file number 001-38710), filed on October 10, 2019. | ||
Amended and Restated Certificate of Incorporation of E.I. du Pont de Nemours and Company (incorporated by reference to Exhibit 3.1 to E.I. du Pont de Nemours and Company’s Current Report on Form 8-K (Commission file number 1-815) dated September 1, 2017). | ||
Amended and Restated Bylaws of E.I. du Pont de Nemours and Company (incorporated by reference to Exhibit 3.2 to E.I. du Pont de Nemours and Company's Current Report on Form 8-K (Commission file number 1-815) dated September 1, 2017). | ||
4 | Corteva agrees to provide the Commission, on request, copies of instruments defining the rights of holders of long-term debt of Corteva and its subsidiaries. | |
Master Repurchase Agreement by and among Cooperatieve Rabobank, U.A. (New York Branch), MUFG Bank, Ltd. (New York Branch), Standard Chartered Bank (New York Branch), and PHI Financial Services, Inc. dated as of February 11, 2020. | ||
Master Framework Agreement by and among Cooperatieve Rabobank, U.A. (New York Branch), MUFG Bank, Ltd. (New York Branch), Standard Chartered Bank (New York Branch), and PHI Financial Services, Inc. dated as of February 11, 2020. | ||
Form of Award Terms for Options granted under the Corteva, Inc. 2019 Omnibus Incentive Plan for U.S. grantees. | ||
Form of Award Terms for Performance Stock Units granted under the Corteva, Inc. 2019 Omnibus Incentive Plan for U.S. grantees. | ||
Form of Award Terms for Restricted Stock Units granted under the Corteva, Inc. 2019 Omnibus Incentive Plan for U.S. grantees. | ||
Rule 13a-14(a)/15d-14(a) Certification of the company’s and EID’s Principal Executive Officer. | ||
Rule 13a-14(a)/15d-14(a) Certification of the company’s and EID’s Principal Financial Officer. | ||
Section 1350 Certification of the company’s and EID’s Principal Executive Officer. The information contained in this Exhibit shall not be deemed filed with the Securities and Exchange Commission nor incorporated by reference in any registration statement filed by the registrant under the Securities Act of 1933, as amended. | ||
Section 1350 Certification of the company’s and EID’s Principal Financial Officer. The information contained in this Exhibit shall not be deemed filed with the Securities and Exchange Commission nor incorporated by reference in any registration statement filed by the registrant under the Securities Act of 1933, as amended. | ||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File – The Cover Page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101.INS) | |
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SIGNATURE
Corteva, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CORTEVA, INC. | ||
(Registrant) | ||
Date: | May 7, 2020 | |
By: | /s/ Brian Titus | |
Brian Titus | ||
Vice President, Controller | ||
(Principal Accounting Officer) | ||
E. I. du Pont de Nemours and Company
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
E. I. du Pont de Nemours and Company | ||
(Registrant) | ||
Date: | May 7, 2020 | |
By: | /s/ Brian Titus | |
Brian Titus | ||
Vice President, Controller | ||
(Principal Accounting Officer) | ||
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CONSOLIDATED FINANCIAL STATEMENTS OF E. I. DU PONT DE NEMOURS AND COMPANY
E. I. du Pont de Nemours and Company
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, | ||||||
(In millions, except per share amounts) | 2020 | 2019 | ||||
Net sales | $ | 3,956 | $ | 3,396 | ||
Cost of goods sold | 2,269 | 2,211 | ||||
Research and development expense | 280 | 299 | ||||
Selling, general and administrative expenses | 757 | 735 | ||||
Amortization of intangibles | 163 | 101 | ||||
Restructuring and asset related charges - net | 70 | 61 | ||||
Integration and separation costs | — | 212 | ||||
Other income - net | 1 | 31 | ||||
Interest expense | 42 | 59 | ||||
Income (loss) from continuing operations before income taxes | 376 | (251 | ) | |||
Provision for (benefit from) income taxes on continuing operations | 119 | (67 | ) | |||
Income (loss) from continuing operations after income taxes | 257 | (184 | ) | |||
Income from discontinued operations after income taxes | 1 | 360 | ||||
Net income | 258 | 176 | ||||
Net income attributable to noncontrolling interests | 8 | 10 | ||||
Net income attributable to E. I. du Pont de Nemours and Company | $ | 250 | $ | 166 | ||
See Notes to the Consolidated Financial Statements beginning on page 69.
