0001751788 us-gaap:DerivativeFinancialInstrumentsAssetsMember us-gaap:PensionPlansDefinedBenefitMember 2018-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ ☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedDecember 31, 20182019
or
¨ ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission file number: 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
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Commission File Number | Exact Name of Registrant as Specified in its Charter, Principal Office Address and Telephone Number | State of Incorporation or Organization | I.R.S. Employer Identification No. |
| 001-38646 | Dow Inc. | Delaware | 30-1128146 |
| 2211 H.H. Dow Way, Midland, MI 48674 | | |
| (989) 636-1000 | | |
| 001-03433 | The Dow Chemical Company | Delaware | 38-1285128 |
State or other jurisdiction of
incorporation or organization
| 2211 H.H. Dow Way, Midland, MI 48674 | | (I.R.S. Employer Identification No.) |
| (989) 636-1000 | | |
2211 H.H. DOW WAY, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 989-636-1000
Securities registered pursuant to Section 12(b) of the Act:
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| Registrant | Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Dow Inc. | Common Stock, par value $0.01 per share | DOW | New York Stock Exchange |
| The Dow Chemical Company | 4.625% Notes due October 1, 2044 | DOW/44 | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.¨ Yes þ No
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| Dow Inc. | ☑ | Yes | ☐ | No |
| The Dow Chemical Company | ☑ | Yes | ☐ | No |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.¨ Yes þ No
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| Dow Inc. | ☐ | Yes | ☑ | No |
| The Dow Chemical Company | ☐ | Yes | ☑ | No |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.þ Yes ¨ No
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| Dow Inc. | ☑ | Yes | ☐ | No |
| The Dow Chemical Company | ☑ | Yes | ☐ | No |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).þ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ |
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| Dow Inc. | ☑ | Yes | ☐ | No |
| The Dow Chemical Company | ☑ | Yes | ☐ | No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Dow Inc. | Large accelerated filerþ | Accelerated filer ¨ | ¨ | | Accelerated filer | | ¨ |
| Non-accelerated filer¨ | | þ | | Smaller reporting company¨ | | ¨ |
| | | | | Emerging growth company¨ |
| The Dow Chemical Company | Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer þ | Smaller reporting company ¨ | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
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Dow Inc. | ☐ | |
| The Dow Chemical Company | ☐ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).¨ Yes þ No
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| Dow Inc. | ☐ | Yes | ☑ | No |
| The Dow Chemical Company | ☐ | Yes | ☑ | No |
As of June 30, 2019, the aggregate market value of the common stock of Dow Inc. held by non-affiliates of Dow Inc. was approximately $36.3 billion based on the last reported closing price of $49.31 per share as reported on the New York Stock Exchange.
Dow Inc. had 741,678,966 shares of common stock, $0.01 par value, outstanding at January 31, 2020. The Dow Chemical Company had 100 shares of common stock, were$0.01 par value, outstanding at January 31, 2020, all of which were held by the registrant'sregistrant’s parent, DowDuPontDow Inc.
The registrantDow Chemical Company meets the conditions set forth in General Instruction I(l)I(1)(a) and (b) for Form 10-K and therefore is therefore filing this form with ain the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
None
Dow Inc.: Portions of Dow Inc.'s Proxy Statement for the 2020 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of Dow Inc.'s fiscal year ended December 31, 2019.
The Dow Chemical Company: None.
Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 20182019
TABLE OF CONTENTS
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| The Dow Chemical Company and Subsidiaries: | |
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| | Dow Inc. and Subsidiaries The Dow Chemical Company and Subsidiaries | |
Throughout thisThis Annual Report on Form 10-K except as otherwise notedis a combined report being filed by the context, the terms "Company" or "Dow" as used herein meanDow Inc. and The Dow Chemical Company and its consolidated subsidiaries.subsidiaries (“TDCC” and together with Dow Inc., “Dow” or the "Company"). This Annual Report on Form 10-K reflects the results of Dow and its consolidated subsidiaries, after giving effect to the distribution to DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc. or "DuPont") of TDCC’s agricultural sciences business (“AgCo”) and specialty products business (“SpecCo”) and the receipt of E. I. du Pont de Nemours and Company and its consolidated subsidiaries' (“Historical DuPont”) ethylene and ethylene copolymers business (other than its ethylene acrylic elastomers business) ("ECP"). The U.S. GAAP consolidated financial results of Dow Inc. and TDCC reflect the distribution of AgCo and SpecCo as discontinued operations for the applicable periods presented as well as the receipt of ECP as a common control transaction from the closing of the merger with Historical DuPont on August 31, 2017. In addition, following the separation from DowDuPont, the Company changed the manner in which its business activities were managed. The Company's portfolio now includes six global businesses which are organized into the following operating segments: Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure and Performance Materials & Coatings. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. As a result of the parent/subsidiary relationship between Dow Inc. and TDCC, and the expectation that the financial statements and disclosures of each company will be substantially similar, the companies are filing a combined report for this Annual Report on Form 10-K. The information reflected in this report is equally applicable to both Dow Inc. and TDCC, except where otherwise noted. Each of Dow Inc. and TDCC is filing information in this report on its own behalf and neither company makes any representation to the information relating to the other company.
Background
On April 1, 2019, DowDuPont completed the separation of its materials science business and Dow Inc. became the direct parent company of TDCC and its consolidated subsidiaries, owning all of the outstanding common shares of TDCC. For filings relating to the period commencing April 1, 2019 and thereafter, TDCC was deemed the predecessor to Dow Inc., and the historical results of TDCC are deemed the historical results of Dow Inc. for periods prior to and including March 31, 2019.
The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017. TDCC and Historical DuPont each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business.
FORWARD-LOOKING STATEMENTS
Certain statements in thisThis report other than purely historical information, including estimates, projections, statements relating to business plans, objectives and expected operating results, and the assumptions upon which those statements are based, arecontains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995,federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may appear throughoutIn this report including, without limitation, the sections: “Item 1. Business,” “Management's Discussion and Analysis” and “Risk Factors.” Thesecontext, forward-looking statements often address expected future business and financial performance, and financial condition, and other matters, and often contain words such as “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “may,” “opportunity,” “outlook,” “plan,” “project,” “see,” “seek,” “should,” “strategy,” “target,”"target," “will,” “would,” “will be,” “will continue,” “will likely result”result,” “would” and similar expressions, and variations or negatives of these words. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.
On December 11, 2015,Forward-looking statements include, but are not limited to, expectations as to future sales of Dow’s products; the ability to protect Dow’s intellectual property in the United States and abroad; estimates regarding Dow’s capital requirements and need for and availability of financing; estimates of Dow’s expenses, future revenues and profitability; estimates of the size of the markets for Dow’s products and services and Dow’s ability to compete in such markets; expectations related to the rate and degree of market acceptance of Dow’s products; the outcome of certain Dow contingencies, such as litigation and E. I. du Pont de Nemoursenvironmental matters; estimates of the success of competing technologies that may become available and Company ("DuPont") entered into an Agreementexpectations regarding the benefits and Plan of Merger, as amended on March 31, 2017 (the "Merger Agreement"), under which the companies would combine in an all-stock merger of equals transaction (the "Merger"). Effective August 31, 2017, the Merger was completed andcosts associated with each of Dow and DuPont became subsidiariesthe foregoing.
Forward-looking statements by their nature address matters that are, to varyingdifferent degrees, uncertain, including important risks associated with the Merger and the intended separation, subject to approval of the Company's Board of Directors and customary closing conditions of DowDuPont’s materials science business under the Dow brand as well as the intended separation of DowDuPont’s agriculture and specialty products businesses in one or more tax- efficient transactions on anticipated terms (the “Intended Business Separations”).uncertain. Forward-looking statements are not guarantees of future performance and are based on certain assumptions and expectations of future events which may not be realized. Forward-lookingrealized and speak only as of the date the statements were made. In addition, forward-looking statements also involve risks, uncertainties and uncertainties, many of whichother factors that are beyond Dow's control. Some of the important factorsDow’s control that could cause Dow’sactual results to differ materially from those projected, anticipated or implied in any suchthe forward-looking statementsstatements. These factors include, but are not limited to: (i) costs to achieve and achieving the successful integration of the respective agriculture, materials science and specialty products businesses of Dow and DuPont, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, productivity actions, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the combined operations; (ii) costs to achieve and achievement of the anticipated synergies by the combined agriculture, materials science and specialty products businesses; (iii) risks associated with the Intended Business Separations, associated costs, disruptions in the financial markets or other potential barriers; (iv) disruptions or business uncertainty, including from the Intended Business Separations, could adversely impact Dow’s business (either directly or indirectly in connection with disruptions to DowDuPont or DuPont); (v) Dow's ability to retain and hire key personnel; (vi) uncertainty as to the long-term value of DowDuPont common stock; and (vii) risks to DowDuPont's, Dow's and DuPont's business, operations and results of operations from: the availability of and fluctuations in the cost of feedstocksenergy and energy; balance of supply and demand and the impact of balance onraw material prices; failure to develop and market new products and optimally manage product life cycles; ability, cost and impact on business operations, including the supply chain, of responding to changes in market acceptance, rules, regulations and policies and failure to respond to such changes; outcome of significant litigation and environmental matters and other commitments and contingencies;matters; failure to appropriately manage process safety and product stewardship issues; changes in laws and regulations or political conditions; global economic and capital marketmarkets conditions, including the continued availability of capital and financing, as wellsuch as inflation, market uncertainty, interest and currency exchange rates; changes in political conditions, including trade disputesrates, and retaliatory actions;equity and commodity prices; business or supply disruptions; security threats, such as acts of sabotage, terrorism or war, natural disasters andwar; weather events and patterns which could result in a significant operational event for the Company or adversely impact demand or production;natural disasters; ability to discover, develop and protect, new technologies and to protectdefend and enforce the Company'sDow’s intellectual property rights; failureincreased competition; changes in relationships with Dow’s significant customers and suppliers; unanticipated expenses such as litigation or legal settlement expenses; unanticipated business disruptions; Dow’s ability to effectively managepredict, identify and interpret changes in consumer preferences and demand; Dow’s ability to complete proposed divestitures or acquisitions; Dow’s ability to realize the expected benefits of acquisitions divestitures, alliances, joint venturesif they are completed; the availability of financing to Dow in the future and the terms and conditions of such financing; and disruptions in Dow’s information technology networks and systems. Additionally, there may be other portfolio changes; unpredictabilityrisks and severityuncertainties that Dow is unable to identify at this time or that Dow does not currently expect to have a material impact on its business.
Risks related to achieving the anticipated benefits of catastrophic events, including,Dow's separation from DowDuPont include, but are not limited to, actsa number of terrorismconditions outside the control of Dow,including risks related to (i) Dow's inability to achieve some or outbreak of war or hostilities, as well as management's response to anyall of the aforementioned factors. Thesebenefits that it expects to receive from the separation from DowDuPont, (ii) certain tax risks areassociated with the separation, (iii) Dow's inability to make necessary changes to operate as a stand-alone company, (iv) the failure of Dow's pro forma financial information to be a reliable indicator of Dow's future results, (v) Dow's inability to enjoy the same benefits of diversity, leverage and will be more fully discussedmarket reputation that it enjoyed as a combined company, (vi) Dow's inability to receive third-party consents required under the separation agreement, (vii) Dow's customers, suppliers and others' perception of Dow's financial stability on a stand-alone basis, (viii) non-compete restrictions under the separation agreement, (ix) receipt of less favorable terms in the current, quarterly and annual reports filedcommercial agreements Dow entered into with the U.S. Securities and Exchange Commission by DowDuPont; as well as, the preliminary registration statements on Form 10, in each case as amended from time-to-time, of each of Dow Holdings Inc.DuPont and Corteva, Inc. While("Corteva"), including restrictions under intellectual property cross-license agreements, than Dow would have received from an unaffiliated third party; and (x) Dow's obligation to indemnify DuPont and/or Corteva for certain liabilities.
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 listcurrent plans and expectations of factors presented here is considered representative, no such list should be consideredmanagement and expressed in good faith and believed 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 Dow’s consolidated financial condition, results of operations, credit ratingreasonable basis, but there can be no assurance that the expectation or liquidity. Neither Dow nor DowDuPont assumes any obligation to publicly provide revisionsbelief will result or updates to any forward-looking statements whether as a result of new information, future developmentsbe achieved or otherwise, should circumstances change, except as otherwise required by securities and other applicable laws.
accomplished. A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section of this Annual Report on Form 10-K titled “Risk Factors” and as set forth in the preliminary registration statements on Form 10 in each case as amended from time-to-time, of each ofFactors.” Dow Holdings Inc. and Corteva, Inc. Dow undertakesTDCC assume no obligation to update or revise publicly any forward-looking statements whether because of new information, future events, or otherwise, except as required by securities and other applicable laws.
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| Dow Inc. and Subsidiaries | |
| | The Dow Chemical Company and Subsidiaries | |
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ITEM 1. BUSINESS
THE COMPANY
Dow Inc. was incorporated on August 30, 2018, under Delaware law, to serve as a holding company for The Dow Chemical Company and its consolidated subsidiaries ("TDCC" and together with Dow Inc., "Dow" or the "Company"). Dow Inc. operates all of its businesses through TDCC, a wholly owned subsidiary, which was incorporated in 1947 under Delaware law and is the successor to a Michigan corporation, of the same name, organized in 1897. The Company's principal executive offices are located at 2211 H.H. Dow Way, Midland, Michigan 48674. Throughout this
Available Information
The Company's Annual ReportReports on Form 10-K, except as otherwise indicated by the context, the terms “Company” or “Dow” as used herein mean The Dow Chemical Company and its consolidated subsidiaries.
Merger with DuPont
Effective August 31, 2017, pursuant to the merger of equals transaction contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, Dow and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, as a result, Dow and DuPont became subsidiaries of DowDuPont (the "Merger"). Following the Merger, Dow and DuPont intend to pursue, subject to certain customary conditions, including, among others, the effectiveness of registration statements filed with the U.S. Securities and Exchange Commission ("SEC") and approval by the board of directors of DowDuPont, the separation of the combined company's agriculture, materials science and specialty products businesses through one or more tax-efficient transactions ("Intended Business Separations").
Effective with the Merger, Dow’s business activities are components of its parent company’s business operations. Dow’s business activities, including the assessment of performance and allocation of resources, ultimately are reviewed and managed by DowDuPont. Information used by the chief operating decision maker of Dow relates to the Company in its entirety. Accordingly, there are no separate reportable business segments for the Company under Accounting Standards Codification Topic 280 “Segment Reporting” and the Company’s business results are reported in this Form 10-K as a single operating segment.
As a result of the Merger, DowDuPont owns all of the common stock of Dow. Pursuant to General Instruction I(1)(a) and (b) of Form 10-K “Omission of Information by Certain Wholly-Owned Subsidiaries,” the Company is filing this Form 10-K with a reduced disclosure format. See Note 3 to the Consolidated Financial Statements for additional information on the Merger.
Intended Business Separations
In furtherance of the Intended Business Separations, Dow and DuPont are engaged in a series of internal reorganization and realignment steps (the “Internal Reorganization”) to realign their businesses into three subgroups: agriculture, materials science and specialty products. DowDuPont has also formed two wholly owned subsidiaries: Dow Holdings Inc. (“DHI”), to serve as a holding company for its materials science business, and Corteva, Inc. (“Corteva”), to serve as a holding company for its agriculture business. Following the separation and distribution of DHI, which is targeted to occur by April 1, 2019, DowDuPont, as the remaining company, which is referred to herein as “New DuPont,” will continue to hold the agriculture and specialty products businesses. New DuPont is then targeted to complete the separation and distribution of Corteva on June 1, 2019, resulting in New DuPont holding the specialty products businesses of DowDuPont. Following the distributions, DowDuPont will be known as DuPont.
As part of the Internal Reorganization, 1) the assets and liabilities of the materials science business will be transferred or conveyed to legal entities that then will be aligned under DHI, 2) the assets and liabilities of the agriculture business will be transferred or conveyed to legal entities that then will be aligned under Corteva, and 3) the assets and liabilities of the specialty products business will be transferred or conveyed to legal entities that then will be aligned with New DuPont. Following the Internal Reorganization, DowDuPont expects to distribute DHI and Corteva through separate, pro rata U.S. federal tax-free spin-offs in which DowDuPont stockholders, at such time, would receive shares of common stock of DHI and of Corteva.
Additional information is included in the Form 10 registration statements for the separation of DowDuPont's materials science business (filed as Dow Holdings Inc.) filed with the SEC on September 7, 2018, as amended on October 19, 2018 and November 19, 2018, and the agriculture business (filed as Corteva, Inc.) filed with the SEC on October 18, 2018, as amended on December 19, 2018.
Available Information
The Company's annual reports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q and current reportsCurrent Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge at www.dow-dupont.com/www.dow.com/investors, as soon as reasonably practicable after the reports are electronically filed or furnished
with the SEC.U.S. Securities and Exchange Commission ("SEC"). The SEC maintains a website that contains these reports as well as proxy statements and other information regarding issuers that file electronically. The SEC's website is at www.sec.gov. The DowDuPontDow's website and its content isare not deemed incorporated by reference into this report.
Principal Product GroupsOn April 1, 2019, DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc. or "DuPont") completed the separation of its materials science business and Dow Inc. became the direct parent company of TDCC and its consolidated subsidiaries, owning all of the outstanding common shares of TDCC.
The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017. TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries (“Historical DuPont”) each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business.
As of the effective date and time of the distribution, DowDuPont does not beneficially own any equity interest in Dow and no longer consolidates Dow and its consolidated subsidiaries into its financial results. The consolidated financial results of Dow for periods prior to April 1, 2019, reflect the distribution of TDCC’s agricultural sciences business (“AgCo”) and specialty products business (“SpecCo”) as discontinued operations for each period presented as well as reflect the receipt of Historical DuPont’s ethylene and ethylene copolymers businesses (other than its ethylene acrylic elastomers business) (“ECP”) as a common control transaction from the closing of the Merger on August 31, 2017. See Notes 3 and 4 to the Consolidated Financial Statements and Dow Inc.'s Amendment No. 4 to the Registration Statement on Form 10 filed with the SEC on March 8, 2019, for additional information.
Throughout this Annual Report on Form 10-K, unless otherwise indicated, amounts and activity are presented on a continuing operations basis.
About Dow
Dow combines science and technology to develop innovative solutions that are essential to human progress. Dow has one of the strongest and broadest toolkits in the industry, with robust technology,global breadth, asset integration and scale, focused innovation and competitive capabilities that enable itleading business positions to address complex global issues.achieve profitable growth. The Company’s ambition is to become the most innovative, customer centric, inclusive and sustainable materials science company. Dow’s market-driven, industry-leading portfolio of advanced materials,plastics, industrial intermediates, coatings and plastics deliversilicones businesses delivers a broad range of differentiated technology-basedscience-based products and solutions tofor its customers in 175 countries in high-growth marketsmarket segments, such as packaging, infrastructure and consumer care. Dow operates 109 manufacturing sites in 31 countries and employs approximately 36,500 people.
BUSINESS SEGMENTS AND PRODUCTS
Effective with the Merger, TDCC's business activities were components of DowDuPont's business operations and were reported as a single operating segment. Following the separation from DowDuPont, the Company changed the manner in which its business activities were managed. The Company's productsportfolio now includes six global businesses which are manufactured at 164 sites in 35 countries acrossorganized into the globe. In 2018, Dow had annual salesfollowing operating segments: Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure and Performance Materials & Coatings. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. The Company did not aggregate any operating segments when determining its reportable segments. See Part II, Item 7, Management’s Discussion and Analysis of approximately $60 billion. The following is a descriptionFinancial Condition and Results of Operations and Note 27 to the Consolidated Financial Statements for additional information concerning the Company’s principaloperating segments.
PACKAGING & SPECIALTY PLASTICS
Packaging & Specialty Plastics consists of two highly integrated global businesses: Hydrocarbons & Energy and Packaging and Specialty Plastics. The segment employs the industry’s broadest polyolefin product groups:
Principal Product Groups Aligned withportfolio, supported by the Materials Science Business
Coatings & Performance Monomers
Coatings & Performance Monomers makes critical ingredientsCompany’s proprietary catalyst and additives that help advancemanufacturing process technologies, to work at the performance of paintscustomer’s design table throughout the value chain to deliver more reliable and coatings. The product grouping offers innovativedurable, higher performing, and more sustainable products to accelerate paint and coatings performance across diverse market segments, including architectural paints and coatings, as well as industrial coatings applications used in maintenance and protective industries, wood, metal packaging, traffic markings, thermal paper and leather. These products enhance coatings by improving hiding and coverage characteristics, enhancing durability against nature and the elements, reducing volatile organic compounds (“VOC”) content, reducing maintenance and improving ease of application. Coatings & Performance Monomers also manufactures critical building blocks based on acrylics needed for the production of coatings, textiles, and home and personal care products.
Consumer Solutions
Consumer Solutions uses innovative, versatile silicone-based technology to provide ingredients and solutionsplastics to customers in high performance building,food and specialty packaging; industrial and consumer goods, elastomeric applicationspackaging; health and hygiene; caps, closures and pipe applications; consumer durables; automotive; and infrastructure.
The Company’s unique advantages compared with its competitors include: extensive low-cost feedstock positions around the pressure sensitive adhesives industry that help them meet modern consumer preferencesworld; unparalleled scale, global footprint and market reach, with world-class manufacturing sites in attributesevery geography; deep customer and brand owner understanding; portfolio of higher-value functional polymers, such as texture, feel, scent, durabilitypolyolefin elastomers, semiconductive and consistency; provides a wide array of silicone-based productsjacketing compound solutions and solutions that enable Dow’swire and cable insulation; and market-driven application development and technical support.
The segment remains agile and adaptive by participating in the entire ethylene-to-polyethylene chain integration, enabling the Company to manage market swings, and therefore optimize returns while reducing long-term earnings volatility. The Company’s unrivaled value chain ownership is further strengthened by its Pack Studio locations in every geography, which help customers to increase the appeal of their products, extend shelf life, improve performance of products under a wider range of conditions and provide a more sustainable offering; provides standalone silicone materials that are used as intermediates in a wide range of applications including adhesion promoters, coupling agents, crosslinking agents, dispersing agents and surface modifiers; and collaborates closely with global and regional brand owners to deliver innovative solutions for creating newfaster and unrivaled consumer benefitsmore efficient packaging product commercialization through a global network of laboratories, technical experts and experiences in cleaning, laundry and skin and hair care applications, among others.testing equipment.
Hydrocarbons & Energy
Hydrocarbons & Energy is the largest global producer of ethylene, an internal feedstock, anda key chemical building block that the Company consumes primarily within the Packaging & Specialty Plastics segment. Ethylene is transferred to downstream derivative businesses at market-based prices, which are generally equivalent to prevailing market prices for large volume purchases. In addition to ethylene, the business is a leading producer of propylene and aromatics products that are used to manufacture materials that consumers use every day. ItThe business also produces and procures the power and feedstocks used by the Company'sCompany’s manufacturing sites.
Industrial Solutions
Industrial Solutions is the world’s largest producer of purified ethylene oxide. It provides a broad portfolio of solutions that address world needs by enabling and improving the manufacture of consumer and industrial goods and services, including products and innovations that minimize friction and heat in mechanical processes, manage the oil and water interface, deliver ingredients for maximum effectiveness, facilitate dissolvability, enable product identification and provide the foundational building blocks for the development of chemical technologies. Industrial Solutions supports manufacturers associated with a large variety of end-markets, notably better crop protection offerings in agriculture, coatings, detergents and cleaners, solvents for electronics processing, inks and textiles.
Packaging and Specialty Plastics
Packaging and Specialty Plastics serves growing, high-value sectors using world-class technology, broad existing product lines, and a rich product pipeline that creates competitive advantages for the entire packaging value chain. DowThe business is a recognized leader in the production, marketing and innovation of polyethylene. The business is also a leader in other ethylene derivatives, such as polyolefin elastomers, ethylene vinyl acetate and ethylene propylene diene monomer ("EPDM") rubber serving automotive, consumer, wire and cable and construction markets. Market growth is expected to be driven by major shifts in population demographics; improving socioeconomic status in emerging geographies; consumer and brand owner demand for increased functionality; global efforts to reduce food waste; growth in telecommunications networks; global development of electrical transmission and distribution infrastructure; and renewable energy applications.
Divestiture
On September 1, 2017, the Company sold its global Ethylene Acrylic Acid copolymers and ionomers business to SK Global Chemical Co., Ltd. See Note 6
Table of Contents to the Consolidated Financial Statements for additional information.
Polyurethanes & CAV
Polyurethanes & Chlor-Alkali & Vinyl ("CAV") is the world’s largest producer of propylene oxide, propylene glycol and polyether polyols, and a leading producer of aromatic isocyanates and fully formulated polyurethane systems for rigid, semi-rigid and flexible foams, and coatings, adhesives, sealants, elastomers and composites that serve energy efficiency, consumer comfort, industrial and enhanced mobility market sectors. Polyurethanes & CAV provides cost advantaged chlorine and caustic soda supply and markets caustic soda, a valuable co-product of the chlor-alkali manufacturing process, and ethylene dichloride and vinyl chloride monomer. The product grouping also provides cellulose ethers, redispersible latex powders, silicones and acrylic emulsions used as key building blocks for differentiated building and construction materials across many market segments and applications ranging from roofing and flooring to gypsum-, cement-, concrete- or dispersion-based building materials.
Corporate
Corporate includes certain enterprise and governance activities (including insurance operations, environmental operations, etc.); non-business aligned joint ventures; gains and losses on sales of financial assets; non-business aligned litigation expenses; discontinued or non-aligned businesses; and foreign exchange gains (losses).
Principal Product Groups Aligned with the Agriculture Business
Crop Protection
Crop Protection serves the global production agriculture industry with crop protection products for field crops such as wheat, corn, soybean and rice, and specialty crops such as trees, fruits and vegetables. Principal crop protection products are weed control, disease control and insect control offerings for foliar or soil application or as a seed treatment.
Seed
Seed provides seed/plant biotechnology products and technologies to improve the productivity and profitability of its customers. Seed develops, produces and markets canola, cereals, corn, cotton, rice, soybean and sunflower seeds.
Principal Product Groups Aligned with the Specialty Products Business
Electronics & Imaging
Electronics & Imaging is a leading global supplier of differentiated materials and systems for a broad range of consumer electronics including mobile devices, television monitors, personal computers and electronics used in a variety of industries. Dow offers a broad portfolio of semiconductor and advanced packaging materials including chemical mechanical planarization ("CMP") pads and slurries, photoresists and advanced coatings for lithography, metallization solutions for back-end-of-line advanced chip packaging, and silicones for light emitting diode ("LED") packaging and semiconductor applications. This product line also includes innovative metallization processes for metal finishing, decorative and industrial applications and cutting-edge materials for the manufacturing of rigid and flexible displays for liquid crystal displays and quantum dot applications.
Industrial Biosciences
Industrial Biosciences is an innovator that works with customers to improve the performance, productivity and sustainability of their products and processes through advanced microbial control technologies such as advanced diagnostics and biosensors, ozone delivery technology and biological microbial control.
Nutrition & Health
Nutrition & Health uses cellulosics and other technologies to improve the functionality and delivery of food and the safety and performance of pharmaceutical products.
Safety & Construction
Safety & Construction unites market-driven science with the strength of highly regarded brands such as STYROFOAM™ brand insulation products, GREAT STUFF™ insulating foam sealants and adhesives, and DOW FILMTEC™ reverse osmosis and nanofiltration elements to deliver products to a broad array of markets including industrial, building and construction, consumer and water processing. Safety & Construction is a leader in the construction space, delivering insulation, air sealing and weatherization systems to improve energy efficiency, reduce energy costs and provide more sustainable buildings. Safety & Construction is also a leading provider of purification and separation technologies including reverse osmosis membranes and ion exchange resins to help customers with a broad array of separation and purification needs such as reusing waste water streams and making more potable drinking water.
Transportation & Advanced Polymers
Transportation & Advanced Polymers provides high-performance adhesives, lubricants and fluids to engineers and designers in the transportation, electronics and consumer end-markets. Key products include MOLYKOTE® lubricants, DOW
CORNING® siliconeDetails on Packaging & Specialty Plastics' 2019 net sales, by business and geographic region, are as follows:
* Europe, Middle East, Africa and India ("EMEAI")
Products
Major applications/market segments and products are listed below by business:
|
| | | | |
| Business | Applications/Market Segments | Major Products | Key Raw Materials | Key Competitors |
| Hydrocarbons & Energy | Purchaser of feedstocks; production of cost competitive hydrocarbon monomers utilized by Dow's derivative businesses; and energy, principally for use in Dow’s global operations | Ethylene, propylene, benzene, butadiene, octene, aromatics co-products, power, steam, other utilities | Butane, condensate, ethane, naphtha, natural gas, propane | Chevron Phillips Chemical, ExxonMobil, INEOS, LyondellBasell, SABIC, Shell, Sinopec |
| Packaging and Specialty Plastics | Adhesives; automotive; caps, closures and pipe applications; construction; cosmetics; electrical transmission and distribution; food and supply chain packaging; footwear; health and hygiene; housewares; industrial specialty applications using polyolefin elastomers, ethylene copolymers, and ethylene propylene diene monomer ("EPDM") elastomers; irrigation pipe; photovoltaic encapsulants; sporting goods; telecommunications infrastructure; toys and infant products | Acrylics, bio-based plasticizers, copolymer, elastomers, ethylene copolymer resins, EPDM, ethylene vinyl acetate ("EVA"), methacrylic acid copolymer resins, polyethylene ("PE"), high-density polyethylene ("HDPE"), low-density polyethylene ("LDPE"), linear low-density polyethylene ("LLDPE"), polyolefin plastomers, resin additives and modifiers, semiconductive and jacketing compound solutions and wire and cable insulation
| Aliphatic solvent, butene, ethylene, hexene, octene, propylene | Borealis, ExxonMobil, INEOS, Lanxess, LyondellBasell, Nova, SABIC |
Joint Ventures
This segment includes a portion of the Company's share of the results of the following joint ventures:
EQUATE Petrochemical Company K.S.C.C. (“EQUATE”) - a Kuwait-based company that manufactures ethylene, polyethylene and ethylene glycol, and manufactures and markets monoethylene glycol, diethylene glycol and polyethylene terephthalate resins; owned 42.5 percent by the Company.
The Kuwait Olefins Company K.S.C.C. (“TKOC”) - a Kuwait-based company that manufactures ethylene and ethylene glycol; owned 42.5 percent by the Company.
Map Ta Phut Olefins Company Limited (“Map Ta Phut”) - a Thailand-based company that manufactures propylene and ethylene; the Company has an effective ownership of 32.77 percent (of which 20.27 percent is owned directly by the Company and aligned with the Industrial Intermediates & Infrastructure segment and 12.5 percent is owned indirectly through the Company’s equity interest in Siam Polyethylene Company Limited, an entity that is part of The SCG-Dow Group and aligned with the Packaging & Specialty Plastics segment).
Sadara Chemical Company ("Sadara") - a Saudi Arabian company that manufactures chlorine, ethylene, propylene and aromatics for healthcare, MULTIBASE™ TPSiV™ siliconesinternal consumption and manufactures and sells polyethylene, ethylene oxide and propylene oxide derivative products, and isocyanates; owned 35 percent by the Company. The Company is responsible for thermoplasticsmarketing a majority of Sadara products outside of the Middle East zone through the Company’s established sales channels. As part of this arrangement, the Company purchases and BETASEAL™, BETAMATE™sells Sadara products for a marketing fee.
This segment also includes the Company's share of the results of the following joint ventures:
The Kuwait Styrene Company K.S.C.C. (“TKSC”) - a Kuwait-based company that manufactures styrene monomer; owned 42.5 percent by the Company.
The SCG-Dow Group - a group of Thailand-based companies (consisting of Siam Polyethylene Company Limited; Siam Polystyrene Company Limited; Siam Styrene Monomer Company Limited; and BETAFORCE™ structuralSiam Synthetic Latex Company Limited) that manufacture polyethylene, polystyrene, styrene, latex and elastic adhesives.specialty elastomers; owned 50 percent by the Company.
Current and Future Investments
In 2017, the Company announced the startup of its new integrated world-scale ethylene production facility and its new ELITE™ Enhanced Polyethylene production facility, both located in Freeport, Texas. In 2018, the Company also started up its new Low Density Polyethylene ("LDPE")LDPE production facility and its new NORDEL™ Metallocene EPDM production facility, both located in Plaquemine, Louisiana. These key milestones enable Dowthe Company to capture benefits from increasing supplies of U.S. shale gas to deliver differentiated downstream solutions in its core market verticals. The Company also completed debottlenecking of an existing bi-modal gas phase polyethylene production facility in St. Charles, Louisiana, and started up a new High Melt Index ("HMI") AFFINITY™ polymer production facility in Freeport, Texas, in the fourth quarter of 2018.
Additionally, the Company has announced investments over the next five years that are expected to enhance Dow’s competitiveness following the Intended Business Separations.competitiveness. These include:
Expansion of the capacity of the Company’s new ethylene production facility in Freeport, TX, bringing the facility’s total ethylene capacity to 2,000 kilotonnes per annum (“KTA”("KTA") and making it the largest ethylene facilitycracker in the world.
Incremental debottleneck projects across its global asset network that will deliver approximately 350 KTA of additional polyethylene, the majority of which will be in North America.
U.S. & Canada.
Construction of a 600 KTAworld-scale polyethylene unit on the U.S. Gulf Coast based on Dow’s proprietary solution process technology,technologies, to meet consumer-driven demand in specialty packaging, health and hygiene, and industrial and consumer packaging applications.
Construction of a 450 KTA polyolefins facility in Europe to maximize the value of the Company’s ethylene integration in the region and serve growing demand for high-performance pressure pipes and fittings, as well as caps and closures applications.
A new catalyst production businessfacility for key catalysts licensed by Univation Technologies, LLC, a wholly-ownedwholly owned subsidiary of Dow.the Company.
On January 29, 2020, the Company announced plans to add another furnace to its ethylene production facility in Alberta, Canada, incrementally expanding capacity by approximately 130,000 metric tons. Dow will co-invest in the expansion with a regional customer, evenly sharing project costs and ethylene output, with the additional ethylene to be consumed by existing polyethylene manufacturing assets in the region. The expansion is expected to come online in the first half of 2021.
Low
The Company's ambition includes becoming the most sustainable materials science company in the world with a strategy to advance the well-being of humanity by helping lead the transition to a sustainable planet and society. This includes lowering energy and greenhouse gas emissions ("GHG") and enabling a shift to a circular economy for plastics by focusing on resource efficiency and integrating recycled content and renewable feedstocks into its production processes. As part of that strategy, Dow announced the following in August 2019:
An agreement with the Fuenix Ecogy Group, based in Weert, The Netherlands, for the supply of pyrolysis oil feedstock, which is made from recycled plastic waste. The feedstock will be used to produce virgin polymers at Dow’s production facilities in Terneuzen, The Netherlands. This is an important step forward to increase feedstock recycling - the process of breaking down mixed waste plastics into their original form to manufacture new virgin polymers. The polymers produced from this pyrolysis oil will be identical to products produced from traditional feedstocks, and as such, they can be used in the same applications, including food packaging.
An agreement with UPM Biofuels, a producer of biofuels, for the supply and integration of wood-based UPM Bio Verno renewable naphtha - a key raw material used to develop plastics - into Dow's slate of raw materials, creating an alternative source for plastics production. The feedstock will be used to produce bio-based polyethylene at Dow's production facilities in Terneuzen, The Netherlands, for use in packaging applications such as food packaging, to reduce food waste.
The retrofit of one of its Louisiana steam crackers with Dow’s proprietary fluidized catalytic dehydrogenation ("FCDh") technology to produce on-purpose propylene. The FCDh technology retrofit further improves Dow’s ability to continue to source the most advantaged feedstocks, while also producing reliable and cost-efficient on-purpose propylene to supply its integrated derivative units in Louisiana. The technology reduces capital outlay by up to 25 percent and lowers energy usage and GHG by up to 20 percent, thereby improving overall sustainability when compared with conventional propane dehydrogenation technologies. The project is expected to begin producing on-purpose propylene by the end of 2021.
INDUSTRIAL INTERMEDIATES & INFRASTRUCTURE
Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & Construction Chemicals - that develop important intermediate chemicals that are essential to manufacturing processes, as well as downstream, customized materials and formulations that use advanced development technologies. These businesses primarily produce and market ethylene oxide and propylene oxide derivatives that are aligned to market segments as diverse as appliances, coatings, infrastructure and oil and gas. The global scale and reach of these businesses, world-class technology and R&D capabilities and materials science expertise enable the Company to be a premier solutions provider offering customers value-add sustainable solutions to enhance comfort, energy efficiency, product effectiveness and durability across a wide range of home comfort and appliances, building and construction, adhesives and lubricant applications, among others.
Industrial Solutions
Industrial Solutions provides a broad portfolio of solutions that address world needs by enabling and improving the manufacture of consumer and industrial goods and services. The business’ solutions minimize friction and heat in mechanical processes; manage the oil and water interface; deliver ingredients for maximum effectiveness; facilitate dissolvability; enable product identification; and provide the foundational building blocks for the development of chemical technologies. The business supports manufacturers associated with a large variety of end-markets, notably coatings, detergents and cleaners, crop protection, solvents for electronics processing, inks and textiles. The business is the world's largest producer of purified ethylene oxide.
Polyurethanes & Construction Chemicals
Polyurethanes & Construction Chemicals consists of three businesses: Polyurethanes, Chlor-Alkali & Vinyl (“CAV”) and Construction Chemicals (“DCC”). The Polyurethanes business is the world’s largest producer of propylene oxide, propylene glycol and polyether polyols, and a leading producer of aromatic isocyanates and fully formulated polyurethane systems for rigid, semi-rigid and flexible foams, and coatings, adhesives, sealants, elastomers and composites that serve energy efficiency, consumer comfort, industrial and enhanced mobility market sectors. The CAV business provides cost-advantaged chlorine and caustic soda supply and markets caustic soda, a valuable co-product of the chlor-alkali manufacturing process, and ethylene dichloride and vinyl chloride monomer. The CAV business' assets are predominantly in Western Europe and largely produce materials for internal consumption. The DCC business provides cellulose ethers, redispersible latex powders, and acrylic emulsions used as key building blocks for differentiated building and construction materials across many market segments and applications ranging from roofing and flooring to gypsum-, cement-, concrete- or dispersion-based building materials.
Details on Industrial Intermediates & Infrastructures' 2019 net sales, by business and geographic region, are as follows:
Products
Major applications/market segments and products are listed below by business:
|
| | | | |
| Business | Applications/Market Segments | Major Products | Key Raw Materials | Key Competitors |
| Industrial Solutions | Broad range of products for specialty applications, including agriculture crop protection offerings, aircraft deicing, solvents for coatings, heat transfer fluids for concentrated solar power, construction, solvents for electronics processing, food preservation, fuel markers, home and personal care, infrastructure applications, lubricant additives, paper, transportation and utilities; products for energy markets including exploration, production, transmission, refining, mining and gas processing to optimize supply, improve efficiencies and manage emissions | Acetone derivatives, butyl glycol ethers, VERSENE™ Chelants, UCAR™ Deicing Fluids, ethanolamines, ethylene oxide ("EO"), ethyleneamines, UCON™ Fluids, glycol ethers, UCARTHERM™ Heat Transfer Fluids, higher glycols, isopropanolamines, low-VOC solvents, methoxypolyethylene glycol, methyl isobutyl, polyalkylene glycol, CARBOWAX™ SENTRY™ Polyethylene Glycol, TERGITOL™ and TRITON™ Surfactants, demulsifiers, drilling and completion fluids, heat transfer fluids, rheology modifiers, scale inhibitors, shale inhibitors, specialty amine solvents, surfactants, water clarifiers, frothing separating agents | Ethylene, propylene | BASF, Eastman, Hexion, Huntsman, INEOS, LyondellBasell, SABIC, Sasol, Shell |
| Polyurethanes & Construction Chemicals | Aircraft deicing fluids; alumina; pulp and paper; appliances; automotive; bedding; building and construction; flooring; footwear; heat transfer fluids; hydraulic fluids; infrastructure; packaging; textiles and transportation; construction; caulks and sealants; cement-based tile adhesives; concrete solutions; elastomeric roof coatings; industrial non-wovens; plasters and renders; roof tiles and siding; sport grounds and tape joint compounds | Aniline, caustic soda, ethylene dichloride ("EDC"), methylene diphenyl diisocyanate (“MDI”), polyether polyols, propylene glycol ("PG"), propylene oxide ("PO"), polyurethane systems, toluene diisocyanate (“TDI”), vinyl chloride monomer ("VCM"), AQUASET™ Acrylic Thermosetting Resins, DOW™ Latex Powder, RHOPLEX™ and PRIMAL™ Acrylic Emulsion Polymers, WALOCEL™ Cellulose Ethers
| Aniline, aqueous hydrochloric acid, benzene, carbon monoxide, caustic soda, cell effluent, cellulose chlorine, electric power, ethylene, hydrogen peroxide, propylene, styrene | Arkema, Ashland, BASF, Covestro, Eastman, Huntsman, INEOS, Olin, Owens-Corning, Yantai Wanhua |
Joint Ventures
This segment includes a portion of the Company's share of the results of EQUATE, TKOC, Map Ta Phut and Sadara.
Current and Future Investments
The Company expects to make investments over the next five years to enhance competitiveness in the Company’s Polyurethanes & Construction Chemicals and Industrial Solutions businesses. The investments will include alkoxylation capacity expansions and finishing capabilities; investments to support growth in polyurethane systems; and efficiency improvements around the world.
