|
|
Item 1.
|
CONSOLIDATED FINANCIAL STATEMENTS
|
Corteva, Inc.
Consolidated Statements of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2019
|
2018
|
2019
|
2018
|
Net sales
|
$
|
1,911
|
|
$
|
1,947
|
|
$
|
10,863
|
|
$
|
11,472
|
|
Cost of goods sold
|
1,349
|
|
1,485
|
|
6,607
|
|
7,924
|
|
Research and development expense
|
289
|
|
325
|
|
857
|
|
1,010
|
|
Selling, general and administrative expenses
|
646
|
|
633
|
|
2,318
|
|
2,347
|
|
Amortization of intangibles
|
100
|
|
88
|
|
314
|
|
284
|
|
Restructuring and asset related charges - net
|
46
|
|
235
|
|
167
|
|
466
|
|
Integration and separation costs
|
152
|
|
253
|
|
694
|
|
697
|
|
Goodwill impairment charge
|
—
|
|
4,503
|
|
—
|
|
4,503
|
|
Other income - net
|
59
|
|
7
|
|
90
|
|
118
|
|
Loss on early extinguishment of debt
|
—
|
|
—
|
|
13
|
|
—
|
|
Interest expense
|
19
|
|
82
|
|
112
|
|
251
|
|
Loss from continuing operations before income taxes
|
(631
|
)
|
(5,650
|
)
|
(129
|
)
|
(5,892
|
)
|
(Benefit from) provision for income taxes on continuing operations
|
(104
|
)
|
(8
|
)
|
99
|
|
(187
|
)
|
Loss from continuing operations after income taxes
|
(527
|
)
|
(5,642
|
)
|
(228
|
)
|
(5,705
|
)
|
Income (loss) from discontinued operations after income taxes
|
22
|
|
526
|
|
(695
|
)
|
1,200
|
|
Net loss
|
(505
|
)
|
(5,116
|
)
|
(923
|
)
|
(4,505
|
)
|
Net (loss) income attributable to noncontrolling interests
|
(11
|
)
|
5
|
|
15
|
|
29
|
|
Net loss attributable to Corteva
|
$
|
(494
|
)
|
$
|
(5,121
|
)
|
$
|
(938
|
)
|
$
|
(4,534
|
)
|
Basic loss per share of common stock:
|
|
|
|
|
Basic loss per share of common stock from continuing operations
|
$
|
(0.69
|
)
|
$
|
(7.54
|
)
|
$
|
(0.32
|
)
|
$
|
(7.64
|
)
|
Basic earnings (loss) per share of common stock from discontinued operations
|
0.03
|
|
0.71
|
|
(0.93
|
)
|
1.59
|
|
Basic loss per share of common stock
|
$
|
(0.66
|
)
|
$
|
(6.83
|
)
|
$
|
(1.25
|
)
|
$
|
(6.05
|
)
|
Diluted loss per share of common stock:
|
|
|
|
|
Diluted loss per share of common stock from continuing operations
|
$
|
(0.69
|
)
|
$
|
(7.54
|
)
|
$
|
(0.32
|
)
|
$
|
(7.64
|
)
|
Diluted earnings (loss) per share of common stock from discontinued operations
|
0.03
|
|
0.71
|
|
(0.93
|
)
|
1.59
|
|
Diluted loss per share of common stock
|
$
|
(0.66
|
)
|
$
|
(6.83
|
)
|
$
|
(1.25
|
)
|
$
|
(6.05
|
)
|
See Notes to the Consolidated Financial Statements beginning on page 9.
Corteva, Inc.
Consolidated Statements of Comprehensive Loss (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2019
|
2018
|
2019
|
2018
|
Net loss
|
$
|
(505
|
)
|
$
|
(5,116
|
)
|
$
|
(923
|
)
|
$
|
(4,505
|
)
|
Other comprehensive loss - net of tax:
|
|
|
|
|
Cumulative translation adjustments
|
(297
|
)
|
(88
|
)
|
(471
|
)
|
(1,099
|
)
|
Adjustments to pension benefit plans
|
5
|
|
5
|
|
13
|
|
13
|
|
Adjustments to other benefit plans
|
—
|
|
—
|
|
(86
|
)
|
—
|
|
Derivative instruments
|
—
|
|
(3
|
)
|
23
|
|
(8
|
)
|
Total other comprehensive loss
|
(292
|
)
|
(86
|
)
|
(521
|
)
|
(1,094
|
)
|
Comprehensive loss
|
(797
|
)
|
(5,202
|
)
|
(1,444
|
)
|
(5,599
|
)
|
Comprehensive (loss) income attributable to noncontrolling interests - net of tax
|
(11
|
)
|
5
|
|
15
|
|
29
|
|
Comprehensive loss attributable to Corteva
|
$
|
(786
|
)
|
$
|
(5,207
|
)
|
$
|
(1,459
|
)
|
$
|
(5,628
|
)
|
See Notes to the Consolidated Financial Statements beginning on page 9.
Corteva, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
(In millions, except share amounts)
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
Assets
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,980
|
|
$
|
2,270
|
|
$
|
1,657
|
|
Marketable securities
|
117
|
|
5
|
|
142
|
|
Accounts and notes receivable - net
|
6,574
|
|
5,260
|
|
6,547
|
|
Inventories
|
4,403
|
|
5,310
|
|
4,898
|
|
Other current assets
|
1,043
|
|
1,038
|
|
1,041
|
|
Assets of discontinued operations - current
|
—
|
|
9,089
|
|
9,055
|
|
Total current assets
|
14,117
|
|
22,972
|
|
23,340
|
|
Investment in nonconsolidated affiliates
|
70
|
|
138
|
|
144
|
|
Property, plant and equipment - net of accumulated depreciation (September 30, 2019 - $3,186; December 31, 2018 - $2,796; September 30, 2018 - $2,694)
|
4,503
|
|
4,544
|
|
4,384
|
|
Goodwill
|
10,168
|
|
10,193
|
|
10,203
|
|
Other intangible assets
|
11,667
|
|
12,055
|
|
12,138
|
|
Deferred income taxes
|
270
|
|
304
|
|
366
|
|
Other assets
|
2,440
|
|
1,932
|
|
1,888
|
|
Assets of discontinued operations - non-current
|
—
|
|
56,545
|
|
57,185
|
|
Total Assets
|
$
|
43,235
|
|
$
|
108,683
|
|
$
|
109,648
|
|
Liabilities and Equity
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Short-term borrowings and finance lease obligations
|
$
|
3,604
|
|
$
|
2,154
|
|
$
|
4,371
|
|
Accounts payable
|
3,014
|
|
3,798
|
|
3,642
|
|
Income taxes payable
|
126
|
|
186
|
|
224
|
|
Accrued and other current liabilities
|
2,249
|
|
4,005
|
|
2,117
|
|
Liabilities of discontinued operations - current
|
—
|
|
3,167
|
|
2,888
|
|
Total current liabilities
|
8,993
|
|
13,310
|
|
13,242
|
|
Long-Term Debt
|
116
|
|
5,784
|
|
10,215
|
|
Other Noncurrent Liabilities
|
|
|
|
|
Deferred income tax liabilities
|
1,328
|
|
1,480
|
|
1,594
|
|
Pension and other post employment benefits - noncurrent
|
5,405
|
|
5,677
|
|
5,267
|
|
Other noncurrent obligations
|
2,132
|
|
1,795
|
|
1,799
|
|
Liabilities of discontinued operations - non-current
|
—
|
|
5,484
|
|
5,532
|
|
Total noncurrent liabilities
|
8,981
|
|
20,220
|
|
24,407
|
|
Commitments and contingent liabilities
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
Common stock, $0.01 par value; 1,666,666,667 shares authorized;
issued at September 30, 2019 - 748,390,000
|
7
|
|
—
|
|
—
|
|
Additional paid-in capital
|
28,072
|
|
—
|
|
—
|
|
Divisional equity
|
—
|
|
78,020
|
|
73,767
|
|
Accumulated deficit
|
(397
|
)
|
—
|
|
—
|
|
Accumulated other comprehensive loss
|
(2,667
|
)
|
(3,360
|
)
|
(2,271
|
)
|
Total Corteva stockholders’ equity
|
25,015
|
|
74,660
|
|
71,496
|
|
Noncontrolling interests
|
246
|
|
493
|
|
503
|
|
Total equity
|
25,261
|
|
75,153
|
|
71,999
|
|
Total Liabilities and Equity
|
$
|
43,235
|
|
$
|
108,683
|
|
$
|
109,648
|
|
See Notes to the Consolidated Financial Statements beginning on page 9.
Corteva, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
(In millions)
|
Nine Months Ended
September 30,
|
|
2019
|
2018
|
Operating activities
|
|
|
Net loss
|
$
|
(923
|
)
|
$
|
(4,505
|
)
|
Adjustments to reconcile net loss to cash used for operating activities:
|
|
|
|
|
Depreciation and amortization
|
1,310
|
|
2,092
|
|
(Benefit from) provision for deferred income tax
|
(427
|
)
|
112
|
|
Net periodic pension benefit
|
(208
|
)
|
(242
|
)
|
Pension contributions
|
(109
|
)
|
(1,266
|
)
|
Net gain on sales of property, businesses, consolidated companies and investments
|
(69
|
)
|
(36
|
)
|
Restructuring and asset related charges - net
|
284
|
|
565
|
|
Amortization of inventory step-up
|
272
|
|
1,494
|
|
Goodwill impairment charge
|
1,102
|
|
4,503
|
|
Loss on early extinguishment of debt
|
13
|
|
—
|
|
Other net loss
|
184
|
|
284
|
|
Changes in operating assets and liabilities - net
|
(3,732
|
)
|
(5,781
|
)
|
Cash used for operating activities
|
(2,303
|
)
|
(2,780
|
)
|
Investing activities
|
|
|
|
Capital expenditures
|
(1,015
|
)
|
(1,020
|
)
|
Proceeds from sales of property, businesses and consolidated companies - net of cash divested
|
142
|
|
101
|
|
Acquisitions of businesses - net of cash acquired
|
(9
|
)
|
—
|
|
Investments in and loans to nonconsolidated affiliates
|
(10
|
)
|
—
|
|
Proceeds from sales of ownership interests in nonconsolidated affiliates
|
21
|
|
—
|
|
Purchases of investments
|
(133
|
)
|
(1,235
|
)
|
Proceeds from sales and maturities of investments
|
42
|
|
1,930
|
|
Other investing activities - net
|
(2
|
)
|
(4
|
)
|
Cash used for investing activities
|
(964
|
)
|
(228
|
)
|
Financing activities
|
|
|
|
Change in short-term (less than 90 days) borrowings
|
1,729
|
|
2,381
|
|
Proceeds from issuance of long-term debt
|
1,001
|
|
756
|
|
Payments on long-term debt
|
(6,803
|
)
|
(1,538
|
)
|
Repurchase of common stock
|
(25
|
)
|
—
|
|
Proceeds from exercise of stock options
|
43
|
|
81
|
|
Dividends paid to stockholders
|
(97
|
)
|
—
|
|
Distributions to DowDuPont
|
(317
|
)
|
(2,481
|
)
|
Cash transferred to DowDuPont at Internal Reorganizations
|
(2,053
|
)
|
—
|
|
Contributions from Dow and DowDuPont
|
7,396
|
|
288
|
|
Debt extinguishment costs
|
(79
|
)
|
—
|
|
Other financing activities
|
(34
|
)
|
(78
|
)
|
Cash provided by (used for) financing activities
|
761
|
|
(591
|
)
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
(118
|
)
|
(187
|
)
|
Decrease in cash, cash equivalents and restricted cash
|
(2,624
|
)
|
(3,786
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
5,024
|
|
7,914
|
|
Cash, cash equivalents and restricted cash at end of period1
|
$
|
2,400
|
|
$
|
4,128
|
|
1. See page 27 for reconciliation of cash and cash equivalents and restricted cash presented in Condensed Consolidated Balance Sheets to total cash, cash equivalents and restricted cash presented in the Condensed Consolidated Statements of Cash Flows.
See Notes to the Consolidated Financial Statements beginning on page 9.
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) Income
|
Treasury Stock
|
Non-controlling Interests
|
Total Equity
|
2018
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
$
|
—
|
|
$
|
—
|
|
$
|
80,318
|
|
$
|
—
|
|
$
|
(1,177
|
)
|
$
|
—
|
|
$
|
452
|
|
$
|
79,593
|
|
Net (loss) income
|
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
20
|
|
(87
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
1,007
|
|
|
|
|
|
1,007
|
|
Distributions to Dow and DowDuPont
|
|
|
|
|
(830
|
)
|
|
|
|
|
|
|
|
|
(830
|
)
|
Issuance of DowDuPont stock
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
45
|
|
Share-based compensation
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
11
|
|
Other - net
|
|
|
|
|
434
|
|
|
|
|
|
|
|
53
|
|
487
|
|
Balance at March 31, 2018
|
$
|
—
|
|
$
|
—
|
|
$
|
79,871
|
|
$
|
—
|
|
$
|
(170
|
)
|
$
|
—
|
|
$
|
525
|
|
$
|
80,226
|
|
Net income
|
|
|
|
694
|
|
|
|
|
|
4
|
|
698
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
(2,015
|
)
|
|
|
(2,015
|
)
|
Distributions to Dow and DowDuPont
|
|
|
|
(828
|
)
|
|
|
|
|
|
(828
|
)
|
Issuance of DowDuPont stock
|
|
|
|
12
|
|
|
|
|
|
|
12
|
|
Share-based compensation
|
|
|
|
50
|
|
|
|
|
|
|
50
|
|
Other - net
|
|
|
|
(409
|
)
|
|
|
|
|
(31
|
)
|
(440
|
)
|
Balance at June 30, 2018
|
$
|
—
|
|
$
|
—
|
|
$
|
79,390
|
|
$
|
—
|
|
$
|
(2,185
|
)
|
$
|
—
|
|
$
|
498
|
|
$
|
77,703
|
|
Net (loss) income
|
|
|
|
(5,121
|
)
|
|
|
|
|
5
|
|
(5,116
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
(86
|
)
|
|
|
(86
|
)
|
Distributions to Dow and DowDuPont
|
|
|
|
(823
|
)
|
|
|
|
|
|
(823
|
)
|
Issuance of DowDuPont stock
|
|
|
|
24
|
|
|
|
|
|
|
24
|
|
Share-based compensation
|
|
|
|
40
|
|
|
|
|
|
|
40
|
|
Other - net
|
|
|
|
257
|
|
|
|
|
|
|
|
257
|
|
Balance at September 30, 2018
|
$
|
—
|
|
$
|
—
|
|
$
|
73,767
|
|
$
|
—
|
|
$
|
(2,271
|
)
|
$
|
—
|
|
$
|
503
|
|
$
|
71,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Common Stock
|
Additional Paid-in Capital
|
Divisional Equity
|
Retained Earnings (Accumulated deficit)
|
Accumulated Other Comp (Loss) Income
|
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 Dow and DowDuPont
|
|
|
(317
|
)
|
|
|
|
|
|
(317
|
)
|
Issuance of DowDuPont stock
|
|
|
35
|
|
|
|
|
|
35
|
|
Share-based compensation
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
18
|
|
Contributions from Dow and DowDuPont
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
88
|
|
Other - net
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(2
|
)
|
(5
|
)
|
Balance at March 31, 2019
|
$
|
—
|
|
$
|
—
|
|
$
|
78,005
|
|
$
|
—
|
|
$
|
(3,434
|
)
|
$
|
—
|
|
$
|
503
|
|
$
|
75,074
|
|
Net (loss) income
|
|
|
|
|
(805
|
)
|
197
|
|
|
|
|
|
14
|
|
(594
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
(155
|
)
|
|
|
|
|
(155
|
)
|
Common dividends ($0.13 per share)
|
|
|
|
(97
|
)
|
|
|
|
|
(97
|
)
|
Contributions from DowDuPont
|
|
|
7,308
|
|
|
|
|
|
7,308
|
|
Issuance of DowDuPont stock
|
|
|
4
|
|
|
|
|
|
4
|
|
Share-based compensation
|
|
|
11
|
|
44
|
|
|
|
|
|
|
|
|
|
55
|
|
Impact of Internal Reorganizations
|
|
|
|
|
(56,479
|
)
|
|
|
1,214
|
|
|
|
(231
|
)
|
(55,496
|
)
|
Reclassification of Divisional Equity to APIC
|
7
|
|
28,070
|
|
(28,077
|
)
|
|
|
|
|
|
|
|
|
—
|
|
Other - net
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
(29
|
)
|
(32
|
)
|
Balance at June 30, 2019
|
$
|
7
|
|
$
|
28,081
|
|
$
|
—
|
|
$
|
97
|
|
$
|
(2,375
|
)
|
$
|
—
|
|
$
|
257
|
|
$
|
26,067
|
|
Net loss
|
|
|
|
|
|
|
(494
|
)
|
|
|
|
|
(11
|
)
|
(505
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
(292
|
)
|
|
|
|
|
(292
|
)
|
Issuance of Corteva common stock
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Share-based compensation
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Common Stock Repurchase
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
Balance at September 30, 2019
|
$
|
7
|
|
$
|
28,072
|
|
$
|
—
|
|
$
|
(397
|
)
|
$
|
(2,667
|
)
|
$
|
—
|
|
$
|
246
|
|
$
|
25,261
|
|
See Notes to the Consolidated Financial Statements beginning on page 9.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
Corteva, Inc.
|
|
|
Notes to the Consolidated Financial Statements (Unaudited)
|
|
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
Corteva, Inc. combines the strengths of EID’s Pioneer and Crop Protection businesses, and Dow AgroSciences ("DAS") to create a leading global provider of seed and crop protection solutions focused on the agriculture industry. The company intends to leverage its rich heritage of over 275 years of scientific achievement to advance its robust innovation pipeline and continue to shape the future of responsible agriculture. The company's broad portfolio of agriculture solutions fuels farmer productivity in more than 140 countries. Corteva has two reportable segments: Seed and Crop Protection. See Note 24 - Segment Information, for additional information on the company's reportable segments.
Throughout this Quarterly Report on Form 10-Q, except as otherwise noted by the context, the terms "Corteva" or "company" used herein means Corteva, Inc. and its consolidated subsidiaries (including EID) and the term “EID” used herein means 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. Additionally, on June 1, 2019, DowDuPont Inc. changed its registered name to DuPont de Nemours, Inc. (“DuPont”), for certain events prior to, or on, June 1, 2019, DuPont may be referred to as DowDuPont.
Principles of Consolidation and Basis of Presentation
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 (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.
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 (the “Merger Effectiveness Time”) pursuant to the Agreement and Plan of Merger, dated as of December 11, 2015, as amended March 31, 2017 (the "Merger Agreement"), Historical Dow and Historical EID each merged with wholly-owned subsidiaries of DowDuPont and became subsidiaries of DowDuPont (the “Merger”). Prior to the Merger, DowDuPont did not conduct any business activities other than those required for its formation and matters contemplated by the Merger Agreement.
Subsequent to the Merger, Historical Dow and Historical EID engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products through a series of tax-efficient transactions (collectively, the "Business Separations”). Effective as of 5:00 pm ET on April 1, 2019, DowDuPont completed the previously announced separation of its materials science business into a separate and independent public company by way of a distribution of Dow Inc. (“Dow”) 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 (the “DowDuPont Common Stock”), as of the close of business on March 21, 2019 (the “Dow Distribution” and together with the Corteva Distribution, the “Distributions”).
Prior to the Dow Distribution, Historical Dow conveyed or transferred the assets and liabilities aligned with Historical Dow’s agriculture business to separate legal entities (“Dow Ag Entities”) and the assets and liabilities associated with its specialty products business to separate legal entities (the “Dow SP Entities”). On April 1, 2019, Dow Ag Entities and the Dow SP Entities were transferred and conveyed to DowDuPont.
In furtherance of the Business Separations, EID engaged in a series of internal reorganization and realignment steps (the “Internal Reorganization” and the "Business Realignment," respectively) to realign its businesses into three subgroups: agriculture, materials science and specialty products. As part of the Internal Reorganization:
|
|
•
|
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”) were transferred or conveyed to separate legal entities (the “Materials Science Entities”) that were ultimately conveyed by DowDuPont to Dow;
|
|
|
•
|
the assets and liabilities aligned with the EID’s specialty products business were transferred or conveyed to separate legal entities (“EID Specialty Products Entities”);
|
|
|
•
|
on April 1, 2019, EID transferred and conveyed its Materials Science Entities to Dow;
|
|
|
•
|
on May 1, 2019, EID distributed its Specialty Products Entities to DowDuPont;
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
•
|
on May 2, 2019, DowDuPont conveyed Dow Ag Entities to EID and in connection with the foregoing, EID issued additional shares of its Common Stock to DowDuPont; and
|
|
|
•
|
on May 31, 2019, DowDuPont contributed EID to Corteva, Inc.
|
On May 6, 2019, the Board of Directors of DowDuPont approved the distribution of all the then-issued and outstanding shares of common stock of Corteva, Inc., a wholly-owned subsidiary of DowDuPont, to DowDuPont stockholders. On June 1, 2019, DowDuPont completed the Separation. Each DowDuPont stockholder received one share of Corteva 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. Upon becoming an independent company, the capital structure of Corteva consisted of 748,815,000 authorized shares of common stock (par value of $0.01 per share), which represents the number of common shares issued on June 3, 2019. Information related to the Corteva Distribution and its effect on the company's financial statements is discussed throughout these Notes to the interim Consolidated Financial Statements.
As a result of the Business Realignment and the Internal Reorganization discussed above, Corteva owns, directly or indirectly, 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.
Certain reclassifications of prior year's data have been made to conform to current year's presentation. The company has revised the impact of the Internal Reorganizations (with a corresponding reduction to additional paid-in capital as of June 30, 2019), in the amount of $76 million, to reflect the removal of an asset related to the Separations.
DAS Common Control Combination
The transfer or conveyance of DAS to Corteva was treated as a transfer of entities under common control. As such, the company recorded the assets, liabilities, and equity of DAS on its balance sheet at their historical basis. Transfers of businesses between entities under common control requires the financial statements to be presented as if the transaction had occurred at the point at which common control first existed (the Merger Effectiveness Time). As a result, the accompanying interim Consolidated Financial Statements and Notes thereto include the results of DAS from the Merger Effectiveness Time. See Note 4 - Common Control Business Combination, for additional information.
Divestiture of EID ECP
The transfer of EID ECP meets the criteria for discontinued operations and as such, results of operations are presented as discontinued operations and have been excluded from continuing operations for all periods presented. The comprehensive income, stockholder's equity and cash flows related to EID ECP have not been segregated and are included in the Consolidated Statements of Comprehensive Income, Consolidated Statements of Equity and Condensed Consolidated Statements of Cash Flows, respectively, for all periods presented. Amounts related to EID ECP are consistently included or excluded from the Notes to the interim Consolidated Financial Statements based on the respective financial statement line item. See Note 5 - Divestitures and Other Transactions, for additional information.
Divestiture of EID Specialty Products Entities
The transfer of the EID Specialty Products Entities meets the criteria for discontinued operations and as such, results of operations are presented as discontinued operations and have been excluded from continuing operations for all periods presented. The comprehensive income, stockholder's equity and cash flows related to the EID Specialty Products Entities have not been segregated and are included in the Consolidated Statements of Comprehensive Income, Consolidated Statements of Equity and Condensed Consolidated Statements of Cash Flows, respectively, for all periods presented. Amounts related to 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 5 - Divestitures and Other Transactions, for additional information.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Divested EID Ag Business
As a condition of the regulatory approval for the Merger, including by the European Commission, EID was required to divest certain assets related to its crop protection business and research and development ("R&D") organization, specifically EID’s Cereal Broadleaf Herbicides and Chewing Insecticides portfolios, including Rynaxypyr®, Cyazypyr® and Indoxacarb as well as the crop protection R&D pipeline and organization, excluding seed treatment, nematicides, and late-stage R&D programs (the “Divested EID Ag Business”). On March 31, 2017, EID and FMC Corporation (“FMC”) entered into a definitive agreement (the "FMC Transaction Agreement"). On November 1, 2017, FMC acquired the Divested Ag Business and EID acquired certain assets relating to FMC’s Health and Nutrition segment, excluding its Omega-3 products (the "H&N Business") (collectively, the "FMC Transactions"). The H&N Business was transferred to DowDuPont as part of the EID Specialty Products Entities.