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E. I. du Pont de Nemours and Company
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
Three Months Ended March 31, | ||||||
(In millions) | 2020 | 2019 | ||||
Net income | $ | 258 | $ | 176 | ||
Other comprehensive loss - net of tax: | ||||||
Cumulative translation adjustments | (672 | ) | (72 | ) | ||
Adjustments to pension benefit plans | — | (3 | ) | |||
Adjustments to other benefit plans | 3 | — | ||||
Derivative instruments | 6 | 1 | ||||
Total other comprehensive loss | (663 | ) | (74 | ) | ||
Comprehensive (loss) income | (405 | ) | 102 | |||
Comprehensive income attributable to noncontrolling interests - net of tax | 8 | 10 | ||||
Comprehensive (loss) income attributable to E. I. du Pont de Nemours and Company | $ | (413 | ) | $ | 92 | |
See Notes to the Consolidated Financial Statements beginning on page 69.
65
E. I. du Pont de Nemours and Company
Condensed Consolidated Balance Sheets (Unaudited)
(In millions, except share amounts) | March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||
Assets | |||||||||
Current assets | |||||||||
Cash and cash equivalents | $ | 1,963 | $ | 1,764 | $ | 1,759 | |||
Marketable securities | 10 | 5 | 5 | ||||||
Accounts and notes receivable - net | 6,775 | 5,528 | 6,507 | ||||||
Inventories | 4,401 | 5,032 | 5,019 | ||||||
Other current assets | 1,530 | 1,190 | 1,318 | ||||||
Assets of discontinued operations - current | — | — | 9,453 | ||||||
Total current assets | 14,679 | 13,519 | 24,061 | ||||||
Investment in nonconsolidated affiliates | 64 | 66 | 77 | ||||||
Property, plant and equipment - net of accumulated depreciation (March 31, 2020 - $3,406; December 31, 2019 - $3,326; March 31, 2019 - $2,970) | 4,358 | 4,546 | 4,521 | ||||||
Goodwill | 10,027 | 10,229 | 10,203 | ||||||
Other intangible assets | 11,241 | 11,424 | 11,961 | ||||||
Deferred income taxes | 273 | 287 | 294 | ||||||
Other assets | 2,336 | 2,326 | 2,368 | ||||||
Assets of discontinued operations - non-current | — | — | 56,617 | ||||||
Total Assets | $ | 42,978 | $ | 42,397 | $ | 110,102 | |||
Liabilities and Equity | |||||||||
Current liabilities | |||||||||
Short-term borrowings and finance lease obligations | $ | 1,996 | $ | 7 | $ | 3,201 | |||
Accounts payable | 3,021 | 3,702 | 3,120 | ||||||
Income taxes payable | 143 | 95 | 195 | ||||||
Accrued and other current liabilities | 4,079 | 4,440 | 4,061 | ||||||
Liabilities of discontinued operations - current | — | — | 3,501 | ||||||
Total current liabilities | 9,239 | 8,244 | 14,078 | ||||||
Long-Term Debt | 614 | 115 | 6,297 | ||||||
Long-Term Debt - Related Party | 3,872 | 4,021 | — | ||||||
Other Noncurrent Liabilities | |||||||||
Deferred income tax liabilities | 911 | 920 | 1,523 | ||||||
Pension and other post employment benefits - noncurrent | 6,186 | 6,377 | 5,554 | ||||||
Other noncurrent obligations | 1,989 | 2,192 | 2,064 | ||||||
Liabilities of discontinued operations - non-current | — | — | 5,512 | ||||||
Total noncurrent liabilities | 13,572 | 13,625 | 20,950 | ||||||
Commitments and contingent liabilities | |||||||||
Stockholders’ equity | |||||||||
Preferred stock, without par value – cumulative; 23,000,000 shares authorized; issued at March 31, 2020, December 31, 2019, and March 31, 2019: | |||||||||
$4.50 Series – 1,673,000 shares (callable at $120) | 169 | 169 | — | ||||||
$3.50 Series – 700,000 shares (callable at $102) | 70 | 70 | — | ||||||
Common stock, $0.30 par value; 1,800,000,000 shares authorized; issued at March 31, 2020 - 200, December 31, 2019 - 200, and March 31, 2019 - 100 | — | — | — | ||||||
Additional paid-in capital | 24,004 | 23,958 | — | ||||||
Divisional equity | — | — | 78,244 | ||||||
Accumulated deficit | (158 | ) | (406 | ) | — | ||||
Accumulated other comprehensive loss | (3,933 | ) | (3,270 | ) | (3,434 | ) | |||
Total E. I. du Pont de Nemours and Company stockholders’ equity | 20,152 | 20,521 | 74,810 | ||||||
Noncontrolling interests | 15 | 7 | 264 | ||||||
Total equity | 20,167 | 20,528 | 75,074 | ||||||
Total Liabilities and Equity | $ | 42,978 | $ | 42,397 | $ | 110,102 | |||
See Notes to the Consolidated Financial Statements beginning on page 69.