PERFORMANCE MATERIALS & COATINGS
Performance Materials & Coatings includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. These businesses primarily utilize the Company's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of the architectural and industrial coatings, home care and personal care end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to combine chemistry platforms to deliver differentiated offerings to customers.
Coatings & Performance Monomers
Coatings & Performance Monomers consists of two businesses: Coating Materials and Performance Monomers. The Coating Materials business makes critical ingredients and additives that help advance the performance of paints and coatings. The business offers innovative and sustainable products to accelerate paint and coatings performance across diverse market segments, including architectural paints and coatings, as well as industrial coatings applications used in maintenance and protective industries, wood, metal packaging, traffic markings, thermal paper and leather. These products enhance coatings by improving hiding and coverage characteristics, enhancing durability against nature and the elements, lowering or eliminating volatile organic compounds (“VOC”) content, reducing maintenance and improving ease of application. The Performance Monomers business manufactures acrylics-based building blocks needed for the production of coatings, textiles, and home and personal care products.
Consumer Solutions
Consumer Solutions consists of three businesses: Performance Silicones; Home & Personal Care; and Silicone Feedstocks & Intermediates. Performance Silicones uses innovative, versatile silicone-based technology to provide ingredients and solutions to customers in high performance building, consumer goods, elastomeric applications and the pressure sensitive adhesives industry that help them meet modern consumer preferences in attributes such as texture, feel, scent, durability and consistency. Dow’s wide array of silicone-based products and solutions enables customers to: increase the appeal of their products; extend shelf life; improve performance of products under a wider range of conditions; and provide a more sustainable offering. The Home & Personal Care business collaborates closely with global and regional brand owners to deliver innovative solutions, leveraging acrylics and cellulosics technology platforms for creating new and unrivaled consumer benefits and experiences in cleaning, laundry and skin and hair care applications, among others. Silicone Feedstocks & Intermediates provides standalone silicone materials that are used as intermediates in a wide range of applications including adhesion promoters, coupling agents, crosslinking agents, dispersing agents and surface modifiers.
Details on Performance Materials & Coatings' 2019 net sales, by business and geographic region, are as follows:
Products
Major applications/market segments and products are listed below by business:
|
| | | | |
| Business | Applications/Market Segments | Major Products | Key Raw Materials | Key Competitors |
| Coatings & Performance Monomers | Acrylic binders for architectural paints and coatings, industrial coatings and paper; adhesives; dispersants; impact modifiers; inks and paints; opacifiers and surfactants for both architectural and industrial applications; plastics additives; processing aids; protective and functional coatings; rheology modifiers
| ACOUSTICRYL™ Liquid-Applied Sound Damping Technology; acrylates; ACRYSOL™ Rheology Modifiers; AVANSE™ Acrylic Binders; EVOQUE™ Pre-Composite Polymer; foam cell promoters; FORMASHIELD™ Acrylic Binder; high-quality impact modifiers; MAINCOTE™ Acrylic Epoxy Hybrid; methacrylates; processing aids; RHOPLEX™ Acrylic Resin; TAMOL™ Dispersants; vinyl acetate monomers; weatherable acrylic capstock compounds for thermoplastic and thermosetting materials | Acetic acid, acetone, acrylic acid, butyl acrylate, methyl methacrylate, propylene, styrene | Arkema, BASF, Celanese, Evonik, LyondellBasell, Wacker Chemie |
| Consumer Solutions | Personal care, color cosmetics, baby care, home care and specialty applications with a key focus on hair care, skin care, sun care, cleansing, as well as fabric, dish, floor, hard surface and air care applications; commercial glazing; electrical and high-voltage insulation; lamp and luminaire modules assembly; oil and gas; paints and inks; release liners, specialty films and tapes; sporting goods; 3D printing | Adhesives and sealants; antifoams and surfactants; coatings and controlled release; coupling agents and crosslinkers; EVOLV3D™ Printing Technology; fluids, emulsions and dispersions; formulating and processing aids; granulation and binders; oils; polymers and emollients; opacifiers; reagents; resins, gels and powders; rheology modifiers; rubber; silicone elastomers; solubility enhancers; aerospace composites; surfactants and solvents; SILASTIC™ Silicone Elastomers; DOWSIL™ Silicone Products | Hydrochloric acid, methanol, platinum, silica, silicon metal | Elkem, Momentive, Shin-Etsu, Wacker Chemie |
Current and Future Investments
The Company has announced investments over the next five years that are expected to enhance competitiveness, including low capital intensity, high return investments in the Company'sCompany’s silicones franchise, including:franchise. The investments include a series of incremental siloxanesilicones debottleneck and efficiency improvement projects around the world;world, a new hydroxyl functional siloxane polymer plant in the U.S.; and a new specialty resin plant in China.
PRINCIPAL PRODUCT GROUP AND GEOGRAPHIC REGION RESULTSCORPORATE
See Note 25 to the Consolidated Financial Statements for information regarding sales by principal product group as well as salesCorporate includes certain enterprise and long-lived assets by geographic region.governance activities (including insurance operations, environmental operations, etc.); non-business aligned joint ventures; non-business aligned litigation expenses; and discontinued or non-aligned businesses.
RAW MATERIALS
The Company operates in an integrated manufacturing environment. Basic raw materials are processed through many stages to produce a number of products that are sold as finished goods at various points in those processes. The major raw material stream that feeds the production of the Company’sCompany's finished goods is hydrocarbon-based raw materials. The Company purchases hydrocarbon raw materials including ethane, propane, butane, naphtha and condensate as feedstocks. These raw materials are used in the production of both saleable products and energy. The Company also purchases certain monomers, primarily ethylene and propylene, to supplement internal production. The Company purchases natural gas, primarily to generate electricity, and purchases electric power to supplement internal generation. TheIn addition, the Company also produces a portion of its electricity needs in Louisiana and Texas; Alberta, Canada; theThe Netherlands; and Germany.
KeyThe Company's primary source of these raw materials purchased for use in the manufacturing process include: acetone, benzene, butane, condensate, electric power, ethane, hexene, methanol, methyl methacrylate, naphtha,are natural gas propane, pygas, silica, styreneliquids ("NGLs"), which are derived from shale gas and wood pulp. Keycrude oil production and naphtha, which is produced during the processing and refining of crude oil. Given recent advancements in shale gas, shale oil and conventional drilling techniques, the Company expects these raw materials that are produced internallyto be in abundant supply. The Company's suppliers of these raw materials include regional, international and procured from external sources for internal consumption include aniline, aqueous hydrochloric acid, butyl acrylate, chlorine, ethylene, octene, propylenenational oil and silicon metal. Hydrogen peroxide is produced internallygas companies.
The Company purchases raw materials on both short- and procured through a consolidated variable interest entity and a joint venture.long-term contracts. The Company had adequate supplies of raw materials in 2018,2019 and expects to continue to have adequate supplies of raw materials in 2019.2020.
INDUSTRY SEGMENTS AND GEOGRAPHIC REGION RESULTS
See Note 27 to the Consolidated Financial Statements for information regarding net sales, pro forma net sales, pro forma Operating EBIT and total assets by segment, as well as net sales and long-lived assets by geographic region.
SIGNIFICANT CUSTOMERS AND PRODUCTS
All products and services are marketed primarily through the Company’s sales force, although in some instances more emphasis is placed on sales through distributors. In 2019, no significant portion of the Company's sales was dependent upon a single customer.
PATENTS, LICENSES AND TRADEMARKS
The Company continually applies for and obtains U.S. and foreign patents and has a substantial number of pending patent applications throughout the world. At December 31, 2018,2019, the Company owned approximately 6,5003,700 active U.S. patents and 32,20019,100 active foreign patents as follows:
| | | Remaining Life of Patents Owned at Dec 31, 2018 | United States | Foreign | |
| Remaining Life of Patents Owned at Dec 31, 2019 | | United States | Foreign |
| Within 5 years | 1,400 |
| 5,600 |
| 900 |
| 3,800 |
|
| 6 to 10 years | 1,500 |
| 10,200 |
| 1,000 |
| 6,400 |
|
| 11 to 15 years | 3,000 |
| 15,300 |
| 1,600 |
| 8,300 |
|
| 16 to 20 years | 600 |
| 1,100 |
| 200 |
| 600 |
|
| Total | 6,500 |
| 32,200 |
| 3,700 |
| 19,100 |
|
Dow’sThe Company’s primary purpose in obtaining patents is to protect the results of its research for use in operations and licensing. DowThe Company is party to a substantial number of patent licenses, including intellectual property cross-license agreements and other technology agreements. Dowagreements, and also has a substantial number of trademarks and trademark registrations in the United States and in other countries, including the “Dow in Diamond” trademark. Although the Company considers that its patents, licenses and trademarks in the aggregate constitute a valuable asset, it does not regard its business as being materially dependent on any single or group of related patents, licenses or trademarks.
PRINCIPAL PARTLY OWNED COMPANIES
Dow’sThe Company’s principal nonconsolidated affiliates at December 31, 2018,2019, including direct or indirect ownership interest for each, are listed below:
|
| | | | |
| Principal Nonconsolidated Affiliate | Country | Ownership Interest | Business Description |
| EQUATE Petrochemical Company K.S.C.C. | Kuwait | 42.50 | % | Manufactures ethylene, polyethylene and ethylene glycol, and manufactures and markets monoethylene glycol, diethylene glycol and polyethylene terephthalate resins |
The HSC Group: | | | |
DC HSC Holdings LLC 1
| United States | 50.00 | % | Manufactures polycrystalline silicon products |
Hemlock Semiconductor L.L.C. | United States | 50.10 | % | Sells polycrystalline silicon products |
The Kuwait Olefins Company K.S.C.C. | Kuwait | 42.50 | % | Manufactures ethylene and ethylene glycol |
| The Kuwait Styrene Company K.S.C.C. | Kuwait | 42.50 | % | Manufactures styrene monomer |
Map Ta Phut Olefins Company Limited 21 | Thailand | 32.77 | % | Manufactures propylene and ethylene |
Sadara Chemical Company 32 | Saudi Arabia | 35.00 | % | Manufactures chlorine, ethylene, propylene and aromatics for internal consumption and manufactures and sells polyethylene, ethylene oxide and propylene oxide derivative products, and isocyanates |
| The SCG-Dow Group: | | | |
| Siam Polyethylene Company Limited | Thailand | 50.00 | % | Manufactures polyethylene |
| Siam Polystyrene Company Limited | Thailand | 50.00 | % | Manufactures polystyrene |
Siam Styrene Monomer Co., Ltd.Company Limited | Thailand | 50.00 | % | Manufactures styrene |
| Siam Synthetic Latex Company Limited | Thailand | 50.00 | % | Manufactures latex and specialty elastomers |
| |
| 1. | DC HSC Holdings LLC holds an 80.5 percent indirect ownership interest in Hemlock Semiconductor Operations LLC. |
| |
2. | The Company's effective ownership of Map Ta Phut Olefins Company Limited is 32.77 percent, of which the Company directly owns 20.27 percent and indirectly owns 12.5 percent through its equity interest in Siam Polyethylene Company Limited. |
| |
3.2. | DowThe Company is responsible for marketing the majority of Sadara products outside of the Middle East zone through the Company's established sales channels. Under this arrangement, the Company purchases and sells Sadara products for a marketing fee. |
See Note 1213 to the Consolidated Financial Statements for additional information regarding nonconsolidated affiliates.
PROTECTION OF THE ENVIRONMENT
Matters pertaining to the environment are discussed in Part I, Item 1A. Risk Factors; Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; and Notes 1 and 1617 to the Consolidated Financial Statements. In addition, detailed information on Dow'sthe Company's performance regarding environmental matters and goals can be found online on Dow'sthe Science & Sustainability webpage at www.dow.com. The Company'swww.dow.com/sustainability. Dow's website and its content are not deemed incorporated by reference into this report.
EMPLOYEES
At December 31, 2018,2019, the Company permanently employed approximately 54,00036,500 people on a full-time basis.
OTHER ACTIVITIES
DowThe Company engages in the property and casualty insurance and reinsurance business primarily through its Liana Limited subsidiaries.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information related to the Company's executive officers as of February 7, 2020:
|
| | | |
| Name - Age | Present Position with Registrant | Year Elected to be an Officer | Other Business Experience since January 1, 2015 |
| Karen S. Carter, 49 | Chief Human Resources Officer | 2019 | Dow Inc.: Chief Human Resources Officer since April 1, 2019.
TDCC: Chief Human Resources Officer since October 2018; Chief Inclusion Officer since July 2017; North America Commercial Vice President, Dow Packaging and Specialty Plastics from February 2016 to July 2017; Global Business Director, Low Density & Slurry Polyethylene, Packaging & Specialty Plastics from April 2015 to January 2016; and Global Marketing Director Value Chain, New Business Development & Sustainability, Performance Plastics from September 2011 to April 2015. |
| Ronald C. Edmonds, 62 | Controller and Vice President of Controllers and Tax | 2019 | Dow Inc.: Controller and Vice President of Controllers and Tax since April 1, 2019.
TDCC: Controller and Vice President since November 2009; Vice President of Tax since January 2016. |
| Jim Fitterling, 58 | Chief Executive Officer | 2018 | Dow Inc.: Chief Executive Officer since August 2018.
TDCC: Chief Executive Officer since July 2018; President and Chief Operating Officer from February 2016 to July 2018; Vice Chairman and Chief Operating Officer from October 2015 to February 2016; Vice Chairman, Business Operations from October 2014 to October 2015. |
| Peter Holicki, 59 | Senior Vice President, Operations - Manufacturing & Engineering and Environment, Health and Safety Operations | 2019 | Dow Inc.: Senior Vice President, Operations - Manufacturing & Engineering and Environment, Health and Safety Operations since April 1, 2019.
TDCC: Senior Vice President, Operations - Manufacturing & Engineering and Environment, Health and Safety Operations since October 2015; responsible for oversight of the Emergency Services and Security Expertise Center since September 2014; Corporate Vice President of Manufacturing & Engineering and Environment, Health & Safety Operations January 2014 to October 2015. |
| A. N. Sreeram, 52 | Senior Vice President of Research & Development and Chief Technology Officer | 2019 | Dow Inc.: Senior Vice President of Research & Development and Chief Technology Officer since April 1, 2019.
TDCC: Chief Technology Officer since October 2015; Senior Vice President of Research & Development since August 2013; Corporate Vice President, Research & Development from August 2013 to October 2015. |
| Howard Ungerleider, 51 | President and Chief Financial Officer | 2018 | Dow Inc.: President and Chief Financial Officer since August 2018.
TDCC: Chief Financial Officer since October 2014; President since July 2018; Vice Chairman from October 2015 to July 2018; Executive Vice President from October 2014 to October 2015. |
| Amy E. Wilson, 49 | General Counsel and Corporate Secretary | 2018 | Dow Inc.: General Counsel and Corporate Secretary since April 1, 2019; Secretary from August 2018 to April 1, 2019.
TDCC: General Counsel since October 2018; Corporate Secretary since February 2015; Associate General Counsel from April 2017 to September 2018; Assistant General Counsel from February 2015 to April 2017; Assistant Corporate Secretary from 2008 to February 2015; Director of the Office of the Corporate Secretary from August 2013 to October 2018. |
ITEM 1A. RISK FACTORS
The factors described below represent the Company's principal risks.
Global Economic Considerations: The Company operates in a global, competitive environment which gives rise to operating and market risk exposure.
The Company sells its broad range of products and services in a competitive, global environment, and competes worldwide for sales on the basis of product quality, price, technology and customer service. Increased levels of competition could result in lower prices or lower sales volume, which could have a negative impact on the Company’s results of operations. Sales of Dow’sthe Company's products are also subject to extensive federal, state, local and foreign laws and regulations, trade agreements, import and export controls and duties and tariffs. The imposition of additional regulations, controls and duties and tariffs or changes to bilateral and regional trade agreements could result in lower sales volume, which could negatively impact the Company’s results of operations.
Economic conditions around the world, and in certain industries in which the Company does business, also impact sales price and volume. As a result, market uncertainty or an economic downturn driven by political tensions, war, terrorism, epidemics or political instability in the geographic regions or industries in which Dowthe Company sells its products could reduce demand for these products and result in decreased sales volume, which could have a negative impact on the Company’s results of operations.
In addition, volatility and disruption of financial markets could limit customers’ ability to obtain adequate financing to maintain operations, which could result in a decrease in sales volume and have a negative impact on the Company’s results of operations. Dow’sThe Company’s global business operations also give rise to market risk exposure related to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks, Dowthe Company enters into hedging transactions pursuant to established guidelines and policies. If Dowthe Company fails to effectively manage such risks, it could have a negative impact on the Company’sits results of operations.
Financial Commitments and Credit Markets: Market conditions could reduce the Company's flexibility to respond to changing business conditions or fund capital needs.
Adverse economic conditions could reduce the Company’s flexibility to respond to changing business and economic conditions or to fund capital expenditures or working capital needs. The economic environment could result in a contraction in the availability of credit in the marketplace and reduce sources of liquidity for the Company. This could result in higher borrowing costs.
Raw Materials: Availability of purchased feedstock and energy, and the volatility of these costs, impact Dow’s operating costs and add variability to earnings.
Purchased feedstock and energy costs account for a substantial portion of the Company’s total production costs and operating expenses. The Company purchases hydrocarbon raw materials including ethane, propane, butane, naphtha and condensate as feedstocks and also purchases certain monomers, primarily ethylene and propylene, to supplement internal production, as well as other raw materials. The Company also purchases natural gas, primarily to generate electricity, and purchases electric power to supplement internal generation.
Feedstock and energy costs generally follow price trends in crude oil and natural gas, which are sometimes volatile. While the Company uses its feedstock flexibility and financial and physical hedging programs to help mitigate feedstock cost increases, the Company is not always able to immediately raise selling prices. Ultimately, the ability to pass on underlying cost increases is dependent on market conditions. Conversely, when feedstock and energy costs decline, selling prices generally decline as well. As a result, volatility in these costs could impact the Company’s results of operations.
The Company has a number of investments on the U.S. Gulf Coast to take advantage of increasing supplies of low-cost natural gas and natural gas liquids (“NGLs”)NGLs derived from shale gas including: the restart of the St. Charles Operations (SCO-2)("SCO-2") ethylene production facility in December 2012; construction of a newan on-purpose propylene production facility, which commenced operations in December 2015; completion of a major maintenance turnaround in December 2016 at an ethylene production facility in Plaquemine, Louisiana, which included expanding the facility’s ethylene production capacity and modifications to enable full ethane cracking flexibility; completion of a new integrated world-scale ethylene production facility and a new ELITE™ Enhanced Polyethylene production facility, both located in Freeport, Texas, in 2017, and a capacity expansion project which will bring the facility’s total ethylene capacity to 2,000 kilotonnes per annum (“KTA”) byKTA in 2020; and, the Company commenced operations in 2018 on its new Low Density Polyethylene ("LDPE")LDPE production facility and its new NORDEL™ Metallocene EPDM production facility, both located in Plaquemine, Louisiana. As a result of these investments, the Company’s exposure to purchased ethylene and propylene is expected to decline, offset by increased exposure to ethane- and propane-based feedstocks.
While the Company expects abundant and cost-advantaged supplies of NGLs in the United States to persist for the foreseeable future, if NGLs become significantly less advantaged than crude oil-based feedstocks, it could have a negative impact on the Company’s results of operations and future investments. Also, if the Company’s key suppliers of feedstocks and energy are unable to provide the raw materials required for production, it could have a negative impact on the Company’s results of operations.
Supply/Demand Balance: Earnings generated by the Company's products vary based in part on the balance of supply relative to demand within the industry.
The balance of supply relative to demand within the industry may be significantly impacted by the addition of new capacity, especially for basic commodities where capacity is generally added in large increments as world-scale facilities are built. This may disrupt industry balances and result in downward pressure on prices due to the increase in supply, which could negatively impact the Company’s results of operations.
Litigation: The Company is party to a number of claims and lawsuits arising out of the normal course of business with respect to product liability, patent infringement, employment matters, governmental tax and regulation disputes, contract and commercial litigation, and other actions.
Certain of the claims and lawsuits facing the Company purport to be class actions and seek damages in very large amounts. All such claims are contested. With the exception of the possible effect of the asbestos-related liability of Union Carbide Corporation (“Union Carbide”) and Chapter 11 related matters of Dow Silicones Corporation (“Dow Silicones,” formerly known as Dow Corning Corporation, which changed its name effective as of February 1, 2018) as described below, it is the opinion of the Company’s management that the possibility is remote that the aggregate of all such claims and lawsuits will have a material adverse impact on the Company’s consolidated financial statements.
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. At December 31, 2018,2019, Union Carbide's total asbestos-related liability, including future defense and processing costs, was $1,260$1,165 million ($1,3691,260 million at December 31, 2017)2018).
In 1995, Dow Silicones, a former 50:50 joint venture, voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code in order to resolve breast implant liabilities and related matters (the “Chapter 11 Proceeding”). Dow Silicones emerged from the Chapter 11 Proceeding on June 1, 2004, and is implementing the Joint Plan of Reorganization (the “Plan”). The Plan provides funding for the resolution of breast implant and other product liability litigation covered by the Chapter 11 Proceeding and provides a process for the satisfaction of commercial creditor claims in the Chapter 11 Proceeding. Dow Silicones’ liability for breast implant and other product liability claims was $263$165 million at December 31, 20182019 ($263 million at December 31, 2017) and the liability related to commercial creditor claims was $82 million ($78 million at December 31, 2017)2018).
See Note 1617 to the Consolidated Financial Statements for additional information on these matters.
Environmental Compliance: The costs of complying with evolving regulatory requirements could negatively impact the Company's financial results. Actual or alleged violations of environmental laws or permit requirements could result in restrictions or prohibitions on plant operations, substantial civil or criminal sanctions, as well as the assessment of strict liability and/or joint and several liability.
The Company is subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment, greenhouse gas emissions, and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. In addition, the Company may have costs related to environmental remediation and restoration obligations associated with past and current sites as well as related to the Company’sits past or current waste disposal practices or other hazardous materials handling. Although management will estimate and accrue liabilities for these obligations, it is reasonably possible that the Company’s ultimate cost with respect to these matters could be significantly higher, which could negatively impact the Company’s financial condition and results of operations. Costs and capital expenditures relating
to environmental, health or safety matters are subject to evolving regulatory requirements and depend on the timing of the promulgation and enforcement of specific standards which impose the requirements. Moreover, changes in environmental regulations could inhibit or interrupt the Company’s operations, or require modifications to its facilities. Accordingly, environmental, health or safety regulatory matters could result in significant unanticipated costs or liabilities.
Health and Safety: Increased concerns regarding the safe use of chemicals and plastics in commerce and their potential impact on the environment as well as perceived impacts of plant biotechnology on health and the environment havehas resulted in more restrictive regulations and could lead to new regulations.
Concerns regarding the safe use of chemicals and plastics in commerce and their potential impact on health and the environment and the perceived impacts of plant biotechnology on health and the environment reflect a growing trend in societal demands for increasing levels of product safety and environmental protection. These concerns could manifest themselves in stockholder proposals, preferred purchasing, delays or failures in obtaining or retaining regulatory approvals, delayed product launches, lack of market acceptance and continued pressure for more stringent regulatory intervention and litigation. These concerns could also influence public perceptions, the viability or continued sales of certain of the Company's products, the Company'sits reputation and the cost to comply with regulations. In addition, terrorist attacks and natural disasters have increased concerns about the security and safety of chemical production and distribution. These concerns could have a negative impact on the Company's results of operations.
Local, state, federal and foreign governments continue to propose new regulations related to the security of chemical plant locations and the transportation of hazardous chemicals, which could result in higher operating costs.
Plastic Waste: Increased concerns regarding plastic waste in the environment, consumers selectively reducing their consumption of plastic products due to recycling concerns, or new or more restrictive regulations and rules related to plastic waste could reduce demand for the Company’s plastic products and could negatively impact the Company’s financial results.
Local, state, federal and foreign governments have been increasingly proposing and in some cases approving bans on certain plastic-based products including single-use plastics, plastic straws and utensils. In addition, plastics have faced increased public scrutiny due to negative coverage of plastic waste in the environment, including the world’s oceans. As Dow is one of the world’s largest producers of plastics, increased regulation on the use of plastics could cause reduced demand for the Company’s polyethylene products which could negatively impact the Company’s financial condition, results of operations and cash flows.
Operational Event: A significant operational event could negatively impact the Company's results of operations.
As a diversified chemical manufacturing company, the Company's operations, the transportation of products, cyber-attacks, or severe weather conditions and other natural phenomena (such as freezing, drought, hurricanes, earthquakes, tsunamis, floods, etc.) could result in an unplanned event that could be significant in scale and could negatively impact operations, neighbors or the public at large, which could have a negative impact on the Company's results of operations.
Major hurricanes have caused significant disruption in Dow'sthe Company's operations on the U.S. Gulf Coast, logistics across the region, and the supply of certain raw materials, which had an adverse impact on volume and cost for some of Dow'sits products. Due to the Company's substantial presence on the U.S. Gulf Coast, similar severe weather conditions or other natural phenomena in the future could negatively impact the Company's results of operations.
Cyber Threat: The risk of loss of the Company’s intellectual property, trade secrets or other sensitive business information or disruption of operations could negatively impact the Company’s financial results.
Cyber-attacks or security breaches could compromise confidential, business critical information, cause a disruption in the Company’s operations or harm the Company's reputation. The Company has attractive information assets, including intellectual property, trade secrets and other sensitive, business critical information. While the Company has a comprehensive cyber-security program that is continuously reviewed, maintained and upgraded, a significant cyber-attack could result in the loss of critical business information and/or could negatively impact operations, which could have a negative impact on the Company’s financial results.
Company Strategy: Implementing certain elements of the Company's strategy could negatively impact the Company'sits financial results.
The Company currently has manufacturing operations, sales and marketing activities, and joint ventures in emerging geographies. Activities in these geographic regions are accompanied by uncertainty and risks including: navigating different government regulatory environments; relationships with new, local partners; project funding commitments and guarantees; expropriation, military actions, war, terrorism and political instability; sabotage; uninsurable risks; suppliers not performing as expected resulting in increased risk of extended project timelines; and determining raw material supply and other details regarding product movement. If the manufacturing operations, sales and marketing activities, and/or implementation of these projects is not successful, it could adversely affect the Company’s financial condition, cash flows and results of operations.
Goodwill: An impairment of goodwill could negatively impact Dow’sthe Company’s financial results.
At least annually, the Company assesses goodwill for impairment. If testing indicates that goodwill is impaired, the carrying value is written down based on fair value with a charge against earnings. Where the Company utilizes a discounted cash flow methodology in determining fair value, continued weak demand for a specific product line or business could result in an impairment. Accordingly, any determination requiring the write-off of a significant portion of goodwill could negatively impact the Company's results of operations. See Note 1314 to the Consolidated Financial Statements for additional information regarding the Company's goodwill impairment testing.
Pension and Other Postretirement Benefits: Increased obligations and expenses related to the Company's defined benefit pension plans and other postretirement benefit plans could negatively impact Dow'sits financial condition and results of operations.
The Company has defined benefit pension plans and other postretirement benefit plans (the “plans”) in the United States and a number of other countries. The assets of the Company's funded plans are primarily invested in fixed income securities, equity securities of U.S. and foreign issuers and alternative investments, including investments in real estate, private market securities and absolute return strategies. Changes in the market value of plan assets, investment returns, discount rates, mortality rates, regulations and the rate of increase in compensation levels may affect the funded status of the Company's plans and could cause volatility in the net periodic benefit cost, future funding requirements of the plans and the funded status of the plans. A significant increase in the Company's obligations or future funding requirements could have a negative impact on the Company's results of operations and cash flows for a particular period and on the Company's financial condition.
Separation from DowDuPont: Risks related to achieving the anticipated benefits of Dow's separation from DowDuPont.
Risks related to achieving the anticipated benefits of Dow's separation from DowDuPont Merger: Failure to successfully integrate the new combined operations of DowDuPont and execute the intended separation of the agriculture business, materials science business and specialty products business could result in business disruption, operational problems, financial loss and similar risk, any of which could have a material adverse effect on Dow’s consolidated financial condition, results of operations, credit rating or liquidity.
On August 31, 2017, Dow and E. I. du Pont de Nemours and Company ("DuPont") completed the previously announced merger of equals transaction and each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, as a result, Dow and DuPont became subsidiaries of DowDuPont (the "Merger"). Following the Merger, Dow and DuPont intend to pursue, subject to certain customary conditions, including, among others, the effectiveness of registration statements filed with the U.S. Securities and Exchange Commission and approval by the board of directors of DowDuPont, the separation of the combined company's agriculture, materials science and specialty products businesses through one or more tax-efficient transactions ("Intended Business Separations"). Many factors could impact the combined company, its subsidiaries, Dow and DuPont, as well as the Intended Business Separations including: (i) costs to achieve and achieving successful integration of the respective agriculture, specialty products and materials science businesses of Dow and DuPont, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, productivity actions, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management and expansion and growth of the new combined company’s operations, (ii) costs to achieve and achievement of anticipated synergies, risks and costs and pursuit and/or implementation of the potential Intended Business Separations, including anticipated timing, and any changes to the configuration of businesses included in the potential separation if implemented, (iii) potential litigation relating to the Merger and proposed Intended Business Separations that could be instituted against Dow, DuPont or their respective directors, (iv) the risk that disruptions from the Merger and proposed Intended Business Separations will harm Dow’s or DuPont’s business, including current plans and operations, (v) the ability of Dow or DuPont to retain and hire key personnel, (vi) potential adverse reactions or changes to business relationships resulting from the Merger, (vii) uncertainty as to the long-term value of DowDuPont common stock, (viii) continued availability of capital and financing and rating agency actions, (ix) legislative, regulatory and economic developments, (x) potential business uncertainty during the pendency of the Merger that could affect Dow’s and/or DuPont’s economic performance, (xi) certain contractual restrictions that could be imposed on Dow and/or DuPont during the pendency of the Merger that might impact Dow’s or DuPont’s ability to pursue certain business opportunities or strategic transactions and (xii) unpredictability and severity of catastrophic events, including,include, but are not limited to, actsa number of terrorismconditions outside the control of Dow,including risks related to (i) Dow's inability to achieve some or outbreak of war or hostilities, as well as management’s response to anyall of the aforementioned factors.benefits that it expects to receive from the separation from DowDuPont, (ii) certain tax risks associated with the separation, (iii) Dow's inability to make necessary changes to operate as a stand-alone company, (iv) the failure of Dow's pro forma financial information to be a reliable indicator of Dow's future results, (v) Dow's inability to enjoy the same benefits of diversity, leverage and market reputation that it enjoyed as a combined company, (vi) Dow's inability to receive third-party consents required under the separation agreement, (vii) Dow's customers, suppliers and others' perception of Dow's financial stability on a stand-alone basis, (viii) non-compete restrictions under the separation agreement, (ix) receipt of less favorable terms in the commercial agreements Dow entered into with DuPont and Corteva, Inc. ("Corteva"), including restrictions under intellectual property cross-license agreements, than Dow would have received from an unaffiliated third party; and (x) Dow's obligation to indemnify DuPont and/or Corteva for certain liabilities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Midland, Michigan. The Company's manufacturing, processing, marketing and research and development facilities, as well as regional purchasing offices and distribution centers are located throughout the world. The Company has investments in property, plant and equipment related to global manufacturing operations. Collectively, the Company operates 164109 manufacturing sites in 3531 countries. The following table includes the number ofmajor manufacturing sites by geographic region,segment, including consolidated variable interest entities:
|
| | | |
Number ofMajor Manufacturing Sites at Dec 31, 2018by Segment | Packaging & Specialty Plastics | Industrial Intermediates & Infrastructure | Performance Materials & Coatings |
GeographicLocation |
| Bahia Blanca, Argentina | X | | |
| Candeias, Brazil | X | X | |
| Canada: | | | |
| Fort Saskatchewan, Alberta | X | | |
| Prentiss, Alberta | X | | |
| Zhangjiagang, China | X | X | X |
| Germany: | | | |
| Boehlen | X | X | X |
| Leuna | X | | |
| Schkopau | X | X | |
| Stade | | X | |
| Terneuzen, The Netherlands | X | X | |
| Tarragona, Spain | X | X | |
| Map Ta Phut, Thailand | X | X | X |
| Barry, United Kingdom | | | X |
| United States: | | | |
| Carrollton, Kentucky | | | X |
| Hahnville, Louisiana | X | X | X |
| Plaquemine, Louisiana | X | X | |
| Midland, Michigan | | | X |
| Deer Park, Texas | | X | X |
| Freeport, Texas | X | X | X |
| Orange, Texas | X | | |
| Seadrift, Texas | X | X | |
Including the major manufacturing sites, the Company has manufacturing sites and holdings in all geographic regions as follows:
|
| |
| Manufacturing Sites by Region |
Number of SitesAsia Pacific | 19 manufacturing sites in 10 countries |
| EMEAI | 37 manufacturing sites in 15 countries |
| Latin America | 18 manufacturing sites in 4 countries |
| U.S. & Canada | 57 |
|
EMEA 1
| 44 |
|
Asia Pacific | 42 |
|
Latin America | 21 |
|
Total | 164 |
35 manufacturing sites in 2 countries |
1. Europe, Middle East and Africa.
Properties of Dowthe Company include facilities which, in the opinion of management, are suitable and adequate for their use and will have sufficient capacity for the Company'sCompany’s current needs and expected near-term growth. All of the Company'sCompany’s plants are owned or leased, subject to certain easements of other persons which, in the opinion of management, do not substantially interfere with the continued use of such properties or materially affect their value. No title examination of the properties has been made for the purpose of this report. Additional information with respect to the Company's property, plant and equipment and leases is contained in Notes 11, 1512, 16 and 1618 to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Asbestos-Related Matters of Union Carbide Corporation
Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc.
For additional information, see Part II, Item 7. Other Matters, Asbestos-Related Matters of Union Carbide Corporation in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Notes 1 and 1617 to the Consolidated Financial Statements.
Environmental Matters
In April 2012 and May 2015, Dow Silicones Corporation ("Dow Silicones"), a wholly owned subsidiary of the Company, received the following notifications from the U.S. Environmental Protection Agency ("EPA"), Region 5 related to Dow Silicones' Midland, Michigan, manufacturing facility (the “Facility”): 1) a Notice of Violation and Finding of Violation which alleges a number of violations in connection with the detection, monitoring and control of certain organic hazardous air pollutants at the Facility and various recordkeeping and reporting violations under the Clean Air Act and 2) a Notice of Violation alleging a number of violations relating to the management of hazardous wastes at the Facility pursuant to the Resource Conservation and Recovery Act. Discussions between the EPA,On June 25, 2019, the U.S. Department of Justice ("DOJ") andfiled a proceeding on behalf of the EPA against Dow Silicones are ongoing.
On March 14, 2017, FilmTec Corporationin the U.S. District Court for the Eastern District of Michigan ("FilmTec"District Court"), which proposes to resolve the previously reported allegations of noncompliance with requirements of federal air, water, waste and chemical release reporting laws at the Facility predating the ownership restructure of Dow Silicones. The consent decree, which was entered by the District Court on January 24, 2020, provides for a wholly owned subsidiarypenalty of $4.55 million, performance of supplemental environmental projects and enhancements at the Company, received notifications from the EPA, Region 5site that will cost approximately $2 million, as well as additional environmental studies and the DOJ of a proposed penalty for alleged violations of the Clean Air Act at FilmTec's Edina, Minnesota, manufacturing facility. Discussion between the EPA, DOJ and FilmTec are ongoing.other actions.
On July 5, 2018, the Company received a draft consent decree from the EPA, the DOJ and the Louisiana Department of Environmental Quality (“DEQ”), relating to the operation of steam-assisted flares at Dow’sthe Company’s olefins manufacturing facilities in Freeport, Texas; Plaquemine, Louisiana; and St. Charles, Louisiana. Discussions between the EPA, the DOJ and the DEQ are ongoing.
On July 7, 2018, the Company received an informal notice that the EPA, Region 6 was contemplating filing a Notice of Violation with a proposed penalty for alleged violations uncovered during a prior inspection related to the management of hazardous wastes at the Company's Freeport, Texas, manufacturing facility, pursuant to the Risk Management Plan requirements of the Clean Air Act. Discussions between the EPA and the Company are ongoing.
On July 26,October 30, 2018, DC Alabama, Inc. (“DCA”), a wholly owned subsidiary of the Company, receivedfinalized and executed a draft consent order (“Order”) from the Alabama Department of Environmental Management (“ADEM”) relating to alleged unpermitted discharges of industrial process water and certain water quality and equipment violations at DCA’s silicon metal production facility located in Mt. Meigs, Alabama. DCA and the ADEM negotiated the terms of and executed a finalThe Order that containsincluded, among other remedies, a civil penalty of $250,000 that DCA paid in December 2018. Implementation of the Order has been ongoing and certain additional requirements.DCA remains compliant with the Order. Discussions between DCA and the ADEM are ongoing.
On NovemberAugust 27, 2018, Union Carbide signed a consent decree with2019, the EPA, DOJ, on behalfTexas Environmental Quality Board, and Texas Office of the EPA, Region 2Attorney General (the “Government Agencies”) added Performance Materials NA, Inc., a wholly owned subsidiary of the Company, as an additional signatory to an existing draft consent decree relating to alleged disposalenvironmental violations at the Sabine manufacturing facility in Orange, Texas (the “Orange, TX Facility”). Performance Materials NA, Inc. acquired the Orange, TX Facility in February 2019 and became a subsidiary of mercury by a third party whichthe Company in April 2019. The alleged violations were first identified during multimedia environmental inspections that the EPA conducted at the Orange, TX Facility while under prior ownership in March 2009 and December 2015, and involve the management of materials in the Orange, TX Facility’s wastewater treatment system, hazardous waste management, flare and air emissions, including leak detection and repair. Discussions are ongoing between the Government Agencies, the Company, and the Orange, TX Facility’s prior owner, who is the other named signatory.
On October 23, 2019, Union Carbide contracted withreceived a proposed Agreed Order from the Texas Commission on Environmental Quality (“TCEQ”) relating to emissions of ethylene oxide from a process leak at Union Carbide’s manufacturing facility in Seadrift, Texas. The proposed Agreed Order included an administrative penalty of $800,000. On December 30, 2019, TCEQ sent a revised Agreed Order reducing the Port Refinery site in Rye Brook, New York. Thepenalty to $600,000 based on Union Carbide’s corrective actions. Discussions between Union Carbide and TCEQ are ongoing.
On November 8, 2019, a proposed consent decree containswas filed in the U.S. District Court for the Eastern District of Michigan, Civil Action No. 1:19-cv-13292 between the Company and federal, state and tribal trustees to resolve allegations of natural resource damages arising from the historic operations of the Company’s Midland manufacturing facility. On November 14, 2019, a paymentNotice of $120,198Lodging and certain additional requirements. The finalNotice of Availability and Request for Comments on Draft Restoration Plan/Environmental Assessment was published in the Federal Register. Public comments on the proposed consent decree is subjectand the draft Restoration Plan/Environmental Assessment were required to be submitted within 45 days of that publication. The proposed consent decree would require the Company to pay a public comment period. $15 million cash settlement to be used for Trustee-selected remediation projects and $6.75 million to specified local projects managed by third parties, and require the Company to complete 13 additional environmental restoration projects which are valued by the trustees at approximately $77 million.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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| | |
| Dow Inc. and Subsidiaries | |
| | The Dow Chemical Company and Subsidiaries | |
| | PART II | |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On December 11, 2015, DowApril 1, 2019, DowDuPont Inc. (“DowDuPont” and E. I. du Ponteffective June 3, 2019, n/k/a DuPont de Nemours, Inc.) completed the separation of its materials science business and Dow Inc. became the direct parent company of The Dow Chemical Company (“DuPont”) entered into an Agreement and Plan of Merger, as amended on March 31, 2017 (the "Merger Agreement") to effect an all-stock, merger of equals strategic combination resulting in a newly formed corporation named DowDuPontits consolidated subsidiaries (“TDCC” and together with Dow Inc. ("DowDuPont"). On August 31, 2017, pursuant to, “Dow” or the terms“Company”), owning all of the Merger Agreement,outstanding common shares of TDCC. Dow Inc. is now an independent, publicly traded company and DuPont each merged with subsidiaries of DowDuPont (the "Mergers") and, as a result of the Mergers, became subsidiaries of DowDuPont (collectively, the "Merger"). See Note 3 to the Consolidated Financial Statements for additional information on the Merger.
Prior to the Merger, the principal market for the Company’sDow Inc. common stock wasis listed on the New York Stock Exchange traded under the symbol “DOW.” Effective with the Merger, there is no longer a public trading market for the Company'sDow Inc. common stock asbegan regular-way trading on April 2, 2019.
Dow Inc. has paid dividends on a quarterly basis since the Company became a wholly owned subsidiaryseparation from DowDuPont and expects to continue to do so, subject to approval by the Company’s Board of DowDuPont.
Directors.Quarterly market price of common stock and dividend information related to periods prior to the Merger can be found in Note 2628 to the Consolidated Financial Statements.
In connection withAt January 31, 2020, there were 81,546 stockholders of record.
See Part III, Item 11. Executive Compensation for information relating to shares authorized for issuance under Dow Inc.'s equity compensation plans.
The Company grants stock-based compensation to employees and non-employee directors in the Merger, on August 31, 2017, all outstanding Dowform of stock incentive plans, which include stock options, restricted stock units ("RSUs") and deferred stock awards were converted into stock options and deferred stock awards with respect to DowDuPont commonrestricted stock. The Company also provides stock-based compensation in the form of performance stock options and deferred stock awards have the same terms and conditions under the applicable plans and award agreements priorunits ("PSUs"). See Note 22 to the Merger. All outstanding and nonvested performance deferred stock awards were converted into deferred stock awards with respect to DowDuPontConsolidated Financial Statements for additional information.