The sale of the Divested EID Ag Business met the criteria for discontinued operations and as such, results of operations are presented as discontinued operations and have been excluded from continuing operations for all periods presented. See Note 5 - Divestitures and Other Transactions, for additional information.
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 unaudited interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the company’s Information Statement included in its Registration Statement on Form 10, as amended, filed with the SEC on May 6, 2019 ("Form 10"). The interim Consolidated Financial Statements include the accounts of the company and all of its subsidiaries in which a controlling interest is maintained.
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. Subsequent to the Corteva Distribution, the financial statements are presented on a consolidated basis.
The company's Condensed Consolidated Balance Sheet at September 30, 2019 consists of the consolidated balances subsequent to the Corteva Distribution. The balances reflect the assets and liabilities that were historically included in the EID statements, as well as assets and liabilities transferred to the company as part of the common control combination acquisition of DAS. The company's Condensed Consolidated Balance Sheets at December 31, 2018 and September 30, 2018 consist 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 2, 2019 represent the consolidated balances of the company.
All intercompany transactions have been eliminated.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies
The below reflects significant accounting policies that have been updated since the issuance of the company's Form 10. See Note 1 - "Summary of Significant Accounting Policies," within Exhibit 99.2 of Amendment 2 to the Form 10 for more information on the company's other significant accounting policies.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Inventories
As of September 30, 2019, approximately 49 percent and 51 percent of the company's inventories were accounted for under the first-in, first-out ("FIFO") and average cost methods, respectively. As of December 31, 2018, approximately 57 percent and 43 percent of the company's inventories were accounted for under the FIFO and average cost methods, respectively. As of September 30, 2018, approximately 49 percent and 51 percent of the company's inventories were accounted for under the FIFO and average cost methods, respectively. Inventories accounted for under the FIFO method are primarily comprised of products with shorter shelf lives such as seeds. See Note 13 - Inventories, for further information.
Leases
The company determines whether an arrangement is a lease at the inception of the arrangement based on the terms and conditions in the contract. A contract contains a lease if there is an identified asset and the company has the right to control the asset. Operating lease right-of-use ("ROU") assets are included in other assets on the company’s Condensed Consolidated Balance Sheets. Operating lease liabilities are included in accrued and other current liabilities and other noncurrent obligations on the company’s Condensed Consolidated Balance Sheets. Finance lease assets are included in property, plant and equipment on the company’s Condensed Consolidated Balance Sheets. Finance lease liabilities are included in short-term borrowings and finance lease obligations and long-term debt on the company’s Condensed Consolidated Balance Sheets.
Operating lease ROU assets represent the company’s right to use an underlying asset for the lease term and lease liabilities represent the company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the company’s leases do not provide the lessor's implicit rate, the company uses its incremental borrowing rate at the commencement date in determining the present value of lease payments. The company's incremental borrowing rate is based on its estimated rate of interest for a collateralized borrowing over a similar term as the lease payments. The same process is followed for any new leases at their commencement dates or modifications to existing leases that require remeasurement. Lease terms include options to extend the lease when it is reasonably certain those options will be exercised. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The company recognizes lease expense for these leases on a straight-line basis over the lease term.
The company has lease agreements with lease and non-lease components, which are accounted for as a single lease component for all asset classes. In the Consolidated Statements of Operations, lease expense for operating lease payments is recognized on a straight-line basis over the lease term. For finance leases, interest expense is recognized on the lease liability and the ROU asset is amortized over the lease term. See Note 16 - Leases, for further information.
Segments
As a result of the Internal Reorganizations and Business Realignments, the company changed its reportable segments to Seed and Crop Protection to reflect the manner in which the company's chief operating decision maker assesses performance and allocates resources. Effective with the Corteva Distribution, the company also updated its reporting units to align with the level at which discrete financial information is available for review by management.
Prior year's segment information has been revised to conform to the current presentation. See Note 24 - Segment Information, for further information.
NOTE 3 - RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), and associated ASUs related to Topic 842, which requires organizations that lease assets to recognize on their balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognize assets and liabilities for leases, and recognition, presentation and measurement in the financial statements will depend on its classification as a finance or operating lease. In addition, the new guidance requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. Lessor accounting remains largely unchanged from previous U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014 (Topic 606).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The company adopted this standard in the first quarter of 2019, which allows for a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial adoption. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statement as its date of initial application. The company has elected to apply the transition requirements at the January 1, 2019 effective date rather than at the beginning of the earliest comparative period presented. This approach allows for a cumulative effect adjustment in the period of adoption, and prior periods are not restated and continue to be reported in accordance with historic accounting under ASC 840 (Leases). In addition, the company has elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, does not require reassessment of prior conclusions related to contracts containing a lease, lease classification, and initial direct lease costs. As an accounting policy election, the company chose to not apply the standard to certain existing land easements, excluded short-term leases (term of 12 months or less) from the balance sheet and will account for non-lease and lease components in a contract as a single component for all asset classes. See Note 16 - Leases, for additional information.
The following table summarizes the impact of adoption to the company’s Condensed Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
As Reported
December 31, 20181
|
Effect of Adoption of ASU 2016-02
|
Updated
January 1, 2019
|
Assets
|
|
|
|
Property, plant and equipment - net
|
$
|
4,544
|
|
$
|
9
|
|
$
|
4,553
|
|
Other assets
|
$
|
1,932
|
|
$
|
546
|
|
$
|
2,478
|
|
Assets of discontinued operations - non-current
|
$
|
56,545
|
|
$
|
461
|
|
$
|
57,006
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
Current liabilities
|
|
|
|
Short-term borrowings and finance lease obligations
|
$
|
2,154
|
|
$
|
1
|
|
$
|
2,155
|
|
Accrued and other current liabilities
|
$
|
4,005
|
|
$
|
143
|
|
$
|
4,148
|
|
Liabilities of discontinued operations - current
|
$
|
3,167
|
|
$
|
141
|
|
$
|
3,308
|
|
|
|
|
|
Long-Term Debt
|
$
|
5,784
|
|
$
|
8
|
|
$
|
5,792
|
|
Other noncurrent obligations
|
$
|
1,795
|
|
$
|
403
|
|
$
|
2,198
|
|
Liabilities of discontinued operations - non-current
|
$
|
5,484
|
|
$
|
320
|
|
$
|
5,804
|
|
|
|
1.
|
Includes adjustments for discontinued operations and common control business combination.
|
The adoption of the new guidance did not have a material impact on the company's Consolidated Statements of Operations and had no impact on the Condensed Consolidated Statement of Cash Flows.
In July 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates (SEC Update)” (“ASU 2019-07”). ASU 2019-07 aligns the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. ASU 2019-07 was effective immediately. The adoption of ASU 2019-07 did not have a material impact on the company's financial position, results of operations or cash flows.
Accounting Guidance Issued But Not Adopted as of September 30, 2019
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 new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning January 1, 2019. In April and May 2019, the FASB subsequently issued ASU 2019-04 and ASU 2019-05, respectively, which contained updates to ASU 2016-13. The company is currently evaluating the impact of adopting this guidance.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 - COMMON CONTROL BUSINESS COMBINATION
DAS Common Control Combination
Based on an evaluation of the provisions of ASC 805 (Business Combinations), Corteva and DAS represent entities under common control, as both shared DowDuPont as their parent company. As a result, the assets, liabilities and operations of Corteva and DAS are combined at their historical carrying amounts, and all historical periods are adjusted as if Corteva and DAS had been combined since the Merger Effectiveness Time, when the entities first came under common control. Accordingly, the accompanying interim Consolidated Financial Statements and Notes thereto have been retrospectively revised to include the transferred net assets and results of operations of DAS beginning on September 1, 2017. Refer to Note 1 - Background and Basis of Presentation, for additional information.
The following table summarizes the final recording of assets and liabilities of DAS at their respective carrying values as of September 1, 2017:
|
|
|
|
|
(In millions)
|
September 1, 2017
|
Cash and cash equivalents
|
$
|
98
|
|
Accounts and notes receivable - net
|
1,377
|
|
Inventories
|
2,133
|
|
Other current assets
|
130
|
|
Investments in nonconsolidated affiliates
|
50
|
|
Property, plant and equipment - net
|
1,555
|
|
Goodwill
|
1,472
|
|
Other intangible assets
|
130
|
|
Deferred income taxes
|
230
|
|
Other assets
|
97
|
|
Short-term borrowings and finance lease obligations
|
6
|
|
Accounts payable
|
1,414
|
|
Income taxes payable
|
103
|
|
Accrued and other current liabilities
|
482
|
|
Long-term debt
|
27
|
|
Deferred income tax liabilities
|
66
|
|
Pension and other post employment benefits - noncurrent
|
126
|
|
Other noncurrent obligations
|
170
|
|
The following table provides supplemental results of EID and DAS for the three and nine months ended September 30, 2018 and the three months ended March 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
(In millions)
|
Historical EID
|
Discontinued Operations and Other Adjustments1
|
DAS
|
Corteva
|
Net sales
|
$
|
5,294
|
|
$
|
(4,378
|
)
|
$
|
1,031
|
|
$
|
1,947
|
|
Loss from continuing operations before income taxes
|
$
|
(4,948
|
)
|
$
|
(535
|
)
|
$
|
(167
|
)
|
$
|
(5,650
|
)
|
Loss from continuing operations after income taxes
|
$
|
(4,960
|
)
|
$
|
(515
|
)
|
$
|
(167
|
)
|
$
|
(5,642
|
)
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
(In millions)
|
Historical EID
|
Discontinued Operations and Other Adjustments1
|
DAS
|
Corteva
|
Net sales
|
$
|
20,538
|
|
$
|
(13,288
|
)
|
$
|
4,222
|
|
$
|
11,472
|
|
(Loss) income from continuing operations before income taxes
|
$
|
(4,482
|
)
|
$
|
(1,668
|
)
|
$
|
258
|
|
$
|
(5,892
|
)
|
(Loss) income from continuing operations after income taxes
|
$
|
(4,662
|
)
|
$
|
(1,180
|
)
|
$
|
137
|
|
$
|
(5,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
(In millions)
|
Historical EID
|
Discontinued Operations and Other Adjustments1
|
DAS
|
Corteva
|
Net sales
|
$
|
6,288
|
|
$
|
(4,341
|
)
|
$
|
1,449
|
|
$
|
3,396
|
|
Income (loss) from continuing operations before income taxes
|
$
|
49
|
|
$
|
(476
|
)
|
$
|
176
|
|
$
|
(251
|
)
|
Income (loss) from continuing operations after income taxes
|
$
|
89
|
|
$
|
(369
|
)
|
$
|
96
|
|
$
|
(184
|
)
|
|
|
1.
|
Reflects discontinued operations of EID's ECP and Specialty Products businesses and adjustments primarily related to the elimination of intercompany transactions between Historical EID and Dow AgroSciences for periods subsequent to the Merger, as if they were combined affiliates.
|
Intercompany balances and transactions with DAS have been eliminated for all periods presented.
NOTE 5 - 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"). The Parties entered into, among other agreements, the following agreements:
|
|
•
|
Separation and Distribution Agreement - Effective April 1, 2019, the Parties entered into an agreement that sets forth, among other things, the agreements among the Parties regarding the principal transactions necessary to effect the Distributions. It also sets forth other agreements that govern certain aspects of the Parties’ ongoing relationships after the completion of the Distributions (the "Corteva Separation Agreement").
|
|
|
•
|
Tax Matters Agreement - The Parties entered into an agreement effective as of April 1, 2019 as amended on June 1, 2019 that governs their respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes.
|
|
|
•
|
Employee Matters Agreement - The Parties entered into an agreement that identifies employees and employee-related liabilities (and attributable assets) to be allocated (either retained, transferred and accepted, or assigned and assumed, as applicable) to the Parties as part of the Distributions and describes when and how the relevant transfers and assignments will occur.
|
|
|
•
|
Intellectual Property Cross-License Agreement - Effective as of April 1, 2019 between Corteva and Dow, and effective June 1, 2019 between Corteva and DuPont entered into Intellectual Property Cross-License Agreements. The Intellectual Property Cross-License Agreements set forth the terms and conditions under which the applicable Parties may use in their respective businesses, following each of the Distributions, certain know-how (including trade secrets), copyrights, and software, and certain patents and standards, allocated to another Party pursuant to the Corteva Separation Agreement.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
•
|
Letter Agreement - DuPont and Corteva entered into a Letter Agreement. The Letter Agreement sets forth certain additional terms and conditions related to the Separation, including certain limitations on each party’s ability to transfer certain businesses and assets to third parties without assigning certain of such party’s indemnification obligations under the Corteva Separation Agreement to the other party to the transferee of such businesses and assets or meeting certain other alternative conditions.
|
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 September 30, 2019, the indemnification assets are $36 million within accounts and notes receivable - net and $57 million within other assets in the interim Condensed Consolidated Balance Sheet. At September 30, 2019, the indemnification liabilities are $15 million within accrued and other current liabilities and $71 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 September 30, 2019, the indemnification assets are $43 million within accounts and notes receivable - net and $1 million within other assets in the interim Condensed Consolidated Balance Sheet. At September 30, 2019, the indemnification liabilities are $87 million within accrued and other current liabilities and $109 million within other noncurrent obligations in the interim Condensed Consolidated Balance Sheet.
EID ECP Divestiture
As discussed in Note 1 - Background and Basis of Presentation, 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:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2018
|
2019
|
2018
|
Net sales
|
$
|
386
|
|
$
|
362
|
|
$
|
1,214
|
|
Cost of goods sold
|
277
|
|
259
|
|
827
|
|
Research and development expense
|
6
|
|
4
|
|
19
|
|
Selling, general and administrative expenses
|
10
|
|
9
|
|
34
|
|
Amortization of intangibles
|
24
|
|
23
|
|
72
|
|
Restructuring and asset related charges - net
|
4
|
|
2
|
|
6
|
|
Integration and separation costs
|
35
|
|
44
|
|
88
|
|
Other income - net
|
1
|
|
2
|
|
12
|
|
Income from discontinued operations before income taxes
|
31
|
|
23
|
|
180
|
|
Provision for income taxes on discontinued operations
|
16
|
|
4
|
|
45
|
|
Income from discontinued operations after income taxes
|
$
|
15
|
|
$
|
19
|
|
$
|
135
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the depreciation and capital expenditures of the discontinued operations related to EID ECP:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2018
|
2019
|
2018
|
Depreciation
|
$
|
34
|
|
$
|
28
|
|
$
|
101
|
|
Capital expenditures
|
$
|
17
|
|
$
|
16
|
|
$
|
59
|
|
The carrying amount of major classes of assets and liabilities classified as assets and liabilities of discontinued operations at December 31, 2018 and September 30, 2018 related to EID ECP consist of the following:
|
|
|
|
|
|
|
|
(In millions)
|
December 31, 2018
|
September 30, 2018
|
Cash and cash equivalents
|
$
|
55
|
|
$
|
8
|
|
Accounts and notes receivable - net
|
194
|
|
216
|
|
Inventories
|
465
|
|
454
|
|
Other current assets
|
12
|
|
8
|
|
Total current assets of discontinued operations
|
726
|
|
686
|
|
Investment in nonconsolidated affiliates
|
108
|
|
110
|
|
Property, plant and equipment - net
|
770
|
|
780
|
|
Goodwill
|
3,587
|
|
3,596
|
|
Other intangible assets
|
1,143
|
|
1,168
|
|
Deferred income taxes
|
13
|
|
35
|
|
Other assets
|
1
|
|
3
|
|
Non-current assets of discontinued operations
|
5,622
|
|
5,692
|
|
Total assets of discontinued operations
|
$
|
6,348
|
|
$
|
6,378
|
|
Short-term borrowings and finance lease obligations
|
2
|
|
—
|
|
Accounts payable
|
214
|
|
157
|
|
Accrued and other current liabilities
|
36
|
|
38
|
|
Total current liabilities of discontinued operations
|
252
|
|
195
|
|
Long-term Debt
|
4
|
|
—
|
|
Deferred income tax liabilities
|
432
|
|
499
|
|
Pension and other post employment benefits - noncurrent
|
6
|
|
6
|
|
Other noncurrent obligations
|
2
|
|
2
|
|
Non-current liabilities of discontinued operations
|
444
|
|
507
|
|
Total liabilities of discontinued operations
|
$
|
696
|
|
$
|
702
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
EID Specialty Products Divestiture
As discussed in Note 1 - Background and Basis of Presentation, 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:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2018
|
2019
|
2018
|
Net sales
|
$
|
3,912
|
|
$
|
5,030
|
|
$
|
11,922
|
|
Cost of goods sold
|
2,599
|
|
3,352
|
|
7,985
|
|
Research and development expense
|
150
|
|
204
|
|
467
|
|
Selling, general and administrative expenses
|
381
|
|
573
|
|
1,199
|
|
Amortization of intangibles
|
201
|
|
267
|
|
616
|
|
Restructuring and asset related charges - net
|
9
|
|
115
|
|
93
|
|
Integration and separation costs
|
80
|
|
253
|
|
203
|
|
Goodwill impairment
|
—
|
|
1,102
|
|
—
|
|
Other income - net
|
27
|
|
38
|
|
162
|
|
Income (loss) from discontinued operations before income taxes
|
519
|
|
(798
|
)
|
1,521
|
|
Provision for income taxes on discontinued operations
|
8
|
|
82
|
|
451
|
|
Income (loss) from discontinued operations after income taxes
|
$
|
511
|
|
$
|
(880
|
)
|
$
|
1,070
|
|
For the three months ended September 30, 2019, the company recorded income from discontinued operations after income taxes of $22 million related to the adjustment of certain prior year tax positions.
EID Specialty Products Impairment
As a result of the Merger and related acquisition method of accounting, Historical EID’s assets and liabilities were measured at fair value resulting in increases to the company’s goodwill and other intangible assets. The fair value valuation increased the risk that any declines in financial projections, including changes to key assumptions, could have a material, negative impact on the fair value of the company’s reporting units and assets, and therefore could result in an impairment.
As a result of the Internal Reorganization, in the second quarter of 2019, EID assessed the recoverability of the goodwill within the electronics and communications, protection solutions, nutrition and health, transportation and advanced polymers, packaging and specialty plastics, industrial biosciences, and clean technologies reporting units, and the overall carrying value of the net assets in the disposal group that was distributed to DowDuPont on May 1, 2019. As a result of this analysis, the company determined that the fair value of certain reporting units related to the EID Specialty Products Entities were below carrying value resulting in pre-tax, non-cash goodwill impairment charges totaling $1,102 million reflected in loss from discontinued operations after income taxes in the nine months ended September 30, 2019. Revised financial projections reflected unfavorable market conditions, driven by slowed demand in the biomaterials business unit, coupled with challenging conditions in U.S. bioethanol markets. These revised financial projections resulted in a reduction in the long-term forecasts of sales and profitability as compared to prior projections.
The company’s analyses above using discounted cash flow models (a form of the income approach) utilized Level 3 unobservable inputs. The company’s significant assumptions in these analyses included, but were not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate, and the tax rate. The company’s estimates of future cash flows were based on current regulatory and economic climates, recent operating results, and planned business strategies. These estimates could be negatively affected by changes in federal, state, or local regulations or economic downturns. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from the company’s estimates. The company also used a form of the market approach (utilizes Level 3 unobservable inputs), which was derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate giving consideration to risk profiles, size, geography, and diversity of products and services. As such, the company believes the assumptions and estimates utilized were both reasonable and appropriate.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In addition, the company performed an impairment analysis related to the equity method investments held by the EID Specialty Products Entities, as of May 1, 2019. The company applied the net asset value method under the cost approach to determine the fair value of the equity method investments in the EID Specialty Products Entities. Based on updated projections, the company determined the fair value of an equity method investment was below the carrying value and had no expectation the fair value would recover in the short-term due to the current economic environment. As a result, management concluded the impairment was other-than-temporary (utilizing Level 3 unobservable inputs) and recorded an impairment charge of $63 million, reflected in loss from discontinued operations after income taxes. Additionally, this impairment is reflected within restructuring and asset related charges - net in the nine months ended September 30, 2019, within the table above.
The following table presents the depreciation and capital expenditures of the discontinued operations related to the EID Specialty Products Entities:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2018
|
2019
|
2018
|
Depreciation
|
$
|
208
|
|
$
|
281
|
|
$
|
636
|
|
Capital expenditures
|
$
|
214
|
|
$
|
481
|
|
$
|
627
|
|
The carrying amount of major classes of assets and liabilities classified as assets and liabilities of discontinued operations at December 31, 2018 and September 30, 2018 related to the EID Specialty Products Entities consist of the following:
|
|
|
|
|
|
|
|
(In millions)
|
December 31, 2018
|
September 30, 2018
|
Cash and cash equivalents
|
$
|
2,199
|
|
$
|
1,957
|
|
Marketable securities
|
29
|
|
122
|
|
Accounts and notes receivable - net
|
2,441
|
|
2,597
|
|
Inventories
|
3,452
|
|
3,433
|
|
Other current assets
|
242
|
|
260
|
|
Total current assets of discontinued operations
|
8,363
|
|
8,369
|
|
Investment in nonconsolidated affiliates
|
1,185
|
|
1,220
|
|
Property, plant and equipment - net
|
8,138
|
|
7,966
|
|
Goodwill
|
28,250
|
|
28,532
|
|
Other intangible assets
|
13,037
|
|
13,330
|
|
Deferred income taxes
|
122
|
|
190
|
|
Other assets
|
191
|
|
255
|
|
Non-current assets of discontinued operations
|
50,923
|
|
51,493
|
|
Total assets of discontinued operations
|
$
|
59,286
|
|
$
|
59,862
|
|
Short-term borrowings and finance lease obligations
|
15
|
|
4
|
|
Accounts payable
|
1,983
|
|
1,837
|
|
Income taxes payable
|
33
|
|
31
|
|
Accrued and other current liabilities
|
884
|
|
821
|
|
Total current liabilities of discontinued operations
|
2,915
|
|
2,693
|
|
Long-term Debt
|
29
|
|
11
|
|
Deferred income tax liabilities
|
3,624
|
|
3,729
|
|
Pension and other post employment benefits - noncurrent
|
1,125
|
|
1,013
|
|
Other noncurrent obligations
|
262
|
|
272
|
|
Non-current liabilities of discontinued operations
|
5,040
|
|
5,025
|
|
Total liabilities of discontinued operations
|
$
|
7,955
|
|
$
|
7,718
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Integration and Separation Costs
Integration and separation costs have 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 Business Separations and the integration of EID’s Pioneer and Crop Protection businesses with DAS. These costs are recorded within integration and separation costs in the Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
Integration and separation costs
|
$
|
152
|
|
$
|
253
|
|
$
|
694
|
|
$
|
697
|
|
Merger Remedy - Divested EID Ag Business
A complete discussion of the Divested Ag Business is included in Note 4 - "Divestitures and Other Transactions," within Exhibit 99.2 of Amendment 2 to the Form 10. For the nine months ended September 30, 2018, the company recorded a loss from discontinued operations before income taxes related to the Divested Ag Business of $10 million ($5 million after tax). For the nine months ended September 30, 2019, the company recorded income from discontinued operations after income taxes of $80 million related to changes in accruals for certain prior year tax positions.