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E. I. du Pont de Nemours and Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, | ||||||
(In millions) | 2020 | 2019 | ||||
Operating activities | ||||||
Net income | $ | 258 | $ | 176 | ||
Adjustments to reconcile net income to cash used for operating activities: | ||||||
Depreciation and amortization | 283 | 726 | ||||
Provision for (benefit from) deferred income tax | 26 | (220 | ) | |||
Net periodic pension benefit | (102 | ) | (75 | ) | ||
Pension contributions | (28 | ) | (50 | ) | ||
Net loss (gain) on sales of property, businesses, consolidated companies, and investments | 46 | (65 | ) | |||
Restructuring and asset related charges - net | 70 | 106 | ||||
Amortization of inventory step-up | — | 205 | ||||
Other net loss | 138 | 92 | ||||
Changes in operating assets and liabilities - net | (2,613 | ) | (2,436 | ) | ||
Cash used for operating activities | (1,922 | ) | (1,541 | ) | ||
Investing activities | ||||||
Capital expenditures | (128 | ) | (663 | ) | ||
Proceeds from sales of property, businesses, and consolidated companies - net of cash divested | 11 | 125 | ||||
Proceeds from sales of ownership interests in nonconsolidated affiliates | — | 21 | ||||
Purchases of investments | (67 | ) | (16 | ) | ||
Proceeds from sales and maturities of investments | 58 | 36 | ||||
Other investing activities - net | (4 | ) | (5 | ) | ||
Cash used for investing activities | (130 | ) | (502 | ) | ||
Financing activities | ||||||
Net change in borrowings (less than 90 days) | 1,619 | 814 | ||||
Payments on related party debt | (148 | ) | — | |||
Proceeds from debt | 875 | 1,000 | ||||
Payments on debt | (1 | ) | (284 | ) | ||
Proceeds from exercise of stock options | 14 | 35 | ||||
Distributions to DowDuPont | — | (317 | ) | |||
Contributions from Dow | — | 88 | ||||
Other financing activities | (23 | ) | (24 | ) | ||
Cash provided by financing activities | 2,336 | 1,312 | ||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (117 | ) | 20 | |||
Increase (decrease) in cash, cash equivalents and restricted cash | 167 | (711 | ) | |||
Cash, cash equivalents and restricted cash at beginning of period | 2,173 | 5,024 | ||||
Cash, cash equivalents and restricted cash at end of period | $ | 2,340 | $ | 4,313 | ||
See Notes to the Consolidated Financial Statements beginning on page 69.