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of Dow Inc. common stock atby the greater ofCompany during the applicable performance target or the actual performance as of the effective time of the Merger. Dow and DuPont did not merge their stock-based compensation plans as a result of the Merger. The Dow and DuPont stock-based compensation plans were assumed by DowDuPont and continue in place with the ability to grant and issue DowDuPont common stock.three months ended December 31, 2019:
|
| | | | | | | | | | | |
| | Issuer Purchases of Equity Securities | Total number of shares purchased as part of the Company's publicly announced share repurchase program | Approximate dollar value of shares that may yet be purchased under the Company's publicly announced share repurchase program 1 (In millions) |
| | Period | Total number of shares purchased | Average price paid per share |
| |
| | October 2019 | — |
| $ | — |
| — |
| $ | 2,594 |
|
| | November 2019 | 735,600 |
| $ | 53.84 |
| 735,600 |
| $ | 2,555 |
|
| | December 2019 | 1,032,502 |
| $ | 53.17 |
| 1,032,502 |
| $ | 2,500 |
|
| | Fourth quarter 2019 | 1,768,102 |
| $ | 53.45 |
| 1,768,102 |
| $ | 2,500 |
|
| |
| 1. | On April 1, 2019, Dow Inc.'s Board of Directors ratified the share repurchase program originally approved on March 15, 2019, authorizing up to $3.0 billion to be spent on the repurchase of the Company's common stock, with no expiration date. |
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I of Form10-K. |
| | | | | | | | | | | | | | | |
| Selected Financial Data - Dow Inc. | | | | | |
| In millions, except as noted (Unaudited) | 2019 | 2018 | 2017 | 2016 | 2015 |
| Summary of Operations | | | | | |
Net sales 1 | $ | 42,951 |
| $ | 49,604 |
| $ | 43,730 |
| $ | 36,264 |
| $ | 37,101 |
|
Income (loss) from continuing operations, net of tax 2 | $ | (1,717 | ) | $ | 2,940 |
| $ | (1,287 | ) | $ | 1,478 |
| $ | 6,462 |
|
| Per share of common stock (in dollars): | | | | | |
Earnings (loss) per common share from continuing operations - basic 2 | $ | (2.42 | ) | $ | 3.80 |
| $ | (1.88 | ) | $ | 1.57 |
| $ | 8.64 |
|
Earnings (loss) per common share from continuing operations - diluted 2 | $ | (2.42 | ) | $ | 3.80 |
| $ | (1.88 | ) | $ | 1.55 |
| $ | 8.31 |
|
Cash dividends declared per share of common stock 3 | $ | 2.10 |
| $ | — |
| $ | 1.38 |
| $ | 1.84 |
| $ | 1.72 |
|
| Year-end Financial Position | | | | | |
| Total assets | $ | 60,524 |
| $ | 83,699 |
| $ | 85,852 |
| $ | 79,511 |
| $ | 67,938 |
|
| Long-term debt | $ | 15,975 |
| $ | 19,253 |
| $ | 19,757 |
| $ | 20,444 |
| $ | 16,202 |
|
| | | | | | |
| Financial Ratios | | | | | |
| Research and development expenses as percent of net sales | 1.8 | % | 1.6 | % | 1.8 | % | 2.1 | % | 2.0 | % |
Income (loss) from continuing operations before income taxes as percent of net sales 2 | (2.9 | )% | 7.6 | % | 0.5 | % | 3.5 | % | 21.8 | % |
Return on stockholders' equity 2 | (10.0 | )% | 14.3 | % | 1.5 | % | 15.3 | % | 28.2 | % |
| Gross debt as a percent of total capitalization | 54.7 | % | 37.2 | % | 39.1 | % | 43.9 | % | 39.5 | % |
| Net debt as a percent of total capitalization | 50.9 | % | 33.7 | % | 31.1 | % | 35.1 | % | 24.6 | % |
|
| | | | | | | | | | | | | | | |
| Selected Financial Data - TDCC | | | | | |
| In millions, except as noted (Unaudited) | 2019 | 2018 | 2017 | 2016 | 2015 |
| Summary of Operations | | | | | |
Net sales 1 | $ | 42,951 |
| $ | 49,604 |
| $ | 43,730 |
| $ | 36,264 |
| $ | 37,101 |
|
Income (loss) from continuing operations, net of tax 2 | $ | (1,595 | ) | $ | 2,940 |
| $ | (1,287 | ) | $ | 1,478 |
| $ | 6,462 |
|
| Year-end Financial Position | | | | | |
| Total assets | $ | 60,390 |
| $ | 83,699 |
| $ | 85,852 |
| $ | 79,511 |
| $ | 67,938 |
|
| Long-term debt | $ | 15,975 |
| $ | 19,253 |
| $ | 19,757 |
| $ | 20,444 |
| $ | 16,202 |
|
| | | | | | |
| Financial Ratios | | | | | |
| Research and development expenses as percent of net sales | 1.8 | % | 1.6 | % | 1.8 | % | 2.1 | % | 2.0 | % |
Income (loss) from continuing operations before income taxes as percent of net sales 2 | (2.6 | )% | 7.6 | % | 0.5 | % | 3.5 | % | 21.8 | % |
Return on stockholders' equity 2 | (8.6 | )% | 14.3 | % | 1.5 | % | 15.3 | % | 28.2 | % |
| Gross debt as a percent of total capitalization | 53.3 | % | 37.2 | % | 39.1 | % | 43.9 | % | 39.5 | % |
| Net debt as a percent of total capitalization | 49.6 | % | 33.7 | % | 31.1 | % | 35.1 | % | 24.6 | % |
| |
| 1. | The Company has certain product and service agreements with DuPont and Corteva that were considered intercompany transactions prior to the separation, but are trade transactions subsequent to the separation. Treatment of these transactions as trade transactions have been reflected in the tables above for 2019, 2018, 2017 and 2016. The amounts for 2015 were not updated as the impact to "Net sales" for this period was not significant. |
| |
| 2. | See Notes 4, 7, 8, 9, 13, 14, 16, 17 and 21 to the Consolidated Financial Statements for information on items materially impacting the results for the years ended December 31, 2019, 2018 and 2017, including the effects of the U.S. Tax Cuts and Jobs Act, enacted on December 22, 2017; Swiss tax reform; loss on early redemption of debt; integration and separation costs; charges related to restructuring programs; goodwill impairment and other asset related charges (including charges related to Sadara Chemical Company); a charge related to environmental remediation; a charge related to payment of plan obligations to certain participants of a U.S. non-qualified pension plan; litigation related charges, awards and adjustments; and charges associated with agreements entered into with DuPont and Corteva as part of the separation from DowDuPont. |
| |
| 3. | Amount shown for 2019 represents dividends declared by Dow Inc. Amounts shown for 2017, 2016 and 2015 represent cash dividends declared by TDCC prior to the Merger. Subsequent to the Merger, TDCC has no common shares outstanding. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On April 1, 2019, DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc. or "DuPont") completed the separation of its materials science business and Dow Inc. became the direct parent company of The Dow Chemical Company and its consolidated subsidiaries (“TDCC” and together with Dow Inc., “Dow” or the “Company”), owning all of the outstanding common shares of TDCC. For filings related to the period commencing April 1, 2019 and thereafter, TDCC was deemed the predecessor to Dow Inc., and the historical results of TDCC are deemed the historical results of Dow Inc. for periods prior to and including March 31, 2019. As a result of the parent/subsidiary relationship between Dow Inc. and TDCC, and the expectation that the financial statements and disclosures of each company will be substantially similar, the companies are filing a combined report for this Annual Report on Form 10-K. The information reflected in the report is equally applicable to both Dow Inc. and TDCC, except where otherwise noted.
The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017. TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries (“Historical DuPont”) each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business.
As of the effective date and time of the distribution, DowDuPont does not beneficially own any equity interest in Dow and no longer consolidates Dow and its consolidated subsidiaries into its financial results. The consolidated financial results of Dow for all periods presented reflect the distribution of TDCC’s agricultural sciences business (“AgCo”) and specialty products business (“SpecCo”) as discontinued operations, as well as reflect the receipt of Historical DuPont’s ethylene and ethylene copolymers businesses (other than its ethylene acrylic elastomers business) (“ECP”) as a common control transaction from the closing of the Merger on August 31, 2017. See Notes 3 and 4 to the Consolidated Financial Statements and Dow Inc.'s Amendment No. 4 to the Registration Statement on Form 10 filed with the U.S. Securities and Exchange Commission ("SEC") on March 8, 2019 for additional information.
Throughout this Annual Report on Form 10-K, unless otherwise indicated, amounts and activity are presented on a continuing operations basis.
Except as otherwise indicated by the context, the terms "Union Carbide" means Union Carbide Corporation, a wholly owned subsidiary of the Company, and "Dow Silicones" means Dow Silicones Corporation (formerly known as Dow Corning Corporation, which changed its name effective as of February 1, 2018), a wholly owned subsidiary of the Company.
Items Affecting Comparability of Financial Results
As a result of the separation from DowDuPont, pro forma net sales and pro forma Operating EBIT are provided in this section and based on the consolidated financial statements of TDCC, adjusted to give effect to the separation from DowDuPont as if it had been consummated on January 1, 2017. Pro forma adjustments include (1) the margin impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva, Inc. ("Corteva") in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont (only included for 2018 and the first three months of 2019), (2) the inclusion of ECP for the period of January 1, 2017 through August 31, 2017, (3) the removal of the amortization of ECP's inventory step-up recognized in connection with the Merger, (4) the elimination of the impact of events directly attributable to the Merger, internal reorganization and business realignment, separation, distribution and other related transactions (e.g., one-time transaction costs), and (5) the elimination of the effect of a consummated divestiture agreed to with certain regulatory agencies as a condition of approval for the Merger. These adjustments impacted the consolidated results as well as the reportable segments. See Note 27 to the Consolidated Financial Statements for a summary of the pro forma adjustments impacting segment measures for the years ended December 31, 2019, 2018 and 2017.
ABOUT DOW
Dow combines science and technology to develop innovative solutions that are essential to human progress. Dow has one of the strongest and broadest toolkits in the industry, with robust technology,global breadth, asset integration and scale, focused innovation and competitive capabilities that enable itleading business positions to address complex global issues.achieve profitable growth. The Company’s ambition is to become the most innovative, customer centric, inclusive and sustainable materials science company. Dow’s market-driven, industry-leading portfolio of advanced materials,plastics, industrial intermediates, coatings and plastics deliversilicones businesses delivers a broad range of differentiated technology-basedscience-based products and solutions tofor its customers in 175 countries in high-growth marketsmarket segments, such as packaging, infrastructure and consumer care. The Company's products are manufactured at 164Dow operates 109 manufacturing sites in 3531 countries acrossand employs approximately 36,500 people.
In 2019, the globe. In 2018, DowCompany had annual sales of approximately $60 billion.
In 2018,$43 billion, of which 36 percent of the Company’s sales were to customers in U.S. & Canada; 3034 percent were in Europe, Middle East, Africa and AfricaIndia ("EMEA"EMEAI"); while the remaining 3430 percent were to customers in Asia Pacific and Latin America.
In 2018,2019, the Company and its consolidated subsidiaries did not operate in countries subject to U.S. economic sanctions and export controls as imposed by the U.S. State Department or in countries designated by the U.S. State Department as state sponsors of terrorism, including Iran, the Democratic People's Republic of Korea (North Korea), Sudan and Syria. The Company has policies and procedures in place designed to ensure that it and its consolidated subsidiaries remain in compliance with applicable U.S. laws and regulations.
Except as otherwise indicated by the context, the term "Union Carbide" means Union Carbide Corporation, a wholly owned subsidiary of Dow, and "Dow Silicones" means Dow Silicones Corporation (formerly known as Dow Corning Corporation, which changed its name effective as of February 1, 2018), a wholly owned subsidiary of Dow.
OVERVIEW
Effective August 31, 2017, pursuant to the merger of equals transaction contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, Dow and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, asThe following is a result, Dow and DuPont became subsidiaries of DowDuPont (the "Merger"). Following the Merger, Dow and DuPont intend to pursue, subject to certain customary conditions, including, among others, the effectiveness of registration statements filed with the U.S. Securities and Exchange Commission ("SEC") and approval by the board of directors of DowDuPont, the separationsummary of the combined company's agriculture, materials scienceresults from continuing operations and specialty products businesses through one or more tax-efficient transactions ("Intended Business Separations"). See Note 3 to the Consolidated Financial Statements for additional information on the Merger.
Effective with the Merger, Dow’s business activities are components of its parent company’s business operations. Dow’s business activities, including the assessment of performance and allocation of resources, ultimately are reviewed and managed by DowDuPont. Information used by the chief operating decision maker of Dow relates to the Company in its entirety. Accordingly, there are no separate reportable business segmentsother notable events for the Company under Accounting Standards Codification Topic 280 “Segment Reporting”for the year ended December 31, 2019:
The Company reported net sales in 2019 of $43 billion, down 13 percent from $49.6 billion in 2018, with declines across all geographic regions and operating segments. These declines were due to a decrease in local price of 11 percent, a volume decline of 2 percent and a 1 percent unfavorable currency impact, partially offset by a 1 percent increase in Portfolio & Other.
Local price decreased 11 percent compared with the Company’s business results aresame period last year, with decreases in all operating segments, including double-digit declines in Packaging & Specialty Plastics and Industrial Intermediates & Infrastructure (both down 12 percent). Local price decreased in all geographic regions, including double-digit declines in Latin America (down 14 percent), Asia Pacific (down 12 percent) and U.S. & Canada (down 11 percent).
Volume decreased 2 percent compared with 2018, driven primarily by lower hydrocarbon co-product sales. Packaging & Specialty Plastics and Performance Materials & Coatings reported volume declines (both down 3 percent) while Industrial Intermediates & Infrastructure was flat. Volume decreased in this Form 10-K as a single operating segment.EMEAI (down 4 percent) and Latin America and U.S. & Canada (both down 3 percent), partially offset by an increase in Asia Pacific (up 5 percent).
As a resultCurrency had an unfavorable impact of the Merger, DowDuPont owns all of the common stock of Dow. Pursuant1 percent on net sales, driven primarily by EMEAI (down 3 percent).
Research and development ("R&D") expenses were $765 million in 2019, down from $800 million in 2018. Selling, general and administrative ("SG&A") expenses for Dow Inc. and TDCC were $1,590 million and $1,585 million, respectively, in 2019, down from $1,782 million in 2018. R&D and SG&A expenses decreased primarily due to General Instruction I(1)(a)cost reductions, cost synergies, stranded cost removal and (b) of Form 10-K “Omission of Information by Certain Wholly-Owned Subsidiaries,” the Company is filing this Form 10-K with a reduced disclosure format.lower performance-based compensation costs.
Intended Business Separations
In furtheranceRestructuring, goodwill impairment and asset related charges - net were $3,219 million in 2019, primarily reflecting post-merger restructuring actions under the DowDuPont Cost Synergy Program, a goodwill impairment charge of the Intended Business Separations, Dow and DuPont are engaged in a series of internal reorganization and realignment steps (the “Internal Reorganization”)$1,039 million related to realign their businesses into three subgroups: agriculture, materials science and specialty products. DowDuPont has also formed two wholly owned subsidiaries: Dow Holdings Inc. (“DHI”), to serve as a holding company for its materials science business, and Corteva, Inc. (“Corteva”), to serve as a holding company for its agriculture business. Following the separation and distribution of DHI, which is targeted to occur by April 1, 2019, DowDuPont, as the remaining company, which is referred to herein as “New DuPont,” will continue to hold the agriculture and specialty products businesses. New DuPont is then targeted to complete the separation and distribution of Corteva on June 1, 2019, resulting in New DuPont holding the specialty products businesses of DowDuPont. Following the distributions, DowDuPont will be known as DuPont.
As part of the Internal Reorganization, 1) the assets and liabilities of the materials science business will be transferred or conveyed to legal entities that then will be aligned under DHI, 2) the assets and liabilities of the agriculture business will be transferred or conveyed to legal entities that then will be aligned under Corteva, and 3) the assets and liabilities of the specialty products business will be transferred or conveyed to legal entities that then will be aligned with New DuPont. Following the Internal Reorganization, DowDuPont expects to distribute DHI and Corteva through separate, pro rata U.S. federal tax-free spin-offs in which DowDuPont stockholders, at such time, would receive shares of common stock of DHI and of Corteva.
Additional information is included in the Form 10 registration statements for the separation of DowDuPont's materials science business (filed as Dow Holdings Inc.) filed with the SEC on September 7, 2018, as amended on October 19, 2018 and November 19, 2018, and the agriculture business (filed as Corteva, Inc.) filed with the SEC on October 18, 2018, as amended on December 19, 2018.
Impact From Recently Enacted Tariffs
Certain countries where the Company’s products are manufactured, distributed or sold have recently enacted tariffs on certain products. The Company has analyzed the direct impact from the enacted tariffs and does not expect them to have a material impact on results of operations in 2019. The Company is taking actions to mitigate the impact by leveraging its global asset base to adjust its product and raw material flows.
PRINCIPAL PRODUCT GROUPS
The Company's principal product groups aligned with the materials science business include: Coatings & Performance Monomers Consumer Solutions, Hydrocarbonsreporting unit and $1,755 million of pretax charges related to Sadara Chemical Company ("Sadara").
Integration and separation costs for Dow Inc. and TDCC were $1,063 million and $1,039 million, respectively, in 2019, down from $1,179 million in 2018, reflecting the wind-down of post-Merger integration and business separation activities.
Equity in earnings (losses) of nonconsolidated affiliates was a loss of $94 million in 2019, down from earnings of $555 million in 2018, primarily due to increased equity losses from Sadara and lower equity earnings from the Kuwait joint ventures and the Thai joint ventures.
Sundry income (expense) - net for Dow Inc. and TDCC was income of $461 million and income of $573 million, respectively, in 2019, compared with income of $96 million in 2018. Sundry income (expense) - net increased primarily due to an increase in foreign currency exchange gains as well as a net gain related to litigation matters.
Net income (loss) available for Dow Inc. and TDCC common stockholder(s) was a loss of $1,359 million and $1,237 million, respectively, in 2019, compared with income of $4,641 million in 2018. Earnings (loss) per share for Dow Inc. was a loss of $1.84 per share in 2019, compared with income of $6.21 per share in 2018.
In 2019, Dow Inc. declared and paid dividends of $2.10 per share ($1,550 million), to common stockholders, and TDCC paid a $535 million dividend to DowDuPont.
In 2019, Dow Inc. repurchased $500 million of the Company's common stock.
In 2019, the Company reduced gross debt by nearly $3 billion.
In October 2019, the Company received a $0.8 billion cash payment related to the Nova Chemicals Corporation ("Nova") ethylene asset matter.
Other notable events and highlights from the year ended December 31, 2019 include:
On April 1, 2019, Dow successfully completed its separation from DowDuPont, becoming a more focused and streamlined materials science company.
In April 2019, Dow Inc. was named to the Dow Jones Industrial Average.
On April 25, 2019, the Company announced plans to expand its alkoxylation capacity at its existing facility in Tarragona, Spain, directly benefiting the EMEAI region.
On August 13, 2019, Dow announced that it reached an agreement for the divestiture of its acetone derivatives business to ALTIVIA Ketones & Energy, Industrial Solutions, PackagingAdditives, LLC, an affiliate of ALTIVIA, a privately held producer of chemicals headquartered in Houston, Texas. The transaction closed on November 1, 2019, and Specialty Plastics, Polyurethanes & CAVincluded the Company's acetone derivatives related inventory and Corporate.production assets located in Institute, West Virginia, in addition to the site infrastructure, land and utilities.
On August 20, 2019, as part of the Company's current slate of low capital intensity, high-return incremental growth investments, Dow announced it will retrofit proprietary fluidized catalytic dehydrogenation technology into one of its mixed-feed crackers in Plaquemine, Louisiana, to produce on-purpose propylene.
Dow announced two new agreements that contribute to its commitment to incorporate at least 100,000 tonnes of recycled plastics in its product offerings sold in the European Union by 2025. The principal product groups alignedfirst was announced on August 29, 2019 with the agriculture business include: Crop ProtectionFuenix Ecogy Group for the supply of pyrolysis oil feedstock, which is made from plastic waste. The second agreement was announced on September 24, 2019 with UPM Biofuels for the supply of wood-based UPM BioVerno renewable naphtha. These feedstocks will be used to produce new polymers and Seed;bio-based polyethylene at Dow's production facilities in Terneuzen, The Netherlands.
Dow was named to the Dow Jones Sustainability World Index - marking the 20th time the Company has been named to this global benchmark.
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| • | Dow was named to Fortune's 2019 Change the World list, recognizing the Company's program to pilot the use of recycled plastics in roads as part of the Company's long-standing commitment to reduce plastic waste and drive sustainable solutions. |
| |
| • | Dow was named to the 2019 Disability Equality Index® "Best Places to Work," by receiving the top score for the third year in a row. |
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| • | Dow received four R&D 100 Awards from R&D Magazine for innovative technologies including: IMAGIN3DTMPolyethylene OBC, SYL-OFFTMSL-25 Release Modifier, SILASTICTM MS-4007 Moldable Optical Silicone and GREAT STUFFTM SMART DISPENSERTM. |
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| • | Dow received four 2019 Sustainability Awards from the Business Intelligence Group, including the Sustainability Initiative of the Year Award for the RENUVATMMattress Project and the Sustainability Products of the Year Award for Dow PRIMALTM Bio-based Acrylic Emulsion, DOWSILTM TC-3015 Re-workable Thermal Conductive Silicone Gel and RENUVATM Polyols. |
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| • | Dow received five prestigious Edison Awards for breakthrough technologies, setting a record for the Company, with two gold, two silver and one bronze award including: gold to ENGAGETM PV Polyolefin Elastomers, gold to Tenter Frame Biaxially Orientable Polyethylene Resin, silver to ECOFASTTM Pure Sustainable Textile Treatment, silver to VORARADTMDownhole Radium Sequestration Technology and bronze to OPULUXTMHGT. |
On June 13, 2019, Samuel R. Allen was elected to Dow's Board of Directors, effective August 1, 2019.
In addition to the highlights above, the following events occurred subsequent to December 31, 2019:
On January 29, 2020, the Company announced plans to add another furnace to its ethylene production facility in Alberta, Canada, incrementally expanding capacity by approximately 130,000 metric tons. Dow will co-invest in the expansion with a regional customer, evenly sharing project costs and those alignedethylene output, with the specialty products business include: Electronics & Imaging, Industrial Biosciences, Nutrition & Health, Safety & Construction and Transportation & Advanced Polymers.additional ethylene to be consumed by existing polyethylene manufacturing assets in the region. The expansion is expected to come online in the first half of 2021.
RESULTS OF OPERATIONS
Net Sales
The following table summarizestables summarize net sales, variancespro forma net sales and sales variance by operating segment and geographic region from the prior year:
|
| | | | | | | | | | |
| Sales Variances by Geographic Region | Local Price & Product Mix | Currency | Volume | Portfolio & Other | Total |
| Percentage change from prior year |
| 2018 | | | | | |
| U.S. & Canada | 3 | % | — | % | 1 | % | — | % | 4 | % |
| EMEA | 4 |
| 4 |
| 3 |
| — |
| 11 |
|
| Asia Pacific | 2 |
| 1 |
| 15 |
| (1 | ) | 17 |
|
| Latin America | 3 |
| — |
| 3 |
| (3 | ) | 3 |
|
| Total | 4 | % | 1 | % | 5 | % | (1 | )% | 9 | % |
| | | | | | |
| 2017 | | | | | |
| U.S. & Canada | 6 | % | — | % | 5 | % | 4 | % | 15 | % |
| EMEA | 10 |
| 1 |
| 6 |
| 3 |
| 20 |
|
| Asia Pacific | 4 |
| — |
| 7 |
| 7 |
| 18 |
|
| Latin America | 2 |
| — |
| (1 | ) | — |
| 1 |
|
| Total | 6 | % | — | % | 5 | % | 4 | % | 15 | % |
| | | | | | |
| 2016 | | | | | |
| U.S. & Canada | (7 | )% | — | % | 3 | % | 2 | % | (2 | )% |
| EMEA | (6 | ) | (1 | ) | 4 |
| (1 | ) | (4 | ) |
| Asia Pacific | (6 | ) | — |
| 6 |
| 9 |
| 9 |
|
| Latin America | (6 | ) | — |
| — |
| (1 | ) | (7 | ) |
| Total | (6 | )% | — | % | 3 | % | 2 | % | (1 | )% |
|
| | | | | | | | | |
| Summary of Sales Results | | | |
| In millions | 2019 | 2018 | 2017 |
| Net sales | $ | 42,951 |
| $ | 49,604 |
| $ | 43,730 |
|
| Pro forma net sales | $ | 42,998 |
| $ | 49,852 |
| $ | 44,772 |
|
Net
|
| | | | | | | | | | | | | | | | | | | | |
| Sales Variances by Operating Segment and Geographic Region - As Reported |
| | 2019 | 2018 |
| Percentage change from prior year | Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total | Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total |
| Packaging & Specialty Plastics | (12 | )% | (1 | )% | (3 | )% | — | % | (16 | )% | 1 | % | 2 | % | 5 | % | 5 | % | 13 | % |
| Industrial Intermediates & Infrastructure | (12 | ) | (1 | ) | — |
| — |
| (13 | ) | 5 |
| 1 |
| 13 |
| — |
| 19 |
|
| Performance Materials & Coatings | (6 | ) | (2 | ) | (3 | ) | 3 |
| (8 | ) | 10 |
| 1 |
| (2 | ) | — |
| 9 |
|
| Total | (11 | )% | (1 | )% | (2 | )% | 1 | % | (13 | )% | 4 | % | 1 | % | 6 | % | 2 | % | 13 | % |
| U.S. & Canada | (11 | )% | — | % | (3 | )% | 1 | % | (13 | )% | 4 | % | — | % | 2 | % | 2 | % | 8 | % |
| EMEAI | (9 | ) | (3 | ) | (4 | ) | — |
| (16 | ) | 5 |
| 3 |
| 4 |
| 2 |
| 14 |
|
| Asia Pacific | (12 | ) | (1 | ) | 5 |
| — |
| (8 | ) | 2 |
| 1 |
| 19 |
| 3 |
| 25 |
|
| Latin America | (14 | ) | — |
| (3 | ) | — |
| (17 | ) | 5 |
| — |
| 4 |
| 2 |
| 11 |
|
| Total | (11 | )% | (1 | )% | (2 | )% | 1 | % | (13 | )% | 4 | % | 1 | % | 6 | % | 2 | % | 13 | % |
| |
| 1. | Portfolio & Other includes the sales impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation, which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont. |
|
| | | | | | | | | | |
Sales Variances by Operating Segment and Geographic Region - As Reported
Percentage change from prior year | 2017 |
| Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total |
| Packaging & Specialty Plastics | 8 | % | — | % | 6 | % | 3 | % | 17 | % |
| Industrial Intermediates & Infrastructure | 10 |
| 1 |
| 6 |
| — |
| 17 |
|
| Performance Materials & Coatings | 8 |
| 1 |
| 2 |
| 26 |
| 37 |
|
| Total | 9 | % | — | % | 6 | % | 6 | % | 21 | % |
| U.S. & Canada | 8 | % | — | % | 5 | % | 6 | % | 19 | % |
| EMEAI | 12 |
| 1 |
| 6 |
| 5 |
| 24 |
|
| Asia Pacific | 6 |
| — |
| 8 |
| 13 |
| 27 |
|
| Latin America | 4 |
| — |
| — |
| 3 |
| 7 |
|
| Total | 9 | % | — | % | 6 | % | 6 | % | 21 | % |
| |
| 1. | Portfolio & Other primarily reflects sales related to the receipt of ECP as a common control transaction from the closing of the Merger on August 31, 2017, and the divestiture of the global Ethylene Acrylic Acid copolymers and ionomers business ("EAA Business"), divested on September 1, 2017 (both impacting Packaging & Specialty Plastics). In addition, Portfolio & Other includes the ownership restructure of Dow Silicones announced on June 1, 2016 (impacting Performance Materials & Coatings). |
2019 Versus 2018
The Company reported net sales for 2018 were $60.3of $43 billion up 9in 2019, down 13 percent from $55.5$49.6 billion in 2018, primarily driven by a decrease in local price, decreased volume and the unfavorable impact of currency. Sales declines were broad-based and occurred in all segments and geographic regions. Local price decreased 11 percent, primarily in response to lower feedstock and raw material costs and pricing pressures. Local price decreased in Packaging & Specialty Plastics and Industrial Intermediates & Infrastructure (both down 12 percent) and in Performance Materials & Coatings (down 6 percent). Local price decreased in all geographic regions. Volume decreased 2 percent with declines in all geographic regions except Asia Pacific (up 5 percent). Volume declines were primarily driven by lower hydrocarbon co-product sales. Volume decreased in Packaging & Specialty Plastics and Performance Materials & Coatings (both down 3 percent), while Industrial Intermediates & Infrastructure volume was flat. Currency unfavorably impacted net sales by 1 percent compared with the prior year, driven primarily by EMEAI (down 3 percent). Portfolio & Other improved sales by 1 percent.
2018 Versus 2017
The Company reported net sales of $49.6 billion in 2018, up 13 percent from $43.7 billion in 2017, driven by higher sales volume, reflecting additional capacity from U.S. Gulf Coast growth projects and increased supply from Sadara, Chemical Company ("Sadara"), increased local price, the receipt of ECP and the favorable impact of currency. Sales increasedgrowth was broad-based, with increases in all segments and geographic regions with double-digit gains in Asia Pacific (up 17 percent) and EMEA (up 11 percent).regions. Volume increased 56 percent compared with the prior year, as increases in PolyurethanesPackaging & CAV, Packaging and Specialty Plastics (up 5 percent) and Industrial Solutions, HydrocarbonsIntermediates & Energy, Electronics & Imaging, Nutrition & Health and Safety & ConstructionInfrastructure (up 13 percent) more than offset declinesa decline in Seed, Consumer Solutions,Performance Materials & Coatings & Performance Monomers, Industrial Biosciences and Transportation & Advanced Polymers. Volume was flat in Crop Protection.(down 2 percent). Volume increased in all geographic regions, including a double-digit increase in Asia Pacific (up 1519 percent).
Local price was up 4 percent compared with the prior year, with increases in all geographic regions, driven by pricing initiatives and higher feedstock and raw material prices. Local price increased 4in all segments, with the most notable increases in Industrial Intermediates & Infrastructure (up 5 percent) and Performance Materials & Coatings (up 10 percent). Portfolio & Other contributed 2 percent of the sales increase, primarily reflecting the receipt of ECP. Currency was up 1 percent compared with the prior year, driven by a favorable impact in EMEAI and Asia Pacific.
|
| | | | | | | | | | | | | | | | | | | | |
| Sales Variances by Operating Segment and Geographic Region - Pro Forma Basis |
| | 2019 | 2018 |
| Percentage change from prior year | Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total | Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total |
| Packaging & Specialty Plastics | (12 | )% | (1 | )% | (3 | )% | — | % | (16 | )% | 1 | % | 1 | % | 5 | % | — | % | 7 | % |
| Industrial Intermediates & Infrastructure | (12 | ) | (2 | ) | 1 |
| — |
| (13 | ) | 5 |
| 1 |
| 13 |
| — |
| 19 |
|
| Performance Materials & Coatings | (6 | ) | (2 | ) | (1 | ) | — |
| (9 | ) | 10 |
| 1 |
| (2 | ) | 2 |
| 11 |
|
| Total | (11 | )% | (1 | )% | (2 | )% | — | % | (14 | )% | 4 | % | 1 | % | 6 | % | — | % | 11 | % |
| Total, excluding the Hydrocarbons & Energy business | (10 | )% | (2 | )% | 1 | % | — | % | (11 | )% | 4 | % | 1 | % | 7 | % | — | % | 12 | % |
| U.S. & Canada | (11 | )% | — | % | (2 | )% | — | % | (13 | )% | 3 | % | — | % | 2 | % | 1 | % | 6 | % |
| EMEAI | (9 | ) | (3 | ) | (4 | ) | — |
| (16 | ) | 5 |
| 3 |
| 4 |
| — |
| 12 |
|
| Asia Pacific | (12 | ) | (1 | ) | 5 |
| — |
| (8 | ) | 3 |
| 1 |
| 18 |
| — |
| 22 |
|
| Latin America | (15 | ) | — |
| (3 | ) | — |
| (18 | ) | 5 |
| — |
| 4 |
| — |
| 9 |
|
| Total | (11 | )% | (1 | )% | (2 | )% | — | % | (14 | )% | 4 | % | 1 | % | 6 | % | — | % | 11 | % |
| |
| 1. | Portfolio & Other includes the sales impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation, which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont. |
2019 Versus 2018 - Pro Forma
The Company reported pro forma net sales for 2019 of $43 billion, down 14 percent from $49.9 billion for 2018, primarily driven by a decrease in local price, decreased volume and the unfavorable impact of currency. Sales declines were broad-based and occurred in all segments and geographic regions. Local price decreased 11 percent, primarily in response to higherlower feedstock and raw material costs and pricing initiatives.pressures. Local price increaseddecreased in Packaging & Specialty Plastics and Industrial Intermediates & Infrastructure (both down 12 percent) and in Performance Materials & Coatings (down 6 percent). Local price decreased in all geographic regions. Volume decreased 2 percent with declines in all geographic regions and across all principal product groups, except Asia Pacific (up 5 percent). Volume decreased in Packaging and& Specialty Plastics (down 3 percent) and ElectronicsPerformance Materials & Imaging which were flat, with the most notable increasesCoatings (down 1 percent), and increased in Consumer Solutions, PolyurethanesIndustrial Intermediates & CAV, Hydrocarbons & Energy, Coatings & Performance Monomers and Industrial Solutions. Portfolio & Other decreased salesInfrastructure (up 1 percent, reflecting the divestiture of the global Ethylene Acrylic Acid copolymers and ionomers business ("EAA Business"), a portion of Dow AgroSciences' corn seed business in Brazil ("DAS Divested Ag Business") and the divestiture of SKC Haas Display Films group of companies.percent). Currency increasedunfavorably impacted net sales by 1 percent compared with the prior year, driven primarily by EMEAEMEAI (down 3 percent). Portfolio & Other was flat compared with the prior year.
2018 Versus 2017 - Pro Forma
The Company reported pro forma net sales of $49.9 billion in 2018, up 11 percent from pro forma net sales of $44.8 billion in 2017, with increases across all segments and geographic regions. Double-digit net sales increases were reported in Industrial Intermediates & Infrastructure (up 419 percent) and Performance Materials & Coatings (up 11 percent).
Net sales for 2017 were $55.5 billion, up 15 percent from $48.2 billion in 2016, primarily reflecting increased local price, higher sales volume and the addition of the Dow Silicones business. Sales increased in all geographic regions with double-digit increases in EMEA (up 20 percent), Asia Pacific (up 1822 percent), EMEAI (up 12 percent), Latin America (up 9 percent) and U.S. & Canada (up 156 percent). Local priceVolume increased 6 percent compared with pro forma results in the prior year, reflecting additional capacity from U.S. Gulf Coast growth projects and increased supply from Sadara. Volume increases in Packaging & Specialty Plastics (up 5 percent) and Industrial Intermediates & Infrastructure (up 13 percent) more than offset a decline in Performance Materials & Coatings (down 2 percent). Volume increased in all geographic regions, including a double-digit increase in EMEAAsia Pacific (up 1018 percent),. Local price was up 4 percent compared with pro forma results in the prior year with increases in all geographic regions, driven by broad-based pricing actions as well asinitiatives and higher feedstock and raw material prices. Local price increased across most principal product groupsall segments, including a double-digit increase in Performance Materials & Coatings (up 10 percent). Currency was up 1 percent compared with the most notable increases in Hydrocarbons & Energy, Polyurethanes & CAV, Coatings & Performance Monomers, Packaging and Specialty Plastics, Industrial Solutions and Consumer Solutions. Local price was flat in Safety & Construction and Transportation & Advanced Polymers and declined in Crop Protection, Electronics & Imaging and Industrial Biosciences. Volume increased 5 percent, with increases across all principal product groups, except Seed, with notable increases reported in Hydrocarbons & Energy, Polyurethanes & CAV, Packaging and Specialty Plastics, Electronics & Imaging and Industrial Solutions. Volume was flat in Crop Protection. Volume increased in all geographic regions, except Latin America (down 1prior year, driven primarily by EMEAI (up 3 percent). Portfolio & Other increased
sales 4 percent, primarily reflecting the addition of the Dow Silicones business, partially offset by divestitures, including the SKC Haas Display Films group of companies, the EAA Business and the DAS Divested Ag Business.
Cost of Sales
Cost of sales ("COS") was $47.7$36.7 billion in 2019, down $4.4 billion from $41.1 billion in 2018. COS decreased in 2019 primarily due to lower feedstock and other raw material costs, decreased sales volume, cost synergies, stranded cost removal and a favorable adjustment to the warranty accrual of an exited business, which were partially offset by $75 million of transaction-related costs resulting from the separation from DowDuPont (related to the Corporate segment) and $399 million of environmental charges related to Packaging & Specialty Plastics ($5 million), Industrial Intermediates & Infrastructure ($8 million), Performance Materials & Coatings ($50 million) and Corporate ($336 million). COS as a percentage of sales was 85.3 percent in 2019 compared with 82.8 percent in 2018.
COS was $41.1 billion in 2018, up $4.1$4.7 billion from $43.6$36.4 billion in 2017. COS increased in 20182017, primarily due to increased sales volume, which reflected additional capacity from U.S. Gulf Coast growth projects and increased supply from Sadara, higher feedstock and other raw material costs and increased planned maintenance turnaround costs which more than offset lower commissioning expenses related to U.S. Gulf Coast growth projects and cost synergies. COS as a percentage of sales was 79.182.8 percent in 2018 compared with 78.683.1 percent in 2017.
COS was $43.6 billion in 2017, up $5.9 billion from $37.7 billion in 2016, primarily due to increased sales volume, higher feedstock, energy and other raw material costs, higher commissioning expenses related to U.S. Gulf Coast growth projects, and the addition of the Dow Silicones business. COS as a percentage of sales was 78.6 percent in 2017 compared with 78.2 percent in 2016. See Note 5 to the Consolidated Financial Statements for additional information on the Dow Silicones ownership restructure.
Personnel Count
The Company permanently employed approximately 54,00036,500 people at December 31, 2019, down from approximately 37,600 people at December 31, 2018 and 2017, down from approximately 56,00039,200 people at December 31, 2016,2017 primarily due to the Company's restructuring programs.
Research and Development Expenses
Research and development (“R&D”)&D expenses were $1,536$765 million in 2019, compared with $800 million in 2018 and $803 million in 2017. R&D expenses in 2019 decreased compared with $1,6482018 primarily due to cost reductions and lower performance-based compensation costs. R&D expenses in 2018 were essentially flat compared with 2017.
Selling, General and Administrative Expenses
SG&A expenses for Dow Inc. and TDCC were $1,590 million and $1,585 million, respectively, in 2019, compared with $1,782 million in 20172018 and $1,593$1,795 million in 2016.2017. In 2018, R&D2019, SG&A expenses decreased primarily due to cost reductions, cost synergies, stranded cost removal and lower performance-based compensation costs. In 2017, R&DSG&A expenses increased primarily duewere favorably impacted by a recovery of a portion of legal costs related to the additionNova litigation award in the third quarter of the Dow Silicones business.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses were $2,846 million in 2018, compared with $2,920 million in 2017 and $2,953 million in 2016.2019. In 2018, SG&A expenses decreased primarily due to additional cost synergiesreductions and lower performance-based compensation costs. In 2017, SG&A expenses decreased as cost reduction initiativescosts which more than offset a full year of expense from the ECP business and reduced litigation expenses, as a resultthe absence of the favorable impact from the recovery of costs related to the Nova Chemicals Corporation ("Nova") patent infringement award more than offset higher spending from the addition of the Dow Silicones business.in 2017. See Note 1617 to the Consolidated Financial Statements for additional information on the Nova award.litigation awards.
Amortization of Intangibles
Amortization of intangibles was $622$419 million in 2019, down from $469 million in 2018, essentially flat compared with $624 million in 2017.primarily due to certain intangible assets becoming fully amortized. Amortization of intangibles in 20172018 increased from $544$400 million in 2016,2017, primarily due to the additionreceipt of the Dow Silicones business.ECP. See Note 1314 to the Consolidated Financial Statements for additional information on intangible assets.
Restructuring, Goodwill Impairment and Asset Related Charges - Net
DowDuPont Agriculture Division Restructuring, Program
During the fourth quarter ofgoodwill impairment and asset related charges - net were $3,219 million in 2019, $221 million in 2018 and $2,739 million in connection with the ongoing integration activities, DowDuPont approved restructuring actions to simplify and optimize certain organizational structures within the Agriculture division in preparation for its intended separation as a standalone company ("Agriculture Division Program"). As a result of these actions, the Company expects to record total pretax restructuring charges of $31 million, comprised of $28 million of severance and related benefit costs and $3 million of asset write-downs and write-offs. For the year ended December 31, 2018, the Company recorded pretax restructuring charges of $25 million, consisting of severance and related benefit costs of $24 million and asset write-downs and write-offs of $1 million. The Company expects actions related to the Agriculture Division Program to be substantially complete by mid 2019.2017.