Other Discontinued Operations Activity
For the nine months ended September 30, 2019, the company recorded income from discontinued operations after income taxes of $86 million related to the adjustment of certain unrecognized tax benefits for positions taken on items from prior years from previously divested businesses.
NOTE 6 - 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 September 30, 2019, the company had remaining performance obligations related to material rights granted to customers for contract renewal options of $108 million ($102 million and $103 million at December 31, 2018 and September 30, 2018, respectively). The company expects revenue to be recognized for the remaining performance obligations over the next 1 year to 6 years.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Contract Balances
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
(In millions)
|
Accounts and notes receivable - trade1
|
$
|
5,372
|
|
$
|
3,843
|
|
$
|
5,164
|
|
Contract assets - current2
|
$
|
20
|
|
$
|
18
|
|
$
|
18
|
|
Contract assets - noncurrent3
|
$
|
49
|
|
$
|
46
|
|
$
|
47
|
|
Deferred revenue - current4
|
$
|
441
|
|
$
|
2,209
|
|
$
|
380
|
|
Deferred revenue - noncurrent5
|
$
|
117
|
|
$
|
150
|
|
$
|
120
|
|
|
|
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.
|
The change in deferred revenue from December 31, 2018 to September 30, 2019 was substantially due to the timing of seed deliveries to customers for the North America growing season. Revenue recognized during the nine months ended September 30, 2019 from amounts included in deferred revenue at the beginning of the period was $2,013 million.
The increase in accounts and notes receivable - trade from December 31, 2018 to September 30, 2019 was primarily due to the seasonality of the company's business. Historically, trade receivables are lowest at year-end and increase through the northern hemisphere selling season, reaching their peak at the end of the second quarter.
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
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
Corn
|
$
|
372
|
|
$
|
344
|
|
$
|
4,149
|
|
$
|
4,289
|
|
Soybean
|
168
|
|
54
|
|
1,297
|
|
1,449
|
|
Other oilseeds
|
44
|
|
57
|
|
469
|
|
514
|
|
Other
|
97
|
|
96
|
|
432
|
|
464
|
|
Seed
|
681
|
|
551
|
|
6,347
|
|
6,716
|
|
Herbicides
|
584
|
|
648
|
|
2,399
|
|
2,579
|
|
Insecticides
|
322
|
|
334
|
|
1,158
|
|
1,111
|
|
Fungicides
|
254
|
|
292
|
|
776
|
|
839
|
|
Other
|
70
|
|
122
|
|
183
|
|
227
|
|
Crop Protection
|
1,230
|
|
1,396
|
|
4,516
|
|
4,756
|
|
Total
|
$
|
1,911
|
|
$
|
1,947
|
|
$
|
10,863
|
|
$
|
11,472
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Sales are attributed to geographic regions based on customer location. Net sales by geographic region and segment are included below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seed
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
North America1
|
$
|
226
|
|
$
|
112
|
|
$
|
4,238
|
|
$
|
4,590
|
|
EMEA2
|
122
|
|
133
|
|
1,200
|
|
1,222
|
|
Asia Pacific
|
62
|
|
52
|
|
273
|
|
272
|
|
Latin America
|
271
|
|
254
|
|
636
|
|
632
|
|
Total
|
$
|
681
|
|
$
|
551
|
|
$
|
6,347
|
|
$
|
6,716
|
|
|
|
1.
|
Represents U.S. & Canada.
|
|
|
2.
|
Europe, Middle East, and Africa ("EMEA").
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crop Protection
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
North America
|
$
|
397
|
|
$
|
425
|
|
$
|
1,562
|
|
$
|
1,844
|
|
EMEA
|
183
|
|
163
|
|
1,136
|
|
1,157
|
|
Asia Pacific
|
159
|
|
187
|
|
674
|
|
653
|
|
Latin America
|
491
|
|
621
|
|
1,144
|
|
1,102
|
|
Total
|
$
|
1,230
|
|
$
|
1,396
|
|
$
|
4,516
|
|
$
|
4,756
|
|
NOTE 7 - RESTRUCTURING AND ASSET RELATED CHARGES - NET
DowDuPont Agriculture Division Restructuring Program
From inception-to-date, the company has recorded total pre-tax restructuring charges of $83 million, comprised of $74 million of severance and related benefit costs and $9 million of asset related charges. For the nine months ended September 30, 2019, the company recorded a pre-tax benefit of $(1) million, recognized in restructuring and asset related charges - net in the company's Consolidated Statement of Operations, and no additional charges for the three months ended September 30, 2019. The charge for the nine months ended September 30, 2019 was comprised of a favorable adjustment of $(4) million to severance and related benefit costs related to the Crop Protection segment and asset related charges of $3 million related to the Seed segment. The actions related to this program are substantially complete.
Account balances and activity for the DowDuPont Agriculture Division Restructuring Program are summarized below:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Severance and Related Benefit Costs
|
Asset Related Charges
|
Total
|
Balance at December 31, 2018
|
$
|
77
|
|
$
|
—
|
|
$
|
77
|
|
(Benefits) charges to loss from continuing operations for the nine months ended September 30, 2019
|
(4
|
)
|
3
|
|
(1
|
)
|
Payments
|
(35
|
)
|
—
|
|
(35
|
)
|
Asset write-offs
|
—
|
|
(3
|
)
|
(3
|
)
|
Separation adjustment1
|
(6
|
)
|
—
|
|
(6
|
)
|
Balance at September 30, 2019
|
$
|
32
|
|
$
|
—
|
|
$
|
32
|
|
1. Adjustment reflects severance liabilities associated with DAS employees who were terminated by Dow prior to separation and were included within the
combined financial statements of Dow, but did not transfer to Corteva as part of the common control combination.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 Business Separations. The company recorded pre-tax restructuring charges of $866 million inception-to-date under the Synergy Program, consisting of severance and related benefit costs of $340 million, contract termination costs of $193 million, and asset write-downs and write-offs of $333 million. The company does not anticipate any additional material charges under the Synergy Program. Actions associated with the Synergy Program, including employee separations, are expected to be 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
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
Seed
|
$
|
(7
|
)
|
$
|
64
|
|
$
|
66
|
|
$
|
147
|
|
Crop Protection
|
(1
|
)
|
30
|
|
28
|
|
42
|
|
Corporate expenses
|
—
|
|
15
|
|
20
|
|
151
|
|
Total
|
$
|
(8
|
)
|
$
|
109
|
|
$
|
114
|
|
$
|
340
|
|
The below is a summary of (benefits) charges incurred related to the Synergy Program for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
Severance and related benefit costs
|
$
|
—
|
|
$
|
20
|
|
$
|
14
|
|
$
|
157
|
|
Contract termination charges
|
—
|
|
9
|
|
69
|
|
46
|
|
Asset related (benefits) charges
|
(8
|
)
|
80
|
|
31
|
|
137
|
|
Total restructuring and asset related (benefits) charges - net
|
$
|
(8
|
)
|
$
|
109
|
|
$
|
114
|
|
$
|
340
|
|
Account balances and activity for the Synergy Program are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Severance and Related Benefit Costs
|
Costs Associated with Exit and Disposal Activities1
|
Asset Related Charges
|
Total
|
Balance at December 31, 2018
|
$
|
154
|
|
$
|
61
|
|
$
|
—
|
|
$
|
215
|
|
Charges to loss from continuing operations for the nine months ended September 30, 2019
|
14
|
|
69
|
|
31
|
|
114
|
|
Payments
|
(101
|
)
|
(89
|
)
|
(1
|
)
|
(191
|
)
|
Asset write-offs
|
—
|
|
—
|
|
(30
|
)
|
(30
|
)
|
Balance at September 30, 2019
|
$
|
67
|
|
$
|
41
|
|
$
|
—
|
|
$
|
108
|
|
|
|
1.
|
Relates primarily to contract terminations charges.
|
Asset Impairments
During the three months ended September 30, 2019, and in connection with strategic product and portfolio reviews, the company determined that the fair value of certain intangible assets classified as developed technology, other intangible assets and in-process research and development ("IPR&D") within the Seed segment that primarily relate to heritage DAS intangibles previously acquired from Cooperativa Central de Pesquisa Agrícola's ("Coodetec"), was less than the carrying value. As a result, the company recorded a pre-tax, non-cash intangible asset impairment charge of $54 million ($41 million after-tax), which is reflected in restructuring and asset related charges - net, in the company's Consolidated Statements of Operations. Refer to Note 15 - Goodwill and Other Intangible Assets, and Note 23 - Fair Value Measurements, for further information.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During the three and nine months ended September 30, 2018, the company recognized an $85 million pre-tax ($66 million after-tax) non-cash impairment charge in restructuring and asset related charges - net in the company's Consolidated Statements of Operations related to certain IPR&D within the Seed segment. Refer to Note 15 - Goodwill and Other Intangible Assets, and Note 23 - Fair Value Measurements, for further information.
In addition, based on updated projections for the company’s investment in nonconsolidated affiliates in China related to the Seed segment, management determined the fair value of the investment in nonconsolidated affiliates was below the carrying value and has no expectation the fair value will recover due to the continuing unfavorable regulatory environment including lack of intellectual property protection, uncertain product registration timing, and limited freedom to operate. As a result, management concluded the impairment was other than temporary and recorded a non-cash impairment charge of $41 million in restructuring and asset related charges - net in the company's Consolidated Statements of Operations, none of which was tax-deductible, for the three and nine months ended September 30, 2018.
NOTE 8 - 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. At September 30, 2018 and December 31, 2018 there was $68 million and $110 million, respectively, due to Historical Dow and its affiliates, reflected in liabilities from discontinued operations - current.
Purchases from Historical Dow and its affiliates were $42 million for the nine months ended September 30, 2019, and $41 million and $112 million for the three and nine months ended September 30, 2018, respectively.
For the three and nine months ended September 30, 2018, DAS net transfers from Dow were $265 million and $288 million, respectively, reflected in Other, net in the Consolidated Statements of Equity. For the nine months ended September 30, 2019, DAS net transfers from Dow were $88 million.
Transactions with DowDuPont
In November 2017, DowDuPont's Board of Directors authorized an initial $4,000 million share repurchase program to buy back shares of DowDuPont common stock. The $4,000 million share repurchase program was completed in the third quarter of 2018. In February, May and August 2018, the DowDuPont Board declared first, second and third quarter dividends per share of DowDuPont common stock payable on March 15, 2018, June 15, 2018 and September 15, 2018, respectively. For the nine months ended September 30, 2018, EID declared and paid distributions to DowDuPont of $2,481 million, primarily to fund a portion of DowDuPont's first, second and third quarter share repurchases and dividend payments.
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 nine months ended September 30, 2019, primarily to fund a portion of DowDuPont's dividend payment.
In addition, at December 31, 2018, and September 30, 2018, EID had a payable to DowDuPont of $103 million and $250 million included in accounts payable in the interim Condensed Consolidated Balance Sheets 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 10 - Income Taxes, for additional information.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9 - SUPPLEMENTARY INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income - Net
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
Interest income
|
$
|
13
|
|
$
|
12
|
|
$
|
46
|
|
$
|
63
|
|
Equity in losses of affiliates - net
|
(3
|
)
|
(3
|
)
|
(8
|
)
|
(2
|
)
|
Net gain (loss) on sales of businesses and other assets
|
2
|
|
1
|
|
(9
|
)
|
35
|
|
Net exchange losses1,2
|
(11
|
)
|
(74
|
)
|
(70
|
)
|
(190
|
)
|
Non-operating pension and other post employment benefit credit3
|
47
|
|
67
|
|
144
|
|
204
|
|
Miscellaneous income (expenses) - net4
|
11
|
|
4
|
|
(13
|
)
|
8
|
|
Other income - net
|
$
|
59
|
|
$
|
7
|
|
$
|
90
|
|
$
|
118
|
|
|
|
1.
|
Includes net pre-tax exchange losses of $(33) million and $(42) million for the three and nine months ended September 30, 2019, respectively and $(40) million and $(73) million for the three and nine months ended September 30, 2018, respectively, associated with the devaluation of the Argentine peso.
|
|
|
2.
|
Includes a $(50) million foreign exchange loss for the nine months ended September 30, 2018 related to adjustments to foreign currency exchange contracts as a result of U.S. tax reform, which is included within significant items.
|
|
|
3.
|
Includes non-service related components of net periodic benefit credits (costs) (interest cost, expected return on plan assets, amortization of unrecognized (gain) loss, amortization of prior service benefit and curtailment/settlement loss).
|
|
|
4.
|
Miscellaneous income (expenses) - net, includes losses from sale of receivables, tax indemnification adjustments related 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, and other items. Refer to Note 12 - Accounts and Notes Receivable - Net, for additional information on losses on the sale of receivables.
|
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
September 30,
|
Nine Months Ended
September 30,
|
|
2019
|
2018
|
2019
|
2018
|
Subsidiary Monetary Position Losses
|
|
|
|
|
Pre-tax exchange losses1
|
$
|
(66
|
)
|
$
|
(105
|
)
|
$
|
(59
|
)
|
$
|
(217
|
)
|
Local tax benefits (expenses)
|
1
|
|
7
|
|
(2
|
)
|
32
|
|
Net after-tax impact from subsidiary exchange losses
|
$
|
(65
|
)
|
$
|
(98
|
)
|
$
|
(61
|
)
|
$
|
(185
|
)
|
|
|
|
|
|
Hedging Program Gains (Losses)
|
|
|
|
|
Pre-tax exchange gains (losses)2
|
$
|
55
|
|
$
|
31
|
|
$
|
(11
|
)
|
$
|
27
|
|
Tax (expenses) benefits
|
(13
|
)
|
(7
|
)
|
2
|
|
(6
|
)
|
Net after-tax impact from hedging program exchange gains (losses)
|
$
|
42
|
|
$
|
24
|
|
$
|
(9
|
)
|
$
|
21
|
|
|
|
|
|
|
Total Exchange Losses
|
|
|
|
|
Pre-tax exchange losses1,2
|
$
|
(11
|
)
|
$
|
(74
|
)
|
$
|
(70
|
)
|
$
|
(190
|
)
|
Tax (expenses) benefits
|
(12
|
)
|
—
|
|
—
|
|
26
|
|
Net after-tax exchange losses
|
$
|
(23
|
)
|
$
|
(74
|
)
|
$
|
(70
|
)
|
$
|
(164
|
)
|
|
|
1.
|
Includes net pre-tax exchange losses of $(33) million and $(42) million for the three and nine months ended September 30, 2019, respectively and $(40) million and $(73) million for the three and nine months ended September 30, 2018, respectively, associated with the devaluation of the Argentine peso.
|
|
|
2.
|
Includes a $(50) million foreign exchange loss for the nine months ended September 30, 2018 related to adjustments to foreign currency exchange contracts as a result of U.S. tax reform.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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)
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
Cash and cash equivalents
|
$
|
1,980
|
|
$
|
2,270
|
|
$
|
1,657
|
|
Restricted cash
|
420
|
|
460
|
|
462
|
|
Total cash, cash equivalents and restricted cash
|
2,400
|
|
2,730
|
|
2,119
|
|
Cash and cash equivalents of discontinued operations1
|
—
|
|
2,254
|
|
1,965
|
|
Restricted cash of discontinued operations2
|
—
|
|
40
|
|
44
|
|
Total cash, cash equivalents and restricted cash
|
$
|
2,400
|
|
$
|
5,024
|
|
$
|
4,128
|
|
|
|
1.
|
Refer to Note 5 - Divestitures and Other Transactions, for additional information.
|
|
|
2.
|
Amount included in other current assets within assets of discontinued operations - current. Refer to Note 5 - 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 September 30, 2019, December 31, 2018, and September 30, 2018 is related to the Trust.
NOTE 10 - 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 5 - Divestitures and Other Transactions, for further information related to indemnifications between Corteva, Dow and DuPont.
On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”) was enacted. The Act reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, required companies to pay a one-time transition tax (“transition tax”) on earnings of foreign subsidiaries that were previously tax deferred, created new provisions related to foreign sourced earnings, eliminated the domestic manufacturing deduction and moved towards a territorial system. At December 31, 2018, the company had completed its accounting for the tax effects of The Act.
|
|
•
|
As a result of The Act, the company remeasured its U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. In the three and nine months ended September 30, 2018, the company recognized benefits of $94 million and $39 million, respectively, to benefit from income taxes on continuing operations in the company's Consolidated Statements of Operations to adjust the provisional amount related to the remeasurement of the company's deferred tax balance. Of the $94 million benefit booked in the three months ended September 30, 2018, $114 million related to the company's discretionary pension contribution in 2018, which was deducted on a 2017 tax return.
|
|
|
•
|
In the nine months ended September 30, 2018, the company recognized a charge of $16 million to benefit from income taxes on continuing operations in the company's Consolidated Statements of Operations as a result of an indirect impact of The Act related to certain inventory.
|
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During the three and nine months ended September 30, 2019, the company recognized an aggregate net tax benefit of $38 million to benefit from income taxes on continuing operations related to the enactment of Switzerland’s Federal Act on Tax Reform and AHV Financing (TRAF) (i.e., “Swiss Tax Reform”).
During the three and nine months ended September 30, 2019, the company recognized a net tax benefit of $13 million and a net tax charge of $83 million, respectively, to (benefit from) provision for income taxes on continuing operations related to application of The Act's foreign tax provisions.
During the nine months ended September 30, 2019, the company recognized a net tax charge of $146 million and a tax benefit of $102 million to provision for income taxes on continuing operations, related to U.S. state blended tax rate changes associated with the Business Separations and an internal legal entity restructuring associated with the Business Separations, respectively.
During the nine months ended September 30, 2019, the company recognized an aggregate tax benefit of $21 million to provision for income taxes on continuing operations associated with changes in accruals for certain prior year tax positions and reductions in the company's unrecognized tax benefits due to the closure of various tax statutes of limitations.
During the three months ended September 30, 2018, it was determined that a full valuation allowance against the net deferred tax asset position of a legal entity in Brazil was required. This determination was based on a change in judgment about the realizability of the deferred tax asset due to revised cash flow projections reflecting declines in the forecasted sales and profitability of the Agriculture reporting unit in Latin America. The revised cash flow projections quantify the impacts of market conditions, events and circumstances that developed throughout 2018. See Note 15 - Goodwill and Other Intangible Assets, for additional information. As a result, the company recognized tax expense of $75 million in the three and nine months ended September 30, 2018.
During 2018, the company repatriated certain funds from its foreign subsidiaries that were not needed to finance local operations or separation activities. During the three and nine months ended September 30, 2018, the company recorded tax expense of $61 million associated with these repatriation activities.
During the three and nine months ended September 30, 2018, the company recognized tax expense of $27 million associated with the reduction of a tax benefit recorded in 2017 due to taxable income limitations triggered by the company's decision to deduct the third quarter 2018 principal U.S. pension plan contribution on its 2017 consolidated U.S. tax return.
During the three and nine months ended September 30, 2018, the company recognized tax expense of $26 million related to an internal entity restructuring associated with the Business Separations.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 11 - 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 (Loss) Income for Earnings Per Share Calculations - Basic and Diluted
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
Loss from continuing operations after income taxes
|
$
|
(527
|
)
|
$
|
(5,642
|
)
|
$
|
(228
|
)
|
$
|
(5,705
|
)
|
Net (loss) income attributable to continuing operations noncontrolling interests
|
(11
|
)
|
5
|
|
10
|
|
23
|
|
Loss from continuing operations available to Corteva common stockholders
|
(516
|
)
|
(5,647
|
)
|
(238
|
)
|
(5,728
|
)
|
Income (loss) from discontinued operations, net of tax
|
22
|
|
526
|
|
(695
|
)
|
1,200
|
|
Net income attributable to discontinued operations noncontrolling interests
|
—
|
|
—
|
|
5
|
|
6
|
|
Income (loss) from discontinued operations available to Corteva common stockholders
|
22
|
|
526
|
|
(700
|
)
|
1,194
|
|
Net loss available to common stockholders
|
$
|
(494
|
)
|
$
|
(5,121
|
)
|
$
|
(938
|
)
|
$
|
(4,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings Per Share Calculations - Basic
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(Dollars per share)
|
2019
|
2018
|
2019
|
2018
|
Loss from continuing operations attributable to common stockholders
|
$
|
(0.69
|
)
|
$
|
(7.54
|
)
|
$
|
(0.32
|
)
|
$
|
(7.64
|
)
|
Income (loss) from discontinued operations, net of tax
|
0.03
|
|
0.71
|
|
(0.93
|
)
|
1.59
|
|
Net loss attributable to common stockholders
|
$
|
(0.66
|
)
|
$
|
(6.83
|
)
|
$
|
(1.25
|
)
|
$
|
(6.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings Per Share Calculations - Diluted
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(Dollars per share)
|
2019
|
2018
|
2019
|
2018
|
Loss from continuing operations attributable to common stockholders
|
$
|
(0.69
|
)
|
$
|
(7.54
|
)
|
$
|
(0.32
|
)
|
$
|
(7.64
|
)
|
Income (loss) from discontinued operations, net of tax
|
0.03
|
|
0.71
|
|
(0.93
|
)
|
1.59
|
|
Net loss attributable to common stockholders
|
$
|
(0.66
|
)
|
$
|
(6.83
|
)
|
$
|
(1.25
|
)
|
$
|
(6.05
|
)
|
|
|
|
|
|
|
|
|
|
|
Share Count Information
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(Shares in millions)
|
2019
|
2018
|
2019
|
2018
|
Weighted-average common shares - basic1
|
749.5
|
|
749.4
|
|
749.4
|
|
749.4
|
|
Plus dilutive effect of equity compensation plans2
|
—
|
|
—
|
|
—
|
|
—
|
|
Weighted-average common shares - diluted
|
749.5
|
|
749.4
|
|
749.4
|
|
749.4
|
|
Stock options and restricted stock units excluded from EPS calculations3
|
13.8
|
|
—
|
|
13.8
|
|
—
|
|
|
|
1.
|
Share amounts for the three and nine months ended September 30, 2018, 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 options to purchase 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.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12 - ACCOUNTS AND NOTES RECEIVABLE - NET
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
Accounts receivable – trade1
|
$
|
3,969
|
|
$
|
3,649
|
|
$
|
3,559
|
|
Notes receivable – trade2
|
1,403
|
|
194
|
|
1,605
|
|
Other3
|
1,202
|
|
1,417
|
|
1,383
|
|
Total accounts and notes receivable - net
|
$
|
6,574
|
|
$
|
5,260
|
|
$
|
6,547
|
|
|
|
1.
|
Accounts receivable – trade is net of allowances of $170 million at September 30, 2019, $127 million at December 31, 2018, and $105 million at September 30, 2018. Allowances are equal to the estimated uncollectible amounts. That estimate 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 September 30, 2019, December 31, 2018, and September 30, 2018 there were no significant past due notes receivable which required a reserve, 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 $127 million, $101 million, and $87 million as of September 30, 2019, December 31, 2018, and September 30, 2018, respectively.
|
Accounts and notes receivable are carried at amounts that approximate fair value.
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 $13 million and $97 million for the three and nine months ended September 30, 2019, respectively, and $42 million and $90 million for the three and nine months ended September 30, 2018, respectively. The trade receivables sold that remained outstanding under these agreements which include an element of recourse as of September 30, 2019, December 31, 2018, and September 30, 2018 were $61 million, $37 million, and $23 million, respectively. The net proceeds received were included in cash provided by operating activities in the Condensed 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 $4 million and $41 million for the three and nine months ended September 30, 2019, respectively, and $9 million and $19 million for the three and nine months ended September 30, 2018, respectively. The guarantee obligations recorded as of September 30, 2019, December 31, 2018, and September 30, 2018 in the Condensed Consolidated Balance Sheets were not material. See Note 18 - Commitments and Contingent Liabilities for additional information on the company’s guarantees.