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E. I. du Pont de Nemours and Company
Consolidated Statements of Equity (Unaudited)
(In millions) | Preferred Stock | Common Stock | Add. Paid-in Capital | Divisional Equity | Retained Earnings (Accumulated deficit) | Accum. Other Comp Loss | Treasury Stock | Non-controlling Interests | Total Equity | ||||||||||||||||||
2019 | |||||||||||||||||||||||||||
Balance at January 1, 2019 | $ | — | $ | — | $ | — | $ | 78,259 | $ | — | $ | (3,360 | ) | $ | — | $ | 254 | $ | 75,153 | ||||||||
Net income | 166 | 10 | 176 | ||||||||||||||||||||||||
Other comprehensive loss | (74 | ) | (74 | ) | |||||||||||||||||||||||
Preferred dividends ($4.50 Series - $1.125 per share, $3.50 Series - $0.875 per share) | (2 | ) | (2 | ) | |||||||||||||||||||||||
Distributions to DowDuPont | (317 | ) | (317 | ) | |||||||||||||||||||||||
Share-based compensation | 18 | 18 | |||||||||||||||||||||||||
Issuance of DowDuPont stock | 35 | 35 | |||||||||||||||||||||||||
Contributions from Dow | 88 | 88 | |||||||||||||||||||||||||
Other - net | (3 | ) | (3 | ) | |||||||||||||||||||||||
Balance at March 31, 2019 | $ | — | $ | — | $ | — | $ | 78,244 | $ | — | $ | (3,434 | ) | $ | — | $ | 264 | $ | 75,074 | ||||||||
(In millions) | Preferred Stock | Common Stock | Add. Paid-in Capital | Divisional Equity | (Accumulated deficit) Retained Earnings | Accum. Other Comp Loss | Treasury Stock | Non-controlling Interests | Total Equity | ||||||||||||||||
2020 | |||||||||||||||||||||||||
Balance at January 1, 2020 | $ | 239 | $ | — | $ | 23,958 | $ | (406 | ) | $ | (3,270 | ) | $ | — | $ | 7 | $ | 20,528 | |||||||
Net income | 250 | 8 | 258 | ||||||||||||||||||||||
Other comprehensive loss | (663 | ) | (663 | ) | |||||||||||||||||||||
Preferred dividends ($4.50 Series - $1.125 per share, $3.50 Series - $0.875 per share) | (2 | ) | (2 | ) | |||||||||||||||||||||
Issuance of Corteva stock | 14 | 14 | |||||||||||||||||||||||
Share-based compensation | 2 | 2 | |||||||||||||||||||||||
Other - net | 32 | (2 | ) | 30 | |||||||||||||||||||||
Balance at March 31, 2020 | $ | 239 | $ | — | $ | 24,004 | $ | (158 | ) | $ | (3,933 | ) | $ | — | $ | 15 | $ | 20,167 | |||||||
See Notes to the Consolidated Financial Statements beginning on page 69.
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E. I. du Pont de Nemours and Company | ||
Notes to the Consolidated Financial Statements (Unaudited) | ||
Table of Contents
69
NOTE 1 - BASIS OF PRESENTATION
As a result of the Business Realignment and the Internal Reorganization, Corteva, Inc. owns 100% of the outstanding common stock of EID. EID is a subsidiary of Corteva, Inc. and continues to be a reporting company, subject to the requirements of the Exchange Act. The primary differences between Corteva, Inc. and EID are outlined below:
• | Preferred Stock - EID has preferred stock outstanding to third parties which is accounted for as a non-controlling interest at the Corteva, Inc. level. Each share of EID Preferred Stock - $4.50 Series and EID Preferred Stock - $3.50 Series issued and outstanding at the effective date of the Corteva Distribution remains issued and outstanding as to EID and was unaffected by the Corteva Distribution. |
• | Related Party Loan - EID engaged in a series of debt redemptions during the second quarter of 2019 that were partially funded through an intercompany loan from Corteva, Inc. This was eliminated in consolidation at the Corteva, Inc. level but remains on EID's financial statements at the standalone level (including the associated interest). |
• | Capital Structure - At March 31, 2020, Corteva, Inc.'s capital structure consists of 748,369,000 issued shares of common stock, par value $0.01 per share. |
The accompanying footnotes relate to EID only, and not to Corteva, Inc., and are presented to show differences between EID and Corteva, Inc.