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont approved post-merger restructuring actions under the DowDuPont Cost Synergy Program (the "Synergy Program") which iswas designed to integrate and optimize the organization following the Merger and in preparation for the Intended Business Separations.business separations. The Company expectsexpected (prior to the impact of any discontinued operations) to record total pretax restructuring charges of approximately $1.3 billion, which included initial estimates of approximately $525 million to $575 million of severance and related benefit costs; $400 million to $440 million of asset write-downs and write-offs, and $290 million to $310 million of costs associated with exit and disposal activities. The restructuring charges below reflect charges from continuing operations.
As a result of the Synergy Program, the Company recorded pretax restructuring charges of $687$399 million in 2017, consisting of severance and related benefit costs of $357$307 million, asset write-downs and write-offs of $287$87 million and costs associated with exit and disposal activities of $43$5 million. The restructuring charges by segment were as follows: $36 million in Packaging & Specialty Plastics, $12 million in Industrial Intermediates & Infrastructure, $11 million in Performance Materials & Coatings and $340 million in Corporate.
For the year ended December 31, 2018, the Company recorded pretax restructuring charges of $551$184 million, consisting of severance and related benefit costs of $204$137 million, asset write-downs and write-offs of
$226 $33 million and costs associated with exit and disposal activities of $121 million. The Company expects to record additional restructuring charges during 2019 and substantially complete the Synergy Program by the end of 2019.
2016 Restructuring
On June 27, 2016, Dow's Board of Directors approved a restructuring plan that incorporated actions related to the ownership restructure of Dow Silicones. These actions, aligned with Dow’s value growth and synergy targets, resulted in a global workforce reduction of approximately 2,500 positions, with most of these positions resulting from synergies related to the ownership restructure of Dow Silicones. As a result of these actions, the Company recorded pretax restructuring charges of $449 million in the second quarter of 2016, consisting of severance and related benefit costs of $268 million, asset write-downs and write-offs of $153 million and costs associated with exit and disposal activities of $28 million.
In 2017, the Company recorded a favorable adjustment to the 2016 restructuring charge related to costs associated with exit and disposal activities of $7 million.
In 2018, the Company recorded a favorable adjustment to the 2016 restructuring charge related to severance and related benefit costs of $8 million and an unfavorable adjustment to costs associated with exit and disposal activities of $14 million. The 2016 restructuring activitiescharges by segment were substantially complete at June 30, 2018, with remaining liabilities foras follows: $13 million in Packaging & Specialty Plastics, $11 million in Industrial Intermediates & Infrastructure, $7 million in Performance Materials & Coatings and $153 million in Corporate.
For the year ended December 31, 2019, the Company recorded pretax restructuring charges of $292 million, consisting of severance and related benefit costs of $123 million, asset write-downs and write-offs of $143 million and costs associated with exit and disposal activities of $26 million. The restructuring charges by segment were as follows: $1 million in Packaging & Specialty Plastics, $7 million in Industrial Intermediates & Infrastructure, $28 million in Performance Materials & Coatings and $256 million in Corporate. The Company expects the Synergy Program to be settled over time. See Note 7 tosubstantially complete by the Consolidated Financial Statements for details onend of the Company's restructuring activities.second quarter of 2020.
Goodwill Impairment
Upon completion of the goodwill impairment testing in the fourth quarter of 2019, the Company determined the fair value of the Coatings & Performance Monomers reporting unit was lower than its carrying amount. As a result, the Company recorded an impairment charge of $1,039 million in the fourth quarter of 2019 related to Performance Materials & Coatings.
Upon completion of the goodwill impairment testing in the fourth quarter of 2017, the Company determined the fair value of the Coatings & Performance Monomers reporting unit was lower than its carrying amount. As a result, the Company recorded an impairment charge of $1,491 million in the fourth quarter of 2017. There were no impairment charges in 2016 or 2018. See Note 132017, related to the Consolidated Financial Statements for additional information on the impairment charge.Performance Materials & Coatings.
Asset Related Charges
2019 Charges
In 2019, the Company recognized additional pretax impairment charges of $58 million related primarily to capital additions made to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil ("Santa Vitoria"), which was impaired in 2017. The impairment charges by segment were as follows: $44 million in Packaging & Specialty Plastics, $9 million in Performance Materials & Coatings and $5 million in Corporate.
On August 13, 2019, the Company entered into a definitive agreement to sell its acetone derivatives business to ALTIVIA Ketones & Additives, LLC. The transaction closed on November 1, 2019 and included the Company's acetone derivatives related inventory and production assets, located in Institute, West Virginia, in addition to the site infrastructure, land, utilities and certain railcars. The Company remains at the Institute site as a tenant. As a result of the divestiture, the Company recognized a pretax impairment charge of $75 million in the third quarter of 2019. The impairment charge by segment was as follows: $24 million in Packaging & Specialty Plastics and $51 million in Corporate.
In the fourth quarter of 2019, the Company concluded that its equity method investment in Sadara was other-than-temporarily impaired. The Company also reserved certain accounts and notes receivable and accrued interest balances due to uncertainty on the timing of collection. As a result, the Company recorded a $1,755 million pretax charge related to Sadara. The charge by segment was as follows: $370 million in Packaging & Specialty Plastics, $1,168 million in Industrial Intermediates & Infrastructure and $217 million in Corporate.
2018 Charges
In 2018, the Company recognized an additional pretax impairment charge of $34 million related primarily to capital additions made to the biopolymers manufacturing facility inat its Santa Vitoria Minas Gerais, Brazil, whichmanufacturing facility. The impairment charge was impaired in 2017.related to Packaging & Specialty Plastics.
2017 Charges
In 2017, the Company recognized a $622 million pretax impairment charge related to a biopolymers manufacturing facility inits Santa Vitoria Minas Gerais, Brazil.manufacturing facility. The Company determined it would not pursue an expansion of the facility’s ethanol mill into downstream derivative products, primarily as a result of cheaper ethane-based production as well as the Company’s new assets coming online on the U.S. Gulf Coast which can be used to meet growing market demands in Brazil. As a result of this decision, cash flow analysis indicated the carrying amount of the impacted assets was not recoverable. The impairment charge was related to Packaging & Specialty Plastics.
The Company also recognized other pretax impairment charges of $317$246 million in the fourth quarter of 2017, including charges related to manufacturing assets of $230$159 million, an equity method investment of $81 million and other assets of $6 million. The impairment charges by segment were as follows: $58 million in Packaging & Specialty Plastics, $5 million in Industrial Intermediates & Infrastructure, $83 million in Performance Materials & Coatings and $100 million in Corporate.
2016 Charges
In 2016, the Company recognized a $143 million pretax impairment charge relatedRefer to its equity interest in AgroFresh Solutions, Inc. (“AFSI”) due to a decline in the market value of AFSI. See NotesNote 7 12, 22 and 23 to the Consolidated Financial Statements for additional information on restructuring, goodwill impairment and asset related charges.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to the Merger and the ownership restructure of Dow Silicones (through May 31, 2018), as well as post-Merger integration and Intended Business Separationbusiness separation activities, were $1,044$1,063 million and $1,039 million for Dow Inc. and TDCC, respectively, in 2019, $1,179 million in 2018 $786and $798 million in 2017, and $349 million in 2016.were related to Corporate. In 2018 and 2019, integration and separation costs ramped upwere higher as a result of post-merger integration and Intended Business Separationbusiness separation activities.
Asbestos-Related ChargeEquity in Earnings of Nonconsolidated Affiliates
The Company’s share of the earnings (losses) of nonconsolidated affiliates in 2019 was a loss of $94 million, compared with earnings of $555 million in 2018 and $394 million in 2017. In 2016,2019, equity earnings decreased primarily due to lower equity earnings from the CompanyKuwait joint ventures (due to lower monethylene glycol and Union Carbide, a wholly owned subsidiary, elected to changepolyethylene prices) and the method of accounting for asbestos-related defenseThai joint ventures and processing costsincreased equity losses from expensing as incurred to estimating and accruing a liability. As a result of this accounting policy change, the Company recorded a pretax charge of $1,009 million for asbestos-related defense costs through the terminal year of 2049. The Company also recorded a pretax charge of $104 million to increase the asbestos-related liability for pending and future claims through the terminal year of 2049. There was no adjustment to the asbestos-related liability for pending and
future claims and defense and processing costs in 2017 or 2018.Sadara. See Notes 1 and 16Note 13 to the Consolidated Financial Statements for additional information on asbestos-related matters.the Company’s evaluation of its equity method investment in Sadara for other-than-temporary impairment.
Equity in Earnings of Nonconsolidated Affiliates
Dow’s share of the earnings of nonconsolidated affiliates in 2018 was $950 million, compared with $762 million in 2017 and $442 million in 2016. In 2018, equity earnings increased from 2017 as higher earnings from the Kuwait joint ventures and lower equity losses from Sadara and higher earnings from the HSC Group, which included settlements with a customer related to long-term polysilicon sales agreements, were partially offset by lower equity earnings from the Thai joint ventures.
In 2017, equity earnings increased as lower equity losses from Sadara and higher equity earnings from the Kuwait joint ventures and the HSC Group, which included settlements with a customer related to long-term polysilicon sales agreements, were partially offset by the impact of the Dow Silicones ownership restructure and lower equity earnings from the Thai joint ventures.
Sundry Income (Expense) - Net
Sundry income (expense) – net includes a variety of income and expense items such as foreign currency exchange gains and losses, interest income, dividends from investments, gains and losses on sales of investments and assets, non-operating pension and other postretirement benefit plan credits or costs, and certain litigation matters.
TDCC
Sundry income (expense) - net for 20182019 was income of $181$573 million, compared with income of $195$96 million in 20172018 and incomeexpense of $1,486$154 million in 2016.2017.
In 2019, sundry income (expense) - net included an increase in foreign currency exchange gains, non-operating pension and postretirement benefit plan credits and gains on sales of assets and investments, as well as a net gain of $205 million related to litigation matters, which included a $170 million gain related to a legal settlement with Nova (related to Packaging & Specialty Plastics), and an $85 million gain related to an adjustment of the Dow Silicones breast implant liability (related to Corporate), which were partially offset by a $50 million charge (net of indemnifications of $37 million), related to the settlement of the Dow Silicones commercial creditor matters (related to Corporate). In 2019, sundry income (expense) - net also included a $102 million loss on the early extinguishment of debt and a gain of $2 million on post-closing adjustments related to previous divestitures (both related to Corporate). See Notes 8, 16, 17, 21 and 27 to the Consolidated Financial Statements for additional information.
In 2018, sundry income (expense) - net included non-operating pension and other postretirement benefit plan credits, a $20 million gain related to the Company's sale of its equity interest incomein MEGlobal (related to Corporate) and gains on sales of assets and investments, which more than offset foreign currency exchange losses, a loss of $54 million on the early extinguishment of debt (related to Corporate) and a loss of $47$20 million for post-closing adjustments related to the Dow Silicones ownership restructure.restructure (related to Performance Materials & Coatings). See Notes 8, 16 and 1521 to the Consolidated Financial Statements for additional information.
In 2017, sundry income (expense) - net included a $635 million gain on the divestiture of the DAS Divested Ag Business, a $227 million gain on the divestiture of the EAA Business (related to Packaging & Specialty Plastics), a $137 million gain related to the Nova patent infringement matter interest income(related to Packaging & Specialty Plastics), a $7 million gain on post-closing adjustments related to the split-off of the chlorine value chain (related to Corporate) and gains on sales of assets and investments. These gains were more than offset $682by $676 million of non-operating pension and other postretirement benefit costs, primarily related todriven by a $687 million settlement charge for a U.S. non-qualified pension plan a $469 million loss related(related to the Bayer CropScience arbitration matterCorporate), and foreign currency exchange losses. See Notes 1, 2, 6, 8, 1617 and 1921 to the Consolidated Financial Statements for additional information.
Dow Inc.
Sundry income (expense) - net for 2019 was income of $461 million, compared with income of $96 million in 2018 and an expense of $154 million in 2017. In 2016,addition to the amounts previously discussed above for TDCC, sundry income (expense) - net in 2019 included a $2,445 million gain related to the Dow Silicones ownership restructure, a $27 million favorable adjustment related to a decrease in Dow Silicone's implant liability, interest income and gains on sales of assets and investments. These gains more than offset a $1,235$51 million loss related to the Company's settlement of the urethane matters class action lawsuit and the opt-out cases litigation, $41 million of costs associated with transactions and productivity actions, $26 million of charges foron post-closing adjustments related to divestituresa previous divestiture and foreign currency exchange losses.$69 million in charges associated with agreements entered into with DuPont and Corteva as part of the separation and distribution, which provides for cross-indemnities and allocations of obligations and liabilities for periods prior to, at and after completion of the separation (both related to Corporate). See Notes 5,4, 8, 17, 21 and 1627 to the Consolidated Financial Statements for additional information.
Interest Expense and Amortization of Debt Discount
Dow Inc.
Interest expense and amortization of debt discount was $1,118$933 million in 2019, down from $1,063 million in 2018, primarily due to debt reductions and lower interest bearing notes issued in the fourth quarter of 2018, which replaced higher interest bearing notes redeemed in the fourth quarter of 2018. Interest expense and amortization of debt discount in 2018 was up from $976$914 million in 2017, primarily reflecting the effect of lower capitalized interest as a result of decreased capital spending. Interest expense and amortization of debt discount in 2017 was up from $858 million in 2016, primarily reflecting the effect of the long-term debt assumed in the Dow Silicones ownership restructure. See Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 1112 and 1516 to the Consolidated Financial Statements for additional information related to debt financing activity.
TDCC
Interest expense and amortization of debt discount was $952 million in 2019, down from $1,063 million in 2018. Interest expense and amortization of debt discount in 2018 was up from $914 million in 2017. In addition to the amounts previously discussed above for Dow Inc., TDCC had interest expense related to an intercompany loan with Dow Inc. See Note 26 to the Consolidated Financial Statements for additional information.
Provision for Income Taxes on Continuing Operations
The Company's effective tax rate fluctuates based on, among other factors, where income is earned, the level of income relative to tax attributes and the level of equity earnings, since most earnings from the Company's equity method investments are taxed at the joint venture level. The underlying factors affecting the Company's overall tax rate are summarized in Note 9 to the Consolidated Financial Statements.
On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”) was enacted. The Act reducesreduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, requiresrequired companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, createscreated new provisions related to foreign sourced earnings, eliminateseliminated the domestic manufacturing deduction and movesmoved to a hybrid territorial system. At December 31, 2017, the Company had not completed its accounting for the tax effects of The Act; however, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118, ("SAB 118"), income tax effects of The Act were
refined upon obtaining, preparing, and analyzing additional information during the measurement period. At December 31, 2018, the Company had completed its accounting for the tax effects of The Act.
In the fourth quarter of 2019, the Company recorded the impacts of tax law changes enacted in Switzerland. As a result, deferred tax assets increased by $92 million.
The provision for income taxes on continuing operations was $1,285$470 million in 2019, compared with $809 million in 2018 compared with $2,204and $1,524 million in 20172017. The tax rate for 2019 was unfavorably impacted by non-deductible goodwill and $9 millioninvestment impairments, geographic mix of earnings and reduced equity earnings. These factors resulted in 2016. a negative effective tax rate of 37.7 percent for Dow Inc. in 2019.
The effective tax rate for 2018 was favorably impacted by the reduced U.S. federal corporate income tax rate as a result of The Act and benefits related to the issuance of stock-based compensation and unfavorably impacted by non-deductible restructuring costs and increases in statutory income in Latin America and Canada due to local currency devaluations. These factors resulted in an effective tax rate of 21.721.6 percent in 2018.
The tax rate for 2017 was unfavorably impacted by the enactment of The Act, the impairment of goodwill for which there was no corresponding tax deduction, charges related to tax attributes in the United States and Germany as a result of the Merger and certain non-deductible costs associated with the Merger. The tax rate was favorably impacted by the geographic mix of earnings, equity earnings and the adoption of Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which resulted in the recognition of excess tax benefits related to the issuance of stock-based compensation in the provision for income taxes.taxes on continuing operations. These factors resulted in an effective tax rate of 78.7643.0 percent for 2017.
TheIncome from Discontinued Operations, Net of Tax
Income from discontinued operations, net of tax rate for 2016 was favorably impacted by the non-taxable gain on the Dow Silicones ownership restructure$445 million in 2019, $1,835 million in 2018 and a tax benefit on the reassessment of a deferred tax liability$1,882 million in 2017, and was related to the basis difference in the Company’s investment in Dow Silicones. The tax rate was also favorably impacted by the geographic mixdistribution of earnings, the availability of foreign tax credits, the deductibilityAgCo and SpecCo to DowDuPont as a result of the urethane matters class action lawsuit and opt-out cases settlements, andseparation. See Note 4 to the asbestos-related charge. A reduction in equity earnings and non-deductible costs associated with transactions and productivity actions unfavorably impacted the tax rate. These factors resulted in an effective tax rateConsolidated Financial Statements for additional information.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $87 million in 2019, $134 million in 2018 $129and $130 million in 2017 and $86 million2017. Net income attributable to noncontrolling interests decreased in 2016.2019 compared with 2018, primarily due to the Company's acquisition of full ownership in a propylene oxide manufacturing joint venture on October 1, 2019. Net income attributable to noncontrolling interests increased in 2018 compared with 2017, primarily due to the sale of the Company's ownership interests in the SKC Haas Display Films group of companies.companies on June 30, 2017. Net income attributable to noncontrolling interests increasedfrom discontinued operations of $13 million in 2019, $32 million in 2018 and $28 million in 2017 compared with 2016, primarily due to higher earnings from Dow Silicones' consolidated joint ventures and improved results from a cogeneration facilityare included in Brazil.the amounts above. See Notes 1820 and 2325 to the Consolidated Financial Statements for additional information.
Preferred Stock DividendsNet Income (Loss) Available for the Common Stockholder(s)
On December 30, 2016,Net income (loss) available for Dow Inc. and TDCC common stockholder(s) was a loss of $1,359 million and $1,237 million, respectively, in 2019, compared with income of $4,641 million in 2018 and income of $465 million in 2017. Earnings (loss) per share of Dow Inc. was a loss of $1.84 per share in 2019, compared with income of $6.21 per share in 2018 and income of $0.60 per share in 2017. Following the separation from DowDuPont, TDCC's common shares are owned solely by Dow Inc.
SEGMENT RESULTS
Effective with the Merger, TDCC's business activities were components of DowDuPont's business operations and were reported as a single operating segment. Following the separation from DowDuPont, the Company converted all outstanding shareschanged the manner in which its business activities were managed. The Company's portfolio now includes six global businesses which are organized into the following operating segments: Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure and Performance Materials & Coatings. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. The Company did not aggregate any operating segments when determining its reportable segments.
Following the separation from DowDuPont, the Company changed its practice of transferring ethylene to its downstream derivative businesses at cost to transferring ethylene at market prices. The Company also changed certain of its Cumulative Convertible Perpetual Preferred Stock, Series ACorporate segment allocation practices, including costs previously assigned to AgCo and SpecCo ("Preferred Stock"stranded costs") into shares ofwhich are now allocated to the operating segments. These changes to the Company's common stock.segment results have been consistently applied to all periods presented.
Dow reported geographic information for the following regions: U.S. & Canada, Asia Pacific, Latin America, and EMEAI. As a result of this conversion, no shares of Preferred Stock are issued or outstanding. On January 6, 2017,the separation from DowDuPont, the Company filed an amendmentchanged the geographic alignment for the country of India to its Restated Certificatebe reflected in EMEAI (previously reported in Asia Pacific).
The Company’s measure of Incorporationprofit/loss for segment reporting purposes is pro forma Operating EBIT as this is the manner in which the Company's chief operating decision maker ("CODM") assesses performance and allocates resources. The Company defines pro forma Operating EBIT as earnings (i.e., "Income (loss) from continuing operations before income taxes") before interest, plus pro forma adjustments, excluding the impact of significant items. Pro forma Operating EBIT by waysegment includes all operating items relating to the businesses; items that principally apply to Dow as a whole are assigned to Corporate. The Company also presents pro forma net sales as it is included in management’s measure of a certificatesegment performance and is regularly reviewed by the CODM. Pro forma net sales includes the impact of eliminationECP from January 1, 2017 through August 31, 2017, as well as the impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the Secretaryseparation which provide for different pricing than the historical intercompany and intracompany pricing practices of State of Delaware eliminating this series of preferred stock. Preferred Stock dividends of $340 million were recognized in 2016.TDCC and Historical DuPont. See Note 1727 to the Consolidated Financial Statements for reconciliations of these measures and a summary of the pro forma adjustments impacting segment measures, which are consistent with the pro forma adjustments included in the Current Report on Form 8-K filed on June 3, 2019, with the SEC.
PACKAGING & SPECIALTY PLASTICS
Packaging & Specialty Plastics consists of two highly integrated global businesses: Hydrocarbons & Energy and Packaging and Specialty Plastics. The segment employs the industry’s broadest polyolefin product portfolio, supported by the Company’s proprietary catalyst and manufacturing process technologies, to work at the customer’s design table throughout the value chain to deliver more reliable and durable, higher performing, and more sustainable plastics to customers in food and specialty packaging; industrial and consumer packaging; health and hygiene; caps, closures and pipe applications; consumer durables; automotive; and infrastructure. Ethylene is transferred to downstream derivative businesses at market-based prices, which are generally equivalent to prevailing market prices for large volume purchases.This segment also includes the results of The Kuwait Styrene Company K.S.C.C. and The SCG-Dow Group, as well as a portion of the results of EQUATE Petrochemical Company K.S.C.C. ("EQUATE"), The Kuwait Olefins Company K.S.C.C. ("TKOC"), Map Ta Phut Olefins Company Limited and Sadara, all joint ventures of the Company.
The Company is responsible for marketing a majority of Sadara products outside of the Middle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee.
|
| | | | | | | | | |
| Packaging & Specialty Plastics | | | |
| In millions | 2019 | 2018 | 2017 |
| Net sales | $ | 20,245 |
| $ | 24,195 |
| $ | 21,504 |
|
| Pro forma net sales | $ | 20,245 |
| $ | 24,237 |
| $ | 22,546 |
|
| Pro forma Operating EBIT | $ | 2,904 |
| $ | 3,593 |
| $ | 3,712 |
|
| Equity earnings | $ | 162 |
| $ | 287 |
| $ | 190 |
|
|
| | | | | | |
| Packaging & Specialty Plastics | | | |
| Percentage change from prior year | 2019 | 2018 | 2017 |
| Change in Net Sales from Prior Period due to: | | | |
| Local price & product mix | (12 | )% | 1 | % | 8 | % |
| Currency | (1 | ) | 2 |
| — |
|
| Volume | (3 | ) | 5 |
| 6 |
|
| Portfolio & other | — |
| 5 |
| 3 |
|
| Total | (16 | )% | 13 | % | 17 | % |
| Change in Pro Forma Net Sales from Prior Period due to: | | | |
| Local price & product mix | (12 | )% | 1 | % | |
| Currency | (1 | ) | 1 |
| |
| Volume | (3 | ) | 5 |
| |
| Portfolio & other | — |
| — |
| |
| Total | (16 | )% | 7 | % | |
2019 Versus 2018
Packaging & Specialty Plastics net sales were $20,245 million in 2019, down 16 percent from net sales of $24,195 million in 2018. Pro forma net sales were $20,245 million in 2019, a decrease of 16 percent compared with pro forma net sales of $24,237 million in 2018, with local price down 12 percent, volume down 3 percent, and an unfavorable currency impact of 1 percent, primarily in EMEAI. Local price decreased in both businesses and across all geographic regions driven by reduced polyethylene prices and lower prices for Hydrocarbons & Energy co-products. Volume declined for the segment in all geographic regions, except Asia Pacific. Hydrocarbons & Energy volume declines more than offset volume gains in Packaging and Specialty Plastics. Volume decreased in Hydrocarbons & Energy primarily due to planned maintenance turnaround activity in Europe, increased internal consumption of ethylene on the U.S. Gulf Coast and lighter feedslate usage in Europe, leading to lower co-product production. Volume increased in Packaging and Specialty Plastics in Asia Pacific and EMEAI. Packaging and Specialty Plastics volume growth was driven by strong end-market growth in flexible food and specialty packaging, industrial and consumer packaging, and health and hygiene applications.
Pro forma Operating EBIT was $2,904 million in 2019, down 19 percent from pro forma Operating EBIT of $3,593 million in 2018. Pro forma Operating EBIT decreased primarily due to lower selling prices, reduced equity earnings at the Kuwait joint ventures due to lower polyethylene margins, lower sales volume in the Hydrocarbons & Energy business and the impact of an outage in Argentina, which more than offset lower feedstock and other raw material costs, volume gains in the Packaging and Specialty Plastics business and cost synergies.
2018 Versus 2017
Packaging & Specialty Plastics net sales were $24,195 million in 2018, up 13 percent from $21,504 million in 2017. Pro forma net sales were $24,237 million in 2018, up from pro forma net sales of $22,546 million in 2017. Pro forma net sales increased 7 percent compared with 2017, with volume up 5 percent, a currency benefit of 1 percent, primarily in EMEAI, and local price up 1 percent. Volume increased in both businesses and across all geographic regions primarily due to new capacity additions on the U.S. Gulf Coast and increased supply from Sadara. Packaging and Specialty Plastics' volume growth was driven by increased demand in industrial and consumer packaging, food and specialty packaging, health and hygiene solutions and elastomer applications. Hydrocarbons & Energy volume increased primarily due to higher sales of ethylene and ethylene co-products. Local price increased in all geographic regions, except U.S. & Canada. Hydrocarbons & Energy local price increased as a result of higher Brent crude oil prices, which increased approximately 30 percent compared with 2017. Packaging and Specialty Plastics local price was flat when compared with 2017 as local price increases in Latin America were offset by declines in EMEAI.
Pro forma Operating EBIT was $3,593 million in 2018, down 3 percent from pro forma Operating EBIT of $3,712 million in 2017. Pro forma Operating EBIT decreased as the impact of higher feedstock and other raw materials costs, increased costs from planned maintenance turnarounds and the unfavorable impact of stranded costs more than offset higher sales volume, reflecting additional information.capacity from growth projects, higher selling prices, the benefit from currency on sales, cost synergies, higher equity earnings and lower startup and commissioning costs.
INDUSTRIAL INTERMEDIATES & INFRASTRUCTURE
Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & Construction Chemicals - that develop important intermediate chemicals that are essential to manufacturing processes, as well as downstream, customized materials and formulations that use advanced development technologies. These businesses primarily produce and market ethylene oxide and propylene oxide derivatives that are aligned to market segments as diverse as appliances, coatings, infrastructure and oil and gas. The global scale and reach of these businesses, world-class technology and R&D capabilities and materials science expertise enable the Company to be a premier solutions provider offering customers value-add sustainable solutions to enhance comfort, energy efficiency, product effectiveness and durability across a wide range of home comfort and appliances, building and construction, adhesives and lubricant applications, among others. This segment also includes a portion of the results of EQUATE, TKOC, Map Ta Phut Olefins Company Limited and Sadara, all joint ventures of the Company.
The Company is responsible for marketing a majority of Sadara products outside of the Middle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee.
|
| | | | | | | | | |
| Industrial Intermediates & Infrastructure | | | |
| In millions | 2019 | 2018 | 2017 |
| Net sales | $ | 13,440 |
| $ | 15,447 |
| $ | 12,951 |
|
| Pro forma net sales | $ | 13,449 |
| $ | 15,465 |
| $ | 12,951 |
|
| Pro forma Operating EBIT | $ | 845 |
| $ | 1,767 |
| $ | 1,470 |
|
| Equity earnings (losses) | $ | (241 | ) | $ | 284 |
| $ | 172 |
|
|
| | | | | | |
| Industrial Intermediates & Infrastructure | | | |
| Percentage change from prior year | 2019 | 2018 | 2017 |
| Change in Net Sales from Prior Period due to: | | | |
| Local price & product mix | (12 | )% | 5 | % | 10 | % |
| Currency | (1 | ) | 1 |
| 1 |
|
| Volume | — |
| 13 |
| 6 |
|
| Portfolio & other | — |
| — |
| — |
|
| Total | (13 | )% | 19 | % | 17 | % |
| Change in Pro Forma Net Sales from Prior Period due to: | | | |
| Local price & product mix | (12 | )% | 5 | % | |
| Currency | (2 | ) | 1 |
| |
| Volume | 1 |
| 13 |
| |
| Portfolio & other | — |
| — |
| |
| Total | (13 | )% | 19 | % | |
2019 Versus 2018
Industrial Intermediates & Infrastructure net sales were $13,440 million in 2019, down 13 percent from $15,447 million in 2018. Pro forma net sales were $13,449 million in 2019, down from pro forma net sales of $15,465 million in 2018. Pro forma net sales decreased 13 percent in 2019, with local price down 12 percent and an unfavorable currency impact of 2 percent, primarily in EMEAI, which were partially offset by a 1 percent increase in volume. Price decreased in both businesses and all geographic regions, driven by lower feedstock and other raw material costs and unfavorable supply/demand fundamentals. Polyurethanes & Construction Chemicals reported volume increases in all geographic regions, primarily reflecting increased supply from Sadara and growth in polyurethanes systems applications, which were partially offset by a decline of caustic soda volume due to planned maintenance turnaround activities. Industrial Solutions volume decreased in EMEAI and U.S & Canada and was flat in Latin America and Asia Pacific, primarily driven by reduced availability of glycol ethers, performance solvents and monoethylene glycol due to planned and unplanned events that more than offset higher demand for industrial specialties.
Pro forma Operating EBIT was $845 million in 2019, down 52 percent from pro forma Operating EBIT of $1,767 million in 2018. Pro forma Operating EBIT decreased as a result of margin compression across both businesses as well as lower equity earnings from the Kuwait joint ventures and increased equity losses from Sadara, which more than offset cost reductions.
2018 Versus 2017
Industrial Intermediates & Infrastructure net sales were $15,447 million in 2018, up 19 percent from $12,951 million in 2017. Pro forma net sales were $15,465 million in 2018, up from pro forma net sales of $12,951 million in 2017. Pro forma net sales increased 19 percent in 2018, with volume up 13 percent, local price up 5 percent and a currency benefit of 1 percent, primarily in EMEAI. Volume increased in both businesses and across all geographic regions. Polyurethanes & Construction Chemicals reported volume increases in all geographic regions, except Latin America, primarily reflecting increased supply from Sadara. Industrial Solutions volume increased in all geographic regions reflecting greater production from Sadara and increased demand in industrial specialties. Local price increased in both businesses and all geographic regions, except Asia Pacific. Local price increases were driven by higher feedstock and other raw material costs, pricing initiatives and strong demand for caustic soda, propylene glycols and propylene oxide which more than offset price declines in isocyanates.
Pro forma Operating EBIT was $1,767 million in 2018, up 20 percent from pro forma Operating EBIT of $1,470 million in 2017. Pro forma Operating EBIT increased as the impact of higher selling prices, cost synergies, higher equity earnings from the Kuwait joint ventures and lower equity losses from Sadara more than offset contraction in isocyanates margins, the unfavorable impact of stranded costs and higher feedstock and other raw material costs.
PERFORMANCE MATERIALS & COATINGS
Performance Materials & Coatings includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. These businesses primarily utilize the Company's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of the architectural and industrial coatings, home care and personal care end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to combine chemistry platforms to deliver differentiated offerings to customers.
|
| | | | | | | | | |
| Performance Materials & Coatings | | | |
| In millions | 2019 | 2018 | 2017 |
| Net sales | $ | 8,923 |
| $ | 9,677 |
| $ | 8,892 |
|
| Pro forma net sales | $ | 8,961 |
| $ | 9,865 |
| $ | 8,892 |
|
| Pro forma Operating EBIT | $ | 918 |
| $ | 1,246 |
| $ | 817 |
|
| Equity earnings | $ | 5 |
| $ | 4 |
| $ | 40 |
|
|
| | | | | | |
| Performance Materials & Coatings | | | |
| Percentage change from prior year | 2019 | 2018 | 2017 |
| Change in Net Sales from Prior Period due to: | | | |
| Local price & product mix | (6 | )% | 10 | % | 8 | % |
| Currency | (2 | ) | 1 |
| 1 |
|
| Volume | (3 | ) | (2 | ) | 2 |
|
| Portfolio & other | 3 |
| — |
| 26 |
|
| Total | (8 | )% | 9 | % | 37 | % |
| Change in Pro Forma Net Sales from Prior Period due to: | | | |
| Local price & product mix | (6 | )% | 10 | % | |
| Currency | (2 | ) | 1 |
| |
| Volume | (1 | ) | (2 | ) | |
| Portfolio & other | — |
| 2 |
| |
| Total | (9 | )% | 11 | % | |
2019 Versus 2018
Performance Materials & Coatings net sales were $8,923 million in 2019, down 8 percent from net sales of $9,677 million in 2018. Pro forma net sales were $8,961 million in 2019, down 9 percent from pro forma net sales of $9,865 million in 2018 with local price down 6 percent, an unfavorable currency impact of 2 percent and volume down 1 percent. Local price decreased in both businesses and all geographic regions. Local price decreased in Consumer Solutions due to lower siloxanes prices, primarily
in Asia Pacific and EMEAI. Coatings & Performance Monomers local price declined in all geographic regions in response to lower feedstock and other raw material costs. Volume for the segment declined in all geographic regions except Asia Pacific. Consumer Solutions volume was flat, with volume growth in Asia Pacific, offset by volume declines in Latin America and EMEAI. Consumer Solutions volume was flat in U.S. & Canada. Coatings & Performance Monomers volume declined in all geographic regions. The decline in volume was driven by increased captive use of coatings products which drove soft demand in coating applications, primarily architectural binders, and lower demand for acrylates and methacrylates due to supply/demand balances.
Pro forma Operating EBIT was $918 million in 2019, down 26 percent from pro forma Operating EBIT of $1,246 million in 2018. Pro forma Operating EBIT decreased primarily due to margin compression in both businesses, which more than offset lower planned maintenance turnaround spending and cost synergies.
2018 Versus 2017
Performance Materials & Coatings net sales were $9,677 million in 2018, up from $8,892 million in 2017. Pro forma net sales were $9,865 million in 2018, up from pro forma net sales of $8,892 million in 2017. Pro forma net sales increased 11 percent in 2018, with an increase in local price of 10 percent, a benefit of 2 percent from portfolio actions, a benefit from currency of 1 percent, primarily in EMEAI, and a decrease in volume of 2 percent. Local price increased in both businesses and all geographic regions. Consumer Solutions local price increased primarily due to disciplined price/volume management in upstream silicone intermediates, which more than offset a decrease in volume. Local price increased in Coatings & Performance Monomers in response to higher feedstock and other raw material costs and favorable supply/demand fundamentals. Volume decreased in both businesses and all geographic regions, except Asia Pacific. Volume decreased in Consumer Solutions primarily as a result of targeted reductions of low-margin business, primarily in the home care market sector. Volume decreased slightly for Coatings & Performance Monomers, with a decline in all geographic regions, except Asia Pacific.
Pro forma Operating EBIT was $1,246 million in 2018, up 53 percent from pro forma Operating EBIT of $817 million in 2017. Pro forma Operating EBIT improved compared with 2017 as higher selling prices and the favorable impact of cost synergies more than offset the unfavorable impact of stranded costs and higher feedstock and other raw material costs.
CORPORATE
Corporate includes certain enterprise and governance activities (including insurance operations, environmental operations, etc.); non-business aligned joint ventures; non-business aligned litigation expenses; and discontinued or non-aligned businesses.
|
| | | | | | | | | |
| Corporate | | | |
| In millions | 2019 | 2018 | 2017 |
| Net sales | $ | 343 |
| $ | 285 |
| $ | 383 |
|
| Pro forma net sales | $ | 343 |
| $ | 285 |
| $ | 383 |
|
| Pro forma Operating EBIT | $ | (315 | ) | $ | (370 | ) | $ | (422 | ) |
| Equity losses | $ | (20 | ) | $ | (20 | ) | $ | (8 | ) |
2019 Versus 2018
Net Income Availablesales and pro forma net sales for Corporate, which primarily relate to the Common StockholderCompany's insurance operations, were $343 million in 2019, up from net sales and pro forma net sales of $285 million in 2018.
Pro forma Operating EBIT was a loss of $315 million in 2019, compared with a pro forma Operating EBIT loss of $370 million in 2018. Compared with 2018, pro forma Operating EBIT improved primarily due to cost reductions and stranded cost removal.
2018 Versus 2017
Net income availablesales and pro forma net sales for the common stockholder was $4,499Corporate were $285 million in 2018, compared with $466net sales and pro forma net sales of $383 million in 2017 and $3,9782017.
Pro forma Operating EBIT was a loss of $370 million in 2016. Effective2018, compared with a loss of $422 million in 2017. Compared with 2017, pro forma Operating EBIT improved primarily due to lower discontinued business costs and cost reductions.
OUTLOOK
Operating Segments & End-Market Expectations
In 2020, the Company expects crude oil, natural gas and feedstock costs to remain volatile and sensitive to external macroeconomic and geopolitical factors. The Company currently expects crude oil prices to be, on average, flat to slightly higher than 2019. Crude oil fundamentals suggest ample global supply to meet current demand; however, geopolitical tensions could add a risk premium that potentially supports higher prices.
The Company expects natural gas prices to be, on average, lower than 2019. In U.S. & Canada, robust supplies of natural gas are expected to keep domestic prices globally competitive. U.S. exports of liquefied natural gas ("LNG") are expected to increase further in 2020. In Europe, the supply of natural gas is expected to continue to be plentiful, both from pipeline supply and from growing LNG imports.
In Packaging & Specialty Plastics, integrated margins are expected to remain stable in U.S. & Canada, supported by delays in new capacity additions, solid underlying demand and regional feedstock cost advantages. Margins in Europe are expected to remain challenged as a result of weaker regional demand and flat to higher feedstock costs. Margins in Asia Pacific commenced 2020 slightly below break-even levels, while full year margins are expected to be comparable to the second half of 2019. Profitability could vary materially depending on global GDP growth, industry operating rates, timing of capacity startups and fluctuations in global crude oil, natural gas and feedstock prices. The Hydrocarbons & Energy business expects to bring online approximately 500,000 metric tons of additional ethylene capacity in Texas as part of its suite of incremental growth investments. The new capacity is expected to come online in the second quarter of 2020.
In Industrial Intermediates & Infrastructure, monoethylene glycol ("MEG") margins are expected to remain constrained in 2020 due to new industry capacity additions. End-market conditions for polyurethane intermediates are expected to remain highly competitive, with demand softness expected in key applications related to infrastructure, household appliances, automotive and furniture and bedding. Methyl diphenyl diisocyanate ("MDI") prices are expected to remain at low levels due to additional industry capacity and weak end-market fundamentals.
In Performance Materials & Coatings, prices for commodity siloxane products are expected to be similar to those observed in the second half of 2019. Downstream silicones volume is expected to grow in excess of GDP, particularly for applications related to home and personal care, high performance building and construction and pressure-sensitive adhesives. The Company will continue to pursue incremental downstream silicones capacity debottleneck projects to meet demand in consumer driven end-markets. Global architectural coatings demand is expected to remain soft in the do-it-yourself and retail market segments. Industrial coatings are also projected to soften in 2020; however, the Company’s focus will be on capturing opportunities from customers’ shift to waterborne chemistries where Dow has unique technologies and solutions.
Other factors impacting operating segment profitability include:
Planned maintenance turnaround spending is expected to be approximately flat compared with 2019.
Equity losses in nonconsolidated affiliates are expected to be slightly unfavorable compared with 2019. With respect to Sadara, which impacts the Packaging & Specialty Plastics and Industrial Intermediates & Infrastructure operating segments, the Company expects to continue to record equity losses due to anticipated funding commitments with the Merger,joint venture.
Other Income Statement Expectations
Additional items that may impact the consolidated statements of income in 2020 include:
The service cost component of pension expense is expected to be flat compared with 2019. The non-operating pension benefit is expected to be a headwind of approximately $125 million compared with 2019.
Interest expense and amortization of debt discount is expected to be approximately $850 million in 2020, reflecting lower gross debt compared with 2019.
Projected Uses of Cash
Items that may impact the consolidated statements of cash flows in 2020 include:
Integration and separation spending is expected to be approximately $200 million to $250 million. Year over year reductions in integration and separation spending as well as cash payments related to the DowDuPont Cost Synergy Program will result in reduced cash spending of approximately $1 billion compared with 2019.
Cash contributions to global pension plans are expected to be limited to mandatory minimum contributions. The total cash outflow is projected to be approximately $250 million.
Capital expenditures are expected to be $1.5 billion to $1.75 billion. The Company will adjust its spending within this range through the year as economic conditions develop.
The Company expects to loan approximately $500 million to Sadara and all or a portion of the loan could potentially be converted into equity.
| |
| • | The Company expects to preferentially deploy its free cash flow1 in a balanced way between shareholder returns and debt reduction. |
1. Dow no longer has publicly traded common stock. Dow's common shares are owned solely by its parent company, DowDuPont.defines free cash flow as cash flows from operating activities - continuing operations, excluding the impact of ASU 2016-15, less capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $2,669$2,367 million at December 31, 2019 and $2,724 million at December 31, 2018, and $6,188of which $986 million at December 31, 2017, of which $1,9632019 and $2,013 million at December 31, 2018, and $4,318 million at December 31, 2017, was held by subsidiaries in foreign countries, including United States territories. The decrease in cash and cash equivalents held by subsidiaries in foreign countries is due to repatriation activities. For each of its foreign subsidiaries, the Company makes an assertion regarding the amount of earnings intended for permanent reinvestment, with the balance available to be repatriated to the United States.