NOTE 13 - INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
Finished products
|
$
|
2,295
|
|
$
|
3,022
|
|
$
|
2,649
|
|
Semi-finished products
|
1,691
|
|
1,821
|
|
1,902
|
|
Raw materials and supplies
|
417
|
|
467
|
|
347
|
|
Total inventories
|
$
|
4,403
|
|
$
|
5,310
|
|
$
|
4,898
|
|
As a result of the Merger, a fair value step-up of $2,297 million was recorded for inventories. This fair value step-up has been fully amortized, as of September 30, 2019. During the three and nine months ended September 30, 2019, the company recognized $15 million and $272 million of these costs in cost of goods sold within loss from continuing operations before income taxes. During the three and nine months ended September 30, 2018, the company recognized $109 million and $1,424 million of these costs in cost of goods sold within loss from continuing operations before income taxes.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 14 - PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
Land and land improvements
|
$
|
451
|
|
$
|
468
|
|
$
|
502
|
|
Buildings
|
1,411
|
|
1,430
|
|
1,424
|
|
Machinery and equipment
|
5,152
|
|
4,863
|
|
4,776
|
|
Construction in progress
|
675
|
|
579
|
|
376
|
|
Total property, plant and equipment
|
7,689
|
|
7,340
|
|
7,078
|
|
Accumulated depreciation
|
(3,186
|
)
|
(2,796
|
)
|
(2,694
|
)
|
Total property, plant and equipment - net
|
$
|
4,503
|
|
$
|
4,544
|
|
$
|
4,384
|
|
Buildings, machinery and equipment and land improvements are depreciated over useful lives on a straight-line basis ranging from 1 year to 25 years. Capitalizable costs associated with computer software for internal use are amortized on a straight-line basis over 1 year to 8 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
Depreciation expense
|
$
|
126
|
|
$
|
127
|
|
$
|
397
|
|
$
|
383
|
|
NOTE 15 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table summarizes changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Agriculture
|
Crop Protection
|
Seed
|
Total
|
Balance as of December 31, 20181
|
$
|
10,193
|
|
$
|
—
|
|
$
|
—
|
|
$
|
10,193
|
|
Currency translation adjustment
|
(28
|
)
|
—
|
|
—
|
|
(28
|
)
|
Other goodwill adjustments and acquisitions2
|
14
|
|
—
|
|
—
|
|
14
|
|
Realignment of segments
|
(10,179
|
)
|
4,726
|
|
5,453
|
|
—
|
|
Balance as of June 1, 2019
|
—
|
|
4,726
|
|
5,453
|
|
10,179
|
|
Currency translation adjustment
|
—
|
|
(5
|
)
|
(6
|
)
|
(11
|
)
|
Balance as of September 30, 2019
|
$
|
—
|
|
$
|
4,721
|
|
$
|
5,447
|
|
$
|
10,168
|
|
|
|
1.
|
Net of accumulated impairment losses of $4,503 million.
|
|
|
2.
|
Primarily consists of the acquisition of a distributor in Greece.
|
The company tests goodwill for impairment annually (during the fourth quarter), or more frequently when events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit has declined below its carrying value. As mentioned in Note 2 - Summary of Significant Accounting Policies, as a result of the Internal Reorganizations and Realignments, the company changed its reportable segments to Seed and Crop Protection to reflect the manner in which the company's chief operating decision maker assesses performance and allocates resources. The change in operating segments resulted in changes to the company's reporting units for goodwill impairment testing to align with the level at which discrete financial information is available for review by management. The company’s reporting units include Seed, Crop Protection and Digital.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In connection with the change in reportable segments and reporting units, goodwill was reassigned from the former Agriculture reporting unit to the Seed, Crop Protection and Digital reporting units using a relative fair value allocation approach. As a result, the company performed a goodwill impairment analysis for the former Agriculture reporting unit immediately prior to the realignment and the newly created reporting units immediately after the realignment. The impairment analysis was performed using a discounted cash flow model (a form of the income approach), utilizing Level 3 unobservable inputs or a market approach. The company’s significant estimates in this analysis include, but are not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate, and the tax rate. The company believes the current assumptions and estimates utilized are both reasonable and appropriate. Based on the goodwill impairment analysis performed both immediately prior to and immediately subsequent to the realignment, the company concluded the fair value of the former Agriculture reporting unit and the newly created reporting units exceeded their carrying value, and no goodwill impairment charge was necessary.
During the three months ended September 30, 2018, and in connection with strategic business reviews, the company assembled updated financial projections. The revised financial projections of the Agriculture reporting unit assessed and quantified the impacts of developing market conditions, events and circumstances that had evolved throughout 2018, resulting in a reduction in the forecasts of sales and profitability as compared to prior forecasts. The reduction in financial projections was principally driven by lower growth in sales and margins in North America and Latin America and unfavorable currency impacts related to the Brazilian Real. The lower growth expectation was driven by reduced planted area, an expected unfavorable shift to soybeans from corn in Latin America, and delays in expected product registrations. In addition, decreases in commodity prices and higher than anticipated industry grain inventories were expected to impact farmers’ income and buying choices resulting in shifts to lower technologies and pricing pressure. The company considered the combination of these factors and the resulting reduction in its forecasted projections for the Agriculture reporting unit and determined it was more likely than not that the fair value of the Agriculture reporting unit was less than the carrying value, thus requiring the performance of an updated goodwill and intangible asset impairment analysis for the Agriculture reporting unit as of September 30, 2018.
The company performed an interim impairment analysis for the Agriculture reporting unit using a discounted cash flow model (a form of the income approach), utilizing Level 3 unobservable inputs. The company’s significant estimates in this analysis included, but were not limited to, future cash flow projections, Merger-related cost and growth synergies, the weighted average cost of capital, the terminal growth rate, and the tax rate. The company believed the current assumptions and estimates utilized were both reasonable and appropriate. The key assumption driving the change in fair value was the lower financial projections discussed above. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from the company’s estimates. If the company’s ongoing estimates of future cash flows are not met, the company may have to record additional impairment charges in future periods. The company’s estimates of future cash flows are based on current regulatory and economic climates, recent operating results, and planned business strategy. These estimates could be negatively affected by changes in federal, state, or local regulations or economic downturns. Based on the analysis performed, the company determined that the carrying amount of the Agriculture reporting unit exceeded its fair value resulting in a pre-tax, non-cash goodwill impairment charge of $4,503 million, reflected in goodwill impairment charge in the company’s Consolidated Statements of Operations for the three and nine months ended September 30, 2018. None of the charge was tax-deductible.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other Intangible Assets
The gross carrying amounts and accumulated amortization of other intangible assets by major class are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
|
Gross
|
Accumulated
Amortization
|
Net
|
Gross
|
Accumulated
Amortization
|
Net
|
Gross
|
Accumulated
Amortization
|
Net
|
Intangible assets subject to amortization (Definite-lived):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
$
|
1,969
|
|
$
|
(238
|
)
|
$
|
1,731
|
|
$
|
1,985
|
|
$
|
(154
|
)
|
$
|
1,831
|
|
$
|
1,987
|
|
$
|
(125
|
)
|
$
|
1,862
|
|
Developed technology1,2
|
1,463
|
|
(332
|
)
|
1,131
|
|
974
|
|
(163
|
)
|
811
|
|
954
|
|
(120
|
)
|
834
|
|
Trademarks/trade names
|
166
|
|
(84
|
)
|
82
|
|
180
|
|
(92
|
)
|
88
|
|
171
|
|
(79
|
)
|
92
|
|
Favorable supply contracts
|
475
|
|
(183
|
)
|
292
|
|
475
|
|
(111
|
)
|
364
|
|
475
|
|
(88
|
)
|
387
|
|
Other2,3
|
401
|
|
(206
|
)
|
195
|
|
538
|
|
(300
|
)
|
238
|
|
530
|
|
(290
|
)
|
240
|
|
Total other intangible assets with finite lives
|
4,474
|
|
(1,043
|
)
|
3,431
|
|
4,152
|
|
(820
|
)
|
3,332
|
|
4,117
|
|
(702
|
)
|
3,415
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization (Indefinite-lived):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IPR&D1,2
|
100
|
|
—
|
|
100
|
|
576
|
|
—
|
|
576
|
|
576
|
|
—
|
|
576
|
|
Germplasm4
|
6,265
|
|
—
|
|
6,265
|
|
6,265
|
|
—
|
|
6,265
|
|
6,265
|
|
—
|
|
6,265
|
|
Trademarks / trade names
|
1,871
|
|
—
|
|
1,871
|
|
1,871
|
|
—
|
|
1,871
|
|
1,871
|
|
—
|
|
1,871
|
|
Other
|
—
|
|
—
|
|
—
|
|
11
|
|
—
|
|
11
|
|
11
|
|
—
|
|
11
|
|
Total other intangible assets
|
8,236
|
|
—
|
|
8,236
|
|
8,723
|
|
—
|
|
8,723
|
|
8,723
|
|
—
|
|
8,723
|
|
Total
|
$
|
12,710
|
|
$
|
(1,043
|
)
|
$
|
11,667
|
|
$
|
12,875
|
|
$
|
(820
|
)
|
$
|
12,055
|
|
$
|
12,840
|
|
$
|
(702
|
)
|
$
|
12,138
|
|
|
|
1.
|
During the first quarter of 2019, the company announced an expanded launch of its Qrome® corn hybrids following the receipt of regulatory approval from China. As a result, the company reclassified the amounts from indefinite-lived IPR&D to developed technology.
|
|
|
2.
|
Refer to discussion of interim impairment analysis completed below.
|
|
|
3.
|
Primarily consists of sales and farmer networks, marketing and manufacturing alliances and noncompetition agreements.
|
|
|
4.
|
Germplasm is the pool of genetic source material and body of knowledge gained from the development and delivery stage of plant breeding. This intangible asset is expected to contribute to cash flows beyond the foreseeable future and there are no legal, regulatory, contractual, or other factors which limit its useful life.
|
As discussed in Note 7 - Restructuring and Asset Related Charges - Net, during the three months ended September 30, 2019, and in connection with strategic product and portfolio reviews, the company determined that the fair value of certain intangible assets classified as developed technology, other intangible assets and IPR&D within the Seed segment that primarily relate to heritage DAS intangibles previously acquired from Coodetec was less than the carrying value due to the company’s focus on advancing more competitive products and eliminating redundancy and complexity across the breeding programs.
For IPR&D and developed technology, the company concluded these projects were abandoned. For other intangible assets, the company performed an analysis of the fair value using the relief from royalty method (a form of the income approach) using Level 3 inputs within the fair value hierarchy. The key assumptions used in the calculation included projected revenue, royalty rates and discount rates. These key assumptions involve management judgment and estimates relating to future operating performance and economic conditions that may differ from actual cash flows. As a result, the company recorded a pre-tax, non-cash intangible asset impairment charge of $54 million ($41 million after-tax), which is reflected in restructuring and asset related charges - net, in the company's Consolidated Statements of Operations for the three and nine months ended September 30, 2019.
There were no other indicators of impairment for the company’s other intangible assets that would suggest that the fair value is less than its carrying value at September 30, 2019.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During 2018, in reviewing the indefinite-lived intangible assets, the company also determined that the fair value of certain IPR&D assets, within the Seed segment, had declined as a result of delays in timing of commercialization and increases to expected R&D costs. The company performed an analysis of the fair value using the relief from royalty method (a form of the income approach) using Level 3 inputs within the fair value hierarchy. The key assumptions used in the calculation included projected revenue, royalty rates and discount rates. These key assumptions involve management judgment and estimates relating to future operating performance and economic conditions that may differ from actual cash flows. As a result, the company recorded a pre-tax, non-cash intangible asset impairment charge of $85 million ($66 million after tax), which was reflected in restructuring and asset related charges - net, in the company's Consolidated Statements of Operations for the three and nine months ended September 30, 2018.
The aggregate pre-tax amortization expense from continuing operations for definite-lived intangible assets was $100 million and $314 million for the three and nine months ended September 30, 2019, respectively, and $88 million and $284 million for the three and nine months ended September 30, 2018, respectively. The estimated aggregate pre-tax amortization expense from continuing operations for the remainder of 2019 and each of the next five years is approximately $115 million, $402 million, $394 million, $373 million, $292 million and $277 million, respectively.
NOTE 16 - LEASES
The company has operating and finance leases for real estate, transportation, certain machinery and equipment, and information technology assets. The company’s leases have remaining lease terms of 1 year to 49 years. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend the lease when it is reasonably certain that the company will exercise that option. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability.
Certain of the company's leases include residual value guarantees. These residual value guarantees are based on a percentage of the lessor's asset acquisition price and the amount of such guarantee declines over the course of the lease term. The portion of residual value guarantees that are probable of payment are included in the related lease liability on the accompanying interim Condensed Consolidated Balance Sheet other than certain finance leases that include the maximum residual value guarantee amount in the measurement of the related liability given the election to use the package of practical expedients at the date of adoption. At September 30, 2019, the company has future maximum payments for residual value guarantees in operating leases of $247 million with final expirations through 2024. The company's lease agreements do not contain any material restrictive covenants. The components of lease cost were as follows:
|
|
|
|
|
|
|
|
(In millions)
|
Three Months Ended September 30, 2019
|
Nine Months Ended September 30, 2019
|
Operating lease cost
|
$
|
46
|
|
$
|
131
|
|
Finance lease cost
|
|
|
|
|
Amortization of right-of-use assets
|
—
|
|
9
|
|
Total finance lease cost
|
—
|
|
9
|
|
Short-term lease cost
|
7
|
|
13
|
|
Variable lease cost
|
2
|
|
7
|
|
Total lease cost
|
$
|
55
|
|
$
|
160
|
|
New leases entered into during the three and nine months ended September 30, 2019 were not considered material. Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
(In millions)
|
Nine Months Ended September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash outflows from operating leases
|
$
|
146
|
|
Operating cash outflows from finance leases
|
$
|
1
|
|
Financing cash outflows from finance leases
|
$
|
8
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
(In millions)
|
September 30, 2019
|
Operating Leases
|
|
|
Operating lease right-of-use assets1
|
$
|
543
|
|
Current operating lease liabilities2
|
149
|
|
Noncurrent operating lease liabilities3
|
407
|
|
Total operating lease liabilities
|
$
|
556
|
|
|
|
Finance Leases
|
|
|
Property, plant, and equipment - gross
|
$
|
15
|
|
Accumulated depreciation
|
(7
|
)
|
Property, plant, and equipment - net
|
8
|
|
Short-term borrowings and finance lease obligations
|
4
|
|
Long-Term Debt
|
6
|
|
Total finance lease liabilities
|
$
|
10
|
|
|
|
1.
|
Included in other assets in the interim Condensed Consolidated Balance Sheet.
|
|
|
2.
|
Included in accrued and other current liabilities in the interim Condensed Consolidated Balance Sheet.
|
|
|
3.
|
Included in other noncurrent obligations in the interim Condensed Consolidated Balance Sheet.
|
The company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable.
|
|
|
|
Lease Term and Discount Rate
|
September 30, 2019
|
Weighted-average remaining lease term (years)
|
|
Operating leases
|
9.05
|
|
Financing leases
|
5.34
|
|
Weighted average discount rate
|
|
|
Operating leases
|
3.74
|
%
|
Financing leases
|
3.26
|
%
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities at September 30, 2019
|
Operating Leases
|
Financing Leases
|
(In millions)
|
Remainder of 2019
|
$
|
48
|
|
$
|
1
|
|
2020
|
147
|
|
3
|
|
2021
|
108
|
|
2
|
|
2022
|
81
|
|
2
|
|
2023
|
57
|
|
1
|
|
2024 and thereafter
|
189
|
|
2
|
|
Total lease payments
|
630
|
|
11
|
|
Less: Interest
|
74
|
|
1
|
|
Present value of lease liabilities
|
$
|
556
|
|
$
|
10
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Future minimum lease payments for operating leases accounted for under ASC 840, "Leases," with remaining non-cancelable terms in excess of one year at December 31, 2018 were as follows:
|
|
|
|
|
Minimum Lease Commitments at December 31, 2018
|
December 31, 20181
|
(In millions)
|
2019
|
$
|
169
|
|
2020
|
99
|
|
2021
|
72
|
|
2022
|
56
|
|
2023
|
38
|
|
2024 and thereafter
|
78
|
|
Total
|
$
|
512
|
|
1. Includes adjustments for discontinued operations and common control business combination.
NOTE 17 - 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)
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
Commercial paper
|
$
|
2,432
|
|
$
|
1,847
|
|
$
|
2,518
|
|
Repurchase facility
|
1,129
|
|
—
|
|
1,300
|
|
Other loans - various currencies
|
35
|
|
19
|
|
39
|
|
Long-term debt payable within one year
|
4
|
|
263
|
|
508
|
|
Finance lease obligations payable within one year
|
4
|
|
25
|
|
6
|
|
Total short-term borrowings and finance lease obligations
|
$
|
3,604
|
|
$
|
2,154
|
|
$
|
4,371
|
|
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
(In millions)
|
Amount
|
Weighted Average Rate
|
Amount
|
Weighted Average Rate
|
Amount
|
Weighted Average Rate
|
Promissory notes and debentures1:
|
|
|
|
|
|
|
Final maturity 2019
|
$
|
—
|
|
—
|
%
|
$
|
263
|
|
2.23
|
%
|
$
|
508
|
|
2.23
|
%
|
Final maturity 2020
|
—
|
|
—
|
%
|
2,496
|
|
2.14
|
%
|
3,046
|
|
2.03
|
%
|
Final maturity 2021
|
—
|
|
—
|
%
|
475
|
|
2.08
|
%
|
1,562
|
|
2.07
|
%
|
Final maturity 2023
|
—
|
|
—
|
%
|
386
|
|
2.48
|
%
|
1,267
|
|
2.48
|
%
|
Final maturity 2024 and thereafter
|
—
|
|
—
|
%
|
249
|
|
3.69
|
%
|
2,211
|
|
3.80
|
%
|
Other facilities:
|
|
|
|
|
|
|
Term loan due 20202
|
—
|
|
—
|
%
|
2,000
|
|
3.46
|
%
|
2,000
|
|
3.12
|
%
|
Other loans:
|
|
|
|
|
|
|
Foreign currency loans, various rates and maturities
|
4
|
|
|
|
3
|
|
|
|
13
|
|
|
|
Medium-term notes, varying maturities through 2041
|
110
|
|
1.88
|
%
|
110
|
|
2.37
|
%
|
110
|
|
2.04
|
%
|
Finance lease obligations
|
6
|
|
|
|
67
|
|
|
|
9
|
|
|
|
Less: Unamortized debt discount and issuance costs
|
—
|
|
|
|
2
|
|
|
|
3
|
|
|
|
Less: Long-term debt due within one year
|
4
|
|
|
|
263
|
|
|
|
508
|
|
|
|
Total
|
$
|
116
|
|
|
|
$
|
5,784
|
|
|
|
$
|
10,215
|
|
|
|
|
|
1.
|
See discussion of debt redemptions/repayments that follows.
|
|
|
2.
|
The Term Loan Facility was amended in 2018 to extend the maturity date to June 2020 and, subsequently, the facility was repaid and terminated in May 2019.
|
There are no material principal payments of long-term debt over the next five years.
The estimated fair value of the company's long-term borrowings 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 long-term borrowings, not including long-term debt due within one year, was $115 million, $5,775 million, and $9,883 million at September 30, 2019, December 31, 2018, and September 30, 2018, respectively.
Available Committed Credit Facilities
The following table summarizes the company's credit facilities:
|
|
|
|
|
|
|
|
|
|
|
Committed and Available Credit Facilities at September 30, 2019
|
(In millions)
|
Effective Date
|
Committed Credit
|
Credit Available
|
Maturity Date
|
Interest
|
Revolving Credit Facility
|
May 2019
|
$
|
3,000
|
|
$
|
3,000
|
|
May 2024
|
Floating Rate
|
Revolving Credit Facility
|
May 2019
|
3,000
|
|
2,971
|
|
May 2022
|
Floating Rate
|
2019 Repurchase Facility
|
February 2019
|
1,300
|
|
171
|
|
December 2019
|
Floating Rate
|
Total Committed and Available Credit Facilities
|
|
$
|
7,300
|
|
$
|
6,142
|
|
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 “2018 Revolving Credit Facilities”). The 2018 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 at the time of the Corteva Distribution. The 2018 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 2018 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.
Repurchase Facility
In February 2019, EID entered into a new committed receivable repurchase facility of up to $1.3 billion (the "2019 Repurchase Facility") which expires in December 2019. From time to time, EID and the banks modify the monthly commitment amounts to better align with working capital requirements. Under the 2019 Repurchase Facility, EID 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 2019 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 2019 Repurchase Facility have an interest rate of LIBOR + 0.75 percent.
As of September 30, 2019, $1,186 million of notes receivable, recorded in accounts and notes receivable - net, were pledged as collateral against outstanding borrowings under the 2019 Repurchase Facility of $1,129 million, recorded in short-term borrowings and finance lease obligations on the interim Condensed Consolidated Balance Sheet.
Debt Redemptions/Repayments
In July 2018, the company fully repaid $1.25 billion of 6.0 percent coupon bonds at maturity.
In the fourth quarter of 2018, the company offered to purchase for cash approximately $6.2 billion of outstanding debt securities from each registered holder of the applicable series of debt securities (the “Tender Offers”). The company retired $4.4 billion aggregate principal amount of such debt securities in connection with the Tender Offers, which expired on December 11, 2018. The retirement of these debt securities was funded with cash contributions from DowDuPont.
On March 22, 2019, EID issued notices of redemption in full of all of its outstanding notes (the “Make Whole Notes”) listed in the table below:
|
|
|
|
|
(in millions)
|
Amount
|
4.625% Notes due 2020
|
$
|
474
|
|
3.625% Notes due 2021
|
296
|
|
4.250% Notes due 2021
|
163
|
|
2.800% Notes due 2023
|
381
|
|
6.500% Debentures due 2028
|
57
|
|
5.600% Senior Notes due 2036
|
42
|
|
4.900% Notes due 2041
|
48
|
|
4.150% Notes due 2043
|
69
|
|
Total
|
$
|
1,530
|
|
The Make Whole Notes were redeemed on April 22, 2019 at the make-whole redemption prices set forth in the respective Make Whole Notes. On and after the date of redemption, the Make Whole Notes were no longer deemed outstanding, interest on the Make Whole Notes ceased to accrue and all rights of the holders of the Make Whole Notes were terminated.
In March 2016, EID entered into a credit agreement that provided for a 3-year, senior unsecured term loan facility in the aggregate principal amount of $4.5 billion (as amended, from time to time, the "Term Loan Facility") under which EID could make up to seven term loan borrowings and amounts repaid or prepaid were not available for subsequent borrowings. On May 2, 2019, EID terminated its Term Loan Facility and repaid the aggregate outstanding principal amount of $3 billion plus accrued and unpaid interest through and including May 1, 2019.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In connection with the repayment of the Make Whole Notes and the Term Loan Facility, EID paid a total of $4.6 billion in the second quarter 2019, which included breakage fees and accrued and unpaid interest on the Make Whole Notes and Term Loan Facility. The repayment of the Make Whole Notes and Term Loan Facility was funded with cash from operations and a contribution from DowDuPont.