For the footnotes listed below, refer to the following Corteva, Inc. footnotes:
• | Note 1 - Summary of Significant Accounting Policies - refer to page 9 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 2 - Recent Accounting Guidance - refer to page 10 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 3 - Divestitures and Other Transactions - refer to page 11 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 4 - Revenue - refer to page 14 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 5 - Restructuring and Asset Related Charges - Net - refer to page 16 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 6 - Related Parties - Differences exist between Corteva, Inc. and EID; refer to EID Note 2 - Related Party Transactions, below |
• | Note 7 - Supplementary Information - refer to page 18 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 8 - Income Taxes - refer to page 20 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 9 - Earnings Per Share of Common Stock - N/A for EID |
• | Note 10 - Accounts and Notes Receivable - Net - refer to page 21 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 11 - Inventories - refer to page 22 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 12 - Other Intangible Assets - refer to page 23 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 13 - Short-Term Borrowings, Long-Term Debt and Available Credit Facilities - refer to page 23 of the Corteva, Inc. interim Consolidated Financial Statements. In addition, EID has a related party loan payable to Corteva, Inc.; refer to EID Note 2 - Related Party Transactions, below |
• | Note 14 - Commitments and Contingent Liabilities - refer to page 25 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 15 - Stockholders' Equity - refer to page 30 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 16 - Pension Plans and Other Post Employment Benefits - refer to page 32 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 17 - Financial Instruments - refer to page 33 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 18 - Fair Value Measurements - refer to page 37 of the Corteva, Inc. interim Consolidated Financial Statements |
• | Note 19 - Segment Information - Differences exist between Corteva, Inc. and EID; refer to EID Note 3 - Segment Information, below |
70
NOTE 2 - RELATED PARTY TRANSACTIONS
Refer to page 18 of the Corteva, Inc. interim Consolidated Financial Statements for discussion of related party transactions with Historical Dow, DowDuPont, and DuPont.
Transactions with Corteva
In the second quarter of 2019, EID entered into a related party revolving loan from Corteva, Inc., with a maturity date in 2024. As of March 31, 2020 and December 31, 2019, the outstanding related party loan balance was $3,872 million and $4,021 million, respectively (which approximates fair value), with an interest rate of 3.27%, and is reflected as long-term debt - related party in EID's interim Condensed Consolidated Balance Sheets. Additionally, EID has incurred tax deductible interest expense of $32 million for the three months ended March 31, 2020 associated with the related party loan from Corteva, Inc.
As of March 31, 2020, EID had payables to Corteva, Inc., the parent company, of $166 million and $82 million ($119 million and $154 million at December 31, 2019) included in accrued and other current liabilities and other noncurrent obligations, respectively, in the interim Condensed Consolidated Balance Sheets related to Corteva's indemnification liabilities to Dow and DuPont per the Separation Agreements (refer to page 11 of the Corteva, Inc. interim Consolidated Financial Statements for further details of the Separation Agreements).
NOTE 3 - SEGMENT INFORMATION
There are no differences in reporting structure or segments between Corteva, Inc. and EID. In addition, there are no differences between Corteva, Inc. and EID segment net sales, segment operating EBITDA or pro forma segment operating EBITDA, segment assets, or significant items by segment; refer to page 39 of the Corteva, Inc. interim Consolidated Financial Statements for background information on the segments as well as further details regarding segment metrics. The tables below reconcile segment pro forma operating EBITDA to loss from continuing operations after income taxes, as differences exist between Corteva, Inc. and EID.
Reconciliation to interim Consolidated Financial Statements
Income (loss) from continuing operations after income taxes to segment operating EBITDA (In millions) | Three Months Ended March 31, | |||||
2020 | 2019 1 | |||||
Income (loss) from continuing operations after income taxes | $ | 257 | $ | (184 | ) | |
Provision for (benefit from) income taxes on continuing operations | 119 | (67 | ) | |||
Income (loss) from continuing operations before income taxes | 376 | (251 | ) | |||
Depreciation and amortization | 283 | 258 | ||||
Interest income | (18 | ) | (16 | ) | ||
Interest expense | 42 | 59 | ||||
Exchange losses - net | 61 | 27 | ||||
Non-operating benefits - net | (73 | ) | (42 | ) | ||
Significant items | 123 | 185 | ||||
Pro forma adjustments | 298 | |||||
Corporate expenses | 25 | 27 | ||||
Segment operating EBITDA | $ | 819 | $ | 545 | ||
1. | Period is presented on a pro forma basis, prepared in accordance with Article 11 of Regulation S-X. |
71