The Company has completed its evaluation of the impact of The Act on its permanent reinvestment assertion. The Act required companies to pay a one-time transition tax on earnings of foreign subsidiaries, a majority of which were previously considered permanently reinvested by the Company. A tax liability was accrued for the estimated U.S. federal tax on all unrepatriated earnings at December 31, 2017, with further refinement during the 2018 measurement period, in accordance with The Act. The cumulative effect at December 31, 2018, was a charge of $780 million to "Provision for income taxes" in the consolidated statements of income, of which the full amount was covered by tax attributes (see Note 9 to the Consolidated Financial Statements for further details of The Act). The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries'
operational activities and future foreign investments. The CompanyDow has the ability to repatriate additional funds to the U.S., which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/or U.S. state income taxes and the impact of foreign currency movements. At December 31, 2018,2019, management believed that sufficient liquidity was available in the United States. The Company has and expects to continue repatriating certain funds from its non-U.S. subsidiaries that are not needed to finance local operations or separation activities;operations; however, these particular repatriation activities have not and are not expected to result in a significant incremental tax liability to the Company.
The Company’s cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized in the following table:
| | | Cash Flow Summary | 2018 | 2017 1 | 2016 1 | Dow Inc. | TDCC |
| In millions | 2019 | 2018 | 2017 1 | 2019 | 2018 | 2017 1 |
| Cash provided by (used for): | | | | | | |
| Operating activities - continuing operations | | $ | 5,713 |
| $ | 3,096 |
| $ | (6,443 | ) | $ | 5,706 |
| $ | 3,096 |
| $ | (6,443 | ) |
| Operating activities - discontinued operations | | 217 |
| 1,158 |
| 1,514 |
| 371 |
| 1,158 |
| 1,514 |
|
| Operating activities | $ | 3,894 |
| $ | (4,958 | ) | $ | (2,957 | ) | 5,930 |
| 4,254 |
| (4,929 | ) | 6,077 |
| 4,254 |
| (4,929 | ) |
| Investing activities - continuing operations | | (2,158 | ) | (1,826 | ) | 6,793 |
| (2,158 | ) | (1,826 | ) | 6,793 |
|
| Investing activities - discontinued operations | | (34 | ) | (369 | ) | 725 |
| (34 | ) | (369 | ) | 725 |
|
| Investing activities | (2,128 | ) | 7,552 |
| 5,092 |
| (2,192 | ) | (2,195 | ) | 7,518 |
| (2,192 | ) | (2,195 | ) | 7,518 |
|
| Financing activities - continuing operations | | (4,077 | ) | (5,351 | ) | (3,275 | ) | (4,224 | ) | (5,351 | ) | (3,275 | ) |
| Financing activities - discontinued operations | | (18 | ) | (53 | ) | (50 | ) | (18 | ) | (53 | ) | (50 | ) |
| Financing activities | (5,164 | ) | (3,331 | ) | (4,014 | ) | (4,095 | ) | (5,404 | ) | (3,325 | ) | (4,242 | ) | (5,404 | ) | (3,325 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (100 | ) | 320 |
| (77 | ) | (27 | ) | (99 | ) | 320 |
| (27 | ) | (99 | ) | 320 |
|
| Summary | | | |
|
|
|
|
|
|
|
|
|
|
|
|
| Decrease in cash, cash equivalents and restricted cash | (3,498 | ) | (417 | ) | (1,956 | ) | (384 | ) | (3,444 | ) | (416 | ) | (384 | ) | (3,444 | ) | (416 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 6,207 |
| 6,624 |
| 8,580 |
| 2,764 |
| 6,208 |
| 6,624 |
| 2,764 |
| 6,208 |
| 6,624 |
|
| Cash, cash equivalents and restricted cash at end of year | $ | 2,709 |
| $ | 6,207 |
| $ | 6,624 |
| $ | 2,380 |
| $ | 2,764 |
| $ | 6,208 |
| $ | 2,380 |
| $ | 2,764 |
| $ | 6,208 |
|
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 40 |
| 19 |
| 17 |
| 13 |
| 40 |
| 19 |
| 13 |
| 40 |
| 19 |
|
| Cash and cash equivalents at end of year | $ | 2,669 |
| $ | 6,188 |
| $ | 6,607 |
| $ | 2,367 |
| $ | 2,724 |
| $ | 6,189 |
| $ | 2,367 |
| $ | 2,724 |
| $ | 6,189 |
|
| |
| 1. | Updated for ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15") (including related SEC interpretive guidance) and ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash.Cash," See Notes 1 and 2 towhich the Consolidated Financial Statements for additional information.Company adopted in 2018. |
Cash Flows from Operating Activities
Cash provided by operating activities from continuing operations increased in 20182019 compared with 2018. The increase was primarily due to improvements in working capital, a cash receipt related to the Nova ethylene asset matter, advance payments from customers for product supply agreements, lower pension contributions and higher dividends received from nonconsolidated affiliates, which were partially offset by a decrease in cash earnings. Cash provided by operating activities from continuing operations in 2018 improved from cash used for operating activities from continuing operations in 2017, primarily due to the change in the Company's accounts receivable securitization facilities discussed onin the following page,section titled "Non-GAAP Cash Flow Measures" and a decrease in cash used for working capital requirements, and higher cash earnings, which were partially offset by the absence of certain cash receipts in 2017.
|
| | | | | | | | | | | | |
| Net Working Capital at Dec 31 | Dow Inc. | TDCC |
| In millions | 2019 | 2018 | 2019 | 2018 |
Current assets 1 | $ | 16,815 |
| $ | 19,470 |
| $ | 16,733 |
| $ | 19,470 |
|
Current liabilities 1 | 10,679 |
| 11,059 |
| 10,150 |
| 11,059 |
|
| Net working capital | $ | 6,136 |
| $ | 8,411 |
| $ | 6,583 |
| $ | 8,411 |
|
| Current ratio | 1.57:1 |
| 1.76:1 |
| 1.65:1 |
| 1.76:1 |
|
| |
| 1. | Amounts exclude assets and liabilities of discontinued operations. |
|
| | | | |
| Working Capital Metrics | Twelve Months Ended |
| | Dec 31, 2019 | Dec 31, 2018 |
Days sales outstanding in trade receivables 1 | 45 |
| 41 |
|
Days sales in inventory 2 | 65 |
| 58 |
|
Days payables outstanding 3 | 65 |
| 58 |
|
| |
| 1. | The increase in days sales outstanding in receivables was primarily due to an increase in accounts receivable as a result of the Company’s accounts receivable securitization facilities moving from off-balance sheet arrangements to secured borrowing arrangements in the second half of 2018. |
| |
| 2. | The increase in days sales in inventory is primarily due to a decrease in COS, driven by lower sales and raw material costs, in addition to an increase in average ending inventory. |
| |
| 3. | The increase in days payables outstanding is primarily due to a decrease in average accounts payable and a decrease in COS, which were partially offset by an increase in average ending inventory. |
Cash used forprovided by operating activities increasedfrom discontinued operations decreased in 20172019 compared with 2016,2018. The reduction was primarily due to an increase inthe separation of AgCo and SpecCo on April 1, 2019. The Company had cash used for working capital requirements, higher pension contributions resulting from a change in control provision in a non-qualified U.S. pension plan, higher integrationpayments and separation costsreceipts with DuPont and a cash paymentCorteva that related to certain agreements and matters related to the Bayer CropScience arbitration matter, partially offset by a cash receipt relatedseparation from DowDuPont. See Note 4 to the Nova patent infringement award and advanced paymentsConsolidated Financial Statements for additional information. Cash provided by operating activities from customers for long-term ethylene supply agreements.discontinued operations decreased in 2018 compared with 2017, primarily due to changes in working capital requirements.
Cash Flows from Investing Activities
Cash used for investing activities from continuing operations in 2019 was primarily for capital expenditures, purchases of investments and investments in and loans to nonconsolidated affiliates, which were partially offset by proceeds from sales and maturities of investments. Cash used for investing activities from continuing operations in 2018 was primarily for capital expenditures and purchases of investments, which were partially offset by proceeds from sales and maturities of investments and proceeds from interests in trade accounts receivable conduits. Cash provided by investing activities from continuing operations in 2017 was primarily from proceeds from interests in trade accounts receivable conduits, proceeds from sales and maturities of investments and proceeds from divestitures, including the divestituresdivestiture of the DAS Divested Ag Business and the EAA Business, which were partially offset by capital expenditures, purchases of investments and investments in and loans to nonconsolidated affiliates, primarily with Sadara. Cash provided by investing activities
The Company loaned Sadara $473 million in 2016 was primarily from proceeds from interests2019 (zero in trade accounts receivable conduits2018 and net cash acquired$735 million in the Dow Silicones ownership restructure, which were partially offset by capital expenditures2017) and investments in anda portion of these loans has been converted to nonconsolidated affiliates, primarily with Sadara.
In 2018, the Company entered into a shareholder loan reduction agreement with Sadara and converted $312 million of the remaining loan and accrued interest balance into equity. The Company's note receivable from Sadara was zero at December 31, 2018. In addition, in the fourth quarter of 2018,2019, the Company waived $70 million of accountsreserved certain notes receivable and accrued interest balances with Sadara which was converted into equity. In 2017, the Company loaned $735 milliondue to Sadara and converted $718 million into equity, and had a note receivable from Sadarauncertainty around timing of $275 million at December 31, 2017.collection. The Company expects to loan up toSadara approximately $500 million in 2020 and all or a portion of the loan could potentially be converted into equity. Additionally, the Company anticipates providing future financial support to Sadara in 2019.through loans or capital contributions which will be subject to collectability assessments. See Note 1213 to the Consolidated Financial Statements for additional information.
The Company's capital expenditures related to continuing operations, including capital expenditures of consolidated variable interest entities, were $2,538$1,961 million in 2019, $2,091 million in 2018 $3,144and $2,807 million in 2017 and $3,804 million in 2016.2017. The Company expects capital spending in 20192020 to be approximately $2.5in the range of $1.5 billion below depreciation and amortization expense and inclusive of capitalto $1.75 billion. The Company will adjust its spending for targeted cost synergy and business separation projects.within this range through the year as economic conditions develop.
Capital spending in 2019, 2018 2017 and 20162017 included spending related to certain U.S. Gulf Coast investment projects including: a world-scale ethylene production facility and an ELITE™ Enhanced Polyethylene production facility, both of which commenced operations in 2017; a NORDEL™ Metallocene EPDM production facility, a Low Density Polyethylene ("LDPE") production facility, a High Melt Index ("HMI") AFFINITY™ polymer production facility and debottlenecking of an existing bi-modal gas phase polyethylene production facility, all of which commenced operations in 2018.2018; and an expansion of the Company's new ethylene production facility expected to commence operations in 2020, bringing the facility's total ethylene capacity to 2,000 kilotonnes per annum and making it the largest ethylene cracker in the world.
Cash used for investing activities from discontinued operations in 2019 was primarily for capital expenditures, partially offset by proceeds from the sales of property, businesses and ownership interests in nonconsolidated affiliates. Cash used for investing activities from discontinued operations in 2018 was primarily for capital expenditures, partially offset by proceeds from the sales of property and businesses. Cash provided by investing activities from discontinued operations in 2017 was primarily due to proceeds from the sale of property and businesses, which was partially offset by capital expenditures.
Cash Flows from Financing Activities
Cash used for financing activities from continuing operations in 2019 included payments on long-term debt and dividends paid to DowDuPont, which were partially offset by proceeds from issuance of long-term debt. In addition, Dow Inc. received cash as part of the separation from DowDuPont, which was more than offset by dividends paid to stockholders and purchases of treasury stock. Cash used for financing activities from continuing operations in 2018 included dividends paid to DowDuPont and payments of long-term debt, which were partially offset by proceeds from issuance of long-term debt. Cash used for financing activities in continuing operations in 2017 included dividends paid to stockholders through the close of the Merger, a dividend paid to DowDuPont in the fourth quarter of 2017, and payments of long-term debt. Cash used for financing activities in 2016 included dividends paid to stockholders (including the accelerated payment of the fourth quarter preferred dividend), repurchases of common stock and payments of long-term debt. See Notes 1516 and 1719 to the Consolidated Financial Statements for additional information related to the issuance and retirement of debt and the Company's share repurchases and dividends.
Reclassification of Prior Year Amounts RelatedCash used for financing activities from discontinued operations in 2019, 2018 and 2017 primarily related to Accounts Receivable Securitizationdistributions to noncontrolling interests and employee taxes paid for share-based payment arrangements.
In connection with the review and implementation
Non-GAAP Cash Flow Measures
Cash Flows from Operating Activities - Continuing Operations - Excluding Impact of ASU 2016-15 and additional interpretive guidance from the SEC related to the required method for calculating the cash received from beneficial interests in trade accounts receivable conduits, the Company changed the prior year presentation and amount of proceeds from interests in trade accounts receivable conduits. Changes related to the calculation and presentation of proceeds from interests in trade accounts receivable conduits resulted in a reclassification from cash used for operating activities to cash provided by investing activities of $9,462 million in 2017 and $8,551 million in 2016. In the fourth quarter of 2017, the Company suspended further sales of trade accounts receivable through these facilities and began reducing outstanding balances through collections of trade accounts receivable previously sold to such conduits. In September and October 2018, the North American and European facilities, respectively, were amended and the terms of the agreements changed from off-balance sheet arrangements to secured borrowing arrangements.
The following table reconciles cashCash flows from operating activities to a non-GAAP measure regarding- continuing operations, excluding the impact of ASU 2016-15, is defined as cash flows fromprovided by (used for) operating activities - continuing operations, excluding the impact of ASU 2016-15 and related interpretive guidance for the years ended December 31, 2018, 2017 and 2016.guidance. Management believes this non-GAAP financial measure is relevant and meaningful as it presents cash flows from operating activities inclusive of all trade accounts receivable collection activity, which the CompanyDow utilizes in support of its operating activities.
Free Cash Flow
Dow defines free cash flow as cash flows from operating activities - continuing operations, excluding the impact of ASU 2016-15, less capital expenditures. Under this definition, free cash flow represents the cash generated by Dow from operations after investing in its asset base. Free cash flow, combined with cash balances and other sources of liquidity, represent the cash available to fund obligations and provide returns to shareholders. Free cash flow is an integral financial measure used in Dow's financial planning process.
Pro Forma Operating EBITDA
Dow defines pro forma operating EBITDA as pro forma earnings (i.e. "Pro forma income from continuing operations before income taxes") before interest, depreciation and amortization, excluding the impact of significant items.
Cash Flow Conversion (Pro Forma Operating EBITDA to Cash Flow From Operations)
Dow defines cash flow conversion (or pro forma Operating EBITDA to cash flow from operations) as cash flows from operating activities - continuing operations, excluding the impact of ASU 2016-15, divided by pro forma Operating EBITDA. Management believes cash flow conversion is an important financial metric as it helps the Company determine how efficiently it is converting its earnings into cash flow.
These financial measures are not recognized in accordance with U.S. GAAP and should not be viewed as alternatives to U.S. GAAP financial measures of performance. All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, Dow's definitions may not be consistent with the methodologies used by other companies.
|
| | | | | | | | | | |
| | Cash Flows from Operating Activities Excluding Impact of ASU 2016-15 and Additional Interpretive Guidance (non-GAAP) | 2018 | 2017 | 2016 |
| |
| | In millions |
| | Cash flows from operating activities - Updated for impact of ASU 2016-15 and additional interpretive guidance (GAAP) | $ | 3,894 |
| $ | (4,958 | ) | $ | (2,957 | ) |
| | Less: Impact of ASU 2016-15 and additional interpretive guidance | (657 | ) | (9,462 | ) | (8,551 | ) |
| | Cash flows from operating activities - Excluding impact of ASU 2016-15 and additional interpretive guidance (non-GAAP) | $ | 4,551 |
| $ | 4,504 |
| $ | 5,594 |
|
|
| | | | | | | | | |
| Reconciliation of Non-GAAP Cash Flow Measures | Dow Inc. |
| In millions | 2019 | 2018 | 2017 |
| Cash provided by (used for) operating activities - continuing operations (GAAP) | $ | 5,713 |
| $ | 3,096 |
| $ | (6,443 | ) |
| Impact of ASU 2016-15 and related interpretive guidance | — |
| 657 |
| 9,462 |
|
| Cash flows from operating activities - continuing operations - excluding impact of ASU 2016-15 (Non-GAAP) | $ | 5,713 |
| $ | 3,753 |
| $ | 3,019 |
|
| Capital expenditures | (1,961 | ) | (2,091 | ) | (2,807 | ) |
| Free cash flow (Non-GAAP) | $ | 3,752 |
| $ | 1,662 |
| $ | 212 |
|
|
| | | | | | | | | |
| Reconciliation of Cash Flow Conversion (Pro Forma Operating EBITDA to Cash Flow From Operations) | Dow Inc. |
| In millions | 2019 | 2018 | 2017 |
| Income (loss) from continuing operations, net of tax (GAAP) | $ | (1,717 | ) | $ | 2,940 |
| $ | (1,287 | ) |
| + Provision for income taxes on continuing operations | 470 |
| 809 |
| 1,524 |
|
| Income (loss) from continuing operations before income taxes | $ | (1,247 | ) | $ | 3,749 |
| $ | 237 |
|
| - Interest income | 81 |
| 82 |
| 66 |
|
| + Interest expense and amortization of debt discount | 933 |
| 1,063 |
| 914 |
|
+ Pro forma adjustments 1 | 65 |
| 180 |
| 1,120 |
|
| - Significant items | (4,682 | ) | (1,326 | ) | (3,372 | ) |
| Pro forma Operating EBIT | $ | 4,352 |
| $ | 6,236 |
| $ | 5,577 |
|
| + Pro forma depreciation and amortization | 2,938 |
| 2,909 |
| 2,684 |
|
| Pro forma Operating EBITDA | $ | 7,290 |
| $ | 9,145 |
| $ | 8,261 |
|
| Cash flows from operating activities - continuing operations - excluding impact of ASU 2016-15 (Non-GAAP) | $ | 5,713 |
| $ | 3,753 |
| $ | 3,019 |
|
| Cash flow conversion (Pro Forma Operating EBITDA to cash flow from operations) (Non-GAAP) | 78.4 | % | 41.0 | % | 36.5 | % |
| |
| 1. | Pro forma adjustments include: (1) the margin impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont (included for 2019 and 2018 only), (2) the inclusion of ECP for the period of January 1, 2017 through August 31, 2017, (3) the removal of the amortization of ECP's inventory step-up recognized in connection with the Merger (4) the elimination of the impact of events directly attributable to the Merger, internal reorganization and business realignment, separation, distribution and other related transactions (e.g., one-time transaction costs) and (5) the elimination of the effect of a consummated divestiture agreed to with certain regulatory agencies as a condition of approval for the Merger. See Note 27 to the Consolidated Financial Statements for additional information. |
Liquidity & Financial Flexibility
The Company’s primary source of incremental liquidity is cash flows from operating activities. The generation of cash from operations and the Company's ability to access debtcapital markets is expected to meet the Company’s cash requirements for working capital, capital expenditures, debt maturities, contributions to pension plans, dividend distributions to its parent companystockholders, share repurchases and other needs. In addition to cash from operating activities, the Company’s current liquidity sources also include TDCC's U.S. and Euromarket commercial paper programs, committed credit facilities, a committed accounts receivable facility, a U.S. retail note program (“InterNotes®”) and other debt markets. Additional details on sources of liquidity are as follows:
Commercial Paper
DowTDCC issues promissory notes under its U.S. and Euromarket commercial paper programs. The CompanyTDCC had $10$151 million of commercial paper outstanding at December 31, 20182019 ($23110 million at December 31, 2017)2018). The CompanyTDCC maintains access to the commercial paper market at competitive rates. Amounts outstanding under the Company'sTDCC's commercial paper programs during the period may be greater or less than the amount reported at the end of the period. Subsequent to December 31, 2018, the Company2019, TDCC issued approximately $1.6$1.5 billion of commercial paper.
Committed Credit Facilities
In the event Dow has short-term liquidity needs and is unable to issue commercial paper for any reason, DowThe Company also has the ability to access liquidity through itsTDCC's committed and available credit facilities. At December 31, 2018, the Company2019, TDCC had total committed credit facilities of $12.1$9.4 billion and available credit facilities of $7.6$7.4 billion. See Note 1516 to the Consolidated Financial Statements for additional information on committed and available credit facilities.
Uncommitted Credit Facilities and Outstanding In connection with the ownership restructure of Dow Silicones on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness under a certain third party credit agreement ("Term Loan Facility"). In the second quarter of 2019, Dow Silicones voluntarily repaid $2.5 billion of principal on the Term Loan Facility. In September 2019, Dow Silicones amended the Term Loan Facility to extend the maturity date on the remaining principal balance of $2 billion, making amounts borrowed under the Term Loan Facility repayable in September 2021. In addition, this amendment includes options to extend the maturity date through September 2023, at Dow Silicones' election, which the Company intends to exercise. See Note 16 to the Consolidated Financial Statements for additional information on the Term Loan Facility.
Letters of Credit
The Company had uncommitted credit facilities in the form of unused bank credit lines of approximately $3,480 million at December 31, 2018. These lines can be used to support short-term liquidity needs and general purposes, including letters of credit. OutstandingTDCC utilizes letters of credit were $439 million at December 31, 2018 ($433 million at December 31, 2017). These letters of creditto support commitments made in the ordinary course of business. While the terms and amounts of letters of credit change, TDCC generally has approximately $400 million of outstanding letters of credit at any given time.
Shelf Registration - U.S.
On July 26, 2019, Dow Inc. and TDCC filed a shelf registration statement with the SEC. The shelf indicates that Dow Inc. may offer common stock; preferred stock; depositary shares; debt securities; guarantees; warrants to purchase common stock, preferred stock and debt securities; and stock purchase contracts and stock purchase units, with pricing and availability of any such offerings depending on market conditions. The shelf also indicates that TDCC may offer debt securities, guarantees and warrants to purchase debt securities, with pricing and availability of any such offerings depending on market conditions. Also on July 26, 2019, TDCC filed a new prospectus supplement under this shelf registration to register an unlimited amount of securities for issuance under InterNotes®.
Debt
As Dowthe Company continues to maintain its strong balance sheet and financial flexibility, management is focused on net debt (a non-GAAP financial measure), as Dowthe Company believes this is the best representation of the Company’sits financial leverage at this point in time. As shown in the following table, net debt is equal to total gross debt minus "Cash and cash equivalents" and "Marketable securities." At December 31, 2018,2019, net debt as a percent of total capitalization for Dow Inc. and TDCC increased to 38.050.9 percent and 49.6 percent, respectively, compared with 35.433.7 percent for both companies at December 31, 2017,2018. The increase is primarily due to a decreasereduction in cashstockholders' equity for both companies as a result of the separation from DowDuPont and cash equivalents,a net loss in 2019, which more thanwas partially offset by a decrease in gross debt.
| | | Total Debt at Dec 31 | | | Dow Inc. | TDCC |
| In millions | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 |
| Notes payable | $ | 305 |
| $ | 484 |
| $ | 586 |
| $ | 298 |
| $ | 586 |
| $ | 298 |
|
| Long-term debt due within one year | 340 |
| 752 |
| 435 |
| 338 |
| 435 |
| 338 |
|
| Long-term debt | 19,254 |
| 19,765 |
| 15,975 |
| 19,253 |
| 15,975 |
| 19,253 |
|
| Gross debt | $ | 19,899 |
| $ | 21,001 |
| $ | 16,996 |
| $ | 19,889 |
| $ | 16,996 |
| $ | 19,889 |
|
| - Cash and cash equivalents | $ | 2,669 |
| $ | 6,188 |
| 2,367 |
| 2,724 |
| 2,367 |
| 2,724 |
|
| - Marketable securities | 100 |
| 4 |
| 21 |
| 100 |
| 21 |
| 100 |
|
| Net debt | $ | 17,130 |
| $ | 14,809 |
| $ | 14,608 |
| $ | 17,065 |
| $ | 14,608 |
| $ | 17,065 |
|
| Gross debt as a percent of total capitalization | 41.6 | % | 43.7 | % | 54.7 | % | 37.2 | % | 53.3 | % | 37.2 | % |
| Net debt as a percent of total capitalization | 38.0 | % | 35.4 | % | 50.9 | % | 33.7 | % | 49.6 | % | 33.7 | % |
In the fourth quarter of 2018,2019, the Company issued $2.0$2 billion of senior unsecured notes in an offering under Rule 144A of the Securities Act of 1933, which1933. The offering included $750 million aggregate principal amount of 4.80 percent notes due 2049; $750 million aggregate principal amount of 3.625 percent notes due 2026; and $500 million aggregate principal amount of 3.15 percent notes due 2025; $600 million due 2028 and $900 million due 2048. See Note 15 to the Consolidated Financial Statements for additional information on the interest related to these notes.2024. In addition, the Company tendered and redeemed $2.1$1.5 billion of notes issued with maturity in 2019. In addition, DHI, the intended parent of the Company after the Intended Business Separations, is obligated, should it issue a guarantee in respect of outstanding or committed indebtedness under Dow’s Five Year Competitive Advance and Revolving Credit Facility Agreement (“Revolving Credit Agreement”), dated October 30, 2018, (as described below), to enter into a supplemental indenture with the Company and the trustee under the existing base indenture governing certain4.25 percent notes issued by the Company with maturity in 2020 and $1.25 billion of 4.125 percent notes issued by the Company with maturity in 2021.
In October 2019, TDCC launched exchange offers for $4 billion of all the outstanding, unregistered senior notes that were issued in private offerings on November 30, 2018 and May 20, 2019, for identical, registered notes under the Securities Act of 1933 (the “Exchange Offers”). The Exchange Offers are with respect to the Company’s 3.15 percent notes due 2024, 4.55 percent notes due 2025, 3.625 percent notes due 2026, 4.80 percent notes due 2028, 5.55 percent notes due 2048 and 4.80 percent notes due 2049, and fulfilled the Company’s obligations contained in the registration rights agreements entered into in connection with the issuance of the aforementioned notes.
The Company may at any time repurchase certain debt securities in the open market or in privately negotiated transactions subject to: the applicable terms under which it will guarantee all outstandingany such debt securities were issued, certain internal approvals of the Company, and all amounts due underapplicable laws and regulations of the existing base indenture.relevant jurisdiction in which any such potential transactions might take place. This in no way obligates the Company to make any such repurchases nor should it be considered an offer to do so.
Dow’sTDCC’s public debt instruments and primary, private credit agreements contain, among other provisions, certain customary restrictive covenant and default provisions. The Company’sTDCC’s most significant debt covenant with regard to its financial position is the obligation to maintain the ratio of the Company’sits consolidated indebtedness to consolidated capitalization at no greater than 0.65 to 1.00 at any time the aggregate outstanding amount of loans under the Five Year Competitive Advance and Revolving Credit Facility Agreement ("Revolving Credit Agreement") equals or exceeds $500 million. The ratio of the Company’sTDCC’s consolidated indebtedness to consolidated capitalization as defined in the Revolving Credit Agreementwas 0.410.51 to 1.00 at December 31, 2018.2019. Management believes the CompanyTDCC was in compliance with all of its covenants and default provisions at December 31, 2018. See Note 15 to the Consolidated Financial Statements for information related to the Company’s notes payable and long-term debt activity and information on Dow’s covenants and default provisions.2019.
On October 30, 2018,April 1, 2019, DowDuPont completed the separation of its materials science business and Dow terminated and replaced its $5.0 billionInc. became the direct parent company of TDCC. In conjunction with the separation, Dow Inc. is obligated, substantially concurrently with the issuance of any guarantee in respect of outstanding or committed indebtedness under the Revolving Credit Agreement, to enter into a supplemental indenture with TDCC and the trustee under substantially similar termsTDCC’s existing 2008 base indenture governing certain notes issued by TDCC. Under such supplemental indenture, Dow Inc. will guarantee all outstanding debt securities and conditions. The new Revolving Credit Agreement has a maturity date in October 2023. Theall amounts due under such existing base indenture and will become subject to certain covenants and events of default under the existing base indenture.
In addition, the Revolving Credit Agreement includes an event of default which would be triggered in the event DHIDow Inc. incurs or guarantees third party indebtedness for borrowed money in excess of $250 million or engages in any material business activity or directly owns any material assets, in each case, subject to certain conditions and exceptions. DHIDow Inc. may, at its option, cure the event of default by delivering an unconditional and irrevocable guarantyguarantee to the administrative agent within thirty days of the event or events giving rise to such event of default.
No such events have occurred or have been triggered at the time of the filing of this Annual Report on Form 10-K. See Note 16 to the Consolidated Financial Statements for information related to TDCC’s notes payable and long-term debt activity and information on TDCC’s covenants and default provisions.
Management expects that the Company will continue to have sufficient liquidity and financial flexibility to meet all of its business obligations.
Credit Ratings
AtTDCC's credit ratings at January 31, 2019, the Company's credit ratings2020 were as follows:
|
| | | |
| Credit Ratings | Long-Term Rating | Short-Term Rating | Outlook |
| Standard & Poor’s | BBB | A-2 | Stable |
| Moody’s Investors Service | Baa2 | P-2 | Stable |
| Fitch Ratings | BBB+ | F2 | Stable |
Downgrades in the Company’sTDCC’s credit ratings will increase borrowing costs on certain indentures and could impact the Company’sits ability to access debt capital markets.
Dividends
Dow Inc.
The following table provides dividends paid to common stockholders for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | |
| Dividends Paid for the Years Ended Dec 31 | 2019 1 | 2018 2 | 2017 3 |
| In millions, except per share amounts |
| Dividends paid, per common share | $ | 2.10 |
| N/A | $ | 1.84 |
|
| Dividends paid to common stockholders | $ | 1,550 |
| N/A | $ | 2,179 |
|
| |
| 1. | Reflects Dow Inc. activity subsequent to the separation from DowDuPont. |
| |
| 2. | In 2018, the common stock of Dow Inc. and TDCC was owned solely by DowDuPont and therefore the Company did not have publicly traded stock. |
| |
| 3. | Reflects TDCC activity prior to the Merger. |
TDCC
Effective with the Merger, DowTDCC no longer has publicly traded common stock. Dow'sFrom the Merger date through March 31, 2019, TDCC's common shares arewere owned solely by its parent company, DowDuPont. The Company hasPursuant to the Merger Agreement, TDCC committed to fund a portion of DowDuPont's share repurchases, dividends paid to common stockholders and certain governance expenses. In addition, share repurchases by DowDuPont were partially funded by TDCC through 2018. Funding iswas accomplished through intercompany loans. On a quarterly basis, the Company’sTDCC's Board of Directors reviewreviewed and determinedetermined a dividend distribution to DowDuPont to settle the intercompany loans. The dividend distribution considersconsidered the level of the Company’sTDCC’s earnings and cash flows and the outstanding intercompany loan balances. For the year ended December 31, 2018, the Company2019, TDCC declared and paid dividends to DowDuPont of $3,711$535 million ($1,0563,711 million for the year ended December 31, 2018 and $1,056 for the year ended December 31, 2017). See Note 2426 to the Consolidated Financial Statements for additional information.
Effective with the separation from DowDuPont on April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. TDCC has committed to fund Dow Inc.'s dividends paid to common stockholders, are as follows:share repurchases and certain governance expenses. Funding is accomplished through intercompany loans. TDCC's Board of Directors reviews and determines a dividend distribution to Dow Inc. to settle the intercompany loans. For the year ended December 31, 2019, TDCC declared and paid dividends to Dow Inc. of $201 million. At December 31, 2019, TDCC's intercompany loan balance with Dow Inc. was zero. See Note 26 to the Consolidated Financial Statements for additional information.
|
| | | | | | |
| Dividends Paid for the Years Ended Dec 31 | 2017 | 2016 |
| In millions, except per share amounts |
| Dividends paid, per common share | $ | 1.84 |
| $ | 1.84 |
|
| Dividends paid to common stockholders | $ | 2,179 |
| $ | 2,037 |
|
Dividends paid to preferred shareholders 1 | $ | — |
| $ | 425 |
|
| |
1. | Dividends paid to preferred shareholders in 2016 includes payment of the fourth quarter 2016 declared dividend. |
Share Repurchase Program
Dow Inc.
On April 1, 2019, Dow Inc.'s Board of Directors ratified the share repurchase program originally approved on March 15, 2019, authorizing up to $3 billion to be spent on the repurchase of the Company's common stock, with no expiration date. In 2019, Dow Inc. repurchased $500 million of the Company's common stock. At December 31, 2019, approximately $2.5 billion of the share repurchase program authorization remained available for repurchases. Dow Inc. expects to repurchase $250 million of the Company's common stock in 2020.
TDCC
In 2013, TDCC's Board of Directors approved a share repurchase program. As a result of subsequent authorizations approved by TDCC's Board of Directors, the total authorized amount of the share repurchase program was $9.5 billion. Effective with the Merger, Dow no longer has publicly traded common stock and therefore has no ongoingthe share repurchase program.program was canceled. Over the duration of the program, a total of $8.1 billion was spent on the repurchase of TDCC Common Stock.
Pension Plans
The Company has both funded and unfunded defined benefit pension plans that cover employees in the United States and a number of other countries. As a result of the Company’s separation from DowDuPont, the number of significant defined benefit pension plans administered by the Company decreased from 45 plans to 35 plans, with approximately $270 million of net unfunded pension liabilities transferred to DowDupont. Plans administered by other subsidiaries of DowDuPont that were transferred to the Company were not significant. There were no changes in the number of significant other postretirement benefit plans administered by the Company as a result of the separation. Existing Company plans that were significantly impacted by the transfer of active plan participants to DowDuPont were remeasured, resulting in curtailment gains and losses and recognition of special termination benefits.
In 2019, 2018 2017 and 2016,2017, the Company contributed $1,656$261 million, $1,676$1,651 million and $629$1,672 million to its continuing operations pension plans respectively, including contributions to fund benefit payments for its non-qualified pension plans.plans ($266 million, $1,656 million and $1,676 million, including contributions to plans of discontinued operations). In the third quarter of 2018, the Company made a $1,100 million discretionary contribution to its principal U.S. pension plan, which is included in the 2018 contribution amount above. The discretionary contribution was primarily based on the Company's funding policy, which permits contributions to defined benefit pension plans when economics encourage funding, and reflected considerations relating to tax deductibility and capital structure.
The provisions of a U.S. non-qualified pension plan require the payment of plan obligations to certain participants upon a change in control of the Company, which occurred at the time of the Merger. Certain participants could elect to receive a lump-sum payment or direct the Company to purchase an annuity on their behalf using the after-tax proceeds of the lump sum. In the fourth quarter of 2017, the Company paid $940 million to plan participants and $230 million to an insurance company for the purchase of annuities, which were included in "Pension contributions" in the consolidated statements of cash flows. The Company also paid $205 million for income and payroll taxes for participants electing the annuity option. The Company recorded a settlement charge of $687 million associated with the payout in the fourth quarter of 2017.
DowThe Company expects to contribute approximately $240$250 million to its pension plans in 2019.2020. See Note 1921 to the Consolidated Financial Statements for additional information concerning the Company’s pension plans.
Restructuring, Goodwill Impairment and Asset Related Charges - Net
The activities related to the DowDuPont Agriculture Division Program and the Synergy Program are expected to result in additional cash expenditurespayments of approximately $480 million to $510$70 million, primarily through the endsecond quarter of 2019,2020, consisting of severance and related benefit costs and costs associated with exit and disposal activities, including environmental remediation (see Note 7 to the Consolidated Financial Statements). The Company expects to incur additional costs in the future related to its restructuring activities. Future costs are expected to include demolition costs related to closed facilities and restructuring plan implementation costs;facilities; these costs will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to the Merger, post-Merger integration and Intended Business Separationbusiness separation activities and costs related to the ownership restructure of Dow Silicones, were $1,044$1,063 million and $1,039 million in 2019 for Dow Inc. and TDCC, respectively, $1,179 million in 2018 $786and $798 million in 2017 and $349 million in 2016.2017. Integration and separation costs related to post-Merger integration and Intended Business Separationbusiness separation activities are expected to continue in 2020 for activities primarily involving the separation of information technology infrastructure and physical plant operations. Integration and separation costs are expected to be significantresult in 2019.additional cash expenditures of approximately $200 million to $250 million through the end of 2020.
Contractual Obligations
The following table summarizes the Company’s contractual obligations, commercial commitments and expected cash requirements for interest at December 31, 2018.2019. Additional information related to these obligations can be found in Notes 15, 16, 17, 18 and 1921 to the Consolidated Financial Statements.
| | | Contractual Obligations at Dec 31, 2018 | Payments Due In | | |
| Contractual Obligations at Dec 31, 2019 | | Payments Due In | |
| In millions | 2019 | 2020-2021 | 2022-2023 | 2024 and beyond | Total | 2020 | 2021-2022 | 2023-2024 | 2025 and beyond | Total |
| Dow Inc. | | | |
Long-term debt obligations 1 | $ | 340 |
| $ | 8,080 |
| $ | 1,990 |
| $ | 9,518 |
| $ | 19,928 |
| $ | 435 |
| $ | 2,024 |
| $ | 4,036 |
| $ | 10,246 |
| $ | 16,741 |
|
Expected cash requirements for interest 2 | 949 |
| 1,779 |
| 1,172 |
| 6,915 |
| 10,815 |
| 799 |
| 1,529 |
| 1,289 |
| 7,479 |
| 11,096 |
|
| Pension and other postretirement benefits | 370 |
| 818 |
| 2,576 |
| 5,614 |
| 9,378 |
| 379 |
| 909 |
| 1,944 |
| 7,214 |
| 10,446 |
|
| Operating leases | 412 |
| 697 |
| 550 |
| 978 |
| 2,637 |
| |
Purchase obligations 3 | 3,160 |
| 4,719 |
| 3,801 |
| 6,476 |
| 18,156 |
| |
Other noncurrent obligations 4 | — |
| 900 |
| 606 |
| 1,750 |
| 3,256 |
| |
Operating leases 3 | | 492 |
| 777 |
| 504 |
| 803 |
| 2,576 |
|
Purchase obligations 4 | | 2,548 |
| 4,162 |
| 3,664 |
| 4,737 |
| 15,111 |
|
Other noncurrent obligations 5 | | — |
| 1,390 |
| 795 |
| 1,062 |
| 3,247 |
|
| Total | $ | 5,231 |
| $ | 16,993 |
| $ | 10,695 |
| $ | 31,251 |
| $ | 64,170 |
| $ | 4,653 |
| $ | 10,791 |
| $ | 12,232 |
| $ | 31,541 |
| $ | 59,217 |
|
| TDCC | | | |
Long-term debt obligations 1 | | $ | 435 |
| $ | 2,024 |
| $ | 4,036 |
| $ | 10,246 |
| $ | 16,741 |
|
Expected cash requirements for interest 2 | | 799 |
| 1,529 |
| 1,289 |
| 7,479 |
| 11,096 |
|
| Pension and other postretirement benefits | | 379 |
| 909 |
| 1,944 |
| 7,214 |
| 10,446 |
|
Operating leases 3 | | 492 |
| 777 |
| 504 |
| 803 |
| 2,576 |
|
Purchase obligations 4 | | 2,548 |
| 4,162 |
| 3,664 |
| 4,737 |
| 15,111 |
|
Other noncurrent obligations 5 | | — |
| 1,180 |
| 633 |
| 1,061 |
| 2,874 |
|
| Total | | $ | 4,653 |
| $ | 10,581 |
| $ | 12,070 |
| $ | 31,540 |
| $ | 58,844 |
|
| |
| 1. | Excludes unamortized debt discount and issuance costs of $334$331 million. Includes capitalfinance lease obligations of $369$395 million. Assumes the option to extend will be exercised for the $2 billion Dow Silicones Term Loan facility will be exercised.Facility. |
| |
| 2. | Cash requirements for interest on long-term debt was calculated using current interest rates at December 31, 2018,2019, and includes $4,915$2,344 million of various floating rate notes. |
| |
| 3. | Includes imputed interest of $416 million. |
| |
| 4. | Includes outstanding purchase orders and other commitments greater than $1 million obtained through a survey conducted within the Company. |
| |
4.5. | Includes liabilities related to asbestos litigation, environmental remediation, legal settlements and other noncurrent liabilities. In addition to these items, Dow Inc. includes liabilities related to noncurrent obligations with DuPont and Corteva. The table excludes uncertain tax positions due to uncertainties in the timing of the effective settlement of tax positions with the respective taxing authorities and deferred tax liabilities as it is impractical to determine whether there will be a cash impact related to these liabilities. The table also excludes deferred revenue as it does not represent future cash requirements arising from contractual payment obligations. |
The Company expects to meet its contractual obligations through its normal sources of liquidity and believes it has the financial resources to satisfy these contractual obligations.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are obligations the Company has with nonconsolidated entities related to transactions, agreements or other contractual arrangements. The Company holds variable interests in joint ventures accounted for under the equity method of accounting. The Company is not the primary beneficiary of these joint ventures and therefore is not required to consolidate these entities (see Note 2325 to the Consolidated Financial Statements). In addition, see Note 1415 to the Consolidated Financial Statements for information regarding the transfer of financial assets.
Guarantees arise during the ordinary course of business from relationships with customers, committed accounts receivable facilities and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others if specific triggering events occur. The Company had outstanding guarantees at December 31, 20182019 of $5,408$3,952 million, compared with $5,663$4,273 million at December 31, 2017.2018. Additional information related to guarantees can be found in the “Guarantees” section of Note 1617 to the Consolidated Financial Statements.