On May 7, 2019, DowDuPont publicly announced the record date in connection with the Corteva Distribution. In connection with such announcement, EID was required to redeem $1.25 billion aggregate principal amount of 2.200% Notes due 2020 and $750 million aggregate principal amount of Floating Rate Notes due 2020 (collectively, the Special Mandatory Redemption, or “SMR Notes”) setting forth the date of redemption of the SMR Notes. On May 17, 2019 EID redeemed and paid a total of $2.0 billion, which included accrued and unpaid interest on the SMR Notes. EID funded the payment with a contribution from DowDuPont. Following the redemption, the SMR Notes are no longer outstanding and no longer bear interest, and all rights of the holders of the SMR Notes have terminated.
For the nine months ended September 30, 2019, EID recorded a loss on the early extinguishment of debt of $13 million related to the difference between the redemption price and the par value of the Make Whole Notes, the Term Loan Facility, and the SMR Notes, partially offset by the write-off of unamortized step-up related to the fair value step-up of EID’s debt.
Uncommitted Credit Facilities and Outstanding Letters of Credit
Unused bank credit lines on uncommitted credit facilities were $401 million at September 30, 2019. These lines are available to support short-term liquidity needs and general corporate purposes, including letters of credit. Outstanding letters of credit were $100 million at September 30, 2019. These letters of credit support commitments made in the ordinary course of business.
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES
Guarantees
Indemnifications
In connection with acquisitions and divestitures as of September 30, 2019, 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 40 and 17 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 September 30, 2019, December 31, 2018 and September 30, 2018, the company had directly guaranteed $80 million, $299 million, and $187 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 September 30, 2019, $79 million had terms less than a year. The maximum future payments also include $11 million, $3 million, and $5 million of guarantees related to the various factoring agreements that the company enters into with its customer to sell its trade receivables at September 30, 2019, December 31, 2018 and September 30, 2018, respectively. See Note 12 - 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 $596 million, $14 million and $282 million at September 30, 2019, December 31, 2018 and September 30, 2018, 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 5 - 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.
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 September 30, 2019.
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 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 October 18, 2019, Chemours filed its brief objecting to the motion to dismiss on the grounds that the arbitration provisions of the Chemours Separation Agreement were unconscionable, and therefore are unenforceable. The company believes the probability of liability with respect to Chemours' suit to be remote, and the defendants continue to vigorously defend the company's rights, including full indemnity rights as set forth in the Chemours Separation Agreement. For additional information regarding environmental indemnification, see discussion below on page 44.
At September 30, 2019, the indemnification assets pursuant to the Chemours Separation Agreement are $67 million within accounts and notes receivable - net and $290 million within other assets along with the corresponding liabilities of $67 million within accrued and other current liabilities and $290 million within other noncurrent obligations in the interim Condensed Consolidated Balance Sheet.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 1 - Background and Basis of Presentation, and Note 5 - 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
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 the company could incur liabilities related to PFOA, 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 $22 million and an indemnification asset of $22 million at September 30, 2019, primarily 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 September 30, 2019, 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 September 30, 2019, approximately 60 lawsuits were pending alleging personal injury, mostly kidney or testicular cancer, from exposure to PFOA through air or water, only 3 of which are not part of the MDL or were not filed on behalf of Leach class members. The first trial is scheduled to begin January 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 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. Corteva believes that Chemours is obligated to indemnify Corteva, Inc. under the Chemours Separation Agreement.
New York. EID is a defendant in 51 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.
New Jersey. At September 30, 2019, 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 has since been 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 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 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.
Other. Approximately 150 cases have been filed against 3M and other defendants 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. At September 30, 2019, EID was named in 32 of these cases. 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.
In addition, the company is aware of an inquiry by the Subcommittee on Environment of the House of Representatives to DuPont, Chemours and 3M regarding exposure to PFAS and has requested certain information related to PFAS.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
In August 2017, the U.S. Attorney’s Office for the Eastern District of North Carolina served EID with a grand jury subpoena for testimony and documents related to these discharges. EID was served with additional subpoenas relating to the same issue 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, including the grand jury subpoena, could result in penalties or sanctions, or that additional litigation will be instituted against Chemours, EID, or both.
At September 30, 2019, three 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 200 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.
While it is reasonably possible that the company could incur liabilities related to the actions described above, any such liabilities are not expected to be material.
The company has an indemnification claim against Chemours with respect to current and future inquiries and claims, including lawsuits, related to the foregoing. At September 30, 2019, 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 September 30, 2019, the company had accrued obligations of $349 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 Sheets. 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 $720 million above the amount accrued at September 30, 2019. 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 41.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The above noted $349 million accrued obligations includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
(In millions)
|
Indemnification Asset
|
Accrual balance3
|
Potential exposure above amount accrued3
|
Environmental Remediation Stray Liabilities
|
|
|
|
Chemours related obligations - subject to indemnity1,2
|
$
|
170
|
|
$
|
170
|
|
$
|
383
|
|
Other discontinued or divested businesses obligations1
|
—
|
|
102
|
|
224
|
|
|
|
|
|
Environmental remediation liabilities primarily related to DuPont - subject to indemnity from DuPont
|
34
|
|
34
|
|
61
|
|
|
|
|
|
Environmental remediation liabilities not subject to indemnity
|
—
|
|
43
|
|
52
|
|
Total
|
$
|
204
|
|
$
|
349
|
|
$
|
720
|
|
|
|
1.
|
Represents liabilities that are subject the $200 million thresholds and sharing arrangements as discussed on page 41, 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.
|
NOTE 19 - STOCKHOLDERS' EQUITY
Common Stock
As discussed in Note 1 - Background and Basis of Presentation, 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 June 1, 2019
|
748,815,000
|
|
Issued
|
399,000
|
|
Repurchased and retired
|
(824,000
|
)
|
Balance September 30, 2019
|
748,390,000
|
|
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 September 30, 2019, the company purchased and retired 824,000 shares in the open market for a total cost of $25 million.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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. 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 September 30, 2019, December 31, 2018, and September 30, 2018, which is classified as noncontrolling interests in the 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
|
Other Comprehensive (Loss) Income
The changes and after-tax balances of components comprising accumulated other comprehensive (loss) income are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Cumulative Translation Adjustment1
|
Derivative Instruments
|
Pension Benefit Plans
|
Other Benefit Plans
|
Total
|
2018
|
|
|
|
|
|
Balance January 1, 2018
|
$
|
(1,217
|
)
|
$
|
(2
|
)
|
$
|
95
|
|
$
|
(53
|
)
|
$
|
(1,177
|
)
|
Other comprehensive (loss) income before reclassifications
|
(1,099
|
)
|
(3
|
)
|
15
|
|
—
|
|
(1,087
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
(5
|
)
|
(2
|
)
|
—
|
|
(7
|
)
|
Net other comprehensive (loss) income
|
(1,099
|
)
|
(8
|
)
|
13
|
|
—
|
|
(1,094
|
)
|
Balance September 30, 2018
|
$
|
(2,316
|
)
|
$
|
(10
|
)
|
$
|
108
|
|
$
|
(53
|
)
|
$
|
(2,271
|
)
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2019
|
$
|
(2,793
|
)
|
$
|
(26
|
)
|
$
|
(620
|
)
|
$
|
79
|
|
$
|
(3,360
|
)
|
Other comprehensive (loss) income before reclassifications
|
(471
|
)
|
11
|
|
9
|
|
(85
|
)
|
(536
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
|
12
|
|
4
|
|
(1
|
)
|
15
|
|
Net other comprehensive (loss) income
|
(471
|
)
|
23
|
|
13
|
|
(86
|
)
|
(521
|
)
|
Impact of Internal Reorganizations
|
1,123
|
|
—
|
|
91
|
|
—
|
|
1,214
|
|
Balance September 30, 2019
|
$
|
(2,141
|
)
|
$
|
(3
|
)
|
$
|
(516
|
)
|
$
|
(7
|
)
|
$
|
(2,667
|
)
|
|
|
1.
|
The cumulative translation adjustment loss for the nine months ended September 30, 2018 was primarily driven by the strengthening of the U.S. Dollar ("USD") against the Euro ("EUR") and the Brazilian real ("BRL"). The cumulative translation adjustment loss for the nine months ended September 30, 2019 was primarily driven by strengthening of the USD against the BRL, EUR, and the South African Rand (“ZAR”).
|
The tax (expense) benefit on the net activity related to each component of other comprehensive (loss) income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2019
|
2018
|
2019
|
2018
|
Derivative instruments
|
$
|
1
|
|
$
|
1
|
|
$
|
(6
|
)
|
$
|
2
|
|
Pension benefit plans - net
|
—
|
|
(2
|
)
|
4
|
|
(4
|
)
|
Other benefit plans - net
|
—
|
|
—
|
|
29
|
|
—
|
|
Provision for (benefit from) income taxes related to other comprehensive income (loss) items
|
$
|
1
|
|
$
|
(1
|
)
|
$
|
27
|
|
$
|
(2
|
)
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A summary of the reclassifications out of accumulated other comprehensive (loss) income is provided as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
Income Classification
|
|
2019
|
2018
|
2019
|
2018
|
Derivative Instruments:
|
$
|
1
|
|
$
|
1
|
|
$
|
13
|
|
$
|
(6
|
)
|
(1)
|
Tax (benefit) expense
|
—
|
|
(1
|
)
|
(1
|
)
|
1
|
|
(2)
|
After-tax
|
$
|
1
|
|
$
|
—
|
|
$
|
12
|
|
$
|
(5
|
)
|
|
Amortization of pension benefit plans:
|
|
|
|
|
|
Actuarial losses
|
$
|
1
|
|
2
|
|
$
|
2
|
|
1
|
|
(3)
|
Settlement loss (gain)
|
1
|
|
(1
|
)
|
2
|
|
(2
|
)
|
(3)
|
Total before tax
|
2
|
|
1
|
|
4
|
|
(1
|
)
|
|
Tax benefit
|
—
|
|
(1
|
)
|
—
|
|
(1
|
)
|
(2)
|
After-tax
|
$
|
2
|
|
$
|
—
|
|
$
|
4
|
|
$
|
(2
|
)
|
|
Amortization of other benefit plans:
|
|
|
|
|
|
Actuarial gain
|
—
|
|
—
|
|
(1
|
)
|
—
|
|
(3)
|
Total before tax
|
—
|
|
—
|
|
(1
|
)
|
—
|
|
|
Tax benefit
|
—
|
|
—
|
|
—
|
|
—
|
|
(2)
|
After-tax
|
$
|
—
|
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
—
|
|
|
Total reclassifications for the period, after-tax
|
$
|
3
|
|
$
|
—
|
|
$
|
15
|
|
$
|
(7
|
)
|
|
|
|
2.
|
(Benefit from) provision for 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 20 - Pension Plans and Other Post Employment Benefits, for additional information.
|
NOTE 20 - PENSION PLANS AND OTHER POST EMPLOYMENT BENEFITS
In connection with the Corteva Distribution, the company retained the benefit obligations relating to EID's principal U.S. pension plan, several other U.S. and non-U.S. pension plans and other post employment benefit plans ("OPEB"). Corteva entered into an employee matters agreement with DuPont which provides that employees of DuPont no longer participate in the benefits sponsored or maintained by the company as of the date of the Corteva Distribution and transferred certain of EID's pension and OPEB obligations and associated assets to DuPont. As a result of the transfer, about $5.8 billion of unfunded obligations of the pension and OPEB plans remained with Corteva, of which $319 million is supported by funding under the Trust agreement, as of June 1, 2019.
As a result of the Corteva Distribution, the company re-measured its OPEB plans as of June 1, 2019. In connection with the re-measurement, the company updated the discount rate assumed at December 31, 2018 from 4.23% to 3.64%. The re-measurement resulted in an increase of $114 million to the company’s OPEB benefit obligations with a corresponding loss effect within other comprehensive loss for the nine months ended September 30, 2019.
The company made a discretionary contribution of $1,100 million in the third quarter of 2018 to its principal U.S. pension plan.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
Defined Benefit Pension Plans:
|
|
|
|
|
Service cost
|
$
|
5
|
|
$
|
31
|
|
$
|
37
|
|
$
|
103
|
|
Interest cost
|
185
|
|
186
|
|
592
|
|
567
|
|
Expected return on plan assets
|
(253
|
)
|
(300
|
)
|
(839
|
)
|
(907
|
)
|
Amortization of unrecognized (gain) loss
|
—
|
|
(1
|
)
|
2
|
|
(5
|
)
|
Curtailment/settlement loss (gain)
|
1
|
|
2
|
|
—
|
|
(2
|
)
|
Net periodic benefit credit - Total
|
$
|
(62
|
)
|
$
|
(82
|
)
|
$
|
(208
|
)
|
$
|
(244
|
)
|
Less: Discontinued operations1
|
—
|
|
(13
|
)
|
(17
|
)
|
(38
|
)
|
Net periodic benefit credit - Continuing operations
|
$
|
(62
|
)
|
$
|
(69
|
)
|
$
|
(191
|
)
|
$
|
(206
|
)
|
Other Post Employment Benefits:
|
|
|
|
|
Service cost
|
$
|
—
|
|
$
|
3
|
|
$
|
3
|
|
$
|
7
|
|
Interest cost
|
20
|
|
20
|
|
65
|
|
63
|
|
Amortization of unrecognized gain
|
—
|
|
—
|
|
(1
|
)
|
—
|
|
Net periodic benefit cost - Continuing operations
|
$
|
20
|
|
$
|
23
|
|
$
|
67
|
|
$
|
70
|
|
|
|
1.
|
Includes non-service related components of net periodic benefit credit of $(37) million for the nine months ended September 30, 2019, $(26) million for the three months ended September 30, 2018, and $(80) million for the nine months ended September 30, 2018, respectively (none for the three months ended September 30, 2019).
|
NOTE 21 - STOCK-BASED COMPENSATION
Prior to the Corteva Distribution, Corteva employees held equity awards, including stock options, share appreciation rights (“SARs”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”), which were denominated in DowDuPont common stock and, in some cases, in Dow Inc. common stock, and which had originally been issued under the DuPont Equity and Incentive Plan ("EIP"), the Dow Chemical Company 2012 Stock Incentive Plan or the Dow Chemical Company 1988 Award and Option Plan. In connection with the Separation on June 1, 2019, outstanding DowDuPont-denominated stock options, SARs, RSU and PSU awards were converted into Corteva-denominated awards under the “Employer Method,” or into both DuPont-denominated awards and Corteva-denominated awards under the “Shareholder Method,” using a formula designed to preserve the intrinsic value of the awards immediately prior to and subsequent to the Corteva Distribution. The awards have the same terms and conditions under the applicable plans and award agreements prior to the Separation transactions. The conversions of equity awards did not have a material impact to the company’s interim consolidated financial statements.
As discussed in Note 5 - Divestitures and Other Transactions, on April 1, 2019 the company entered into an employee matters agreement (the "EMA") with DuPont and Dow that identifies employees and employee-related liabilities (and attributable assets) to be allocated (either retained, transferred and accepted, or assigned and assumed, as applicable) to the Parties as part of the Distributions and describes when and how the relevant transfers and assignments will occur. With some exceptions, the EMA provides for the equitable adjustment of existing equity incentive compensation awards denominated in the common stock of DowDuPont to reflect the occurrence of the Distributions.
On June 1, 2019 (the “Adoption Date”), in connection with the Separation, the Omnibus Incentive Plan (the "OIP") became effective. Under the OIP, the company may grant incentive awards, including stock options (both “incentive stock options” and nonqualified stock options), share appreciation rights, restricted shares, restricted stock units, other share-based awards and cash awards, to its and its subsidiaries’ eligible employees, non-employee directors, independent contractors and consultants following the Separation until the tenth anniversary of the Adoption Date, subject to an aggregate limit and annual individual limits. Under the OIP, the maximum number of shares reserved for the grant or settlement of awards is 20,000,000 shares, excluding shares underlying certain exempt awards, such as the awards converted to Corteva-denominated awards pursuant to the Separation. The company generally satisfies stock option exercises and the vesting of RSUs and PSUs with newly issued shares of Corteva common stock, although RSU awards granted under Historical Dow plans in certain countries are settled in cash.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The total stock-based compensation cost included in loss from continuing operations before income taxes within the Consolidated Statements of Operations was $19 million and $67 million for the three and nine months ended September 30, 2019, respectively, and $16 million and $53 million for the three and nine months ended September 30, 2018, respectively. The income tax benefits related to stock-based compensation arrangements were $4 million and $14 million for the three and nine months ended September 30, 2019, respectively, and $3 million and $10 million for the three and nine months ended September 30, 2018, respectively.
Stock Options
The exercise price of shares subject to option is equal to the market price of Corteva's stock on the date of grant. All options vest serially over a period of 3 years. Stock option awards granted under the previous plan (EIP) between 2013 and 2015 expire 7 years after the grant date and options granted between 2016 and 2018 expire 10 years after the grant date. Stock option awards granted under the Historical Dow plans after 2010 expire 10 years after the grant date.
The following table summarizes stock option activity for the period June 1 through September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
For the period June 1 - September 30, 2019
|
|
Number of Shares
(in thousands)
|
Weighted Average Exercise Price (per share)
|
Weighted Average Remaining Contractual Term (in years)
|
Aggregate Intrinsic Value
(in thousands)
|
Outstanding at June 1, 2019
|
10,468
|
|
$
|
32.11
|
|
|
|
Exercised
|
(178
|
)
|
21.23
|
|
|
|
Forfeited/Expired
|
(36
|
)
|
38.26
|
|
|
|
Outstanding at September 30, 2019
|
10,254
|
|
$
|
32.28
|
|
4.90
|
$
|
15,855
|
|
Exercisable at September 30, 2019
|
8,215
|
|
$
|
30.32
|
|
4.12
|
$
|
14,868
|
|
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options at period end.
As of September 30, 2019, $5 million of total unrecognized pre-tax compensation expense related to nonvested stock options is expected to be recognized over a weighted-average period of about 1 year.
Restricted Stock Units and Performance Share Units
RSUs granted under the EIP serially vest over 3 years. RSUs granted under the Historical Dow plans vest after a designated period of time, generally 1 year to 3 years. Upon vesting, these RSUs convert one-for-one to Corteva Common Stock. A retirement-eligible employee retains any granted awards upon retirement provided the employee has rendered at least 6 months of service following the grant date. Additional RSUs are also granted periodically to key senior management employees. These RSUs generally vest over periods ranging from 3 years to 5 years. The fair value of all stock-settled RSUs is based upon the market price of the underlying common stock as of the grant date.
The company grants PSUs to senior leadership. There were $2.2 million PSUs granted for the nine months ended September 30, 2019. These PSUs vest over a period of 2.5 years, subject to the achievement of the award’s performance conditions.
Nonvested awards of RSUs and PSUs are shown below.
|
|
|
|
|
|
|
|
For the period June 1 - September 30, 2019
|
|
Number of Shares
(in thousands)
|
Weighted Average Grant Date Fair Value
(per share)
|
Nonvested at June 1, 2019
|
3,757
|
|
$
|
35.56
|
|
Granted
|
2,228
|
|
28.88
|
|
Vested
|
(374
|
)
|
39.22
|
|
Forfeited
|
(35
|
)
|
36.10
|
|
Nonvested at September 30, 2019
|
5,576
|
|
$
|
32.66
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The weighted-average grant-date fair value of stock units granted for the period June 1 through September 30, 2019 was $28.88. As of September 30, 2019, $70 million of total unrecognized pre-tax compensation expense related to RSUs and PSUs is expected to be recognized over a weighted average period of 1.57 years.
NOTE 22 - FINANCIAL INSTRUMENTS
At September 30, 2019, the company had $1,568 million ($1,221 million and $759 million at December 31, 2018 and September 30, 2018, 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 $117 million ($5 million and $142 million at December 31, 2018 and September 30, 2018, 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 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)
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
Derivatives designated as hedging instruments:
|
|
|
|
Commodity contracts
|
$
|
73
|
|
$
|
525
|
|
$
|
125
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Foreign currency contracts
|
$
|
1,313
|
|
$
|
2,057
|
|
$
|
3,159
|
|
Commodity contracts
|
$
|
—
|
|
$
|
9
|
|
$
|
12
|
|
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. 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 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 cash flow hedges on accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
Beginning balance
|
$
|
(3
|
)
|
$
|
(7
|
)
|
$
|
(26
|
)
|
$
|
(2
|
)
|
Additions and revaluations of derivatives designated as cash flow hedges
|
(1
|
)
|
(3
|
)
|
11
|
|
(3
|
)
|
Clearance of hedge results to earnings
|
1
|
|
—
|
|
12
|
|
(5
|
)
|
Ending balance
|
$
|
(3
|
)
|
$
|
(10
|
)
|
$
|
(3
|
)
|
$
|
(10
|
)
|
At September 30, 2019, an after-tax net loss of $4 million is expected to be reclassified from accumulated other comprehensive loss into earnings over the next twelve months.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
$
|
74
|
|
$
|
(6
|
)
|
$
|
68
|
|
Total asset derivatives
|
|
$
|
74
|
|
$
|
(6
|
)
|
$
|
68
|
|
|
|
|
|
|
Liability derivatives:
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign currency contracts
|
Accrued and other current liabilities
|
$
|
20
|
|
$
|
7
|
|
$
|
27
|
|
Total liability derivatives
|
|
$
|
20
|
|
$
|
7
|
|
$
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(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
|
$
|
72
|
|
$
|
(35
|
)
|
$
|
37
|
|
Total asset derivatives
|
|
$
|
72
|
|
$
|
(35
|
)
|
$
|
37
|
|
|
|
|
|
|
Liability derivatives:
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign currency contracts
|
Accrued and other current liabilities
|
$
|
21
|
|
$
|
(15
|
)
|
$
|
6
|
|
Total liability derivatives
|
|
$
|
21
|
|
$
|
(15
|
)
|
$
|
6
|
|
|
|
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.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
(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
|
$
|
55
|
|
$
|
(39
|
)
|
$
|
16
|
|
Total asset derivatives
|
|
$
|
55
|
|
$
|
(39
|
)
|
$
|
16
|
|
|
|
|
|
|
Liability derivatives:
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign currency contracts
|
Accrued and other current liabilities
|
$
|
54
|
|
$
|
(18
|
)
|
$
|
36
|
|
Total liability derivatives
|
|
$
|
54
|
|
$
|
(18
|
)
|
$
|
36
|
|
|
|
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
September 30,
|
Nine Months Ended
September 30,
|
(In millions)
|
2019
|
2018
|
2019
|
2018
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
Commodity contracts
|
$
|
(2
|
)
|
$
|
(5
|
)
|
$
|
16
|
|
$
|
(4
|
)
|
Total derivatives designated as hedging instruments
|
(2
|
)
|
(5
|
)
|
16
|
|
(4
|
)
|
Total derivatives
|
$
|
(2
|
)
|
$
|
(5
|
)
|
$
|
16
|
|
$
|
(4
|
)
|
|
|
1.
|
OCI is defined as other comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Income - Pre-Tax1
|
(In millions)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2019
|
2018
|
2019
|
2018
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
Commodity contracts2
|
$
|
(1
|
)
|
$
|
(1
|
)
|
$
|
(13
|
)
|
$
|
6
|
|
Total derivatives designated as hedging instruments
|
(1
|
)
|
(1
|
)
|
(13
|
)
|
6
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
Foreign currency contracts3
|
55
|
|
31
|
|
(11
|
)
|
27
|
|
Commodity contracts2
|
1
|
|
—
|
|
9
|
|
5
|
|
Total derivatives not designated as hedging instruments
|
56
|
|
31
|
|
(2
|
)
|
32
|
|
Total derivatives
|
$
|
55
|
|
$
|
30
|
|
$
|
(15
|
)
|
$
|
38
|
|
|
|
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 9 - Supplementary Information, for additional information.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 23 - FAIR VALUE MEASUREMENTS
The following tables summarize the basis used to measure certain assets and liabilities at fair value on a recurring basis:
|
|
|
|
|
September 30, 2019
|
Significant Other Observable Inputs (Level 2)
|
(In millions)
|
Assets at fair value:
|
|
Cash equivalents and restricted cash equivalents1
|
$
|
1,568
|
|
Marketable securities
|
117
|
|
Derivatives relating to:2
|
|
Foreign currency
|
74
|
|
Total assets at fair value
|
$
|
1,759
|
|
Liabilities at fair value:
|
|
Long-term debt including debt due within one year3
|
$
|
123
|
|
Derivatives relating to:2
|
|
Foreign currency
|
20
|
|
Total liabilities at fair value
|
$
|
143
|
|
|
|
|
|
|
December 31, 2018
|
Significant Other Observable Inputs (Level 2)
|
(In millions)
|
Assets at fair value:
|
|
Cash equivalents and restricted cash equivalents1
|
$
|
1,221
|
|
Marketable securities
|
5
|
|
Derivatives relating to:2
|
|
Foreign currency
|
72
|
|
Total assets at fair value
|
$
|
1,298
|
|
Liabilities at fair value:
|
|
Long-term debt including debt due within one year3
|
$
|
6,100
|
|
Derivatives relating to:2
|
|
|
Foreign currency
|
21
|
|
Total liabilities at fair value
|
$
|
6,121
|
|
|
|
|
|
|
September 30, 2018
|
Significant Other Observable Inputs (Level 2)
|
(In millions)
|
Assets at fair value:
|
|
Cash equivalents and restricted cash equivalents1
|
$
|
759
|
|
Marketable securities
|
142
|
|
Derivatives relating to:2
|
|
Foreign currency
|
55
|
|
Total assets at fair value
|
$
|
956
|
|
Liabilities at fair value:
|
|
Long-term debt including debt due within one year3
|
$
|
10,397
|
|
Derivatives relating to:2
|
|
Foreign currency
|
54
|
|
Total liabilities at fair value
|
$
|
10,451
|
|
|
|
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 22 - Financial Instruments for the classification of derivatives in the interim Condensed Consolidated Balance Sheets.