Fair Value Measurements
See Note 1921 to the Consolidated Financial Statements for information related to fair value measurements of pension and other postretirement benefit plan assets; see Note 2123 for information related to other-than-temporary impairments; and, see Note 2224 for additional information concerning fair value measurements.
OTHER MATTERS
Recent Accounting Guidance
See Note 2 to the Consolidated Financial Statements for a summary of recent accounting guidance.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Following are the Company’s accounting policies impacted by judgments, assumptions and estimates:
Litigation
The Company is subject to legal proceedings and claims arising out of the normal course of business including product liability, patent infringement, employment matters, governmental tax and regulation disputes, contract and commercial litigation and other actions. The Company routinely assesses the legal and factual circumstances of each matter, the likelihood of any adverse outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known claim. DowThe Company has an active risk management program consisting of numerous insurance policies secured from many carriers covering various timeframes. These policies may provide coverage that could be utilized to minimize the financial impact, if any, of certain contingencies. The required reserves may change in the future due to new developments in each matter. For further discussion, see Note 1617 to the Consolidated Financial Statements.
Asbestos-Related Matters of Union Carbide Corporation
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. ("Amchem"). Each year, Ankura Consulting Group, LLC ("Ankura") performs a review for Union Carbide based upon historical asbestos claims, resolution and historicalasbestos-related defense spending.and processing costs, through the terminal year of 2049. Union Carbide compares current asbestos claim and resolution activity, including asbestos-related defense and defense spending activityprocessing costs, to the results of the most recent Ankura study at each balance sheet date to determine whether the asbestos-related liability continues to be appropriate.
In 2016, the Company elected to change its method of accounting for Union Carbide's asbestos-related defense and processing costs from expensing as incurred to estimating and accruing a liability. In addition to performing their annual review of pending and future asbestos claim resolution activity, Ankura also performed a review of Union Carbide's asbestos-related defense and processing costs to determine a reasonable estimate of future defense and processing costs to be included in the asbestos-related liability, through the terminal year of 2049.
For additional information, see Part I, Item 3. Legal Proceedings; Asbestos-Related Matters of Union Carbide Corporation in Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Notes 1 and 1617 to the Consolidated Financial Statements.
Environmental Matters
The Company determines the costs of environmental remediation of its facilities and formerly owned facilities based on evaluations of current law and existing technologies. Inherent uncertainties exist in such evaluations primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies. The recorded liabilities are adjusted periodically as remediation efforts progress, or as additional technical or legal information becomes available. At December 31, 2018,2019, the Company had accrued obligations of $820$1,155 million for probable environmental remediation and restoration costs, including $156$207 million for the remediation of Superfund sites. 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 approximately twoone and a half times that amount. For further discussion, see Environmental Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 1 and 1617 to the Consolidated Financial Statements.
Goodwill
The Company performs goodwill impairment testing at the reporting unit level. Reporting units are the level at which discrete financial information is available and reviewed by business management on a regular basis. The Company tests goodwill for impairment annually (in 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 separation from DowDuPont on April 1, 2019, did not impact the composition of the Company's six reporting units: Coatings & Performance Monomers, Consumer Solutions, Hydrocarbons & Energy, Industrial Solutions, Packaging and Specialty Plastics and Polyurethanes & Construction Chemicals. The ECP businesses received as part of the separation from DowDuPont are included in the Hydrocarbons & Energy and Packaging and Specialty Plastics reporting units. At December 31, 2018, the Company has defined 12 reporting units;2019, goodwill iswas carried by allfive out of thesesix of the Company's reporting units.
The Company has the option to first perform qualitative testing to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors assessed at the Company level include, but are not limited to, GDP growth rates, long-term hydrocarbon and energy prices, equity and credit market activity, discount rates, foreign exchange rates and overall financial performance. Qualitative factors assessed at the reporting unit level include, but are not limited to, changes in industry and market structure, competitive environments, planned capacity and new product launches, cost factors such as raw material prices, and financial performance of the reporting unit. If the Company chooses not to complete a qualitative assessment for a given reporting unit or if the initial assessment indicates that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying value, additional quantitative testing is required.
Quantitative testing requires the fair value of the reporting unit to be compared with its carrying value. If the reporting unit's carrying value exceeds its fair value, an impairment charge is recognized for the difference. The Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units. This valuation technique has been selected by management as the most meaningful valuation method due to the limited number of market comparables for the Company's reporting units. However, where market comparables are available, the Company includes EBIT/EBITDA multiples as part of the reporting unit valuation analysis. The discounted cash flow valuations are completed using the following key assumptions: projected revenue growth rates or compounded annual growth rates, discount rates, tax rates, terminal values, currency exchange rates, and forecasted long-term hydrocarbon and energy prices, by geographic arearegion and by year, which include the Company's key feedstocks as well as natural gas and crude oil (due to its correlation to naphtha). Currency exchange rates and long-term hydrocarbon and energy prices are established for the Company as a whole and applied consistently to all reporting units, while revenue growth rates, discount rates and tax rates are established by reporting unit to account for differences in business fundamentals and industry risk. These key assumptions drive projected EBIT/EBITDA and EBIT/EBITDA margins, which are key elements of management’s internal control over the reporting unit valuation analysis.
20182019 Goodwill Impairment Testing
In 2018, there were no events or changes in circumstances identified that warranted interim goodwill impairment testing. In the fourth quarter of 2018,2019, quantitative testing was performed on two reporting units and a qualitative assessment was performed for the remaining reporting units. For the quantitative testing, the fair values exceeded carrying values for both reporting units. Fair values exceeded carrying value in all scenarios where sensitivity analysis was performed, and the differences between fair value and carrying value of each reporting unit were determined to be reasonable. For the qualitative assessments, management considered the factors at both the Company level and the reporting unit level. Based on the qualitative assessment, management concluded it is not more likely than not that the fair value of the reporting unit is less than the carrying value of the reporting unit.
Upon completion of the quantitative testing in the fourth quarter of 2019, the Company determined the Coatings & Performance Monomers ("C&PM") reporting unit was impaired. During 2019, the C&PM reporting unit did not consistently meet expected financial performance targets, primarily due to the industry’s increased captive use of coatings products, which led to volume reductions, reduced margins for products across the portfolio due to changes in customer buying patterns and supply and demand balances, as well as a continued trend of customer consolidation in end markets, which reduced growth opportunities. As a result, the C&PM reporting unit lowered its future revenue and profitability projections, which were used in determining the fair value of the C&PM reporting unit using a discounted cash flow methodology. These discounted cash flows did not support the carrying value of the C&PM reporting unit. As a result, the Company recorded a goodwill impairment charge of$1,039 million in the fourth quarter of 2019. The C&PM reporting unit did not carry a goodwill balance at December 31, 2019. The fair value of the other reporting unit exceeded its carrying value and no other goodwill impairments were identified as a result of the 2019 testing.
Pension and Other Postretirement Benefits
As a result of the Company’s separation from DowDuPont, the number of defined benefit pension plans administered by the Company decreased from 45 plans to 35 plans, with approximately $270 million of net unfunded pension liabilities transferring to DowDuPont. Plans administered by other subsidiaries of DowDuPont that were transferred to the Company were not significant. There were no changes in the number of other postretirement benefit plans administered by the Company as a result of the separation.
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could have been settled at December 31, 2018,2019, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually and are disclosed in Note 1921 to the Consolidated Financial Statements. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect expense recognized and obligations recorded in future periods. The U.S. pension plans represent 71 percent of the Company’s pension plan assets and 6970 percent of the pension obligations.
The Company uses the spot rate approach to determine the discount rate utilized to measure the service cost and interest cost components of net periodic pension and other postretirement benefit costs for the U.S. and other selected countries. Under the spot rate approach, the Company calculates service costs and interest costs by applying individual spot rates from the Willis Towers Watson RATE:Link yield curve (based on high-quality corporate bond yields) for each selected country to the separate expected cash flow components of service cost and interest cost; service cost and interest cost for all other plans (including all plans prior to adoption) are determined on the basis of the single equivalent discount rates derived in determining those plan obligations.
The following information relates to the U.S. plans only; a similar approach is used for the Company’s non-U.S. plans.
The Company determines the expected long-term rate of return on assets by performing a detailed analysis of historical and expected returns based on the strategic asset allocation approved by the Company's Investment Committee and the underlying return fundamentals of each asset class. The Company’s historical experience with the pension fund asset performance is also considered. The expected return of each asset class is derived from a forecasted future return confirmed by historical experience. The expected long-term rate of return is an assumption and not what is expected to be earned in any one particular year. The weighted-average long-term rate of return assumption used for determining net periodic pension expense for 20182019 was 7.92 percent. The weighted-average assumption to be used for determining 20192020 net periodic pension expense is 7.947.95 percent. Future actual pension expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Company’s pension plans.
The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are based on the yield on high-quality corporate fixed income investments at the measurement date. Future expected actuarially determined cash flows for Dow’sthe Company’s U.S. plans are individually discounted at the spot rates under the Willis Towers Watson U.S. RATE:Link 60-90 corporate yield curve (based on 60th to 90th percentile high-quality corporate bond yields) to arrive at the plan’s obligations as of the measurement date. The weighted average discount rate utilized to measure pension obligations increaseddecreased to 3.41 percent at December 31, 2019, from 4.39 percent at December 31, 2018, from 3.66 percent at December 31, 2017.2018.
At December 31, 2018,2019, the U.S. qualified plans were underfunded on a projected benefit obligation basis by $4,066$4,768 million. The underfunded amount decreased $1,297increased $702 million compared with December 31, 2017.2018. The decreaseincrease in the underfunded amount in 20182019 was primarily due to the impact of higherlower discount rates, and discretionarywhich was partially offset by the reduction in the number of active U.S. pension plan contributions made in 2018.participants after the Company's separation from DowDuPont. The Company contributed $1,285 milliondid not make contributions to the U.S. qualified plans in 2018.2019.
The assumption for the long-term rate of increase infor the compensation levels for the U.S. qualified plans was 4.25 percent.unchanged. The Company uses a generational mortality table to determine the duration of its pension and other postretirement obligations.
The following discussion relates to the Company’s significant pension plans.
The Company bases the determination of pension expense on a market-related valuation of plan assets that reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return calculated using the market-related value of plan assets and the actual return based on the market value of plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plans, both gains and losses have been recognized and amortized. At December 31, 2018,2019, net lossesgains of $1,505$566 million remain to be recognized in the calculation of the market-related value of plan assets. These net lossesgains will result in increasesdecreases in future pension expense as they are recognized in the market-related value of assets.
The net decreaseincrease in the market-related value of assets due to the recognition of prior lossesgains (losses) is presented in the following table:
| | | Net Decrease in Market-Related Asset Value Due to Recognition of Prior Losses | |
| Net Increase in Market-Related Asset Value Due to Recognition of Prior Gains (Losses) | | Net Increase in Market-Related Asset Value Due to Recognition of Prior Gains (Losses) |
In millions | | 2019 | $ | 504 |
| |
| 2020 | 299 |
| $ | 93 |
|
| 2021 | 263 |
| 129 |
|
| 2022 | 439 |
| (48 | ) |
| 2023 | | 392 |
|
| Total | $ | 1,505 |
| $ | 566 |
|
At December 31, 2019, the Company expects pension expense from continuing operations to decreaseincrease in 20192020 by approximately $130$125 million. The decreaseincrease in pension expense is primarily due to the impact of higherdecrease in discount rates and the full year impactcurtailment gains of the significant 2018 contributions$27 million recognized in 2019 that are not expected to the Company's U.S. pension plans.recur in 2020.
A 25 basis point increase or decrease in the long-term return on assets assumption would change the Company’s total pension expense for 20192020 by $58$59 million. A 25 basis point increase in the discount rate assumption would lower the Company's total pension expense for 20192020 by $52$54 million. A 25 basis point decrease in the discount rate assumption would increase the Company's total pension expense for 20192020 by $62$56 million. A 25 basis point change in the long-term return and discount rate assumptions would have an immaterial impact on the other postretirement benefit expense for 2019.2020.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of available evidence, both positive and negative, the Company recognizes future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not.
At December 31, 2018,2019, the Company had a net deferred tax asset balance of $1,367$1,866 million, after valuation allowances of $1,320$1,262 million.
In evaluating the ability to realize the deferred tax assets, the Company relies on, in order of increasing subjectivity, taxable income in prior carryback years, the future reversals of existing taxable temporary differences, tax planning strategies and forecasted taxable income using historical and projected future operating results.
At December 31, 2018,2019, the Company had deferred tax assets for tax loss and tax credit carryforwards of $2,244$1,920 million, $300$295 million of which is subject to expiration in the years 20192020 through 2023.2024. In order to realize these deferred tax assets for tax loss and tax credit carryforwards, the Company needs taxable income of approximately $28,758$27,010 million across multiple jurisdictions. The taxable income needed to realize the deferred tax assets for tax loss and tax credit carryforwards that are subject to expiration between 20192020 through 20232024 is approximately $4,458$3,388 million.
The Company recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination. At December 31, 2018,2019, the Company had uncertain tax positions for both domestic and foreign issues of $313$319 million.
The Company accrues for non-income tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. At December 31, 2018,2019, the Company had a non-income tax contingency reserve for both domestic and foreign issues of $91$44 million.
OnIndemnification Assets and Liabilities
In connection with the 2019 separation from DowDupont and the 2016 ownership restructure of Dow Silicones, Dow entered into agreements that established each party’s indemnification obligations for certain tax, environmental, litigation and other matters, subject to certain conditions and limits. The Company records indemnification assets when collection is deemed probable and engages with indemnifying parties and assesses publicly available information to evaluate collectability. The underlying tax, environmental, litigation and other liabilities for which the Company claims indemnification are subject to significant judgment and potential disputes could adversely impact collectability. The Company assesses the collectability of indemnification assets when events or changes in circumstances indicate the carrying values may not be recoverable. At December 22, 2017, 31, 2019, indemnification assets were $210 million and $100 million for Dow Inc. and TDCC respectively (zero for both at December 31, 2018).
The Act was enacted, making significant changesCompany records indemnification liabilities when it is probable that a liability has been incurred and the amount can be reasonably estimated. At December 31, 2019, indemnification liabilities related to the U.S. tax law (see Note 9agreements were $848 million for Dow Inc. and zero for TDCC (zero for both at December 31, 2018). This represents management’s best estimate of the Company’s obligations under the agreements, although it is reasonably possible that future events could cause the actual values to be higher or lower than those projected or those recorded. For further discussion, see Notes 4 and 17 to the Consolidated Financial Statements for additional information). At December 31, 2017, the Company had not completed its accounting for the tax effects of The Act; however, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with SAB 118, income tax effects of The Act were refined upon obtaining, preparing, and analyzing additional information during the measurement period. At December 31, 2018, the Company had completed its accounting for the tax effects of The Act.Statements.
Environmental Matters
Environmental Policies
Dow is committed to world-class environmental, health and safety (“EH&S”) performance, as demonstrated by industry-leading performance, a long-standing commitment to RESPONSIBLE CARE®Responsible Care®, and a strong commitment to achieve the Company’sCompany's 2025 Sustainability Goals – goals that set the standard for sustainability in the chemical industry by focusing on improvements in Dow’sthe Company’s local corporate citizenship and product stewardship, and by actively pursuing methods to reduce the Company’sits environmental impact.
To meet the Company’s public commitments, as well as the stringent laws and government regulations related to environmental protection and remediation to which its global operations are subject, Dowthe Company has well-defined policies, requirements and management systems. Dow’sThe Company's EH&S Management System (“EMS”) defines the “who, what, when and how” needed for the businesses to achieve the Company’s policies, requirements, performance objectives, leadership expectations and public commitments. To ensure effective utilization, the EMS is integrated into a company-wide management system for EH&S, Operations, Quality and Human Resources.
It is Dow’sthe Company's policy to adhere to a waste management hierarchy that minimizes the impact of wastes and emissions on the environment. First, Dow workswork to eliminate or minimize the generation of waste and emissions at the source through research, process design, plant operations and maintenance. Second, Dow findsfind ways to reuse and recycle materials. Finally, unusable or non-recyclable hazardous waste is treated before disposal to eliminate or reduce the hazardous nature and volume of the waste. Treatment may include destruction by chemical, physical, biological or thermal means. Disposal of waste materials in landfills is considered only after all other options have been thoroughly evaluated. DowThe Company has specific requirements for waste that is transferred to non-Dow facilities, including the periodic auditing of these facilities.
DowThe Company believes third-party verification and transparent public reporting are cornerstones of world-class EH&S performance and building public trust. Numerous Dow sites in Europe, Latin America, Asia Pacific and U.S. & Canada have received third-party verification of Dow’sthe Company’s compliance with RESPONSIBLE CARE®Responsible Care® and with outside specifications such as ISO-14001. DowThe Company continues to be a global champion of RESPONSIBLE CARE®Responsible Care® and has worked to broaden the application and impact of RESPONSIBLE CARE®Responsible Care® around the world through engagement with suppliers, customers and joint venture partners.
Dow’sThe Company’s EH&S policies helped the Companyto achieve improvements in many aspects of EH&S performance in 2018. Dow’s2019. The Company’s process safety performance was excellent in 20182019 and improvements were made in injury/illness rates. Safetyrates, and safety remains a priority for the entire Company.priority. Further improvement in these areas, as well as environmental compliance, remains a top management priority, with initiatives underway to further improve performance and compliance in 20192020 as Dowthe Company continues to implement the Company's 2025 Sustainability Goals.
Detailed information on Dow’s performance regarding environmental matters and goals can be found online on Dow’sthe Company's Science & Sustainability webpage at www.dow.comwww.dow.com/sustainability. The Company's website and its content are not deemed incorporated by reference into this report.
Chemical Security
Public and political attention continues to be placed on the protection of critical infrastructure, including the chemical industry, from security threats. Terrorist attacks, natural disasters and cyber incidents have increased concern about the security and safety of chemical production and distribution. Many, including Dowthe Company and the American Chemistry Council, have called for uniform risk-based and performance-based national standards for securing the U.S. chemical industry. The Maritime Transportation Security Act of 2002 and its regulations further set forth risk-based and performance-based standards that must be met at U.S. Coast Guard-regulated facilities. U.S. Chemical Plant Security legislation was passed in 2006 and the Department of Homeland Security is now implementing the regulations known as the Chemical Facility Anti-Terrorism Standards. The Company is complying with the requirements of the Rail Transportation Security Rule issued by the U.S. Transportation Security Administration. DowThe Company continues to support uniform risk-based national standards for securing the chemical industry.
The focus on security, emergency planning, preparedness and response is not new to Dow.the Company. A comprehensive, multi-level security plan for the Company has been maintained since 1988. This plan, which has been activated in response to significant world and national events since then, is reviewed on an annual basis. DowThe Company continues to improve its security plans, placing emphasis on the safety of Dow communities and people by being prepared to meet risks at any level and to address both internal and external identifiable risks. The security plan includes regular vulnerability assessments, security audits, mitigation efforts and physical security upgrades designed to reduce vulnerability. Dow’sThe Company’s security plans also are developed to avert interruptions of normal business operations that could materially and adversely affect the Company’s results of operations, liquidity and financial condition.
DowThe Company played a key role in the development and implementation of the American Chemistry Council’s RESPONSIBLE CARE®Responsible Care® Security Code ("Security Code"), which requires that all aspects of security – including facility, transportation and cyberspace – be assessed and gaps addressed. Through the Company’s global implementation of the Security Code, Dowthe Company has permanently heightened the level of security – not just in the United States,U.S., but worldwide. DowThe Company employs several hundred employees and contractors in its Emergency Services and Security department worldwide. In 2019, the Company established its Global Security Operations Center ("GSOC") to provide 24-hour/day, 365-day/year real-time monitoring of global risks to Dow assets and people. The GSOC employs state-of-the-art social media monitoring, threat reporting and geo-fencing capabilities to analyze global risks and report those risks facilitating decision-making and actions to prevent Dow crises.
Through the implementation of the Security Code, including voluntary security enhancements and upgrades made since 2002, Dowthe Company is well-positioned to comply with U.S. chemical facility regulations and other regulatory security frameworks. DowThe Company is currently participating with the American Chemistry Council to review and update the Security Code.
DowThe Company continues to work collaboratively across the supply chain on RESPONSIBLE CARE®Responsible Care®, Supply Chain Design, Emergency Preparedness, Shipment Visibility and transportation of hazardous materials. DowThe Company is cooperating with public and private entities to lead the implementation of advanced tank car design, and track and trace technologies. Further, Dow’sthe Company’s Distribution Risk Review process that has been in place for decades was expanded to address potential threats in all modes of transportation across the Company’s supply chain. To reduce vulnerabilities, Dowthe Company maintains security measures that meet or exceed regulatory and industry security standards in all areas in which the Company operates.they operate.
Dow'sThe Company's initiatives relative to chemical security, emergency preparedness and response, Community Awareness and Emergency Responses and crisis management are implemented consistently at all Dow sites on a global basis. DowThe Company participates with chemical associations globally and participates as an active member of the U.S. delegation to the G7 Global Partnership Sub-Working Group on Chemical Security.
Climate Change
Climate change matters for Dowthe Company are likely to be driven by changes in regulations, public policy and physical climate parameters.
Regulatory Matters
Regulatory matters include cap and trade schemes; increased greenhouse gas (“GHG”) limits; and taxes on GHG emissions, fuel and energy. The potential implications of each of these matters are all very similar, including increased cost of purchased energy, additional capital costs for installation or modification of GHG emitting equipment, and additional costs associated directly with GHG emissions (such as cap and trade systems or carbon taxes), which are primarily related to energy use. It is difficult to estimate the potential impact of these regulatory matters on energy prices.
Reducing Dow'sthe Company's overall energy usage and GHG emissions through new and unfolding projects will decrease the potential impact of these regulatory matters. DowThe Company also has a dedicated commercial group to handle energy contracts and purchases, including managing emissions trading. The Company has not experienced any material impact related to regulated GHG emissions. The Companyemissions, and continues to evaluate and monitor this area for future developments.
Physical Climate Parameters
Many scientific academies throughout the world have concluded that it is very likely that human activities are contributing to global warming. At this point, it is difficult to predict and assess the probability and opportunity of a global warming trend on Dowthe Company specifically. Preparedness plans are developed that detail actions needed in the event of severe weather. These measures have historically been in place and these activities and associated costs are driven by normal operational preparedness. Dow continues to study the long-term implications of changing climate parameters on water availability, plant siting issues, and impacts and opportunities for products.
Dow’s Energy business and Public Affairs and Sustainability functions are tasked with developing and implementing a comprehensive strategy that addresses the potential challenges of energy security and GHG emissions on the Company. The CompanyDow continues to elevate its internal focus and external positions - to focus on the root causes of GHG emissions - including the unsustainable use of energy. Dow'sThe Company's energy plan provides the roadmap:
Conserve - aggressively pursue energy efficiency and conservation
Optimize - increase and diversify energy resources
Accelerate - develop cost-effective, clean, renewable and alternative energy sources
Transition - to a sustainable energy future
Through corporate energy efficiency programs and focused GHG management efforts, the Company has and is continuing to reduce its GHG emissions footprint. The Company’sDow’s manufacturing intensity, measured in Btu per pound of product, has improved by more than 40 percent since 1990. As part of the Company's 2025 Sustainability Goals, Dowthe Company will maintain GHG emissions below 2006 levels on an absolute basis for all GHGs.
DowThe Company intends to implement the recommendations of the Financial Stability BoardBoard's Task Force on Climate-RelatedClimate-related Financial Disclosures ("Task Force") over the next two to fourthree years, which is aligned with the recommendations of the Task Force.
Environmental Remediation
DowThe Company accrues the costs of remediation of its facilities and formerly owned facilities based on current law and regulatory requirements. The nature of such remediation can include management of soil and groundwater contamination. The accounting policies adopted to properly reflect the monetary impacts of environmental matters are discussed in Note 1 to the Consolidated Financial Statements. To assess the impact on the financial statements, environmental experts review currently available facts to evaluate the probability and scope of potential liabilities. Inherent uncertainties exist in such evaluations primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and the ability to apply remediation technologies. These liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. DowThe Company had an accrued liability of $664$948 million at December 31, 2018,2019, related to the remediation of current or former Dow-owned sites. At December 31, 2017,2018, the liability related to remediation was $726$654 million.
In addition to current and former Dow-owned sites, under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and equivalent state laws (hereafter referred to collectively as "Superfund Law"), Dowthe Company is liable for remediation of other hazardous waste sites where Dowthe Company allegedly disposed of, or arranged for the treatment or disposal of, hazardous substances. Because Superfund Law imposes joint and several liability upon each party at a site, Dowthe Company has evaluated its potential liability in light of the number of other companies that also have been named potentially responsible parties (“PRPs”) at each site, the estimated apportionment of costs among all PRPs, and the financial ability and commitment of each to pay its expected share. The Company’s remaining liability for the remediation of Superfund sites was $156$207 million at December 31, 20182019 ($152156 million at December 31, 2017)2018). The Company has not recorded any third-party recovery related to these sites as a receivable.
Information regarding environmental sites is provided below:
| | | Environmental Sites | Dow-owned Sites 1 | Superfund Sites 2 | Dow-owned Sites 1 | Superfund Sites 2 |
| 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 |
| Number of sites at Jan 1 | 244 |
| 189 |
| 131 |
| 131 |
| 178 |
| 181 |
| 131 |
| 131 |
|
| Sites added during year | 3 |
| 60 |
| 2 |
| 2 |
| 7 |
| 3 |
| 6 |
| 2 |
|
| Sites closed during year | (9 | ) | (5 | ) | (2 | ) | (2 | ) | (7 | ) | (6 | ) | (4 | ) | (2 | ) |
| Number of sites at Dec 31 | 238 |
| 244 |
| 131 |
| 131 |
| 178 |
| 178 |
| 133 |
| 131 |
|
| |
| 1. | Dow-owned sites are sites currently or formerly owned by Dow.the Company. In the United States, remediation obligations are imposed by the Resource Conservation and Recovery Act or analogous state law. At December 31, 2018, 322019, 28 of these sites (35(32 sites at December 31, 2017)2018) were formerly owned by Dowell Schlumberger, Inc., a group of companies in which the Company previously owned a 50 percent interest. DowThe Company sold its interest in Dowell Schlumberger in 1992. |
| |
| 2. | Superfund sites are sites, including sites not owned by Dow,the Company, where remediation obligations are imposed by Superfund Law. |
Additional information is provided below for the Company’s Midland, Michigan, manufacturing site and Midland off-site locations (collectively, the "Midland sites"), as well as a Superfund site in Wood-Ridge, New Jersey, the locations for which the Company has the largest potential environmental liabilities.
In the early days of operations at the Midland manufacturing site, wastes were usually disposed of on-site, resulting in soil and groundwater contamination, which has been contained and managed on-site under a series of Resource Conservation and Recovery Act permits and regulatory agreements. The Hazardous Waste Operating License for the Midland manufacturing site, issued in 2003, and renewed and replaced in September 2015, also included provisions for the Company to conduct an investigation to determine the nature and extent of off-site contamination from historic Midland manufacturing site operations. In January 2010, the Company, the U.S. Environmental Protection Agency ("EPA") and the State of Michigan ("State") entered into an Administrative Order on Consent that requires the Company to conduct a remedial investigation, a feasibility study and a remedial design for the Tittabawassee River, the Saginaw River and the Saginaw Bay, and pay the oversight costs of the EPA and the State under the authority of CERCLA. See Note 1617 to the Consolidated Financial Statements for additional information. At December 31, 2018, the Company had an accrual of $134 million ($131 million at December 31, 2017) forfurther information relating to Midland off-site environmental remediation and investigation associated with the Midland sites. In 2018, the Company spent $26 million ($24 million in 2017) for environmental remediation at the Midland sites.matters.
Rohm and Haas, a wholly owned subsidiary of Dow,the Company, is a PRP at the Wood-Ridge, New Jersey Ventron/Velsicol Superfund Site, and the adjacent Berry’s Creek Study Area ("BCSA") (collectively, the "Wood-Ridge sites"). Rohm and Haas is a successor
in interest to a company that owned and operated a mercury processing facility, where wastewater and waste handling resulted in contamination of soils and adjacent creek sediments. TheIn 2018, the Berry’s Creek Study Area Potentially Responsible Party Group (“PRP groupGroup”), consisting of over 100 PRPs, completed a multi-stage Remedial Investigation ("RI") pursuant to an Administrative Order on Consent with U.S. EPA Region 2 to identify contamination in surface water, sediment and biota related to numerous contaminated sites inInvestigation/Feasibility Study for the Berry's Creek watershed, and submitted the report to the
EPA in June 2016. That same month,BCSA. During that time, the EPA concluded that an "iterative“iterative or adaptive approach"approach” was appropriate for cleaning up the BCSA. Thus, each phase of remediation will be followed by a period of monitoring to assess its effectiveness and determine if there is a need for more work. The Feasibility Study ("FS") forIn September 2018, the first phase of work was submitted in the third quarter of 2018. The EPA selected the interim remedy and issued an interimsigned a Record of Decision ("ROD"ROD 1"). which describes the initial phase of the EPA’s plan to clean-up the BCSA. ROD 1 will remediate waterways and major tributaries in the most contaminated part of the BCSA. The PRP group is negotiatingGroup has signed agreements among the PRP's to fund design of the selected remedy and with the EPA to design the selected remedy. Although there is currently much uncertainty as to what will ultimately be required to remediate the BCSA and Rohm and Haas's share of these costs has yet to be determined, the range of activities that are required in the interim RODRecord of Decision is known in general terms. Based on the interim remedy selected by the EPA, the overall remediation accrual for the Wood-Ridge sites was increased by $21 million in the fourth quarter of 2018.
At December 31, 2018,2019, the Company had an accrual of $106accrued liabilities totaling $368 million ($88240 million at December 31, 2017)2018) for environmental remediation at the Midland and Wood-Ridge sites. In 2018,2019, the Company spent $6$32 million ($732 million in 2017) on2018) for environmental remediation at the Midland and Wood-Ridge sites.
InDuring the fourththird quarter of 2016,2019, the Company accrued additional liabilities totaling $447 million related to environmental remediation matters at a number of current and historical locations. The additional accrual primarily resulted from: the culmination of long-standing negotiations and discussions with regulators and agencies, including technical studies supporting higher cost estimates for final or staged remediation plans; the Company’s evaluation of the cost required to manage remediation activities at sites affected by Dow’s separation from DowDuPont and related agreements with Corteva and DuPont; and, the Company’s review of its closure strategies and obligations to monitor ongoing operations and maintenance activities. In addition, the Company recorded indemnification assets of $48 million related to Dow Silicones’ environmental matters. Net of indemnifications, the Company recognized a pretax charge of $295$399 million forrelated to these environmental remediation at a number of historical locations, including the Midland manufacturing site/off-site matters, and the Wood-Ridge sites, primarily resulting from the culmination of negotiations with regulators and/or final agency approval. This charge was included in "Cost“Cost of sales"sales” in the consolidated statements of income.
In total, the Company’s accrued liability for probable environmental remediation and restoration costs was $820$1,155 million at December 31, 2018,2019, compared with $878$810 million at December 31, 2017.2018. 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 approximately twoone and a half times that amount. 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. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s results of operations, financial condition and cash flows.
The amounts charged to income on a pretax basis related to environmental remediation totaled $174$588 million in 2019, $176 million in 2018 $171and $163 million in 2017 and $504 million in 2016.2017. The amounts charged to income on a pretax basis related to operating the Company’sCompany's current pollution abatement facilities, excluding internal recharges, totaled $772$677 million in 2019, $695 million in 2018 $640and $566 million in 2017 and $623 million in 2016.2017. Capital expenditures for environmental protection were $76$83 million in 2019, $55 million in 2018 $79and $57 million in 2017 and $66 million in 2016.2017.
Asbestos-Related Matters of Union Carbide Corporation
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.
The table below provides information regarding asbestos-related claims pending against Union Carbide and Amchem based on criteria developed by Union Carbide and its external consultants.consultants:
| | | Asbestos-Related Claim Activity | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| Claims unresolved at Jan 1 | 15,427 |
| 16,141 |
| 18,778 |
| 12,780 |
| 15,427 |
| 16,141 |
|
| Claims filed | 6,599 |
| 7,010 |
| 7,813 |
| 5,743 |
| 6,599 |
| 7,010 |
|
| Claims settled, dismissed or otherwise resolved | (9,246 | ) | (7,724 | ) | (10,450 | ) | (7,406 | ) | (9,246 | ) | (7,724 | ) |
| Claims unresolved at Dec 31 | 12,780 |
| 15,427 |
| 16,141 |
| 11,117 |
| 12,780 |
| 15,427 |
|
| Claimants with claims against both Union Carbide and Amchem | (4,675 | ) | (5,530 | ) | (5,741 | ) | (3,837 | ) | (4,675 | ) | (5,530 | ) |
| Individual claimants at Dec 31 | 8,105 |
| 9,897 |
| 10,400 |
| 7,280 |
| 8,105 |
| 9,897 |
|
Plaintiffs’ lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous claimants. As a result, the damages alleged are not expressly identified as to Union Carbide, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no asbestos personal injury cases in which only Union Carbide and/or Amchem are the sole named defendants. For these reasons and based upon Union Carbide’s litigation and settlement experience, Union Carbide does not consider the damages alleged against Union Carbide and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.
For additional information see Part I, Item 3. Legal Proceedings and Asbestos-Related Matters andof Union Carbide Corporation in Note 1617 to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Dow’sThe Company’s business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies that enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as hedges per the accounting guidance related to derivatives and hedging activities, where appropriate. A secondary objective is to add value by creating additional non-specific exposure within established limits and policies; derivatives used for this purpose are not designated as hedges. The potential impact of creating such additional exposures is not material to the Company’s results.
The global nature of Dow’sthe Company’s business requires active participation in the foreign exchange markets. The Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company’s foreign currency risk management is to optimize the U.S. dollar value of net assets and cash flows. To achieve this objective, the Company hedges on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps and nonderivative instruments in foreign currencies. Exposures primarily relate to assets, liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to operating activities. The largest exposures are denominated in European currencies, the Japanese yen and the Chinese yuan, although exposures also exist in the Canadian dollar, the Indian rupee and other currencies ofin Asia Pacific, Canada, Latin America, the Middle East Africa and India.Africa.
The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. To achieve this objective, the Company hedges using interest rate swaps, “swaptions,” and exchange-traded instruments. The Company’s primary exposure is to the U.S. dollar yield curve.
DowThe Company has a portfolio of equity securities derived primarily from the investment activities of its insurance subsidiaries. This exposure is managed in a manner consistent with the Company’s market risk policies and procedures.
Inherent in Dow’sthe Company’s business is exposure to price changes for several commodities. Some exposures can be hedged effectively through liquid tradable financial instruments. Natural gas and crude oil, along with feedstocks for ethylene and propylene production, constitute the main commodity exposures. Over-the-counter and exchange traded instruments are used to hedge these risks, when feasible.
DowThe Company uses value-at-risk (“VAR”), stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the maximum potential loss in fair market values, given a certain move in prices over a certain period of time, using specified confidence levels. The VAR methodology used by the Company is a variance/covariance model. This model uses a 97.5 percent confidence level and includes at least one year of historical data. The 20182019 and 20172018 year-end and average daily VAR for the aggregate of all positions are shown below. These amounts are immaterial relative to the total equity of the Company.
| | | Total Daily VAR by Exposure Type at Dec 31 | 2018 | 2017 | 2019 | 2018 |
| In millions | Year-end | Average | Year-end | Average | Year-end | Average | Year-end | Average |
| Commodities | $ | 26 |
| $ | 30 |
| $ | 32 |
| $ | 35 |
| $ | 7 |
| $ | 12 |
| $ | 26 |
| $ | 30 |
|
| Equity securities | 12 |
| 7 |
| 4 |
| 9 |
| 10 |
| 11 |
| 12 |
| 7 |
|
| Foreign exchange | 26 |
| 28 |
| 26 |
| 38 |
| 43 |
| 36 |
| 26 |
| 28 |
|
| Interest rate | 81 |
| 80 |
| 70 |
| 76 |
| 77 |
| 69 |
| 81 |
| 80 |
|
| Composite | $ | 145 |
| $ | 145 |
| $ | 132 |
| $ | 158 |
| $ | 137 |
| $ | 128 |
| $ | 145 |
| $ | 145 |
|
The Company’s dailycomposite VAR for the aggregate of all positions increaseddecreased from a composite VAR of $132 million at December 31, 2017 to a composite VAR of $145 million at December 31, 2018.2018 to $137 million at December 31, 2019. The interest rate and commodities VAR increaseddeclined due to an increasea decrease in exposure. The equity securities VAR increased due to an increase in managed exposures and higher equity volatility. The commodities VAR decreaseddeclined due to a decrease in managed exposure.exposures and lower equity volatility. The foreign exchange VAR increased due to increased hedging. See Note 2123 to the Consolidated Financial Statements for further disclosure regarding market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Dow Chemical CompanyInc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Dow Chemical CompanyInc. and subsidiaries (the "Company") as of December 31, 20182019 and 2017,2018, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2018,2019, and the related notes and the schedule listed in the Index at Item 15(a)2 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 11, 2019,7, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Changes in Accounting Principles
As discussed in Note 16 to the financial statements, in the fourth quarter of 2016, the Company changed its accounting policy from expensing asbestos-related defense and processing costs as incurred to the accrual of asbestos-related defense and processing costs when probable of occurring and estimable. As discussed in Note 41 to the financial statements, in the first quarter of 2018, the Company changed its method of accounting for revenue due to the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts with Customers and, in the first quarter of 2019, the Company changed the method of accounting for leases due to the adoption of ASC Topic 842, Leases.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill - Coatings & Performance Monomers Reporting Unit - Refer to Note 1 and Note 14 to the financial statements
Critical Audit Matter Description
The Company tests goodwill for impairment annually (in 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. The Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units, which requires management to make significant estimates and assumptions related to projected revenue growth rates, discount rates, and earnings before interest, taxes, depreciation and amortization (“EBITDA”). Changes in these assumptions could have a significant impact on the fair value
of the reporting unit and the amount of any goodwill impairment charge. As of December 31, 2019, the Company has six reporting units, all but one of which have goodwill.
Throughout 2019, the Coatings & Performance Monomers reporting unit (“C&PM”) did not consistently meet expected financial targets and experienced volume reductions and reduced margins for products across the portfolio due to changes in customer buying patterns and supply and demand balances, as well as the continued trend of customer consolidation in end markets, which reduced its future revenue and profitability projections. Therefore, in 2019, the Company used a discounted cash flow methodology to determine the fair value of the C&PM reporting unit. These discounted cash flows did not support the carrying value of C&PM. As a result, the Company recorded a goodwill impairment charge of $1,039 million in the fourth quarter of 2019.
Given the significant judgments made by management to estimate the fair value of the C&PM reporting unit, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to projected revenue growth rates, discount rates, EBITDA and EBITDA margin required a high degree of auditor judgment and an increased extent of effort, including the assistance of our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates and assumptions related to projected revenue growth rates, discount rates, EBITDA and EBITDA margin for the C&PM reporting unit included the following, among other procedures:
We tested the effectiveness of internal controls over the goodwill impairment evaluation, including controls over the selection of the discount rates and over forecasts of future revenue growth rates, EBITDA, and EBITDA margin.
We performed a retrospective review comparing actual revenue and EBITDA results of the reporting unit for 2019 to the forecasted results from 2018.
We performed a retrospective review comparing management’s estimates and assumptions relating to revenue, EBITDA, and EBITDA margin projections for the reporting unit used for the purpose of current year’s annual impairment test to the projections previously used in connection with the prior year annual impairment test.
We evaluated the consistency of estimates and assumptions relating to revenue and EBITDA growth inherent in the discounted cash flow model for the reporting unit to those used by management in other annual forecasting activities.
With the assistance of our fair value specialists, we performed a benchmarking exercise comparing management’s estimates and assumptions related to revenue growth, EBITDA and EBITDA margin for the reporting unit as of the measurement date to the revenue growth, EBITDA and EBITDA margins of a peer group of public companies for the most recent three years and the projection period.
With the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and (2) the projections of long-term revenue growth and the discount rates by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rates selected by management.
Other-Than-Temporary-Impairment (“OTTI”) of the Sadara Chemical Company (“Sadara”) equity method investment - Refer to Note 13 to the financial statements
Critical Audit Matter Description
In 2011, the Company and Saudi Arabian Oil Company formed Sadara Chemical Company (“Sadara”), a joint venture between the two companies that subsequently constructed and now operates a world-scale, fully integrated chemicals complex in Jubail Industrial City, Kingdom of Saudi Arabia. The Company has a 35 percent equity interest in this joint venture and has been, and continues to be, responsible for marketing the majority of Sadara’s products through the Company’s established sales channels.
In 2017, Sadara achieved full commercial operations of all its facilities. In December 2018, the joint venture successfully completed its Creditors Reliability Test, an extensive operational testing program designed to demonstrate the reliability of the joint venture’s full chemical complex by operating at high rates for an extended period of time. While Sadara has reached these operational milestones and has been generating positive EBITDA, the joint venture has yet to report positive net income.
During the fourth quarter of 2019, Sadara tested its long-lived assets for impairment using long-term cash flow projections. Due to Sadara's financial condition and its long-lived asset impairment test, Dow evaluated its equity method investment in Sadara for other-than-temporary impairment. The Company utilized a discounted cash flow methodology to measure the estimated fair value of its investment in Sadara, which was estimated to be zero. The Company determined the decline in value of its investment in Sadara was other-than-temporary due to Sadara’s financial performance since becoming commercially operational in 2017 and uncertainty around the prospects for recovery in Sadara’s financial condition. In the fourth quarter of 2019, the Company recorded
an impairment of its investment in Sadara and reserved certain accounts and notes receivable and accrued interest balances due to uncertainty around timing of collection for a total charge of $1,755 million.
We have identified the evaluation of the Sadara investment for other-than-temporary impairment as a critical audit matter because of the significant estimates and assumptions management makes to estimate the fair value of its investment, including the discount rate, terminal value, and long-term growth rates. This required a high degree of auditor judgment and increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s judgements, estimates and assumptions, related to the discount rate, terminal value, and long-term growth rate used in the discounted cash flow analysis used in the evaluation of other-than-temporary impairment of the Sadara investment included the following, among others:
We tested the effectiveness of internal controls over management’s evaluation of the Sadara investment for other-than-temporary impairment, including management’s evaluation of the assumptions used such as discount rate, terminal value, and long-term growth rate.
We evaluated the consistency of the assumptions and judgments relating to the discount rate, terminal value, and long-term growth rates by comparing to:
| |
| ◦ | Agreements in place between Sadara and Dow |
| |
| ◦ | Independent third-party pricing study |
We read external information included in press releases, earnings releases, regulatory filings, and other Sadara communications to search for contradictory information.
With the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and model being used (2) the assumptions used such as the discount rate, terminal value, and the long-term growth rate by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rates selected by management.
|
|
| /s/ DELOITTE & TOUCHE LLP |
Deloitte & Touche LLP
Midland, Michigan
February 7, 2020
We have served as the Company's auditor since 1905.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and the Board of Directors of The Dow Chemical Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Dow Chemical Company and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes and the schedule listed in the Index at Item 15(a)2 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 7, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Changes in Accounting Principles
As discussed in Note 1 to the financial statements, in the first quarter of 2018, the Company changed its method of accounting for revenue due to the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts with Customers and, in the first quarter of 2019, the Company changed the method of accounting for leases due to the adoption of ASC Topic 842, Leases.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill - Coatings & Performance Monomers Reporting Unit - Refer to Note 1 and Note 14 to the financial statements
Critical Audit Matter Description
The Company tests goodwill for impairment annually (in 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. The Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units, which requires management to make significant estimates and assumptions related to projected revenue growth rates, discount rates, and earnings before interest, taxes, depreciation and amortization (“EBITDA”). Changes in these assumptions could have a significant impact on the fair value of the reporting unit and the amount of any goodwill impairment charge. As of December 31, 2019, the Company has six reporting units, all but one of which have goodwill.
Throughout 2019, the Coatings & Performance Monomers reporting unit (“C&PM”) did not consistently meet expected financial targets and experienced volume reductions and reduced margins for products across the portfolio due to changes in customer buying patterns and supply and demand balances, as well as the continued trend of customer consolidation in end markets, which reduced its future revenue and profitability projections. Therefore, in 2019, the Company used a discounted cash flow methodology to determine the fair value of the C&PM reporting unit. These discounted cash flows did not support the carrying value of C&PM. As a result, the Company recorded a goodwill impairment charge of $1,039 million in the fourth quarter of 2019.
Given the significant judgments made by management to estimate the fair value of the C&PM reporting unit, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to projected revenue growth rates, discount rates, EBITDA and EBITDA margin required a high degree of auditor judgment and an increased extent of effort, including the assistance of our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates and assumptions related to projected revenue growth rates, discount rates, EBITDA and EBITDA margin for the C&PM reporting unit included the following, among other procedures:
We tested the effectiveness of internal controls over the goodwill impairment evaluation, including controls over the selection of the discount rates and over forecasts of future revenue growth rates, EBITDA, and EBITDA margin.
We performed a retrospective review comparing actual revenue and EBITDA results of the reporting unit for 2019 to the forecasted results from 2018.
We performed a retrospective review comparing management’s estimates and assumptions relating to revenue, EBITDA, and EBITDA margin projections for the reporting unit used for the purpose of current year’s annual impairment test to the projections previously used in connection with the prior year annual impairment test.
We evaluated the consistency of estimates and assumptions relating to revenue and EBITDA growth inherent in the discounted cash flow model for the reporting unit to those used by management in other annual forecasting activities.
With the assistance of our fair value specialists, we performed a benchmarking exercise comparing management’s estimates and assumptions related to revenue growth, EBITDA and EBITDA margin for the reporting unit as of the measurement date to the revenue growth, EBITDA and EBITDA margins of a peer group of public companies for the most recent three years and the projection period.
With the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and (2) the projections of long-term revenue growth and the discount rates by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rates selected by management.
Other-Than-Temporary-Impairment (“OTTI”) of the Sadara Chemical Company (“Sadara”) equity method investment - Refer to Note 13 to the financial statements
Critical Audit Matter Description
In 2011, the Company and Saudi Arabian Oil Company formed Sadara Chemical Company (“Sadara”), a joint venture between the two companies that subsequently constructed and now operates a world-scale, fully integrated chemicals complex in Jubail Industrial City, Kingdom of Saudi Arabia. The Company has a 35 percent equity interest in this joint venture and has been, and continues to be, responsible for marketing the majority of Sadara’s products through the Company’s established sales channels.
In 2017, Sadara achieved full commercial operations of all its facilities. In December 2018, the joint venture successfully completed its Creditors Reliability Test, an extensive operational testing program designed to demonstrate the reliability of the joint venture’s full chemical complex by operating at high rates for an extended period of time. While Sadara has reached these operational milestones and has been generating positive EBITDA, the joint venture has yet to report positive net income.
During the fourth quarter of 2019, Sadara tested its long-lived assets for impairment using long-term cash flow projections. Due to Sadara's financial condition and its long-lived asset impairment test, Dow evaluated its equity method investment in Sadara for other-than-temporary impairment. The Company utilized a discounted cash flow methodology to measure the estimated fair value of its investment in Sadara, which was estimated to be zero. The Company determined the decline in value of its investment in Sadara was other-than-temporary due to Sadara’s financial performance since becoming commercially operational in 2017 and uncertainty around the prospects for recovery in Sadara’s financial condition. In the fourth quarter of 2019, the Company recorded an impairment of its investment in Sadara and reserved certain accounts and notes receivable and accrued interest balances due to uncertainty around the timing of collection for a total charge of $1,755 million.
We have identified the evaluation of the Sadara investment for other-than-temporary impairment as a critical audit matter because of the significant estimates and assumptions management makes to estimate the fair value of its investment, including the discount rate, terminal value, and long-term growth rates. This required a high degree of auditor judgment and increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s judgements, estimates and assumptions, related to the discount rate, terminal value, and long-term growth rate used in the discounted cash flow analysis used in the evaluation of other-than-temporary impairment of the Sadara investment included the following, among others:
We tested the effectiveness of internal controls over management’s evaluation of the Sadara investment for other-than-temporary impairment, including management’s evaluation of the assumptions used such as discount rate, terminal value, and long-term growth rate.
We evaluated the consistency of the assumptions and judgments relating to the discount rate, terminal value, and long-term growth rates by comparing to:
| |
| ◦ | Agreements in place between Sadara and Dow |
| |
| ◦ | Independent third-party pricing study |
We read external information included in press releases, earnings releases, regulatory filings, and other Sadara communications to search for contradictory information.
With the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and model being used (2) the assumptions used such as the discount rate, terminal value, and the long-term growth rate by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rates selected by management.
|
|
| /s/ DELOITTE & TOUCHE LLP |
Deloitte & Touche LLP
Midland, Michigan
February 11, 20197, 2020
We have served as the Company's auditor since 1905.
Dow Inc. and Subsidiaries
Consolidated Statements of Income
|
| | | | | | | | | |
| (In millions, except per share amounts) For the years ended Dec 31, | 2019 | 2018 | 2017 |
| Net sales | $ | 42,951 |
| $ | 49,604 |
| $ | 43,730 |
|
| Cost of sales | 36,657 |
| 41,074 |
| 36,350 |
|
| Research and development expenses | 765 |
| 800 |
| 803 |
|
| Selling, general and administrative expenses | 1,590 |
| 1,782 |
| 1,795 |
|
| Amortization of intangibles | 419 |
| 469 |
| 400 |
|
| Restructuring, goodwill impairment and asset related charges - net | 3,219 |
| 221 |
| 2,739 |
|
| Integration and separation costs | 1,063 |
| 1,179 |
| 798 |
|
| Equity in earnings (losses) of nonconsolidated affiliates | (94 | ) | 555 |
| 394 |
|
| Sundry income (expense) - net | 461 |
| 96 |
| (154 | ) |
| Interest income | 81 |
| 82 |
| 66 |
|
| Interest expense and amortization of debt discount | 933 |
| 1,063 |
| 914 |
|
| Income (loss) from continuing operations before income taxes | (1,247 | ) | 3,749 |
| 237 |
|
| Provision for income taxes on continuing operations | 470 |
| 809 |
| 1,524 |
|
| Income (loss) from continuing operations, net of tax | (1,717 | ) | 2,940 |
| (1,287 | ) |
| Income from discontinued operations, net of tax | 445 |
| 1,835 |
| 1,882 |
|
| Net income (loss) | (1,272 | ) | 4,775 |
| 595 |
|
| Net income attributable to noncontrolling interests | 87 |
| 134 |
| 130 |
|
| Net income (loss) available for Dow Inc. common stockholders | $ | (1,359 | ) | $ | 4,641 |
| $ | 465 |
|
| | | | |
| | | | |
| Per common share data: | | | |
| Earnings (loss) per common share from continuing operations - basic | $ | (2.42 | ) | $ | 3.80 |
| $ | (1.88 | ) |
| Earnings per common share from discontinued operations - basic | 0.58 |
| 2.41 |
| 2.48 |
|
| Earnings (loss) per common share - basic | $ | (1.84 | ) | $ | 6.21 |
| $ | 0.60 |
|
| Earnings (loss) per common share from continuing operations - diluted | $ | (2.42 | ) | $ | 3.80 |
| $ | (1.88 | ) |
| Earnings per common share from discontinued operations - diluted | 0.58 |
| 2.41 |
| 2.48 |
|
| Earnings (loss) per common share - diluted | $ | (1.84 | ) | $ | 6.21 |
| $ | 0.60 |
|
| |
|
|
|
| |
| Weighted-average common shares outstanding - basic | 742.5 |
| 747.2 |
| 744.8 |
|
| Weighted-average common shares outstanding - diluted | 742.5 |
| 747.2 |
| 744.8 |
|
See Notes to the Consolidated Financial Statements.
Dow Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
|
| | | | | | | | | |
| (In millions) For the years ended Dec 31, | 2019 | 2018 | 2017 |
| Net income (loss) | $ | (1,272 | ) | $ | 4,775 |
| $ | 595 |
|
| Other comprehensive income (loss), net of tax |
|
|
|
| Unrealized gains (losses) on investments | 115 |
| (67 | ) | (46 | ) |
| Cumulative translation adjustments | (32 | ) | (225 | ) | 900 |
|
| Pension and other postretirement benefit plans | (899 | ) | (40 | ) | 391 |
|
| Derivative instruments | (338 | ) | 75 |
| (14 | ) |
| Total other comprehensive income (loss) | (1,154 | ) | (257 | ) | 1,231 |
|
| Comprehensive income (loss) | (2,426 | ) | 4,518 |
| 1,826 |
|
| Comprehensive income attributable to noncontrolling interests, net of tax | 99 |
| 97 |
| 172 |
|
| Comprehensive income (loss) attributable to Dow Inc. | $ | (2,525 | ) | $ | 4,421 |
| $ | 1,654 |
|
See Notes to the Consolidated Financial Statements.
Dow Inc. and Subsidiaries
Consolidated Balance Sheets
|
| | | | | | |
| (In millions, except share amounts) At Dec 31, | 2019 | 2018 |
| Assets | | |
| Current Assets |
|
|
| Cash and cash equivalents (variable interest entities restricted - 2019: $37; 2018: $71) | $ | 2,367 |
| $ | 2,724 |
|
| Marketable securities | 21 |
| 100 |
|
| Accounts and notes receivable: |
|
|
| Trade (net of allowance for doubtful receivables - 2019: $45; 2018: $42) | 4,844 |
| 5,646 |
|
| Other | 2,711 |
| 3,389 |
|
| Inventories | 6,214 |
| 6,899 |
|
| Other current assets | 658 |
| 712 |
|
| Assets of discontinued operations - current | — |
| 19,900 |
|
| Total current assets | 16,815 |
| 39,370 |
|
| Investments |
|
|
| Investment in nonconsolidated affiliates | 1,404 |
| 3,320 |
|
| Other investments (investments carried at fair value - 2019: $1,584; 2018: $1,699) | 2,588 |
| 2,646 |
|
| Noncurrent receivables | 1,063 |
| 360 |
|
| Total investments | 5,055 |
| 6,326 |
|
| Property |
|
|
| Property | 54,910 |
| 53,984 |
|
| Less accumulated depreciation | 33,914 |
| 32,566 |
|
| Net property (variable interest entities restricted - 2019: $330; 2018: $683) | 20,996 |
| 21,418 |
|
| Other Assets |
|
|
| Goodwill | 8,796 |
| 9,846 |
|
| Other intangible assets (net of accumulated amortization - 2019: $3,886; 2018: $3,379) | 3,759 |
| 4,225 |
|
| Operating lease right-of-use assets | 2,072 |
| — |
|
| Deferred income tax assets | 2,213 |
| 1,779 |
|
| Deferred charges and other assets | 818 |
| 735 |
|
| Total other assets | 17,658 |
| 16,585 |
|
| Total Assets | $ | 60,524 |
| $ | 83,699 |
|
| Liabilities and Equity |
|
|
| Current Liabilities |
|
|
| Notes payable | $ | 586 |
| $ | 298 |
|
| Long-term debt due within one year | 435 |
| 338 |
|
| Accounts payable: |
|
|
| Trade | 3,889 |
| 4,456 |
|
| Other | 2,064 |
| 2,479 |
|
| Operating lease liabilities - current | 421 |
| — |
|
| Income taxes payable | 522 |
| 557 |
|
| Accrued and other current liabilities | 2,762 |
| 2,931 |
|
| Liabilities of discontinued operations - current | — |
| 4,488 |
|
| Total current liabilities | 10,679 |
| 15,547 |
|
| Long-Term Debt (variable interest entities nonrecourse - 2019: $34; 2018: $75) | 15,975 |
| 19,253 |
|
| Other Noncurrent Liabilities |
|
|
| Deferred income tax liabilities | 347 |
| 501 |
|
| Pension and other postretirement benefits - noncurrent | 10,083 |
| 8,926 |
|
| Asbestos-related liabilities - noncurrent | 1,060 |
| 1,142 |
|
| Operating lease liabilities - noncurrent | 1,739 |
| — |
|
| Other noncurrent obligations | 6,547 |
| 4,709 |
|
| Total other noncurrent liabilities | 19,776 |
| 15,278 |
|
| Stockholders’ Equity |
|
|
Common stock (2019: authorized 5,000,000,000 shares and issued 751,228,644 shares of $0.01 par value each; 2018: authorized and issued 100 shares of $0.01 par value each) | 8 |
| — |
|
| Additional paid-in capital | 7,325 |
| 7,042 |
|
| Retained earnings | 17,045 |
| 35,460 |
|
| Accumulated other comprehensive loss | (10,246 | ) | (9,885 | ) |
| Unearned ESOP shares | (91 | ) | (134 | ) |
| Treasury stock at cost (2019: 9,729,834 shares; 2018: zero shares) | (500 | ) | — |
|
| Dow Inc.’s stockholders’ equity | 13,541 |
| 32,483 |
|
| Noncontrolling interests | 553 |
| 1,138 |
|
| Total equity | 14,094 |
| 33,621 |
|
| Total Liabilities and Equity | $ | 60,524 |
| $ | 83,699 |
|
See Notes to the Consolidated Financial Statements.
Dow Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
| | | | | | | | | |
(In millions) For the years ended Dec 31, | 2019 | 2018 | 2017 |
| Operating Activities |
|
| |
| Net income (loss) | $ | (1,272 | ) | $ | 4,775 |
| $ | 595 |
|
| Less: Income from discontinued operations, net of tax | 445 |
| 1,835 |
| 1,882 |
|
| Income (loss) from continuing operations, net of tax | (1,717 | ) | 2,940 |
| (1,287 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |
|
|
|
| Depreciation and amortization | 2,938 |
| 2,909 |
| 2,546 |
|
| Provision (credit) for deferred income tax | (228 | ) | (429 | ) | 1,413 |
|
| Earnings of nonconsolidated affiliates less than dividends received | 1,114 |
| 108 |
| 253 |
|
| Net periodic pension benefit cost | 144 |
| 279 |
| 1,032 |
|
| Pension contributions | (261 | ) | (1,651 | ) | (1,672 | ) |
| Net gain on sales of assets, businesses and investments | (81 | ) | (38 | ) | (419 | ) |
| Restructuring, goodwill impairment and asset related charges - net | 3,219 |
| 221 |
| 2,739 |
|
| Other net loss | 198 |
| 415 |
| 451 |
|
| Changes in assets and liabilities, net of effects of acquired and divested companies: |
|
|
|
|
|
|
| Accounts and notes receivable | 1,253 |
| (855 | ) | (11,431 | ) |
| Inventories | 668 |
| (859 | ) | (891 | ) |
| Accounts payable | (948 | ) | 787 |
| 1,081 |
|
| Other assets and liabilities, net | (586 | ) | (731 | ) | (258 | ) |
| Cash provided by (used for) operating activities - continuing operations | 5,713 |
| 3,096 |
| (6,443 | ) |
| Cash provided by operating activities - discontinued operations | 217 |
| 1,158 |
| 1,514 |
|
| Cash provided by (used for) operating activities | 5,930 |
| 4,254 |
| (4,929 | ) |
| Investing Activities |
|
|
|
| |
| Capital expenditures | (1,961 | ) | (2,091 | ) | (2,807 | ) |
| Investment in gas field developments | (76 | ) | (114 | ) | (121 | ) |
| Purchases of previously leased assets | (9 | ) | (26 | ) | (187 | ) |
| Proceeds from sales of property and businesses, net of cash divested | 84 |
| 47 |
| 522 |
|
| Acquisitions of property and businesses, net of cash acquired | — |
| (20 | ) | 47 |
|
| Investments in and loans to nonconsolidated affiliates | (638 | ) | (18 | ) | (749 | ) |
| Distributions and loan repayments from nonconsolidated affiliates | 89 |
| 55 |
| 69 |
|
| Purchases of investments | (899 | ) | (1,530 | ) | (642 | ) |
| Proceeds from sales and maturities of investments | 1,252 |
| 1,214 |
| 1,165 |
|
| Proceeds from interests in trade accounts receivable conduits | — |
| 657 |
| 9,462 |
|
| Other investing activities, net | — |
| — |
| 34 |
|
| Cash provided by (used for) investing activities - continuing operations | (2,158 | ) | (1,826 | ) | 6,793 |
|
| Cash provided by (used for) investing activities - discontinued operations | (34 | ) | (369 | ) | 725 |
|
| Cash provided by (used for) investing activities | (2,192 | ) | (2,195 | ) | 7,518 |
|
| Financing Activities |
|
|
|
|
|
|
| Changes in short-term notes payable | 307 |
| (178 | ) | 268 |
|
| Proceeds from issuance of long-term debt | 2,287 |
| 1,999 |
| — |
|
| Payments on long-term debt | (5,561 | ) | (3,054 | ) | (617 | ) |
| Purchases of treasury stock | (500 | ) | — |
| — |
|
| Proceeds from issuance of parent company stock | 93 |
| 112 |
| 66 |
|
| Proceeds from sales of common stock | — |
| — |
| 423 |
|
| Transaction financing, debt issuance and other costs | (119 | ) | (70 | ) | — |
|
| Employee taxes paid for share-based payment arrangements | (60 | ) | (77 | ) | (81 | ) |
| Distributions to noncontrolling interests | (77 | ) | (135 | ) | (101 | ) |
| Purchases of noncontrolling interests | (297 | ) | — |
| — |
|
| Dividends paid to stockholders | (1,550 | ) | — |
| (2,179 | ) |
| Dividends paid to DowDuPont Inc. | (535 | ) | (3,711 | ) | (1,056 | ) |
| Settlements and transfers related to separation from DowDuPont Inc. | 1,935 |
| (240 | ) | 6 |
|
| Other financing activities, net | — |
| 3 |
| (4 | ) |
| Cash used for financing activities - continuing operations | (4,077 | ) | (5,351 | ) | (3,275 | ) |
| Cash used for financing activities - discontinued operations | (18 | ) | (53 | ) | (50 | ) |
| Cash used for financing activities | (4,095 | ) | (5,404 | ) | (3,325 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (27 | ) | (99 | ) | 320 |
|
| Summary |
|
|
|
|
|
|
| Decrease in cash, cash equivalents and restricted cash | (384 | ) | (3,444 | ) | (416 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 2,764 |
| 6,208 |
| 6,624 |
|
| Cash, cash equivalents and restricted cash at end of year | $ | 2,380 |
| $ | 2,764 |
| $ | 6,208 |
|
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 13 |
| 40 |
| 19 |
|
| Cash and cash equivalents at end of year | $ | 2,367 |
| $ | 2,724 |
| $ | 6,189 |
|
See Notes to the Consolidated Financial Statements.
Dow Inc. and Subsidiaries
Consolidated Statements of Equity
|
| | | | | | | | | |
| (In millions, except per share amounts) For the years ended Dec 31, | 2019 | 2018 | 2017 |
| Common Stock |
|
|
|
| Balance at beginning of year | $ | — |
| $ | — |
| $ | 3,107 |
|
| Merger impact | — |
| — |
| (3,107 | ) |
| Common stock issued | 8 |
| — |
| — |
|
| Balance at end of year | 8 |
| — |
| — |
|
| Additional Paid-in Capital |
|
|
|
| Balance at beginning of year | 7,042 |
| 6,553 |
| 4,262 |
|
| Common stock issued / sold | 57 |
| — |
| 423 |
|
| Issuance of parent company stock - DowDuPont Inc. | 28 |
| 112 |
| 66 |
|
| Stock-based compensation and allocation of ESOP shares | 235 |
| 377 |
| (368 | ) |
| Merger impact | — |
| — |
| 2,172 |
|
| Other | (37 | ) | — |
| (2 | ) |
| Balance at end of year | 7,325 |
| 7,042 |
| 6,553 |
|
| Retained Earnings |
|
|
|
| Balance at beginning of year | 35,460 |
| 33,742 |
| 30,338 |
|
| Adoption of accounting standards (Note 1) | (151 | ) | 989 |
| — |
|
| Net income (loss) available for Dow Inc.'s common stockholders | (1,359 | ) | 4,641 |
| 465 |
|
| Dividends to stockholders | (1,550 | ) | — |
| (1,673 | ) |
| Dividends to DowDuPont Inc. | (535 | ) | (3,711 | ) | (1,056 | ) |
| Common control transaction | (14,806 | ) | (182 | ) | 5,693 |
|
| Other | (14 | ) | (19 | ) | (25 | ) |
| Balance at end of year | 17,045 |
| 35,460 |
| 33,742 |
|
| Accumulated Other Comprehensive Loss |
|
|
|
| Balance at beginning of year | (9,885 | ) | (8,591 | ) | (9,822 | ) |
| Adoption of accounting standards (Note 1) | — |
| (1,037 | ) | — |
|
| Other comprehensive income (loss) | (1,154 | ) | (257 | ) | 1,231 |
|
| Common control transaction | 793 |
| — |
| — |
|
| Balance at end of year | (10,246 | ) | (9,885 | ) | (8,591 | ) |
| Unearned ESOP Shares |
|
|
|
| Balance at beginning of year | (134 | ) | (189 | ) | (239 | ) |
| Stock-based compensation and allocation of ESOP shares | 45 |
| 55 |
| 50 |
|
| ESOP shares acquired | (2 | ) | — |
| — |
|
| Balance at end of year | (91 | ) | (134 | ) | (189 | ) |
| Treasury Stock |
|
|
|
| Balance at beginning of year | — |
| — |
| (1,659 | ) |
| Common stock issued/sold | — |
| — |
| 724 |
|
| Treasury stock purchases | (500 | ) | — |
| — |
|
| Merger impact | — |
| — |
| 935 |
|
| Balance at end of year | (500 | ) | — |
| — |
|
| Dow Inc.'s stockholders' equity | 13,541 |
| 32,483 |
| 31,515 |
|
| Noncontrolling Interests | 553 |
| 1,138 |
| 1,186 |
|
| Total Equity | $ | 14,094 |
| $ | 33,621 |
| $ | 32,701 |
|
| | | | |
| Dividends declared per share of common stock | $ | 2.10 |
| $ | — |
| $ | 1.38 |
|
See Notes to the Consolidated Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
| | | (In millions) For the years ended Dec 31, | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| Net sales | $ | 60,278 |
| $ | 55,508 |
| $ | 48,158 |
| $ | 42,951 |
| $ | 49,604 |
| $ | 43,730 |
|
| Cost of sales | 47,705 |
| 43,612 |
| 37,668 |
| 36,657 |
| 41,074 |
| 36,350 |
|
| Research and development expenses | 1,536 |
| 1,648 |
| 1,593 |
| 765 |
| 800 |
| 803 |
|
| Selling, general and administrative expenses | 2,846 |
| 2,920 |
| 2,953 |
| 1,585 |
| 1,782 |
| 1,795 |
|
| Amortization of intangibles | 622 |
| 624 |
| 544 |
| 419 |
| 469 |
| 400 |
|
| Restructuring, goodwill impairment and asset related charges - net | 620 |
| 3,100 |
| 595 |
| 3,219 |
| 221 |
| 2,739 |
|
| Integration and separation costs | 1,044 |
| 786 |
| 349 |
| 1,039 |
| 1,179 |
| 798 |
|
| Asbestos-related charge | — |
| — |
| 1,113 |
| |
| Equity in earnings of nonconsolidated affiliates | 950 |
| 762 |
| 442 |
| |
| Equity in earnings (losses) of nonconsolidated affiliates | | (94 | ) | 555 |
| 394 |
|
| Sundry income (expense) - net | 181 |
| 195 |
| 1,486 |
| 573 |
| 96 |
| (154 | ) |
| Interest income | | 81 |
| 82 |
| 66 |
|
| Interest expense and amortization of debt discount | 1,118 |
| 976 |
| 858 |
| 952 |
| 1,063 |
| 914 |
|
| Income before income taxes | 5,918 |
| 2,799 |
| 4,413 |
| |
| Provision for income taxes | 1,285 |
| 2,204 |
| 9 |
| |
| Net income | 4,633 |
| 595 |
| 4,404 |
| |
| Income (loss) from continuing operations before income taxes | | (1,125 | ) | 3,749 |
| 237 |
|
| Provision for income taxes on continuing operations | | 470 |
| 809 |
| 1,524 |
|
| Income (loss) from continuing operations, net of tax | | (1,595 | ) | 2,940 |
| (1,287 | ) |
| Income from discontinued operations, net of tax | | 445 |
| 1,835 |
| 1,882 |
|
| Net income (loss) | | (1,150 | ) | 4,775 |
| 595 |
|
| Net income attributable to noncontrolling interests | 134 |
| 129 |
| 86 |
| 87 |
| 134 |
| 130 |
|
| Net income attributable to The Dow Chemical Company | 4,499 |
| 466 |
| 4,318 |
| |
| Preferred stock dividends | — |
| — |
| 340 |
| |
| Net income available for The Dow Chemical Company common stockholder | $ | 4,499 |
| $ | 466 |
| $ | 3,978 |
| |
| Net income (loss) available for The Dow Chemical Company common stockholder | | $ | (1,237 | ) | $ | 4,641 |
| $ | 465 |
|
See Notes to the Consolidated Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | (In millions) For the years ended Dec 31, | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| Net income | $ | 4,633 |
| $ | 595 |
| $ | 4,404 |
| |
| Net income (loss) | | $ | (1,150 | ) | $ | 4,775 |
| $ | 595 |
|
| Other comprehensive income (loss), net of tax | | | | | | |
| Unrealized losses on investments | (67 | ) | (46 | ) | (4 | ) | |
| Unrealized gains (losses) on investments | | 115 |
| (67 | ) | (46 | ) |
| Cumulative translation adjustments | (225 | ) | 900 |
| (644 | ) | (32 | ) | (225 | ) | 900 |
|
| Pension and other postretirement benefit plans | (40 | ) | 391 |
| (620 | ) | (899 | ) | (40 | ) | 391 |
|
| Derivative instruments | 75 |
| (14 | ) | 113 |
| (338 | ) | 75 |
| (14 | ) |
| Total other comprehensive income (loss) | (257 | ) | 1,231 |
| (1,155 | ) | (1,154 | ) | (257 | ) | 1,231 |
|
| Comprehensive income | 4,376 |
| 1,826 |
| 3,249 |
| |
| Comprehensive income (loss) | | (2,304 | ) | 4,518 |
| 1,826 |
|
| Comprehensive income attributable to noncontrolling interests, net of tax | 97 |
| 172 |
| 83 |
| 99 |
| 97 |
| 172 |
|
| Comprehensive income attributable to The Dow Chemical Company | $ | 4,279 |
| $ | 1,654 |
| $ | 3,166 |
| |
| Comprehensive income (loss) attributable to The Dow Chemical Company | | $ | (2,403 | ) | $ | 4,421 |
| $ | 1,654 |
|
See Notes to the Consolidated Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
| | | (In millions, except share amounts) At Dec 31, | 2018 | 2017 | 2019 | 2018 |
| Assets | | | | |
| Current Assets | | | | |
| Cash and cash equivalents (variable interest entities restricted - 2018: $82; 2017: $107) | $ | 2,669 |
| $ | 6,188 |
| |
| Cash and cash equivalents (variable interest entities restricted - 2019: $37; 2018: $71) | | $ | 2,367 |
| $ | 2,724 |
|
| Marketable securities | 100 |
| 4 |
| 21 |
| 100 |
|
| Accounts and notes receivable: | | | | |
| Trade (net of allowance for doubtful receivables - 2018: $106; 2017: $117) | 8,246 |
| 7,338 |
| |
| Trade (net of allowance for doubtful receivables - 2019: $45; 2018: $42) | | 4,844 |
| 5,646 |
|
| Other | 4,136 |
| 4,711 |
| 2,716 |
| 3,389 |
|
| Inventories | 9,260 |
| 8,376 |
| 6,214 |
| 6,899 |
|
| Other current assets | 852 |
| 627 |
| 571 |
| 712 |
|
| Assets of discontinued operations - current | | — |
| 19,900 |
|
| Total current assets | 25,263 |
| 27,244 |
| 16,733 |
| 39,370 |
|
| Investments | | | | |
| Investment in nonconsolidated affiliates | 3,823 |
| 3,742 |
| 1,404 |
| 3,320 |
|
| Other investments (investments carried at fair value - 2018: $1,699; 2017: $1,512) | 2,648 |
| 2,510 |
| |
| Other investments (investments carried at fair value - 2019: $1,584; 2018: $1,699) | | 2,588 |
| 2,646 |
|
| Noncurrent receivables | 394 |
| 594 |
| 1,011 |
| 360 |
|
| Total investments | 6,865 |
| 6,846 |
| 5,003 |
| 6,326 |
|
| Property | | | | |
| Property | 61,437 |
| 60,426 |
| 54,910 |
| 53,984 |
|
| Less accumulated depreciation | 37,775 |
| 36,614 |
| 33,914 |
| 32,566 |
|
| Net property (variable interest entities restricted - 2018: $734; 2017: $907) | 23,662 |
| 23,812 |
| |
| Net property (variable interest entities restricted - 2019: $330; 2018: $683) | | 20,996 |
| 21,418 |
|
| Other Assets | | | | |
| Goodwill | 13,848 |
| 13,938 |
| 8,796 |
| 9,846 |
|
| Other intangible assets (net of accumulated amortization - 2018: $5,762; 2017: $5,161) | 4,913 |
| 5,549 |
| |
| Other intangible assets (net of accumulated amortization - 2019: $3,886; 2018: $3,379) | | 3,759 |
| 4,225 |
|
| Operating lease right-of-use assets | | 2,072 |
| — |
|
| Deferred income tax assets | 2,031 |
| 1,722 |
| 2,213 |
| 1,779 |
|
| Deferred charges and other assets | 796 |
| 829 |
| 818 |
| 735 |
|
| Total other assets | 21,588 |
| 22,038 |
| 17,658 |
| 16,585 |
|
| Total Assets | $ | 77,378 |
| $ | 79,940 |
| $ | 60,390 |
| $ | 83,699 |
|
| Liabilities and Equity | | | | |
| Current Liabilities | | | | |
| Notes payable | $ | 305 |
| $ | 484 |
| $ | 586 |
| $ | 298 |
|
| Long-term debt due within one year | 340 |
| 752 |
| 435 |
| 338 |
|
| Accounts payable: | | | | |
| Trade | 5,378 |
| 5,360 |
| 3,889 |
| 4,456 |
|
| Other | 3,330 |
| 3,062 |
| 2,064 |
| 2,479 |
|
| Operating lease liabilities - current | | 421 |
| — |
|
| Income taxes payable | 791 |
| 694 |
| 522 |
| 557 |
|
| Accrued and other current liabilities | 3,611 |
| 4,025 |
| 2,233 |
| 2,931 |
|
| Liabilities of discontinued operations - current | | — |
| 4,488 |
|
| Total current liabilities | 13,755 |
| 14,377 |
| 10,150 |
| 15,547 |
|
| Long-Term Debt (variable interest entities nonrecourse - 2018: $75; 2017: $249) | 19,254 |
| 19,765 |
| |
| Long-Term Debt (variable interest entities nonrecourse - 2019: $34; 2018: $75) | | 15,975 |
| 19,253 |
|
| Other Noncurrent Liabilities | | | | |
| Deferred income tax liabilities | 664 |
| 764 |
| 347 |
| 501 |
|
| Pension and other postretirement benefits - noncurrent | 9,226 |
| 10,794 |
| 10,083 |
| 8,926 |
|
| Asbestos-related liabilities - noncurrent | 1,142 |
| 1,237 |
| 1,060 |
| 1,142 |
|
| Operating lease liabilities - noncurrent | | 1,739 |
| — |
|
| Other noncurrent obligations | 5,368 |
| 5,994 |
| 6,174 |
| 4,709 |
|
| Total other noncurrent liabilities | 16,400 |
| 18,789 |
| 19,403 |
| 15,278 |
|
| Stockholders’ Equity | | | |
| Stockholder's Equity | | | |
| Common stock (authorized and issued 100 shares of $0.01 par value each) | — |
| — |
| — |
| — |
|
| Additional paid-in capital | 7,042 |
| 6,553 |
| 7,333 |
| 7,042 |
|
| Retained earnings | 29,808 |
| 28,050 |
| 17,313 |
| 35,460 |
|
| Accumulated other comprehensive loss | (9,885 | ) | (8,591 | ) | (10,246 | ) | (9,885 | ) |
| Unearned ESOP shares | (134 | ) | (189 | ) | (91 | ) | (134 | ) |
| The Dow Chemical Company’s stockholders’ equity | 26,831 |
| 25,823 |
| |
| The Dow Chemical Company’s stockholder's equity | | 14,309 |
| 32,483 |
|
| Noncontrolling interests | 1,138 |
| 1,186 |
| 553 |
| 1,138 |
|
| Total equity | 27,969 |
| 27,009 |
| 14,862 |
| 33,621 |
|
| Total Liabilities and Equity | $ | 77,378 |
| $ | 79,940 |
| $ | 60,390 |
| $ | 83,699 |
|
See Notes to the Consolidated Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
| | | (In millions) For the years ended Dec 31, | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| Operating Activities | | | | |
| Net income | $ | 4,633 |
| $ | 595 |
| $ | 4,404 |
| |
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | |
| Net income (loss) | | $ | (1,150 | ) | $ | 4,775 |
| $ | 595 |
|
| Less: Income from discontinued operations, net of tax | | 445 |
| 1,835 |
| 1,882 |
|
| Income (loss) from continuing operations, net of tax | | (1,595 | ) | 2,940 |
| (1,287 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | |
|
|
| Depreciation and amortization | 3,329 |
| 3,155 |
| 2,862 |
| 2,938 |
| 2,909 |
| 2,546 |
|
| Provision (Credit) for deferred income tax | (530 | ) | 933 |
| (1,259 | ) | |
| Earnings of nonconsolidated affiliates less than (in excess of) dividends received | (42 | ) | 95 |
| 243 |
| |
| Provision (credit) for deferred income tax | | (228 | ) | (429 | ) | 1,413 |
|
| Earnings of nonconsolidated affiliates less than dividends received | | 1,114 |
| 108 |
| 253 |
|
| Net periodic pension benefit cost | 380 |
| 1,137 |
| 389 |
| 144 |
| 279 |
| 1,032 |
|
| Pension contributions | (1,656 | ) | (1,676 | ) | (629 | ) | (261 | ) | (1,651 | ) | (1,672 | ) |
| Net gain on sales of assets, businesses and investments | (67 | ) | (1,156 | ) | (214 | ) | (81 | ) | (38 | ) | (419 | ) |
| Net (gain) loss on step acquisition of nonconsolidated affiliate | 47 |
| — |
| (2,445 | ) | |
| Restructuring, goodwill impairment and asset related charges - net | 620 |
| 3,100 |
| 595 |
| 3,219 |
| 221 |
| 2,739 |
|
| Asbestos-related charge | — |
| — |
| 1,113 |
| |
| Other net loss | 426 |
| 378 |
| 361 |
| 213 |
| 415 |
| 451 |
|
| Changes in assets and liabilities, net of effects of acquired and divested companies: | | |
|
|
|
|
|
|
| Accounts and notes receivable | (1,532 | ) | (11,927 | ) | (8,833 | ) | 1,253 |
| (855 | ) | (11,431 | ) |
| Inventories | (983 | ) | (1,225 | ) | 610 |
| 668 |
| (859 | ) | (891 | ) |
| Accounts payable | 359 |
| 1,735 |
| 569 |
| (948 | ) | 787 |
| 1,081 |
|
| Other assets and liabilities, net | (1,090 | ) | (102 | ) | (723 | ) | (730 | ) | (731 | ) | (258 | ) |
| Cash provided by (used for) operating activities - continuing operations | | 5,706 |
| 3,096 |
| (6,443 | ) |
| Cash provided by operating activities - discontinued operations | | 371 |
| 1,158 |
| 1,514 |
|
| Cash provided by (used for) operating activities | 3,894 |
| (4,958 | ) | (2,957 | ) | 6,077 |
| 4,254 |
| (4,929 | ) |
| Investing Activities | | |
|
|
|
|
|
|
| Capital expenditures | (2,538 | ) | (3,144 | ) | (3,804 | ) | (1,961 | ) | (2,091 | ) | (2,807 | ) |
| Investment in gas field developments | (114 | ) | (121 | ) | (113 | ) | (76 | ) | (114 | ) | (121 | ) |
| Purchases of previously leased assets | (26 | ) | (187 | ) | — |
| (9 | ) | (26 | ) | (187 | ) |
| Proceeds from sales of property and businesses, net of cash divested | 155 |
| 1,691 |
| 284 |
| 84 |
| 47 |
| 522 |
|
| Acquisitions of property and businesses, net of cash acquired | (20 | ) | 47 |
| (187 | ) | — |
| (20 | ) | 47 |
|
| Cash acquired in step acquisition of nonconsolidated affiliate | — |
| — |
| 1,070 |
| |
| Investments in and loans to nonconsolidated affiliates | (18 | ) | (749 | ) | (1,020 | ) | (638 | ) | (18 | ) | (749 | ) |
| Distributions and loan repayments from nonconsolidated affiliates | 55 |
| 69 |
| 109 |
| 89 |
| 55 |
| 69 |
|
| Proceeds from sales of ownership interests in nonconsolidated affiliates | 4 |
| 64 |
| 22 |
| |
| Purchases of investments | (1,530 | ) | (643 | ) | (577 | ) | (899 | ) | (1,530 | ) | (642 | ) |
| Proceeds from sales and maturities of investments | 1,216 |
| 1,163 |
| 733 |
| 1,252 |
| 1,214 |
| 1,165 |
|
| Proceeds from interests in trade accounts receivable conduits | 657 |
| 9,462 |
| 8,551 |
| — |
| 657 |
| 9,462 |
|
| Other investing activities, net | 31 |
| (100 | ) | 24 |
| — |
| — |
| 34 |
|
| Cash provided by (used for) investing activities - continuing operations | | (2,158 | ) | (1,826 | ) | 6,793 |
|
| Cash provided by (used for) investing activities - discontinued operations | | (34 | ) | (369 | ) | 725 |
|
| Cash provided by (used for) investing activities | (2,128 | ) | 7,552 |
| 5,092 |
| (2,192 | ) | (2,195 | ) | 7,518 |
|
| Financing Activities | | |
|
|
|
|
|
|
| Changes in short-term notes payable | (176 | ) | 293 |
| (33 | ) | 307 |
| (178 | ) | 268 |
|
| Proceeds from issuance of long-term debt | 2,000 |
| — |
| 32 |
| 2,287 |
| 1,999 |
| — |
|
| Payments on long-term debt | (3,058 | ) | (621 | ) | (588 | ) | (5,561 | ) | (3,054 | ) | (617 | ) |
| Purchases of treasury stock | — |
| — |
| (916 | ) | |
| Proceeds from issuance of parent company stock | 112 |
| 66 |
| — |
| 93 |
| 112 |
| 66 |
|
| Proceeds from sales of common stock | — |
| 423 |
| 398 |
| — |
| — |
| 423 |
|
| Transaction financing, debt issuance and other costs | | (119 | ) | (70 | ) | — |
|
| Employee taxes paid for share-based payment arrangements | (92 | ) | (93 | ) | (65 | ) | (60 | ) | (77 | ) | (81 | ) |
| Distributions to noncontrolling interests | (172 | ) | (129 | ) | (176 | ) | (77 | ) | (135 | ) | (101 | ) |
| Purchases of noncontrolling interests | — |
| — |
| (202 | ) | (297 | ) | — |
| — |
|
| Dividends paid to stockholders | — |
| (2,179 | ) | (2,462 | ) | — |
| — |
| (2,179 | ) |
| Dividends paid to parent | (3,711 | ) | (1,056 | ) | — |
| |
| Dividends paid to DowDuPont Inc. | | (535 | ) | (3,711 | ) | (1,056 | ) |
| Dividends paid to Dow Inc. | | (201 | ) | — |
| — |
|
| Settlements and transfers related to separation from DowDuPont Inc. | | (61 | ) | (240 | ) | 6 |
|
| Other financing activities, net | (67 | ) | (35 | ) | (2 | ) | — |
| 3 |
| (4 | ) |
| Cash used for financing activities - continuing operations | | (4,224 | ) | (5,351 | ) | (3,275 | ) |
| Cash used for financing activities - discontinued operations | | (18 | ) | (53 | ) | (50 | ) |
| Cash used for financing activities | (5,164 | ) | (3,331 | ) | (4,014 | ) | (4,242 | ) | (5,404 | ) | (3,325 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (100 | ) | 320 |
| (77 | ) | (27 | ) | (99 | ) | 320 |
|
| Summary | | |
|
|
|
|
|
|
| Decrease in cash, cash equivalents and restricted cash | (3,498 | ) | (417 | ) | (1,956 | ) | (384 | ) | (3,444 | ) | (416 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 6,207 |
| 6,624 |
| 8,580 |
| 2,764 |
| 6,208 |
| 6,624 |
|
| Cash, cash equivalents and restricted cash at end of year | $ | 2,709 |
| $ | 6,207 |
| $ | 6,624 |
| $ | 2,380 |
| $ | 2,764 |
| $ | 6,208 |
|
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 40 |
| 19 |
| 17 |
| 13 |
| 40 |
| 19 |
|
| Cash and cash equivalents at end of year | $ | 2,669 |
| $ | 6,188 |
| $ | 6,607 |
| $ | 2,367 |
| $ | 2,724 |
| $ | 6,189 |
|
| Supplemental cash flow information | | | |
| Cash paid during year for: | | | |
| Interest, net of amounts capitalized | $ | 1,198 |
| $ | 1,178 |
| $ | 1,192 |
| |
| Income taxes | $ | 1,419 |
| $ | 1,805 |
| $ | 1,592 |
| |
See Notes to the Consolidated Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Preferred Stock | Common Stock | Add'l Paid in Capital | Retained Earnings | Accum Other Comp Loss | Unearned ESOP | Treasury Stock | Non-controlling Interests | Total Equity |
| 2016 | | | | | | | | | |
| Balance at Jan 1, 2016 | $ | 4,000 |
| $ | 3,107 |
| $ | 4,936 |
| $ | 28,425 |
| $ | (8,667 | ) | $ | (272 | ) | $ | (6,155 | ) | $ | 809 |
| $ | 26,183 |
|
| Net income available for The Dow Chemical Company common stockholders | — |
| — |
| — |
| 3,978 |
| — |
| — |
| — |
| — |
| 3,978 |
|
| Other comprehensive loss | — |
| — |
| — |
| — |
| (1,155 | ) | — |
| — |
| — |
| (1,155 | ) |
| Dividends to stockholders | — |
| — |
| — |
| (2,037 | ) | — |
| — |
| — |
| — |
| (2,037 | ) |
| Common stock issued/sold | — |
| — |
| 398 |
| — |
| — |
| — |
| 717 |
| — |
| 1,115 |
|
| Stock-based compensation and allocation of ESOP shares | — |
| — |
| (376 | ) | — |
| — |
| 51 |
| — |
| — |
| (325 | ) |
| ESOP shares acquired | — |
| — |
| — |
| — |
| — |
| (18 | ) | — |
| — |
| (18 | ) |
| Impact of noncontrolling interests | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 433 |
| 433 |
|
| Treasury stock purchases | — |
| — |
| — |
| — |
| — |
| — |
| (916 | ) | — |
| (916 | ) |
| Preferred stock converted to common stock | (4,000 | ) | — |
| (695 | ) | — |
| — |
| — |
| 4,695 |
| — |
| — |
|
| Other | — |
| — |
| (1 | ) | (28 | ) | — |
| — |
| — |
| — |
| (29 | ) |
| Balance at Dec 31, 2016 | $ | — |
| $ | 3,107 |
| $ | 4,262 |
| $ | 30,338 |
| $ | (9,822 | ) | $ | (239 | ) | $ | (1,659 | ) | $ | 1,242 |
| $ | 27,229 |
|
| 2017 | | | | | | | | | |
| Net income available for The Dow Chemical Company common stockholder | — |
| — |
| — |
| 466 |
| — |
| — |
| — |
| — |
| 466 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 1,231 |
| — |
| — |
| — |
| 1,231 |
|
| Dividends to stockholders | — |
| — |
| — |
| (1,673 | ) | — |
| — |
| — |
| — |
| (1,673 | ) |
| Dividends to parent | — |
| — |
| — |
| (1,056 | ) | — |
| — |
| — |
| — |
| (1,056 | ) |
| Common stock issued/sold | — |
| — |
| 423 |
| — |
| — |
| — |
| 724 |
| — |
| 1,147 |
|
| Issuance of parent company stock | — |
| — |
| 66 |
| — |
| — |
| — |
| — |
| — |
| 66 |
|
| Stock-based compensation and allocation of ESOP shares | — |
| — |
| (368 | ) | — |
| — |
| 50 |
| — |
| — |
| (318 | ) |
| Impact of noncontrolling interests | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (56 | ) | (56 | ) |
| Merger impact | — |
| (3,107 | ) | 2,172 |
| — |
| — |
| — |
| 935 |
| — |
| — |
|
| Other | — |
| — |
| (2 | ) | (25 | ) | — |
| — |
| — |
| — |
| (27 | ) |
| Balance at Dec 31, 2017 | $ | — |
| $ | — |
| $ | 6,553 |
| $ | 28,050 |
| $ | (8,591 | ) | $ | (189 | ) | $ | — |
| $ | 1,186 |
| $ | 27,009 |
|
| 2018 | | | | | | | | | |
| Adoption of accounting standards (Note 1) | — |
| — |
| — |
| 989 |
| (1,037 | ) | — |
| — |
| — |
| (48 | ) |
| Net income available for The Dow Chemical Company common stockholder | — |
| — |
| — |
| 4,499 |
| — |
| — |
| — |
| — |
| 4,499 |
|
| Other comprehensive loss | — |
| — |
| — |
| — |
| (257 | ) | — |
| — |
| — |
| (257 | ) |
| Dividends to parent | — |
| — |
| — |
| (3,711 | ) | — |
| — |
| — |
| — |
| (3,711 | ) |
| Issuance of parent company stock | — |
| — |
| 112 |
| — |
| — |
| — |
| — |
| — |
| 112 |
|
| Stock-based compensation and allocation of ESOP shares | — |
| — |
| 377 |
| — |
| — |
| 55 |
| — |
| — |
| 432 |
|
| Impact of noncontrolling interests | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (48 | ) | (48 | ) |
| Other | — |
| — |
| — |
| (19 | ) | — |
| — |
| — |
| — |
| (19 | ) |
| Balance at Dec 31, 2018 | $ | — |
| $ | — |
| $ | 7,042 |
| $ | 29,808 |
| $ | (9,885 | ) | $ | (134 | ) | $ | — |
| $ | 1,138 |
| $ | 27,969 |
|
|
| | | | | | | | | |
| (In millions, except per share amounts) For the years ended Dec 31, | 2019 | 2018 | 2017 |
| Common Stock | | | |
| Balance at beginning of year | $ | — |
| $ | — |
| $ | 3,107 |
|
| Merger impact | — |
| — |
| (3,107 | ) |
| Balance at end of year | — |
| — |
| — |
|
| Additional Paid-in Capital | | | |
| Balance at beginning of year | 7,042 |
| 6,553 |
| 4,262 |
|
| Common stock issued / sold | — |
| — |
| 423 |
|
| Issuance of parent company stock - Dow Inc. | 65 |
| — |
| — |
|
| Issuance of parent company stock - DowDuPont Inc. | 28 |
| 112 |
| 66 |
|
| Stock-based compensation and allocation of ESOP shares | 235 |
| 377 |
| (368 | ) |
| Merger impact | — |
| — |
| 2,172 |
|
| Other | (37 | ) | — |
| (2 | ) |
| Balance at end of year | 7,333 |
| 7,042 |
| 6,553 |
|
| Retained Earnings | | | |
| Balance at beginning of year | 35,460 |
| 33,742 |
| 30,338 |
|
| Adoption of accounting standards (Note 1) | (151 | ) | 989 |
| — |
|
| Net income (loss) available for The Dow Chemical Company's common stockholder | (1,237 | ) | 4,641 |
| 465 |
|
| Dividends to stockholders | — |
| — |
| (1,673 | ) |
| Dividends to DowDuPont Inc. | (535 | ) | (3,711 | ) | (1,056 | ) |
| Dividends to Dow Inc. | (201 | ) | — |
| — |
|
| Common control transaction | (16,009 | ) | (182 | ) | 5,693 |
|
| Other | (14 | ) | (19 | ) | (25 | ) |
| Balance at end of year | 17,313 |
| 35,460 |
| 33,742 |
|
| Accumulated Other Comprehensive Loss | | | |
| Balance at beginning of year | (9,885 | ) | (8,591 | ) | (9,822 | ) |
| Adoption of accounting standards (Note 1) | — |
| (1,037 | ) | — |
|
| Other comprehensive income (loss) | (1,154 | ) | (257 | ) | 1,231 |
|
| Common control transaction | 793 |
| — |
| — |
|
| Balance at end of year | (10,246 | ) | (9,885 | ) | (8,591 | ) |
| Unearned ESOP Shares | | | |
| Balance at beginning of year | (134 | ) | (189 | ) | (239 | ) |
| Stock-based compensation and allocation of ESOP shares | 45 |
| 55 |
| 50 |
|
| ESOP shares acquired | (2 | ) | — |
| — |
|
| Balance at end of year | (91 | ) | (134 | ) | (189 | ) |
| Treasury Stock | | | |
| Balance at beginning of year | — |
| — |
| (1,659 | ) |
| Common stock issued/sold | — |
| — |
| 724 |
|
| Merger impact | — |
| — |
| 935 |
|
| Balance at end of year | — |
| — |
| — |
|
| The Dow Chemical Company's stockholder's equity | 14,309 |
| 32,483 |
| 31,515 |
|
| Noncontrolling Interests | 553 |
| 1,138 |
| 1,186 |
|
| Total Equity | $ | 14,862 |
| $ | 33,621 |
| $ | 32,701 |
|
See Notes to the Consolidated Financial Statements.