3. See Note 17 - Short-Term Borrowings, Long-Term Debt and Available Credit Facilities, for information on fair value measurements of long-term debt.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Fair Value Measurements on a Nonrecurring Basis
The following table summarizes the bases used to measure certain assets at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
Basis of Fair Value Measurements on a Nonrecurring Basis at September 30
|
Significant Other Unobservable Inputs
(Level 3)
|
Total Losses
|
(In millions)
|
2019
|
|
|
Assets at fair value:
|
|
|
Developed technology
|
$
|
—
|
|
$
|
(1
|
)
|
Other intangible assets
|
$
|
—
|
|
$
|
(6
|
)
|
IPR&D
|
$
|
—
|
|
$
|
(47
|
)
|
|
|
|
2018
|
|
|
Assets at fair value:
|
|
|
Investment in nonconsolidated affiliates
|
$
|
51
|
|
$
|
(41
|
)
|
Other intangible assets
|
$
|
450
|
|
$
|
(85
|
)
|
With the exception of the developed technology, other intangible assets, and IPR&D non-cash impairment charges, there were no other non-recurring fair value adjustments recorded during the three and nine months ended September 30, 2019. With the exception of the goodwill, indefinite-lived intangible asset, and investment in nonconsolidated affiliates non-cash impairment charges, there were no other non-recurring fair value adjustments recorded during the three and nine months ended September 30, 2018. See Note 7 - Restructuring and Asset Related Charges - Net, and Note 15 - Goodwill and Other Intangible Assets, for further discussion of these fair value measurements.
NOTE 24 - SEGMENT INFORMATION
In connection with the Internal Reorganizations and the Corteva Distribution, the company realigned its reporting structure and changed the manner in which the chief operating decision maker (“CODM”) allocates resources and assesses performance. As a result, new operating segments were created, Seed and Crop Protection. The segment reporting changes were retrospectively applied to all periods presented.
Segment operating EBITDA is the primary measure of segment profitability used by Corteva’s CODM. For purposes of the three and nine months ended September 30, 2018 and the nine months ended September 30, 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. 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 costs-net and foreign exchange gains (losses), excluding the impact of significant items. Non-operating 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.
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 17 - 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Corporate Profile
The company conducts its global operations through the following reportable segments:
Seed
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 is a leader in many of the company’s key seed markets, including North America corn and soybeans, Europe corn and sunflower, as well as Brazil, India, South Africa and Argentina corn. 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.
Crop Protection
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.
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended September 30,
(In millions)
|
Seed
|
Crop Protection
|
Total
|
2019
|
|
|
|
|
|
|
Net sales
|
$
|
681
|
|
$
|
1,230
|
|
$
|
1,911
|
|
Segment operating EBITDA
|
$
|
(295
|
)
|
$
|
119
|
|
$
|
(176
|
)
|
Segment assets1,2
|
$
|
26,021
|
|
$
|
13,331
|
|
$
|
39,352
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
Net sales
|
$
|
551
|
|
$
|
1,396
|
|
$
|
1,947
|
|
Pro forma segment operating EBITDA
|
$
|
(372
|
)
|
$
|
159
|
|
$
|
(213
|
)
|
Segment assets1
|
$
|
30,300
|
|
$
|
9,088
|
|
$
|
39,388
|
|
|
|
1.
|
Segment assets at December 31, 2018 were $29,286 million and $9,346 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.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
(In millions)
|
Seed
|
Crop Protection
|
Total
|
2019
|
|
|
|
|
|
|
Net sales
|
$
|
6,347
|
|
$
|
4,516
|
|
$
|
10,863
|
|
Pro forma segment operating EBITDA
|
$
|
1,066
|
|
$
|
789
|
|
$
|
1,855
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
Net sales
|
$
|
6,716
|
|
$
|
4,756
|
|
$
|
11,472
|
|
Pro forma segment operating EBITDA
|
$
|
1,226
|
|
$
|
905
|
|
$
|
2,131
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Reconciliation to interim Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations after income taxes to segment operating EBITDA
(In millions)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
2019
|
2018 1
|
2019 1
|
2018 1
|
Loss from continuing operations after income taxes
|
$
|
(527
|
)
|
$
|
(5,642
|
)
|
$
|
(228
|
)
|
$
|
(5,705
|
)
|
(Benefit from) provision for income taxes on continuing operations
|
(104
|
)
|
(8
|
)
|
99
|
|
(187
|
)
|
Loss from continuing operations before income taxes
|
(631
|
)
|
(5,650
|
)
|
(129
|
)
|
(5,892
|
)
|
Depreciation and amortization
|
226
|
|
215
|
|
711
|
|
667
|
|
Interest income
|
(13
|
)
|
(12
|
)
|
(46
|
)
|
(63
|
)
|
Interest expense
|
19
|
|
82
|
|
112
|
|
251
|
|
Exchange (gains) losses - net 2
|
(22
|
)
|
74
|
|
37
|
|
140
|
|
Non-operating benefits - net
|
(32
|
)
|
(49
|
)
|
(106
|
)
|
(155
|
)
|
Goodwill impairment charge
|
—
|
|
4,503
|
|
—
|
|
4,503
|
|
Significant items
|
246
|
|
369
|
|
886
|
|
876
|
|
Pro forma adjustments3
|
—
|
|
217
|
|
298
|
|
1,695
|
|
Corporate expenses
|
31
|
|
38
|
|
92
|
|
109
|
|
Segment operating EBITDA
|
$
|
(176
|
)
|
$
|
(213
|
)
|
$
|
1,855
|
|
$
|
2,131
|
|
|
|
1.
|
Periods prior to March 31, 2019 are on a pro forma basis, prepared in accordance with Article 11 of Regulation S-X.
|
|
|
2.
|
Excludes a $(33) million foreign exchange loss for the three and nine months ended September 30, 2019 associated with the devaluation of the Argentine peso and a $(50) million foreign exchange loss for the nine months ended September 30, 2018 related to adjustments to foreign currency exchange contracts as a result of U.S. tax reform, as they are included within significant items. See Note 9 - Supplementary Information for additional information.
|
|
|
3.
|
Refer to page 69 for further details of pro forma adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets to total assets (in millions)
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
Total segment assets
|
$
|
39,352
|
|
$
|
38,632
|
|
$
|
39,388
|
|
Corporate assets
|
3,883
|
|
4,417
|
|
4,020
|
|
Assets related to discontinued operations1
|
—
|
|
65,634
|
|
66,240
|
|
Total assets
|
$
|
43,235
|
|
$
|
108,683
|
|
$
|
109,648
|
|
|
|
1.
|
See Note 5 - Divestitures and Other Transactions for additional information on discontinued operations.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Significant Pre-tax (Charges) Benefits Not Included in Pro Forma Segment Operating EBITDA
The three and nine months ended September 30, 2019 and 2018, respectively, included the following significant pre-tax (charges) benefits which are excluded from pro forma segment operating EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
2019
|
2018
|
2019
|
2018
|
As Reported
|
Pro Forma
|
Pro Forma
|
Pro Forma
|
Seed 1,2,3,4
|
$
|
(62
|
)
|
$
|
(190
|
)
|
$
|
(214
|
)
|
$
|
(249
|
)
|
Crop Protection 5
|
1
|
|
(30
|
)
|
(24
|
)
|
(42
|
)
|
Corporate 6,7,8,9,10
|
(185
|
)
|
(149
|
)
|
(648
|
)
|
(585
|
)
|
Total
|
$
|
(246
|
)
|
$
|
(369
|
)
|
$
|
(886
|
)
|
$
|
(876
|
)
|
|
|
1.
|
Includes restructuring and asset related charges of $(47) million and $(123) million for the three and nine months ended September 30, 2019, respectively, and $(190) million and $(273) million for the three and nine months ended September 30, 2018, respectively. See Note 7 - Restructuring and Asset Related Charges - Net, for additional information.
|
|
|
2.
|
Includes a $(24) million loss recorded in other income - net for the nine months ended September 30, 2019 related to Historical Dow’s sale of a joint venture related to synergy actions.
|
|
|
3.
|
Includes charges of $(15) million and $(67) million included in cost of goods sold for the three and nine months ended September 30, 2019 related to the amortization on the inventory that was stepped up to fair value in connection with the Merger.
|
|
|
4.
|
Includes a $24 million gain recorded in other income - net for the nine months ended September 30, 2018, related to an asset sale.
|
|
|
5.
|
Includes restructuring and asset related benefits (charges) of $1 million and $(24) million for the three and nine months ended September 30, 2019, respectively, and $(30) million and $(42) million for the three and nine months ended September 30, 2018, respectively. See Note 7 - Restructuring and Asset Related Charges - Net, for additional information.
|
|
|
6.
|
Includes restructuring and asset related charges of $(20) million for the nine months ended September 30, 2019, and $(15) million and $(151) million for the three and nine months ended September 30, 2018, respectively. See Note 7 - Restructuring and Asset Related Charges - Net, for additional information.
|
|
|
7.
|
Includes integration and separation costs of $(152) million and $(582) million for the three and nine months ended September 30, 2019. Includes integration costs of $(134) million and $(384) million for the three and nine months ended September 30, 2018, respectively.
|
|
|
8.
|
Includes a $(13) million loss included in loss on early extinguishment of debt for the nine months ended September 30, 2019 related to the difference between the redemption price and the par value of the Make Whole Notes and Term Loan Facility, partially offset by the write-off of unamortized step-up related to the fair value step-up of EID’s debt.
|
|
|
9.
|
Includes a $(50) million foreign exchange loss for the nine months ended September 30, 2018 related to adjustments to foreign currency exchange contracts as a result of U.S. tax reform.
|
|
|
10.
|
Includes a $(33) million charge included in other income - net for the three and nine months ended September 30, 2019 associated with remeasuring the company’s Argentine Peso net monetary assets, resulting from an unexpected August primary election result in Argentina. Throughout the three months ended September 30, 2019, the Argentine Peso dropped approximately a third of its value against the US dollar and in September of 2019, the country’s central bank announced new restrictions on foreign currency transactions.
|
|
|
Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Cautionary Statements About Forward-Looking Statements
This report contains 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 are based on certain assumptions and expectations of future events which may not be accurate or realized. Forward-looking statements 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) effect of competition and consolidation in Corteva’s industry; (ii) failure to successfully develop and commercialize Corteva’s pipeline; (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 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 DuPont 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; and (xxi) effect of counterfeit products; (xxii) failure to effectively manage acquisitions, divestitures, alliances and other portfolio actions; and (xxiii) risks related to the discontinuation of LIBOR.
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, 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 this report.
For further discussion of some of the important factors that could cause the company's actual results to differ materially from those projected in any such forward-looking statements, see the Risk Factors discussion set forth under "Risk Factors" within Exhibit 99.1 of Amendment 4 to the Form 10 and in the section titled "Risk Factors" (Part II, Item 1A of this Form 10-Q).
Recent Developments
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 (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.
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 (the “Merger Effectiveness Time”) pursuant to the Agreement and Plan of Merger, dated as of December 11, 2015, as amended March 31, 2017 (the "Merger Agreement"), Historical Dow and Historical EID each merged with wholly-owned subsidiaries of DowDuPont and became subsidiaries of DowDuPont (the “Merger”). Prior to the Merger, DowDuPont did not conduct any business activities other than those required for its formation and matters contemplated by the Merger Agreement.
Subsequent to the Merger, Historical Dow and Historical EID engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products through a series of tax-efficient transactions (collectively, the "Business Separations”). Effective as of 5:00 pm ET on April 1, 2019, DowDuPont completed the previously announced separation of its materials science business into a separate and independent public company by way of a distribution of Dow Inc. (“Dow”) 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 (the “DowDuPont Common Stock”), as of the close of business on March 21, 2019 (the “Dow Distribution” and together with the Corteva Distribution, the “Distributions”).
Prior to the Dow Distribution, Historical Dow conveyed or transferred the assets and liabilities aligned with Historical Dow’s agriculture business to separate legal entities (“Dow Ag Entities”) and the assets and liabilities associated with its specialty products business to separate legal entities (the “Dow SP Entities”). On April 1, 2019, Dow Ag Entities and the Dow SP Entities were transferred and conveyed to DowDuPont.
In furtherance of the Business Separations, EID engaged in a series of internal reorganization and realignment steps (the “Internal Reorganization” and the "Business Realignment," respectively) to realign its businesses into three subgroups: agriculture, materials science and specialty products. As part of the Internal Reorganization:
|
|
•
|
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”) were transferred or conveyed to separate legal entities (the “Materials Science Entities”) that were ultimately conveyed by DowDuPont to Dow;
|
|
|
•
|
the assets and liabilities aligned with the EID’s specialty products business were transferred or conveyed to separate legal entities (“EID Specialty Products Entities”);
|
|
|
•
|
on April 1, 2019, EID transferred and conveyed its Materials Science Entities to Dow;
|
|
|
•
|
on May 1, 2019, EID distributed its Specialty Products Entities to DowDuPont;
|
|
|
•
|
on May 2, 2019, DowDuPont conveyed Dow Ag Entities to EID and in connection with the foregoing, EID issued additional shares of its Common Stock to DowDuPont; and
|
|
|
•
|
on May 31, 2019, DowDuPont contributed EID to Corteva, Inc.
|
On May 6, 2019, the Board of Directors of DowDuPont approved the distribution of all the then issued and outstanding shares of common stock of Corteva, Inc., a wholly-owned subsidiary of DowDuPont, to DowDuPont stockholders. On June 1, 2019, DowDuPont completed the Separation. Each DowDuPont stockholder received one share of Corteva 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. Upon becoming an independent company, the capital structure of Corteva consisted of 748,815,000 authorized shares of common stock (par value of $0.01 per share), which represents the number of common shares issued on June 3, 2019. Information related to the Corteva Distribution and its effect on the company's financial statements is discussed throughout these Notes to the interim Consolidated Financial Statements.
As a result of the Business Realignment and the Internal Reorganization discussed above, Corteva owns, directly or indirectly, 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.
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"). The Parties entered into, among other agreements, the following agreements:
|
|
•
|
Separation and Distribution Agreement - Effective April 1, 2019, the Parties entered into an agreement that sets forth, among other things, the agreements among the Parties regarding the principal transactions necessary to effect the Distributions. It also sets forth other agreements that govern certain aspects of the Parties’ ongoing relationships after the completion of the Distributions (the "Corteva Separation Agreement").
|
|
|
•
|
Tax Matters Agreement - The Parties entered into an agreement effective as of April 1, 2019 as amended on June 1, 2019 that governs their respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes.
|
|
|
•
|
Employee Matters Agreement - The Parties entered into an agreement that identifies employees and employee-related liabilities (and attributable assets) to be allocated (either retained, transferred and accepted, or assigned and assumed, as applicable) to the Parties as part of the Distributions and describes when and how the relevant transfers and assignments will occur.
|
|
|
•
|
Intellectual Property Cross-License Agreement - Effective as of April 1, 2019 between Corteva and Dow, and effective June 1, 2019 between Corteva and DuPont entered into Intellectual Property Cross-License Agreements. The Intellectual Property Cross-License Agreements set forth the terms and conditions under which the applicable Parties may use in their respective businesses, following each of the Distributions, certain know-how (including trade secrets), copyrights, and software, and certain patents and standards, allocated to another Party pursuant to the Corteva Separation Agreement.
|
|
|
•
|
Letter Agreement - DuPont and Corteva entered into a Letter Agreement. The Letter Agreement sets forth certain additional terms and conditions related to the Separation, including certain limitations on each party’s ability to transfer certain businesses and assets to third parties without assigning certain of such party’s indemnification obligations under the Corteva Separation Agreement to the other party to the transferee of such businesses and assets or meeting certain other alternative conditions.
|
Debt Redemptions/Repayments
On March 22, 2019, EID issued notices of redemption in full of all of its outstanding notes (the “Make Whole Notes”) listed in the table below:
|
|
|
|
|
(in millions)
|
Amount
|
4.625% Notes due 2020
|
$
|
474
|
|
3.625% Notes due 2021
|
296
|
|
4.250% Notes due 2021
|
163
|
|
2.800% Notes due 2023
|
381
|
|
6.500% Debentures due 2028
|
57
|
|
5.600% Senior Notes due 2036
|
42
|
|
4.900% Notes due 2041
|
48
|
|
4.150% Notes due 2043
|
69
|
|
Total
|
$
|
1,530
|
|
The Make Whole Notes were redeemed on April 22, 2019 at the make-whole redemption prices set forth in the respective Make Whole Notes. On and after the date of redemption, the Make Whole Notes were no longer deemed outstanding, interest on the Make Whole Notes ceased to accrue and all rights of the holders of the Make Whole Notes were terminated.
In March 2016, EID entered into a credit agreement that provided for a three-year, senior unsecured term loan facility in the aggregate principal amount of $4.5 billion (as amended, from time to time, the "Term Loan Facility") under which EID could make up to seven term loan borrowings and amounts repaid or prepaid were not available for subsequent borrowings. On May 2, 2019, EID terminated its Term Loan Facility and repaid the aggregate outstanding principal amount of $3 billion plus accrued and unpaid interest through and including May 1, 2019.
In connection with the repayment of the Make Whole Notes and the Term Loan Facility, EID paid a total of $4.6 billion in the second quarter 2019, which included breakage fees and accrued and unpaid interest on the Make Whole Notes and Term Loan Facility. The repayment of the Make Whole Notes and Term Loan Facility was funded with cash from operations and a contribution from DowDuPont.
On May 7, 2019, DowDuPont publicly announced the record date in connection with the Corteva Distribution. In connection with such announcement, EID was required to redeem $1.25 billion aggregate principal amount of 2.200% Notes due 2020 and $750 million aggregate principal amount of Floating Rate Notes due 2020 (collectively, the Special Mandatory Redemption, or “SMR Notes”) setting forth the date of redemption of the SMR Notes. On May 17, 2019 and EID redeemed and paid a total of $2.0 billion, which included accrued and unpaid interest on the SMR Notes. EID funded the payment with a contribution from DowDuPont. Following the redemption, the SMR Notes are no longer outstanding and no longer bear interest, and all rights of the holders of the SMR Notes have terminated.
For the nine months ended September 30, 2019, EID recorded a loss on the early extinguishment of debt of $13 million related to the difference between the redemption price and the par value of the Make Whole Notes, the Term Loan Facility, and the SMR Notes, partially offset by the write-off of unamortized step-up related to the fair value step-up of EID’s debt.
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 Business Separations. The company recorded pre-tax restructuring charges of $866 million inception-to-date under the Synergy Program, consisting of severance and related benefit costs of $340 million, contract termination costs of $193 million, and asset write-downs and write-offs of $333 million. The company does not anticipate any additional material charges under the Synergy Program. Actions associated with the Synergy Program, including employee separations, are expected to be substantially complete by the end of 2019.
For the three and nine months ended September 30, 2019, the company recorded pre-tax (benefits) charges of $(8) million and $114 million recognized in restructuring and asset related charges - net in the company's Consolidated Statements of Operations. The benefit for the three months ended September 30, 2019 was comprised of favorable adjustments to asset related charges of $(8) million. The charge for the nine months ended September 30, 2019 was comprised of severance and related benefit costs of $14 million, contract termination costs of $69 million and asset related charges of $31 million.
Future cash payments related to this program are anticipated to be approximately $110 million, primarily related to the payment of severance and related benefits and contract termination costs. It is possible that additional charges and future cash payments could occur in relation to the restructuring actions. The company anticipates including savings associated with these actions within its cost synergy commitment of $1.2 billion associated with the Merger.
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. During the three months ended September 30, 2019, the company purchased and retired 824,000 shares in the open market for a total cost of $25 million.
Note on Financial Presentation
DAS Common Control Combination
The transfer or conveyance of DAS to Corteva was treated as a transfer of entities under common control. As such, the company recorded the assets, liabilities, and equity of DAS on its balance sheet at their historical basis. Transfers of businesses between entities under common control requires the financial statements to be presented as if the transaction had occurred at the point at which common control first existed (the Merger Effectiveness Time). As a result, the accompanying interim Consolidated Financial Statements and Notes thereto include the results of DAS from the Merger Effectiveness Time. See Note 4 - Common Control Business Combination, to the interim Consolidated Financial Statements for additional information.
Divestiture of EID ECP
The transfer of EID ECP meets the criteria for discontinued operations and as such, results of operations are presented as discontinued operations and have been excluded from continuing operations for all periods presented. The comprehensive income, stockholder's equity and cash flows related to EID ECP have not been segregated and are included in the Consolidated Statements of Comprehensive Income, Consolidated Statements of Equity and Condensed Consolidated Statements of Cash Flows, respectively, for all periods presented. Amounts related to EID ECP are consistently included or excluded from the Notes to the interim Consolidated Financial Statements based on the respective financial statement line item. See Note 5 - Divestitures and Other Transactions, for additional information.
Divestiture of EID Specialty Products Entities
The transfer of the EID Specialty Products Entities meets the criteria for discontinued operations and as such, results of operations are presented as discontinued operations and have been excluded from continuing operations for all periods presented. The comprehensive income, stockholder's equity and cash flows related to the EID Specialty Products Entities have not been segregated and are included in the Consolidated Statements of Comprehensive Income, Consolidated Statements of Equity and Condensed Consolidated Statements of Cash Flows, respectively, for all periods presented. Amounts related to 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 5 - Divestitures and Other Transactions, for additional information.
Overview
The following is a summary of results from continuing operations for the three months ended September 30, 2019:
|
|
•
|
The company reported net sales of $1,911 million, down 2 percent versus the same quarter last year, reflecting a 3 percent increase in volume which was more than offset by a 3 percent decline in local price and a 2 percent decline in currency.
|
|
|
•
|
Cost of goods sold ("COGS") totaled $1,349 million in the third quarter of 2019, down from $1,485 million in the third quarter of 2018, primarily driven by lower amortization of inventory step-up. As of September 30, 2019, all inventory step-up has been amortized.
|
|
|
•
|
Restructuring and asset related charges - net were $46 million in the third quarter of 2019, primarily reflecting non-cash intangible asset impairment charges, primarily related to DAS intangibles previously acquired from Cooperativa Central de Pesquisa Agrícola's ("Coodetec"), a decrease from $235 million from the third quarter 2018.
|
|
|
•
|
Integration and separation costs were $152 million in the third quarter of 2019, down from $253 million in the third quarter of 2018, reflecting post-Merger integration and Business Separation activities.
|
|
|
•
|
Loss from continuing operations after income taxes was $(527) million, as compared to a loss of $(5,642) million in the same quarter last year.
|
|
|
•
|
The company realized cost synergies of approximately $100 million for the three months ended 2019.
|
The following is a summary of the results of continuing operations for the nine months ended September 30, 2019:
|
|
•
|
The company reported net sales of $10,863 million, down 5 percent versus the same period last year, reflecting a 3 percent decline in currency and a 2 percent decline in volume
|
|
|
•
|
COGS totaled $6,607 million in the nine months ended 2019, down from $7,924 million in the nine months ended 2018, primarily driven by lower amortization of inventory step-up.
|
|
|
•
|
Restructuring and asset related charges - net were $167 million in the nine months ended 2019, reflecting non-cash intangible asset impairment charges, primarily related to DAS intangibles previously acquired from Coodetec, and restructuring actions under the DowDuPont Cost Synergy Program, a decrease from $466 million in the nine months ended 2018.
|
|
|
•
|
Loss from continuing operations after income taxes was $(228) million, as compared to a loss of $(5,705) million in the same period last year.
|
|
|
•
|
The company realized cost synergies of approximately $300 million for the nine months ended 2019.
|
In addition to the financial highlights above, the following events occurred during or subsequent to the third quarter of 2019:
|
|
•
|
The company repurchased $25 million of shares as part of the $1 billion share repurchase program announced in the second quarter.
|
|
|
•
|
The company's Board of Directors authorized a common stock dividend of $0.13 per share, payable on December 18, 2019, to shareholders of record on November 29, 2019.
|
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions, except per share amounts
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
2019
|
2018
|
2019
|
2018
|
Net sales
|
$
|
1,911
|
|
$
|
1,947
|
|
$
|
10,863
|
|
$
|
11,472
|
|
|
|
|
|
|
Cost of goods sold
|
$
|
1,349
|
|
$
|
1,485
|
|
$
|
6,607
|
|
$
|
7,924
|
|
Percent of net sales
|
71
|
%
|
76
|
%
|
61
|
%
|
69
|
%
|
|
|
|
|
|
Research and development expense
|
$
|
289
|
|
$
|
325
|
|
$
|
857
|
|
$
|
1,010
|
|
Percent of net sales
|
15
|
%
|
17
|
%
|
8
|
%
|
9
|
%
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
646
|
|
$
|
633
|
|
$
|
2,318
|
|
$
|
2,347
|
|
Percent of net sales
|
34
|
%
|
33
|
%
|
21
|
%
|
20
|
%
|
|
|
|
|
|
Effective tax rate on continuing operations
|
16.5
|
%
|
0.1
|
%
|
(76.7
|
)%
|
3.2
|
%
|
|
|
|
|
|
Loss from continuing operations after income taxes
|
$
|
(527
|
)
|
$
|
(5,642
|
)
|
$
|
(228
|
)
|
$
|
(5,705
|
)
|
|
|
|
|
|
Loss from continuing operations available to Corteva common stockholders
|
$
|
(516
|
)
|
$
|
(5,647
|
)
|
$
|
(238
|
)
|
$
|
(5,728
|
)
|
|
|
|
|
|
Basic loss per share of common stock from continuing operations
|
$
|
(0.69
|
)
|
$
|
(7.54
|
)
|
$
|
(0.32
|
)
|
$
|
(7.64
|
)
|
Diluted loss per share of common stock from continuing operations
|
$
|
(0.69
|
)
|
$
|
(7.54
|
)
|
$
|
(0.32
|
)
|
$
|
(7.64
|
)
|
Results of Operations
Net Sales
Net sales were $1,911 million and $1,947 million for the three months ended September 30, 2019 and 2018, respectively. The decrease was primarily driven by a (3) percent decline in local price and a (2) percent decline in currency, partially offset by a 3 percent increase in volume. The decline in local price was driven by an increase in soybean and cotton replant in the U.S. as well as increased grower incentive discounts in North America. Unfavorable currency impacts were driven predominately by the Brazilian Real. Volume growth was driven by soybean and corn seed sales recovered from the first half weather-related delays in North America, partially offset by strong early demand for Crop Protection products in Latin America (which shifted sales into the second quarter) and delays in the Brazil soybean season (which shifted Crop Protection sales into the fourth quarter).
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2019
|
2018
|
|
Net Sales
($ Millions)
|
%
|
Net Sales
($ Millions)
|
%
|
Worldwide
|
$
|
1,911
|
|
100
|
%
|
$
|
1,947
|
|
100
|
%
|
North America
|
623
|
|
33
|
%
|
537
|
|
28
|
%
|
EMEA
|
305
|
|
16
|
%
|
296
|
|
15
|
%
|
Asia Pacific
|
221
|
|
11
|
%
|
239
|
|
12
|
%
|
Latin America
|
762
|
|
40
|
%
|
875
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2019 vs. Q3 2018
|
Percent Change Due To:
|
|
Net Sales Change
|
Local Price &
|
|
|
Portfolio /
|
In millions
|
$
|
%
|
Product Mix
|
Volume
|
Currency
|
Other
|
North America
|
$
|
86
|
|
16
|
%
|
(15
|
)%
|
31
|
%
|
—
|
%
|
—
|
%
|
EMEA
|
9
|
|
3
|
%
|
1
|
%
|
7
|
%
|
(5
|
)%
|
—
|
%
|
Asia Pacific
|
(18
|
)
|
(8
|
)%
|
(4
|
)%
|
(2
|
)%
|
(2
|
)%
|
—
|
%
|
Latin America
|
(113
|
)
|
(13
|
)%
|
4
|
%
|
(15
|
)%
|
(2
|
)%
|
—
|
%
|
Total
|
$
|
(36
|
)
|
(2
|
)%
|
(3
|
)%
|
3
|
%
|
(2
|
)%
|
—
|
%
|
Net sales were $10,863 million and $11,472 million for the nine months ended September 30, 2019 and 2018, respectively. The decrease was primarily due to a (3) percent decline in currency and a (2) percent decline in volume. Unfavorable currency impacts were driven predominately by the Euro and the Brazilian Real. The decline in volume was primarily driven by weather-related delays, which drove lower planted area in corn, soybeans and canola in North America and negatively impacted soybean herbicide and nitrogen stabilizer applications.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
2019
|
2018
|
|
Net Sales
($ Millions)
|
%
|
Net Sales
($ Millions)
|
%
|
Worldwide
|
$
|
10,863
|
|
100
|
%
|
$
|
11,472
|
|
100
|
%
|
North America
|
5,800
|
|
53
|
%
|
6,434
|
|
56
|
%
|
EMEA
|
2,336
|
|
22
|
%
|
2,379
|
|
21
|
%
|
Asia Pacific
|
947
|
|
9
|
%
|
925
|
|
8
|
%
|
Latin America
|
1,780
|
|
16
|
%
|
1,734
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months 2019 vs. Nine Months 2018
|
Percent Change Due To:
|
|
Net Sales Change
|
Local Price &
|
|
|
Portfolio /
|
In millions
|
$
|
%
|
Product Mix
|
Volume
|
Currency
|
Other
|
North America
|
$
|
(634
|
)
|
(10
|
)%
|
(3
|
)%
|
(7
|
)%
|
—
|
%
|
—
|
%
|
EMEA
|
(43
|
)
|
(2
|
)%
|
1
|
%
|
6
|
%
|
(9
|
)%
|
—
|
%
|
Asia Pacific
|
22
|
|
2
|
%
|
4
|
%
|
3
|
%
|
(5
|
)%
|
—
|
%
|
Latin America
|
46
|
|
3
|
%
|
4
|
%
|
3
|
%
|
(4
|
)%
|
—
|
%
|
Total
|
$
|
(609
|
)
|
(5
|
)%
|
—
|
%
|
(2
|
)%
|
(3
|
)%
|
—
|
%
|
Cost of Goods Sold
COGS was $1,349 million and $1,485 million for the three months ended September 30, 2019 and 2018, respectively. The decrease was primarily driven by the amortization of inventory step-up of $15 million for the three months ended September 30, 2019 compared with $109 million for the three months ended September 30, 2018.
COGS as a percentage of net sales was 71 percent and 76 percent for the three months ended September 30, 2019 and 2018, respectively. The amortization of inventory step-up was 1 percent and 6 percent of net sales for the three months ended September 30, 2019 and 2018, respectively.
COGS was $6,607 million and $7,924 million for the nine months ended September 30, 2019 and 2018, respectively. The decrease was primarily driven by the amortization of inventory step-up of $272 million for the nine months ended September 30, 2019 compared with $1,424 million for the nine months ended September 30, 2018, partially offset by higher input costs for Crop Protection.
COGS as a percentage of net sales was 61 percent and 69 percent for the nine months ended September 30, 2019 and 2018, respectively. The amortization of inventory step-up was 3 percent and 12 percent of net sales for the nine months ended September 30, 2019 and 2018, respectively.
Research and Development Expense
R&D expense was $289 million (15 percent of net sales) and $325 million (17 percent of net sales) for the three months ended September 30, 2019 and 2018, respectively. The decrease was driven by cost synergies.
R&D expense was $857 million (8 percent of net sales) and $1,010 million (9 percent of net sales) for the nine months ended September 30, 2019 and 2018, respectively. The change was primarily driven by cost synergies.
Selling, General and Administrative Expenses
SG&A expenses were $646 million (34 percent of net sales) and $633 million (33 percent of net sales) for the three months ended September 30, 2019 and 2018, respectively. The increase was primarily driven by an increase in sales commissions resulting from a change in the route to market in the Pacific Northwest of the U.S. and eastern Europe, partially offset by cost synergies.
SG&A expenses were $2,318 million (21 percent of net sales) and $2,347 million (20 percent of net sales) for the nine months ended September 30, 2019 and 2018, respectively. The decrease was primarily driven by cost synergies, which were partially offset by an increase in sales commissions resulting from a change in the route to market in the Pacific Northwest of the U.S. and eastern Europe, and a settlement of a legal matter.
Amortization of Intangibles
Intangible asset amortization was $100 million and $88 million for the three months ended September 30, 2019 and 2018, respectively, and $314 million and $284 million for the nine months ended September 30, 2019 and 2018, respectively. The increase was largely due to the reclassification of amounts from indefinite-lived in-process research and development ("IPR&D") to developed technology as a result of the company's expanded launch of its Qrome® corn hybrids following the receipt of regulatory approval from China. See Note 15 - Goodwill and 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 $46 million and $235 million for the three months ended September 30, 2019 and 2018, respectively. The charges in the third quarter of 2019 related to a pre-tax, non-cash intangible asset impairment charge of $54 million, primarily related to DAS intangibles previously acquired from Coodetec, offset by an $8 million favorable adjustment to asset related charges associated with the DowDuPont Cost Synergy Program. The charges in the third quarter 2018 related to a $85 million non-cash impairment charge related to certain IPR&D assets, a $41 million non-cash impairment charge related to the company's investment in nonconsolidated affiliates in China and a $109 million charge related to the DowDuPont Cost Synergy Program.
Restructuring and asset related charges - net were $167 million and $466 million for the nine months ended September 30, 2019 and 2018, respectively. The charges for the nine months ended September 30, 2019 related to a pre-tax, non-cash intangible asset impairment charge of $54 million, primarily related to DAS intangibles previously acquired from Coodetec. The charges also included $14 million of severance and related benefit costs, $69 million of contract termination costs, and $31 million of asset related charges associated with the DowDuPont Cost Synergy Program, as well as a $4 million benefit adjustment to severance and related benefit costs and $3 million of asset related charges associated with the DuPont Agriculture Division Restructuring Program. The charges for the nine months ended September 30, 2018 related to a $85 million non-cash impairment charge related to certain IPR&D assets, a $41 million non-cash impairment charge related to the company's investment in nonconsolidated affiliates in China and a $340 million charge related to the DowDuPont Cost Synergy Program. See Note 7 - Restructuring and Asset Related Charges, Net, to the interim Consolidated Financial Statements for additional information.
Integration and Separation Costs
Integration and separation costs were $152 million and $253 million for the three months ended September 30, 2019 and 2018, respectively, and $694 million and $697 million for the nine months ended September 30, 2019 and 2018, respectively. These costs primarily have 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 Business Separations and the integration of EID’s Pioneer and Crop Protection businesses with DAS.
Other Income - Net
Other income - net was $59 million and $7 million for the three months ended September 30, 2019 and 2018, respectively. The three months ended September 30, 2019 included a non-operating pension and other post employment benefit credit of $47 million and interest income of $13 million, partially offset by net exchange losses of $11 million. The three months ended September 30, 2018 included non-operating pension and other post-employment benefit credit of $67 million and interest income of $12 million, partially offset by foreign exchange loss of $74 million.
Other income - net was $90 million and $118 million for the nine months ended September 30, 2019 and 2018, respectively. The nine months ended September 30, 2019 included non-operating pension and other post employment benefit credit of $144 million and interest income of $46 million, partially offset by foreign exchange losses of $70 million. The nine months ended September 30, 2018 included a non-operating pension and other post-employment benefit credit of $204 million, interest income of $63 million, and a $24 million gain related to an asset sale, partially offset by foreign exchange losses of $190 million.
The decrease in non-operating pension and other post-employment benefits for the three and nine months ended September 30, 2019 is mainly due to higher interest cost.
See Note 9 - Supplementary Information, to the interim Consolidated Financial Statements for additional information.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt of $13 million for the nine months ended September 30, 2019 was related to the difference between the redemption price and the par value of the Make Whole Notes, the Term Loan Facility, and the SMR Notes, partially offset by the write-off of unamortized step-up related to the fair value step-up of EID’s debt.
Interest Expense
Interest expense was $19 million and $82 million for the three months ended September 30, 2019 and 2018, respectively, and $112 million and $251 million for the nine months ended September 30, 2019 and 2018, respectively. The change was primarily driven by lower average debt balances.
(Benefit from) Provision for Income Taxes on Continuing Operations
The company’s benefit from income taxes on continuing operations was $(104) million for the three months ended September 30, 2019 on pre-tax loss from continuing operations of $(631) million, resulting in an effective tax rate of 16.5 percent. The effective tax rate was unfavorably impacted by integration and separation costs, the Argentine peso devaluation, the tax impact of certain net exchange losses recognized on the re-measurement of the net monetary asset positions which were not deductible in their local jurisdictions, as well as geographic mix of earnings. Those unfavorable impacts were partially offset by tax benefits associated with the enactment of the Federal Act on Tax Reform and AHV Financing (“Swiss Tax Reform”), as well as a tax benefit of $13 million related to application of the Tax Cuts and Jobs Act ("The Act") foreign tax provisions.
The company’s benefit from income taxes on continuing operations was $(8) million for the three months ended September 30, 2018 on a pre-tax loss from continuing operations of $(5,650) million, resulting in an effective tax rate of 0.1 percent. Unfavorable effective tax rate impacts were attributable to the non-tax-deductible impairment charge for the former Agriculture reporting unit and corresponding $75 million tax charge associated with a valuation allowance recorded against the net deferred tax asset position of a legal entity in Brazil, integration and separation costs (including a $61 million net tax cost on repatriation activities to facilitate the Business Separations), a tax charge of $26 million related to an internal entity restructuring associated with the Business Separations, and the tax impact of certain net exchange losses recognized on the re-measurement of the net monetary asset positions which were not deductible in their local jurisdictions. The effective tax rate was favorably impacted by the tax impacts related to the non-tax-deductible amortization of the fair value step-up in inventories as a result of the Merger. A third quarter 2018 U.S. discretionary pension contribution deducted on a 2017 tax return resulted in a tax benefit of $114 million associated with the reversal of a portion of the U.S. federal deferred tax remeasurement associated with The Act, offset partially by a tax charge of $27 million related to the reduction of a tax benefit recorded in 2017.
The company’s provision for income taxes on continuing operations was $99 million for the nine months ended September 30, 2019 on pre-tax loss from continuing operations of $(129) million, resulting in an effective tax rate of (76.7) percent. During the nine months ended September 30, 2019, the company recorded a tax charge of $146 million related to the U.S. state blended tax rate changes associated with the Business Separations, as well as a tax charge of $83 million related to application of The Act’s foreign tax provisions. Other net unfavorable effective tax rate impacts included those related to integration and separation costs, non-tax-deductible amortization of the fair value step-up in inventories as a result of the Merger, as well as the tax impact of certain net exchange losses recognized on the re-measurement of the net monetary asset positions which were not deductible in their local jurisdictions. Those unfavorable impacts were partially offset by a first quarter tax benefit of $102 million related to an internal legal entity restructuring associated with the Business Separations, a $21 million benefit associated with changes in accruals for certain prior year tax positions and reductions in the company’s unrecognized tax benefits due to the closure of various tax statutes of limitations, as well as geographic mix of earnings.
The company’s benefit for income taxes on continuing operations was $(187) million for the nine months ended September 30, 2018 on a pre-tax loss from continuing operations of $(5,892) million, resulting in an effective tax rate of 3.2 percent. The non-tax-deductible impairment charge for the former Agriculture reporting unit, and corresponding $75 million tax charge associated with a valuation allowance recorded against the net deferred tax asset position of a legal entity in Brazil, had unfavorable consequences on the effective tax rate. The effective tax rate was also unfavorably impacted by non-tax-deductible amortization of the fair value step-up in inventory as a result of the Merger, costs associated with the Merger with Dow and asset related charges (including a $61 million net tax cost on repatriation activities to facilitate the Business Separations), a tax charge of $26 million related to an internal entity restructuring associated with the Business Separations, as well as the tax impact of certain net exchange losses recognized on the re-measurement of the net monetary asset positions which were not deductible in their local jurisdictions. These impacts were partially offset by favorable impacts associated with a third quarter 2018 U.S. discretionary pension contribution deducted on a 2017 tax return which resulted in a tax benefit of $114 million associated with the reversal of a portion of the U.S. federal deferred tax remeasurement associated with The Act, offset partially by a tax charge of $27 million related to the reduction of a tax benefit recorded in 2017, an incremental net provisional benefit of $39 million associated with the enactment of The Act, as well as geographic mix of earnings.
Income (Loss) from Discontinued Operations After Tax
Income (loss) from discontinued operations after tax was $22 million and $526 million for the three months ended September 30, 2019 and 2018, respectively, and $(695) million and $1,200 million for the nine months ended September 30, 2019 and 2018, respectively. The $22 million benefit for the three months ended September 30, 2019 relates to the adjustment of certain prior year tax positions.
The decrease during the nine months ended September 30, 2019 as compared to the prior year, was primarily driven by the non-cash goodwill impairment charge of $1,102 million and adjustments of certain unrecognized tax benefits for positions taken on items from prior years from previously divested businesses.
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 17 - 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. 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 thereto contained in the company’s Information Statement included in its Registration Statement on Form 10, as amended, filed with the SEC on May 6, 2019 ("Form 10").
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Pro Forma Statement of Operations
|
Three Months Ended September 30, 2018
|
(In millions, except per share amounts)
|
Corteva
|
Merger 1
|
Debt Retirement 2
|
Separations Related 3
|
Pro Forma
|
Net sales
|
$
|
1,947
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,947
|
|
Cost of goods sold
|
1,485
|
|
(109
|
)
|
—
|
|
12
|
|
1,388
|
|
Research and development expense
|
325
|
|
—
|
|
—
|
|
(1
|
)
|
324
|
|
Selling, general and administrative expenses
|
633
|
|
—
|
|
—
|
|
—
|
|
633
|
|
Amortization of intangibles
|
88
|
|
—
|
|
—
|
|
—
|
|
88
|
|
Restructuring and asset related charges - net
|
235
|
|
—
|
|
—
|
|
—
|
|
235
|
|
Integration and separation costs
|
253
|
|
—
|
|
—
|
|
(119
|
)
|
134
|
|
Goodwill impairment charge
|
4,503
|
|
—
|
|
—
|
|
—
|
|
4,503
|
|
Other income - net
|
7
|
|
—
|
|
—
|
|
—
|
|
7
|
|
Loss on early extinguishment of debt
|
—
|
|
|
|
|
|
|
|
—
|
|
Interest expense
|
82
|
|
—
|
|
(69
|
)
|
—
|
|
13
|
|
(Loss) income from continuing operations before income taxes
|
(5,650
|
)
|
109
|
|
69
|
|
108
|
|
(5,364
|
)
|
(Benefit from) provision for income taxes on continuing operations
|
(8
|
)
|
24
|
|
15
|
|
(59
|
)
|
(28
|
)
|
(Loss) income from continuing operations after income taxes
|
(5,642
|
)
|
85
|
|
54
|
|
167
|
|
(5,336
|
)
|
Net income from continuing operations attributable to noncontrolling interests
|
5
|
|
—
|
|
—
|
|
—
|
|
5
|
|
Net loss attributable to Corteva
|
$
|
(5,647
|
)
|
$
|
85
|
|
$
|
54
|
|
$
|
167
|
|
$
|
(5,341
|
)
|
|
Per share common data
|
|
Loss per share of common stock from continuing operations - basic
|
$
|
(7.13
|
)
|
Loss per share of common stock from continuing operations - diluted
|
$
|
(7.13
|
)
|
|
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. includes 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Pro Forma Statement of Operations
|
Nine Months Ended September 30, 2019
|
(In millions, except per share amounts)
|
Corteva
|
Merger 1
|
Debt Retirement 2
|
Separations Related 3
|
Pro Forma
|
Net sales
|
$
|
10,863
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
10,863
|
|
Cost of goods sold
|
6,607
|
|
(205
|
)
|
—
|
|
16
|
|
6,418
|
|
Research and development expense
|
857
|
|
—
|
|
—
|
|
—
|
|
857
|
|
Selling, general and administrative expenses
|
2,318
|
|
—
|
|
—
|
|
3
|
|
2,321
|
|
Amortization of intangibles
|
314
|
|
—
|
|
—
|
|
—
|
|
314
|
|
Restructuring and asset related charges - net
|
167
|
|
—
|
|
—
|
|
—
|
|
167
|
|
Integration and separation costs
|
694
|
|
—
|
|
—
|
|
(112
|
)
|
582
|
|
Goodwill impairment charge
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Other income - net
|
90
|
|
—
|
|
—
|
|
—
|
|
90
|
|
Loss on early extinguishment of debt
|
13
|
|
—
|
|
—
|
|
—
|
|
13
|
|
Interest expense
|
112
|
|
—
|
|
(45
|
)
|
—
|
|
67
|
|
(Loss) income from continuing operations before income taxes
|
(129
|
)
|
205
|
|
45
|
|
93
|
|
214
|
|
Provision for income taxes on continuing operations
|
99
|
|
36
|
|
10
|
|
1
|
|
146
|
|
(Loss) income from continuing operations after income taxes
|
(228
|
)
|
169
|
|
35
|
|
92
|
|
68
|
|
Net income from continuing operations attributable to noncontrolling interests
|
10
|
|
—
|
|
—
|
|
—
|
|
10
|
|
Net (loss) income attributable to Corteva
|
$
|
(238
|
)
|
$
|
169
|
|
$
|
35
|
|
$
|
92
|
|
$
|
58
|
|
|
Per share common data
|
|
Earnings per share of common stock from continuing operations - basic
|
$
|
0.08
|
|
Earnings per share of common stock from continuing operations - diluted
|
$
|
0.08
|
|
|
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. includes the following: removal of Telone®; 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Pro Forma Statement of Operations
|
Nine Months Ended September 30, 2018
|
(In millions, except per share amounts)
|
Corteva
|
Merger 1
|
Debt Retirement 2
|
Separations Related 3
|
Pro Forma
|
Net sales
|
$
|
11,472
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
11,472
|
|
Cost of goods sold
|
7,924
|
|
(1,424
|
)
|
—
|
|
43
|
|
6,543
|
|
Research and development expense
|
1,010
|
|
—
|
|
—
|
|
(2
|
)
|
1,008
|
|
Selling, general and administrative expenses
|
2,347
|
|
—
|
|
—
|
|
1
|
|
2,348
|
|
Amortization of intangibles
|
284
|
|
—
|
|
—
|
|
—
|
|
284
|
|
Restructuring and asset related charges - net
|
466
|
|
—
|
|
—
|
|
—
|
|
466
|
|
Integration and separation costs
|
697
|
|
—
|
|
—
|
|
(313
|
)
|
384
|
|
Goodwill impairment charge
|
4,503
|
|
—
|
|
—
|
|
—
|
|
4,503
|
|
Other income - net
|
118
|
|
—
|
|
—
|
|
—
|
|
118
|
|
Loss on early extinguishment of debt
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Interest expense
|
251
|
|
—
|
|
(200
|
)
|
—
|
|
51
|
|
Loss from continuing operations before income taxes
|
(5,892
|
)
|
1,424
|
|
200
|
|
271
|
|
(3,997
|
)
|
(Benefit from) provision for income taxes on continuing operations
|
(187
|
)
|
264
|
|
46
|
|
71
|
|
194
|
|
Loss from continuing operations after income taxes
|
(5,705
|
)
|
1,160
|
|
154
|
|
200
|
|
(4,191
|
)
|
Net income from continuing operations attributable to noncontrolling interests
|
23
|
|
—
|
|
—
|
|
—
|
|
23
|
|
Net loss attributable to Corteva
|
$
|
(5,728
|
)
|
$
|
1,160
|
|
$
|
154
|
|
$
|
200
|
|
$
|
(4,214
|
)
|
|
Per share common data
|
|
Loss per share of common stock from continuing operations - basic
|
$
|
(5.62
|
)
|
Loss per share of common stock from continuing operations - diluted
|
$
|
(5.62
|
)
|
|
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. includes the following: removal of Telone®; 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 3 - Recent Accounting Guidance, to the interim Consolidated Financial Statements for a description of recent accounting pronouncements.
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 and nine months ended September 30, 2019 compared with the same period in 2018. For purposes of the three and nine months ended September 30, 2018 and the nine months ended September 30, 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 17 - 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 69). 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 costs-net and foreign exchange gains (losses), excluding the impact of significant items. Non-operating 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. See Note 24 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 and nine months ended September 30, 2019 and 2018 is included in Note 24 - Segment Information, to the interim Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seed
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
In millions
|
2019
|
2018
|
2019
|
2018
|
Net sales
|
$
|
681
|
|
$
|
551
|
|
$
|
6,347
|
|
$
|
6,716
|
|
Pro forma segment operating EBITDA 1
|
$
|
(295
|
)
|
$
|
(372
|
)
|
$
|
1,066
|
|
$
|
1,226
|
|
|
|
1.
|
The three months ended September 30, 2019 are on an as reported basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seed
|
Q3 2019 vs. Q3 2018
|
Percent Change Due To:
|
|
Net Sales Change
|
Local Price &
|
|
|
Portfolio /
|
In millions
|
$
|
%
|
Product Mix
|
Volume
|
Currency
|
Other
|
North America
|
$
|
114
|
|
102
|
%
|
(63
|
)%
|
165
|
%
|
—
|
%
|
—
|
%
|
EMEA
|
(11
|
)
|
(8
|
)%
|
2
|
%
|
(5
|
)%
|
(5
|
)%
|
—
|
%
|
Asia Pacific
|
10
|
|
19
|
%
|
5
|
%
|
18
|
%
|
(4
|
)%
|
—
|
%
|
Latin America
|
17
|
|
7
|
%
|
14
|
%
|
(5
|
)%
|
(2
|
)%
|
—
|
%
|
Total
|
$
|
130
|
|
24
|
%
|
(5
|
)%
|
31
|
%
|
(2
|
)%
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seed
|
Nine Months 2019 vs. Nine Months 2018
|
Percent Change Due To:
|
In millions
|
Net Sales Change
|
Local Price &
|
|
|
Portfolio /
|
|
$
|
%
|
Product Mix
|
Volume
|
Currency
|
Other
|
North America
|
$
|
(352
|
)
|
(8
|
)%
|
(4
|
)%
|
(4
|
)%
|
—
|
%
|
—
|
%
|
EMEA
|
(22
|
)
|
(2
|
)%
|
1
|
%
|
6
|
%
|
(9
|
)%
|
—
|
%
|
Asia Pacific
|
1
|
|
—
|
%
|
2
|
%
|
4
|
%
|
(6
|
)%
|
—
|
%
|
Latin America
|
4
|
|
1
|
%
|
6
|
%
|
(1
|
)%
|
(4
|
)%
|
—
|
%
|
Total
|
$
|
(369
|
)
|
(5
|
)%
|
(1
|
)%
|
(2
|
)%
|
(2
|
)%
|
—
|
%
|
Seed
Seed net sales were $681 million in the third quarter of 2019, up from $551 million in the third quarter of 2018. The increase was due to a 31 percent increase in volume, partially offset by a (5) percent decline in local price and a (2) percent decline in currency.
Volume growth was driven by significant weather-related planting delays in North America in the first half of the year, which shifted soybean and corn seed sales into the third quarter. The decline in local price was driven by competitive pricing pressure in soybeans in the U.S. and increased soybean and corn replant in North America, which was partially offset by favorable mix in Latin America. Unfavorable currency impacts were primarily due to the Brazilian Real.
Segment operating EBITDA was a loss of $295 million in the third quarter of 2019, compared to a loss of $372 million in the third quarter of 2018 on a pro forma basis. Volume gains in North America, cost synergies and ongoing productivity more than offset decreases in local price and the unfavorable impact of currency.
Seed net sales were $6,347 million for the first nine months of 2019, down from $6,716 million in the first nine months of 2018. The decrease was primarily due to a (2) percent decline in volume, a (2) percent decline in currency, and a (1) percent decline in local price.
The decline in volume was driven by weather-related planting delays in North America, leading to a reduction in planted area for soybeans, and early deliveries of corn in the fourth quarter of 2018. These declines were partially offset by favorable demand leading to a strong corn season in EMEA. Unfavorable currency impacts were primarily due to the Euro, Eastern European currencies, and the Brazilian Real. The decline in local price was driven by competitive pricing pressure in soybeans in the U.S. and increased soybean and corn replant in North America, which was partially offset by favorable mix in Latin America.
Pro forma segment operating EBITDA was $1,066 million for the first nine months of 2019, down 13 percent from pro forma segment operating EBITDA of $1,226 million for the first nine months of 2018. Decreases in local price, the unfavorable impact of currency, higher commissions, and volume declines in North America more than offset cost synergies and ongoing productivity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crop Protection
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
In millions
|
2019
|
2018
|
2019
|
2018
|
Net sales
|
$
|
1,230
|
|
$
|
1,396
|
|
$
|
4,516
|
|
$
|
4,756
|
|
Pro forma Segment Operating EBITDA 1
|
$
|
119
|
|
$
|
159
|
|
$
|
789
|
|
$
|
905
|
|
|
|
1.
|
The three months ended September 30, 2019 are on an as reported basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crop Protection
|
Q3 2019 vs. Q3 2018
|
Percent Change Due To:
|
In millions
|
Net Sales Change
|
Local Price &
|
|
|
Portfolio /
|
|
$
|
%
|
Product Mix
|
Volume
|
Currency
|
Other
|
North America
|
$
|
(28
|
)
|
(7
|
)%
|
(3
|
)%
|
(4
|
)%
|
—
|
%
|
—
|
%
|
EMEA
|
20
|
|
12
|
%
|
—
|
%
|
16
|
%
|
(4
|
)%
|
—
|
%
|
Asia Pacific
|
(28
|
)
|
(15
|
)%
|
(6
|
)%
|
(8
|
)%
|
(1
|
)%
|
—
|
%
|
Latin America
|
(130
|
)
|
(21
|
)%
|
(1
|
)%
|
(19
|
)%
|
(1
|
)%
|
—
|
%
|
Total
|
$
|
(166
|
)
|
(12
|
)%
|
(2
|
)%
|
(9
|
)%
|
(1
|
)%
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crop Protection
|
Nine Months 2019 vs. Nine Months 2018
|
Percent Change Due To:
|
In millions
|
Net Sales Change
|
Local Price &
|
|
|
Portfolio /
|
|
$
|
%
|
Product Mix
|
Volume
|
Currency
|
Other
|
North America
|
$
|
(282
|
)
|
(15
|
)%
|
(2
|
)%
|
(13
|
)%
|
—
|
%
|
—
|
%
|
EMEA
|
(21
|
)
|
(2
|
)%
|
1
|
%
|
5
|
%
|
(8
|
)%
|
—
|
%
|
Asia Pacific
|
21
|
|
3
|
%
|
4
|
%
|
3
|
%
|
(4
|
)%
|
—
|
%
|
Latin America
|
42
|
|
4
|
%
|
2
|
%
|
6
|
%
|
(4
|
)%
|
—
|
%
|
Total
|
$
|
(240
|
)
|
(5
|
)%
|
1
|
%
|
(2
|
)%
|
(4
|
)%
|
—
|
%
|
Crop Protection
Crop protection net sales were $1,230 million in the third quarter of 2019, down from $1,396 million in the third quarter of 2018. The decrease was primarily due to a (9) percent decline in volume, a (2) percent decline in local price, and a (1) percent decline in currency.
The decline in volume was driven by early demand for spinosyns insecticides and seed applied technologies in Latin America, which pulled approximately $80 million of sales into the second quarter, coupled with a delayed soybean season in Brazil, which shifted approximately $50 million of expected sales into the fourth quarter. These declines more than offset the approximate $65 million improvement in new product sales, primarily driven by EMEA, versus the same quarter last year. The decrease in local price was driven by grower incentive discounts in North America. Unfavorable currency impacts were primarily due to the Brazilian Real and the Euro.
Segment operating EBITDA was $119 million in the third quarter of 2019, down 25 percent from pro forma segment operating EBITDA of $159 million in the third quarter of 2018. Volume declines in Latin America, grower incentive discounts in North America, and the unfavorable impact of currency more than offset cost synergies, sales from new products, and ongoing productivity.
Crop protection net sales were $4,516 million for the first nine months of 2019, down from $4,756 million in the first nine months of 2018. The decrease was primarily due to a (4) percent decline in currency and a (2) percent decline in volume, partially offset by a 1 percent increase in local price.
Unfavorable currency impacts were primarily due to the Euro and the Brazilian Real. The decline in volume was driven by weather-related delays in North America, which negatively impacted corn and soybean herbicide and nitrogen stabilizer applications. This decline was partially offset by new product launches, including ArylexTM herbicide, EnlistTM herbicide, and ZorvecTM fungicide. The increase in local price was driven by increases in Latin America to offset currency, partially offset by grower incentive discounts in North America.
Pro forma segment operating EBITDA was $789 million for the first nine months of 2019, down 13 percent from pro forma segment operating EBITDA of $905 million for the first nine months of 2018. Higher input costs, the unfavorable impact of currency, and volume declines in North America more than offset cost synergies, sales from new products, and ongoing productivity.
Liquidity and Capital Resources
Information related to the company's liquidity and capital resources can be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" within Exhibit 99.1 of Amendment 4 to the Form 10. The discussion below provides the updates to this information for the nine months ended September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
September 30, 2019
|
December 31, 2018
|
September 30, 2018
|
Cash, cash equivalents and marketable securities
|
$
|
2,097
|
|
$
|
2,275
|
|
$
|
1,799
|
|
Total debt
|
$
|
3,720
|
|
$
|
7,938
|
|
$
|
14,586
|
|
The company's cash, cash equivalents and marketable securities at September 30, 2019, December 31, 2018, and September 30, 2018 were $2,097 million, $2,275 million and $1,799 million, respectively. Total debt at September 30, 2019, December 31, 2018, and September 30, 2018 was $3,720 million, $7,938 million, and $14,586 million, respectively. The decrease in debt balances was primarily due to debt redemption/repayment transactions. See further information in Note 17 - 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.
The company had access to approximately $6.5 billion, $5.8 billion, and $5.7 billion in committed and uncommitted unused credit lines at September 30, 2019, December 31, 2018, and September 30, 2018, respectively. These unused credit lines 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 “2018 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 2018 Revolving Credit Facilities upon the Corteva Distribution. The 2018 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 2018 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 September 30, 2019 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, factoring and cash from operations.
In February 2019, in line with seasonal working capital requirements, the company entered into a committed receivable repurchase agreement of up to $1.3 billion (the "2019 Repurchase Facility") which expires in December 2019. From time to time, the company and the banks modify the monthly commitment amounts to better align with working capital requirements. Under the 2019 Repurchase Facility, the company 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 17 - Short-Term Borrowings, Long-Term Debt and Available Credit Facilities, to the interim Consolidated Financial Statements.
The company has factoring agreements with third-party financial institutions primarily in Latin America 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 12 - 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 18 - Commitments and Contingent Liabilities, to the interim Consolidated Financial Statements for more information on the company’s guarantees.
Capacity Expansion
The company's Board of Directors authorized an investment of approximately $145 million to increase Spinosyns fermentation capacity by 30% to address global market growth in insecticides that handle chewing insects in specialty and row crops. The additional capacity will be staged to come online over the next few years.
Debt Redemptions/Repayments
In July 2018, the company fully repaid $1.25 billion of 6.0 percent coupon bonds at maturity.
In the fourth quarter of 2018, the company offered to purchase for cash approximately $6.2 billion of outstanding debt securities from each registered holder of the applicable series of debt securities (the “Tender Offers”). The company retired $4.4 billion aggregate principal amount of such debt securities in connection with the Tender Offers, which expired on December 11, 2018. The retirement of these debt securities was funded with cash contributions from DowDuPont.
On March 22, 2019, EID issued notices of redemption in full of all of its outstanding notes (the “Make Whole Notes”) listed in the table below:
|
|
|
|
|
(in millions)
|
Amount
|
4.625% Notes due 2020
|
$
|
474
|
|
3.625% Notes due 2021
|
296
|
|
4.250% Notes due 2021
|
163
|
|
2.800% Notes due 2023
|
381
|
|
6.500% Debentures due 2028
|
57
|
|
5.600% Senior Notes due 2036
|
42
|
|
4.900% Notes due 2041
|
48
|
|
4.150% Notes due 2043
|
69
|
|
Total
|
$
|
1,530
|
|
The Make Whole Notes were redeemed on April 22, 2019 at the make-whole redemption prices set forth in the respective Make Whole Notes. On and after the date of redemption, the Make Whole Notes were no longer deemed outstanding, interest on the Make Whole Notes ceased to accrue and all rights of the holders of the Make Whole Notes were terminated. For further information on the Make Whole Notes, see Note 17 - Short-Term Borrowings, Long-Term Debt and Available Credit Facilities, to the interim Consolidated Financial Statements and Recent Developments.
In March 2016, the company entered into a credit agreement that provides for a three-year, senior unsecured term loan facility in the aggregate principal amount of $4.5 billion (as amended, from time to time, the "Term Loan Facility") under which EID could make up to seven term loan borrowings and amounts repaid or prepaid were not available for subsequent borrowings. On May 2, 2019 EID terminated its Term Loan Facility and repaid the aggregate outstanding principal amount of $3 billion plus accrued and unpaid interest through and including May 1, 2019. For further information on the termination of the Term Loan Facility, see Note 17 - Short-Term Borrowings, Long-Term Debt and Available Credit Facilities, to the interim Consolidated Financial Statements and Recent Developments.
In connection with the repayment of the Make Whole Notes and the Term Loan Facility, EID paid a total of $4.6 billion in the second quarter 2019, which included breakage fees and accrued and unpaid interest on the Make Whole Notes and Term Loan Facility. The repayment of the Make Whole Notes and Term Loan Facility was funded with cash from operations and a contribution from DowDuPont.
On May 7, 2019, DowDuPont publicly announced the record date in connection with the Corteva Distribution. In connection with such announcement, EID was required to redeem $1.25 billion aggregate principal amount of 2.200% Notes due 2020 and $750 million aggregate principal amount of Floating Rate Notes due 2020 (collectively, the Special Mandatory Redemption or “SMR Notes”) setting forth the date of redemption of the SMR Notes. The date of redemption was May 17, 2019 and the company paid a total of $2.0 billion, which included accrued and unpaid interest on the SMR Notes. The company funded the payment with a contribution from DowDuPont. Following the redemption, the SMR Notes are no longer outstanding and no longer bear interest and all rights of the holders of the SMR Notes have terminated.
The company's cash, cash equivalents and marketable securities at September 30, 2019, December 31, 2018, and September 30, 2018 are $2.1 billion, $2.3 billion, and $1.8 billion, respectively, of which $2 billion at September 30, 2019, $1.7 billion at December 31, 2018, and $1.6 billion at September 30, 2018 was held by subsidiaries in foreign countries, including United States territories.
The Act required companies to pay a one-time transition tax on the untaxed earnings of foreign subsidiaries (see Note 10 - Income Taxes, to the interim Consolidated Financial Statements for further details of The Act). 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 September 30, 2019, management believed that sufficient liquidity is available in the U.S. The company is anticipating fourth quarter 2019 repatriation activities of approximately $200 million with little to minimal amount of foreign withholding tax.
Summary of Cash Flows
Cash used for operating activities was $2.3 billion for the nine months ended September 30, 2019 compared to $2.8 billion for the nine months ended September 30, 2018. The decrease in cash used for operating activities was driven by a reduction in pension contribution, as a result of the company’s 2018 discretionary pension contribution, partially offset by the net impact of lower net income and working capital changes as a result of the Internal Reorganizations and Business Realignments in 2019.
Cash used for investing activities was $1.0 billion for the nine months ended September 30, 2019 compared to $0.2 billion used for investing activities for the nine months ended September 30, 2018. The change was due primarily to a decrease in net proceeds from sales and maturities of investments.
Cash provided by financing activities was $0.8 billion for the nine months ended September 30, 2019, and cash used for financing activities was $0.6 billion for the nine months ended September 30, 2018. The change was due primarily to a net increase in contributions from Dow and DowDuPont, primarily for repayment of long-term debt, and a decrease in distributions to Dow and DowDuPont which were used to fund a portion of DowDuPont’s dividend payments, and in 2018 to fund a portion of DowDuPont’s share repurchases, partially offset by repayments of long-term debt and transfers of cash to DowDuPont in connection with the Internal Reorganization and Business Realignments in 2019.
In June 2019, the company's Board of Directors authorized a common stock dividend of $0.13 per share, payable on September 13, 2019, to shareholders of record on July 31, 2019. In October 2019, the company's Board of Directors authorized a common stock dividend of $0.13 per share, payable on December 18, 2019, to shareholders of record on November 29, 2019.
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.
During the three months ended September 30, 2019, the company purchased and retired 824,000 shares for a total cost of $25 million.
Guarantees and Off-Balance Sheet Arrangements
Detailed information related to Guarantees, Indemnifications, and Obligations for Equity Affiliates and Others can be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" within Exhibit 99.1 of Amendment 4 to the Form 10, and Note 18 - Commitments and Contingent Liabilities, to the interim Consolidated Financial Statements.
Critical Accounting Estimates
The company's significant accounting policies are more fully described in Note 1 - "Summary of Significant Accounting Policies," within Exhibit 99.2 of Amendment 2 to the Form 10. Management believes that the application of these policies on a consistent basis enables the company to provide the users of the financial statements with useful and reliable information about the company's operating results and financial condition.
Valuation of Assets and Impairment Considerations
The company tests goodwill for impairment annually (during the fourth quarter), or more frequently when events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit has declined below its carrying value. Goodwill is evaluated for impairment using qualitative and / or quantitative testing procedures. The company performs goodwill impairment testing at the reporting unit level which is defined as the operating segment or one level below the operating segment. One level below the operating segment, or component, is a business in which discrete financial information is available and regularly reviewed by segment management. The Company aggregates certain components into reporting units based on economic similarities.
As a result of the Internal Reorganizations and Realignments, the company changed its reportable segments to Seed and Crop Protection to reflect the manner in which the company's chief operating decision maker assesses performance and allocates resources. The change in reportable segments resulted in changes to the company's reporting units for goodwill impairment testing to align with the level at which discrete financial information is available for review by management. The company’s reporting units are Seed, Crop Protection and Digital.
Due to this change in reportable segments and reporting units, goodwill was reassigned from the former Agriculture reporting unit to the three newly created reporting units using a relative fair value allocation approach. As a result, the company performed a goodwill impairment analysis for the former Agriculture reporting unit immediately prior to the realignment and for Seed, Crop Protection and Digital immediately after the realignment. The impairment analysis was performed for each reporting unit using a discounted cash flow model (a form of the income approach), utilizing Level 3 unobservable inputs or a market approach. The company’s significant estimates in this analysis include, but are not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate, and the tax rate. The company’s estimates of future cash flows are based on current regulatory and economic climates, recent operating results, and planned business strategy. The company believes the current assumptions and estimates utilized are both reasonable and appropriate. Based on the goodwill impairment analysis performed both immediately prior to and immediately subsequent to the realignment, the company concluded the fair value of the former Agriculture reporting unit and the newly created reporting units exceeded their carrying value, and no goodwill impairment charge was necessary. In the testing of the new reporting units, the fair value of the Seed reporting unit indicates the excess fair value over carrying value is approximately 10 percent. The Crop Protection and Digital reporting units’ fair value substantially exceed the carrying value. The fair value of reporting units could be negatively affected by changes in federal, state, or local regulations or economic downturns.
During the three months ended September 30, 2019, and in connection with strategic product and portfolio reviews, the company determined that the fair value of certain intangible assets classified as developed technology, other intangible assets and in-process research and development ("IPR&D") within the Seed segment that primarily relate to heritage DAS intangibles previously acquired from Coodetec was less than the carrying value due to the company’s focus on advancing more competitive products and eliminating redundancy and complexity across the breeding programs. As a result, the company recorded a pre-tax, non-cash intangible asset impairment charge of $54 million ($41 million after-tax), which is reflected in restructuring and asset related charges - net, in the company's Consolidated Statements of Operations for the three and nine months ended September 30, 2019. The key assumptions used in determining the fair value of these intangibles involve management judgment and estimates relating to future operating performance and economic conditions that may differ from actual cash flows. Refer to Note 7 - Restructuring and Asset Related Charges - Net, Note 15 - Goodwill and Other Intangible Assets, and Note 23 - Fair Value Measurements, to the interim Consolidated Financial Statements for more information.
Contractual Obligations
Information related to the company’s contractual obligations, commercial commitments and expected cash requirements for interest can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements" within Exhibit 99.1 of Amendment 4 to the Form 10. This information materially changed as the result of the Internal Reorganization and Business Realignment (as discussed in Note 1 - Background and Basis of Presentation), as was reported in the company’s Form 10-Q under "Part I, Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations" for the period ended June 30, 2019. The company’s significant contractual obligations have not changed materially from those reported in the company’s Form 10-Q for the period ended June 30, 2019.
The company expects to meet its contractual obligations through its normal sources of liquidity and believes it has the financial resources to satisfy the contractual obligations that arise in the ordinary course of business.