|
|
Dow Inc. and Subsidiaries The Dow Chemical Company and Subsidiaries |
| Notes to the Consolidated Financial Statements |
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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merger and Separation
On April 1, 2019, DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc. or "DuPont") completed the separation of its materials science business and Dow Inc. became the direct parent company of The Dow Chemical Company and its consolidated subsidiaries (“TDCC” and together with Dow Inc., “Dow” or the “Company”). The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017. TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries (“Historical DuPont”) each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business. See Notes 3 and 4 for additional information.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements of The Dow Chemical CompanyInc. and its subsidiaries (“Dow” or the “Company”)TDCC were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the CompanyDow exercises control and, when applicable, entities for which the CompanyDow has a controlling financial interest or is the primary beneficiary. Intercompany transactions and balances are eliminated in consolidation. Investments in nonconsolidated affiliates (20-50 percent owned companies or less than 20 percent owned companies over which significant influence is exercised) are accounted for using the equity method.
Effective April 1, 2019, Dow Inc. owns all of the outstanding common shares of TDCC. TDCC is deemed the predecessor to Dow Inc. and the historical results of TDCC are deemed the historical results of Dow Inc. for periods prior to and including March 31, 2019. As a result of the parent/subsidiary relationship between Dow Inc. and TDCC, and the expectation that the financial statements and disclosures of each company will be substantially similar, the companies are filing a combined report for this Annual Report on Form 10-K. The information reflected in the report is equally applicable to both Dow Inc. and TDCC, except where otherwise noted.
As of the effective date and time of the distribution, DowDuPont does not beneficially own any equity interest in Dow and no longer consolidates Dow and its consolidated subsidiaries into its financial results. The consolidated financial results of Dow for all periods presented reflect the distribution of TDCC’s agricultural sciences business (“AgCo”) and specialty products business (“SpecCo”) as discontinued operations, as well as the receipt of Historical DuPont’s ethylene and ethylene copolymers businesses (other than its ethylene acrylic elastomers business) (“ECP”) as a common control transaction from the closing of the Merger on August 31, 2017 pursuant to("Merger Date"). See Notes 3 and 4 for additional information.
Effective with the mergerMerger, the Company's business activities were components of equals transaction contemplated by the AgreementDowDuPont's business operations and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, Dow and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and,therefore, were reported as a result, Dowsingle operating segment. Following the separation from DowDuPont, the Company changed the manner in which its business activities were managed. The Company's portfolio now includes six global businesses which are organized into the following operating segments: Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure and DuPont became subsidiaries of DowDuPont (the "Merger"). In accordance withPerformance Materials & Coatings. Corporate contains the accounting guidancereconciliation between the totals for earnings per share, the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries.operating segments and the Company's totals. See Note 327 for additional information oninformation.
From the Merger.
Beginning September 1, 2017,Merger Date through the separation, transactions between DowDuPont, DowTDCC and Historical DuPont and their affiliates are reflected in these consolidated financial statements and will be disclosedwere treated as related party transactions, when material.transactions. Transactions between DowTDCC and Historical DuPont primarily consistconsisted of the sale and procurement of certain feedstocks, energy and raw materials that arewere consumed in each company's manufacturing process. Transactions between TDCC and Dow Inc. are treated as related party transactions for TDCC. See Note 2426 for additional information.
Effective with the Merger, Dow’s business activities are components of its parent company’s business operations. Dow’s business activities, including the assessment of performance and allocation of resources, are reviewed and managed by DowDuPont. Information used by the chief operating decision maker of Dow relates to the Company in its entirety. Accordingly, there are no separate reportable business segments for the Company under Accounting Standards Codification ("ASC") Topic 280 “Segment Reporting” and the Company’s business results are reported inThroughout this Annual Report on Form 10-K, asunless otherwise indicated, amounts and activity are presented on a single operating segment.continuing operations basis.
Except as otherwise indicated by the context, the termterms "Union Carbide" means Union Carbide Corporation, a wholly owned subsidiary of Dow,the Company, and "Dow Silicones" means Dow Silicones Corporation (formerly known as Dow Corning Corporation, which changed its name effective as of February 1, 2018), a wholly owned subsidiary of Dow.the Company.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.
Significant Accounting Policies
Asbestos-Related Matters
Accruals for asbestos-related matters, including defense and processing costs, are recorded based on an analysis of claim and resolution activity, defense spending, and pending and future claims. These accruals are assessed at each balance sheet date to determine if the asbestos-related liability remains appropriate. Accruals for asbestos-related matters are included in the consolidated balance sheets in “Accrued and other current liabilities” and “Asbestos-related liabilities - noncurrent.” See Note 1617 for additional information.
Legal Costs
The Company expenses legal costs as incurred, with the exception of defense and processing costs associated with asbestos-related matters.
Foreign Currency Translation
The local currency has been primarily used as the functional currency throughout the world. Translation gains and losses of those operations that use local currency as the functional currency are included in the consolidated balance sheets in "Accumulated other comprehensive loss" ("AOCL"). For certain subsidiaries, the U.S. dollar is used as the functional currency. This occurs when the subsidiary operates in an economic environment where the products produced and sold are tied to U.S. dollar-denominated markets, or when the foreign subsidiary operates in a hyper-inflationary environment. Where the U.S. dollar is used as the functional currency, foreign currency translation gains and losses are reflected in income.
Environmental Matters
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. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the consolidated balance sheets in “Accrued and other current liabilities” and “Other noncurrent obligations” at undiscounted amounts. Accruals for related insurance or other third-party recoveries for environmental liabilities are recorded when it is probable that a recovery will be realized and are included in the consolidated balance sheets in “Accounts and notes receivable - Other.”Other” or "Noncurrent receivables."
Environmental costs are capitalized if the costs extend the life of the property, increase its capacity and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and investments with maturities of three months or less at the time of purchase.
Financial Instruments
The Company calculates the fair value of financial instruments using quoted market prices when available. When quoted market prices are not available for financial instruments, the Company uses standard pricing models with market-based inputs that take into account the present value of estimated future cash flows.
The Company utilizes derivatives to manage exposures to foreign currency exchange rates, commodity prices and interest rate risk. The fair values of all derivatives are recognized as assets or liabilities at the balance sheet date. Changes in the fair values of these instruments are reported in income or AOCL, depending on the use of the derivative and whether the Company has elected hedge accounting treatment.
Gains and losses on derivatives that are designated and qualify as cash flow hedging instruments are recorded in AOCL until the underlying transactions are recognized in income. Gains and losses on derivative and non-derivative instruments used as hedges of the Company’s net investment in foreign operations are recorded in AOCL as part of the cumulative translation adjustment. Prior to the adoption of Accounting Standards Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" in 2018, the ineffective portions of hedges, if any, were recognized in income immediately. See Note 2 for additional information.
Gains and losses on derivatives designated and qualifying as fair value hedging instruments, as well as the offsetting losses and gains on the hedged items, are reported in income in the same accounting period. Derivatives not designated as hedging instruments are marked-to-market at the end of each accounting period with the results included in income.
Inventories
Inventories are stated at the lower of cost or net realizable value. The method of determining cost for each subsidiary varies among last-in, first-out (“LIFO”); first-in, first-out (“FIFO”); and average cost, and is used consistently from year to year. At December 31, 2018,2019, approximately 2432 percent, 7058 percent and 610 percent of the Company's inventories were accounted for under the LIFO, FIFO and average cost methods, respectively. At December 31, 2017,2018, approximately 2434 percent, 6757 percent and 9 percent of the Company's inventories were accounted for under the LIFO, FIFO and average cost methods, respectively.
The Company routinely exchanges and swaps raw materials and finished goods with other companies to reduce delivery time, freight and other transportation costs. These transactions are treated as non-monetary exchanges and are valued at cost.
Property
Land, buildings and equipment including property under capital lease agreements, are carried at cost less accumulated depreciation.depreciation or amortization. Property under finance lease agreements is carried at the present value of lease payments over the lease term less accumulated amortization. Depreciation is based on the estimated service lives of depreciable assets and is calculated using the straight-line method, unless the asset was capitalized before 1997 when the declining balance method was used. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.
Impairment and Disposal of Long-Lived Assets
The Company evaluates long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value based on bids received from third parties or a discounted cash flow analysis based on market participant assumptions.
Long-lived assets to be disposed of by sale, if material, are classified as held for sale and reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of other than by sale are classified as held and used until they are disposed of and reported at the lower of carrying amount or fair value, and depreciation is recognized over the remaining useful life of the assets.
Goodwill and Other Intangible Assets
The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the reporting unit level annually in the fourth quarter, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial qualitative assessment identifies that it is more likely than not that the fair value of a reporting unit is less than its carrying value, additional quantitative testing is performed. The Company may also elect to skip the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, an impairment charge is recognized based on the difference between the reporting unit's carrying value and its fair value. The Company primarily utilizes a discounted cash flow methodology to calculate the fair value of its reporting units.
Finite-lived intangible assets such as purchased customer lists, developed technology, patents, trademarks and software, are amortized over their estimated useful lives, generally on a straight-line basis for periods ranging primarily from 3 to 20 years. Indefinite-lived intangible assets are reviewed for impairment or obsolescence annually, or more frequently when events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows.
Asset Retirement Obligations
The Company records asset retirement obligations as incurred and reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. The fair values of obligations are recorded as liabilities on a discounted basis and are accreted over time for the change in present value. Costs associated with the liabilities are capitalized and amortized over the estimated remaining useful life of the asset, generally for periods of 10 years or less.
Investments
Investments in debt securities, primarily held by the Company’sCompany's insurance operations, are classified as trading, available-for-sale or held-to-maturity. Investments classified as trading are reported at fair value with unrealized gains and losses related to mark-to-market adjustments included in income. Those classified as available-for-sale are reported at fair value with unrealized gains and losses recorded in AOCL. Those classified as held-to-maturity are recorded at amortized cost. The cost of investments sold is determined by FIFO or specific identification.
Investments in equity securities primarily held by the Company’s insurance operations, with a readily determinable fair value are reported at fair value with unrealized gains and losses related to mark-to-market adjustments included in income. Equity securities without a readily determinable fair value are accounted for at cost, adjusted for impairments and observable price changes in orderly transactions.
The Company routinely reviews its investments for declines in fair value below the cost basis. When events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the security is written down to fair value, establishing a new cost basis.
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842),” and the associated ASUs (collectively, “Topic 842”). The Company added the following significant accounting policy for leases as a result of the adoption of Topic 842.
The Company determines whether a contract contains a lease at contract inception. 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 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 lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses the incremental borrowing rate in determining the present value of lease payments, unless the implicit rate is readily determinable. If lease terms include options to extend or terminate the lease, the ROU asset and lease liability are measured based on the reasonably certain decision. Leases with a term of 12 months or less at the commencement date are not recognized on the balance sheet and are expensed as incurred.
The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component for all classes of leased assets for which the Company is the lessee. Additionally, for certain equipment leases, the portfolio approach is applied to account for the operating lease ROU assets and lease liabilities. In the consolidated statements of income, 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.
Some leasing arrangements require variable payments that are dependent upon usage or output, or may vary for other reasons, such as insurance or tax payments. Variable lease payments are recognized as incurred and are not presented as part of the ROU asset or lease liability. See Notes 2 and 18 for additional information.
Revenue
Effective with the January 1, 2018 adoption of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," and the associated ASUs (collectively, "Topic 606"), the Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of Topic 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 45 for additional information.
Revenue related to the Company's insurance operations includes third-party insurance premiums, which are earned over the terms of the related insurance policies and reinsurance contracts.
In periods prior to the adoption of Topic 606, the Company's accounting policy was to recognize revenue when it was realized or realizable, and the earnings process was complete. Revenue for product sales was recognized as risk and title to the product transferred to the customer, which usually occurred at the time shipment was made. As such, title to the product passed when the product was delivered to the freight carrier. The Company’s standard terms of delivery were included in its contracts of sale, order confirmation documents and invoices. Revenue related to the initial licensing of patent and technology was recognized when earned; revenue related to running royalties was recognized according to licensee production levels.
Severance Costs
The Company routinely reviews its operations around the world in an effort to ensure competitiveness across its businesses and geographic regions. When the reviews result in a workforce reduction related to the shutdown of facilities or other optimization activities, severance benefits are provided to employees primarily under Dow’sthe Company’s ongoing benefit arrangements. These severance costs are accrued once management commits to a plan of termination and it becomes probable that employees will be entitled to benefits at amounts that can be reasonably estimated.
Integration and Separation Costs
The Company classifies expenses related to the Merger and separation and the ownership restructure of Dow Silicones as "Integration and separation costs" in the consolidated statements of income. Merger-relatedMerger and separation related costs include: costs incurred to prepare for and close the Merger, post-Merger integration expenses, and costs incurred to prepare for the separation of AgCo and SpecCo and costs related to the agriculture business, materials science business and specialty products business.integration of ECP. The Dow Silicones-related costs include costsintegration expenses incurred to prepare for andafter the close of the ownership restructure, as well as integration expenses. Theserestructure. Integration and separation costs primarily consist of financial advisor,adviser, information technology, legal, accounting, consulting and other professional advisory fees associated with preparation and execution of these activities.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted tax rates. The effect of a change in tax rates on deferred tax assets or liabilities is recognized in income in the period that includes the enactment date. The Company uses the portfolio approach for releasing income tax effects from AOCL.
Effective with the Merger, the CompanyTDCC and Historical DuPont arewere subsidiaries of DowDuPont. The Company isPrior to the separation, TDCC was included in DowDuPont's consolidated tax groups and related income tax returns within certain jurisdictions. The Company will continue to recordrecords a separate tax liability for its share of the taxable income and tax attributes and obligations on DowDuPont’s consolidated income tax returns following a formula consistent with the economic sharing of tax attributes and obligations. DowThe Company and Historical DuPont compute the amount due to DowDuPont for their share of taxable income and tax attributes and obligations on DowDuPont’s consolidated tax return. The amounts reported as income tax payable or receivable represent the Company’s payment obligation (or refundable amount) to DowDuPont based on a theoretical tax liability calculated based on the methodologies agreed, elected or required in each combined or consolidated filing jurisdiction.
The Company recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company accrues for other tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. The current portion of uncertain income tax positions is included in “Income taxes payable” and the long-term portion is included in “Other noncurrent obligations” in the consolidated balance sheets.
Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.
See Note 9 for further information relating to the enactment of the Tax Cuts and Jobs Act ("The Act"). in 2017.
Changes to Prior Period Consolidated Financial StatementsEarnings per Common Share
InThe calculation of earnings per common share is based on the first quarterweighted-average number of 2018,the Company's common shares outstanding for the applicable period. The calculation of diluted earnings per common share reflects the effect of all potential common shares that were outstanding during the respective periods, unless the effect of doing so is antidilutive.
Adoption of Accounting Standards
Effective January 1, 2019, the Company adopted Topic 842 and added the accounting policy discussed in the section above. Adoption of the new accounting standards that required retrospective application.standard resulted in the recording of operating lease ROU assets and lease liabilities of $2.3 billion at January 1, 2019. The Company updatednet impact to “Retained earnings” was an increase of $32 million and was primarily a result of the recognition of a deferred gain associated with a prior sale-leaseback transaction. The adoption of the new guidance did not have a material impact on Dow's consolidated statements of income as a result of adopting ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The consolidated statements ofhad no impact on cash flows were updated as a result of adopting ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receiptsflows. See Notes 2 and Cash Payments" and ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." See Note 218 for additional information oninformation.
Additionally, the ASUs. InCompany's consolidated balance sheets reflect the third quarter of 2018, the U.S. Securities and Exchange Commission's ("SEC") Officeimpact of the Chief Accountant provided additional guidance relatedadoption of Topic 606 at January 1, 2019, by certain nonconsolidated affiliates of the Company, which were subsequently distributed as part of the separation from DowDuPont. The net impact is reflected in assets and liabilities of discontinued operations with a corresponding reduction to ASU 2016-15 that indicated an entity must evaluate daily transaction activity to calculate the value"Retained earnings" of cash received from beneficial interests$183 million in conduits, resulting in additional retrospective updates to the consolidated statements of cash flows.balance sheets at January 1, 2019.
Changes to the consolidated financial statements as a result of the retrospective application of the new accounting standards are summarized as follows:
|
| | | | | | | | | | | | |
| Summary of Changes to the Consolidated Statements of Income | 2017 | 2016 |
| In millions | As Filed | Updated 1 | As Filed | Updated 1 |
| Cost of sales | $ | 44,308 |
| $ | 43,612 |
| $ | 37,640 |
| $ | 37,668 |
|
| Research and development expenses | $ | 1,637 |
| $ | 1,648 |
| $ | 1,584 |
| $ | 1,593 |
|
| Selling, general and administrative expenses | $ | 2,917 |
| $ | 2,920 |
| $ | 2,956 |
| $ | 2,953 |
|
| Sundry income (expense) - net | $ | 877 |
| $ | 195 |
| $ | 1,452 |
| $ | 1,486 |
|
| |
1. | Reflects changes resulting from the adoption of ASU 2017-07. See Note 2 for additional information. |
|
| | | | | | | | | | | | |
| Summary of Changes to the Consolidated Statements of Cash Flows | 2017 | 2016 |
| In millions | As Filed | Updated 1 | As Filed | Updated 1 |
| Operating Activities | | | | |
| Accounts and notes receivable | $ | (4,734 | ) | $ | (11,927 | ) | $ | (1,539 | ) | $ | (8,833 | ) |
| Proceeds from interests in trade accounts receivable conduits | $ | 2,269 |
| $ | — |
| $ | 1,257 |
| $ | — |
|
| Other assets and liabilities, net | $ | (104 | ) | $ | (102 | ) | $ | (717 | ) | $ | (723 | ) |
| Cash provided by (used for) operating activities | $ | 4,502 |
| $ | (4,958 | ) | $ | 5,600 |
| $ | (2,957 | ) |
| Investing Activities | | | | |
| Payment into escrow account | $ | (130 | ) | $ | — |
| $ | (835 | ) | $ | — |
|
| Distribution from escrow account | $ | 130 |
| $ | — |
| $ | 835 |
| $ | — |
|
| Acquisitions of property and businesses, net of cash acquired | $ | 16 |
| $ | 47 |
| $ | (187 | ) | $ | (187 | ) |
| Cash acquired in step acquisition of nonconsolidated affiliate | $ | — |
| $ | — |
| $ | 1,050 |
| $ | 1,070 |
|
| Proceeds from interests in trade accounts receivable conduits | $ | — |
| $ | 9,462 |
| $ | — |
| $ | 8,551 |
|
| Cash provided by (used for) investing activities | $ | (1,941 | ) | $ | 7,552 |
| $ | (3,479 | ) | $ | 5,092 |
|
| Financing Activities | | | | |
| Other financing activities, net | $ | (4 | ) | $ | (35 | ) | $ | (2 | ) | $ | (2 | ) |
| Cash used for financing activities | $ | (3,300 | ) | $ | (3,331 | ) | $ | (4,014 | ) | $ | (4,014 | ) |
| Summary | | | | |
| Decrease in cash, cash equivalents and restricted cash | $ | (419 | ) | $ | (417 | ) | $ | (1,970 | ) | $ | (1,956 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | $ | 6,607 |
| $ | 6,624 |
| $ | 8,577 |
| $ | 8,580 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 6,188 |
| $ | 6,207 |
| $ | 6,607 |
| $ | 6,624 |
|
| |
1. | Reflects the adoption of ASU 2016-15 and ASU 2016-18. In connection with the review and implementation of ASU 2016-15, the Company also changed the value of “Proceeds from interests in trade accounts receivable conduits” due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits, including additional guidance from the SEC's Office of the Chief Accountant issued in the third quarter of 2018. |
Opening Balance Sheet Impact of Accounting Standards Adoption2018
In the first quarter of 2018, the Company adopted Topic 606, ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" and ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." See Note 2 for additional information onThe adoption of these ASUs. The cumulative effect on the Company's January 1, 2018, consolidated balance sheet asASUs resulted in a resultnet decrease of adopting these accounting standards is summarized in the following table:
|
| | | | | | | | | | | | | | | |
| Summary of Impacts to the Consolidated Balance Sheet | Dec 31, 2017 | Adjustments due to: | Jan 1, 2018 |
| In millions | As Filed | Topic 606 | ASU 2016-01 | ASU 2016-16 | Updated |
| Assets | | | | | |
| Inventories | $ | 8,376 |
| $ | (11 | ) | $ | — |
| $ | — |
| $ | 8,365 |
|
| Other current assets | $ | 627 |
| $ | 29 |
| $ | — |
| $ | 31 |
| $ | 687 |
|
| Total current assets | $ | 27,244 |
| $ | 18 |
| $ | — |
| $ | 31 |
| $ | 27,293 |
|
| Deferred income tax assets | $ | 1,722 |
| $ | 25 |
| $ | — |
| $ | 10 |
| $ | 1,757 |
|
| Deferred charges and other assets | $ | 829 |
| $ | 43 |
| $ | — |
| $ | — |
| $ | 872 |
|
| Total other assets | $ | 22,038 |
| $ | 68 |
| $ | — |
| $ | 10 |
| $ | 22,116 |
|
| Total Assets | $ | 79,940 |
| $ | 86 |
| $ | — |
| $ | 41 |
| $ | 80,067 |
|
| Liabilities | | | | | |
| Accounts payable - Other | $ | 3,062 |
| $ | 10 |
| $ | — |
| $ | — |
| $ | 3,072 |
|
| Income taxes payable | $ | 694 |
| $ | (2 | ) | $ | — |
| $ | — |
| $ | 692 |
|
| Accrued and other current liabilities | $ | 4,025 |
| $ | 50 |
| $ | — |
| $ | — |
| $ | 4,075 |
|
| Total current liabilities | $ | 14,377 |
| $ | 58 |
| $ | — |
| $ | — |
| $ | 14,435 |
|
| Other noncurrent obligations | $ | 5,994 |
| $ | 117 |
| $ | — |
| $ | — |
| $ | 6,111 |
|
| Total other noncurrent liabilities | $ | 18,789 |
| $ | 117 |
| $ | — |
| $ | — |
| $ | 18,906 |
|
| Stockholders' Equity | | | | | |
| Retained earnings | $ | 28,050 |
| $ | (89 | ) | $ | (20 | ) | $ | 41 |
| $ | 27,982 |
|
| Accumulated other comprehensive loss | $ | (8,591 | ) | $ | — |
| $ | 20 |
| $ | — |
| $ | (8,571 | ) |
| The Dow Chemical Company's stockholders' equity | $ | 25,823 |
| $ | (89 | ) | $ | — |
| $ | 41 |
| $ | 25,775 |
|
| Total equity | $ | 27,009 |
| $ | (89 | ) | $ | — |
| $ | 41 |
| $ | 26,961 |
|
| Total Liabilities and Equity | $ | 79,940 |
| $ | 86 |
| $ | — |
| $ | 41 |
| $ | 80,067 |
|
The most significant changes as$68 million to "Retained earnings" and a resultdecrease of adopting Topic 606 relate$20 million to the Company's contract liabilities which include payments received in advance of performance. Contract liabilities, which are included in "Accrued and"Accumulated other current liabilities" and "Other noncurrent obligations"comprehensive loss" ("AOCL") in the consolidated balance sheets, increased as certain performance obligations, which were previously recognized over time and related to the licensingstatements of certain rights to patents and technology, as well as other performance obligations, are now recognizedequity at a point in time as none of the three criteria for 'over time' recognition under Topic 606 are met.
January 1, 2018. In the second quarter of 2018, the Company early adopted ASU 2018-02. This2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02")." The adoption of this standard was adopted on April 1, 2018, and resulted in a $1,057 million increase to retained earnings"Retained earnings" due to the reclassification from accumulated other comprehensive loss. The reclassification was primarily related to the change in the federal corporate tax rate and the effect of The Act on the Company's pension plans, derivative instruments, available-for-sale securities and cumulative translation adjustments. This reclassification is reflected in the "Adoption of accounting standards" lineAOCL in the consolidated statements of equity. See Note 2 for additional information.equity at April 1, 2018.
Current Period Impact of Topic 606
The following table summarizes the effects of adopting Topic 606 on the Company's consolidated balance sheets, which was applied prospectively to contracts not completed at January 1, 2018. The effect of adopting Topic 606 did not have a material impact on the consolidated statements of income and the consolidated statements of cash flows.
|
| | | | | | | | | |
Summary of Impacts to the Consolidated Balance Sheets
| As Reported at Dec 31, 2018 | Adjustments | Balance at Dec 31, 2018 Excluding Adoption of Topic 606 |
| In millions |
| Assets | | | |
| Inventories | $ | 9,260 |
| $ | 6 |
| $ | 9,266 |
|
| Other current assets | $ | 852 |
| $ | (16 | ) | $ | 836 |
|
| Total current assets | $ | 25,263 |
| $ | (10 | ) | $ | 25,253 |
|
| Deferred income tax assets | $ | 2,031 |
| $ | (26 | ) | $ | 2,005 |
|
| Deferred charges and other assets | $ | 796 |
| $ | (43 | ) | $ | 753 |
|
| Total other assets | $ | 21,588 |
| $ | (69 | ) | $ | 21,519 |
|
| Total Assets | $ | 77,378 |
| $ | (79 | ) | $ | 77,299 |
|
| Liabilities | | | |
| Accounts payable - Other | $ | 3,330 |
| $ | (10 | ) | $ | 3,320 |
|
| Income taxes payable | $ | 791 |
| $ | 2 |
| $ | 793 |
|
| Accrued and other current liabilities | $ | 3,611 |
| $ | (15 | ) | $ | 3,596 |
|
| Total current liabilities | $ | 13,755 |
| $ | (23 | ) | $ | 13,732 |
|
| Other noncurrent obligations | $ | 5,368 |
| $ | (140 | ) | $ | 5,228 |
|
| Total other noncurrent liabilities | $ | 16,400 |
| $ | (140 | ) | $ | 16,260 |
|
| Stockholders' Equity | | | |
| Retained earnings | $ | 29,808 |
| $ | 84 |
| $ | 29,892 |
|
| The Dow Chemical Company's stockholders' equity | $ | 26,831 |
| $ | 84 |
| $ | 26,915 |
|
| Total equity | $ | 27,969 |
| $ | 84 |
| $ | 28,053 |
|
| Total Liabilities and Equity | $ | 77,378 |
| $ | (79 | ) | $ | 77,299 |
|
Dividends
Prior to the Merger, the CompanyTDCC declared dividends of $1.38 per share in 2017, ($1.84 per share in 2016).based on the historical number of shares of common stock of TDCC held by shareholders of record for each dividend. Effective with the Merger, DowTDCC no longer hashad publicly traded common stock. Dow'sTDCC's common shares arewere owned solely by its parent company, DowDuPont. As a result, the Company’sDowDuPont, prior to separation, and TDCC's Board of Directors ("Board")determined whether or not there would be a dividend distribution to DowDuPont. Effective with the separation from DowDuPont, TDCC became a wholly owned subsidiary of Dow Inc. and TDCC's Board of Directors determines whether or not there will be a dividend distribution to DowDuPont.Dow Inc. Subsequent to the separation from DowDuPont, Dow Inc. declared dividends of $2.10 per share in 2019. See Note 24Notes 19 and 26 for additional information.
NOTE 2 – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In the fourth quarter of 2018,2019, the Company early adopted ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans," which, as part of the Financial Accounting Standards Board ("FASB") disclosure framework project, removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of certain disclosures and adds new disclosure requirements that are considered relevant for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The new standard is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The new guidance should be applied on a retrospective basis for all periods presented. See Note 19 for updated disclosures for defined benefit pension and other postretirement benefit plans.
In the second quarter of 2018, the Company early adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends the hedge accounting recognition and presentation under Topic 815, with the objectives of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities and simplifying the application of hedge accounting by preparers. The new standard expands the strategies eligible for hedge accounting, relaxes the timing requirements of hedge documentation and effectiveness assessments, and permits, in certain cases, the use of qualitative assessments on an ongoing basis to assess hedge effectiveness. The new guidance also requires new disclosures and presentation. The new standard is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. Early adoption is permitted in any interim or annual period after issuance of the ASU. Entities must adopt the new guidance by applying a modified retrospective approach to hedging relationships existing as of the adoption date. The adoption of the new guidance did not have a material impact on the consolidated financial statements.
In the second quarter of 2018, the Company early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from The Act, which was enacted on December 22, 2017, and requires certain disclosures about stranded tax effects. An entity has the option of applying the new guidance at the beginning of the period of adoption or retrospectively to each period (or periods) in which the tax effects related to items remaining in accumulated other comprehensive income are recognized. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period for reporting periods in which the financial statements have not yet been issued. The Company's adoption of the new standard was applied prospectively at the beginning of the second quarter of 2018, with a reclassification of the stranded tax effects as a result of the The Act from accumulated other comprehensive loss to retained earnings. See Note 1 for additional information.
In the first quarter of 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition," and most industry specific guidance. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In 2015 and 2016, the FASB issued additional ASUs related to Topic 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance obligations, and accounting for licenses, and included other improvements and practical expedients. The new guidance was effective for annual and interim periods beginning after December 15, 2017. The Company elected to adopt the new guidance using the modified retrospective transition method for all contracts not completed as of the date of adoption. The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of the first quarter of 2018. The comparative periods have not been restated and continue to be accounted for under Topic 605. The adoption of the new guidance did not have a material impact on the consolidated financial statements. See Notes 1 and 4 for additional disclosures regarding the Company's contracts with customers as well as the impact of adopting Topic 606.
In the first quarter of 2018, the Company adopted ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company applied the amendments in the new guidance by means of a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the first quarter of 2018. The adoption of the new guidance did not have a material impact on the consolidated financial statements. See Notes 1 and 21 for additional information.
In the first quarter of 2018, the Company adopted ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statements of cash flows and addresses eight specific cash flow issues. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A key provision in the new guidance impacted the presentation of proceeds from interests in certain trade accounts receivable conduits, which were retrospectively reclassified from "Operating Activities" to "Investing Activities" in the consolidated statements of cash flows. See Note 1 for additional information.
In the first quarter of 2018, the Company adopted ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The new guidance was applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the first quarter of 2018. The adoption of this guidance did not have a material impact on the consolidated financial statements. See Note 1 for additional information.
In the first quarter of 2018, the Company adopted ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which clarifies how entities should present restricted cash and restricted cash equivalents in the statements of cash flows, and as a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statements of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The new guidance changed the presentation of restricted cash in the consolidated statements of cash flows and was implemented on a retrospective basis in the first quarter of 2018. See Note 1 for additional information.
In the first quarter of 2018, the Company adopted ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost must be presented separately from the line items that includes the service cost. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Entities were required to use a retrospective transition method to adopt the requirement for separate income statement presentation of the service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. Accordingly, in the first quarter of 2018, the Company used a retrospective transition method to reclassify net periodic benefit cost, other than the service component, from "Cost of sales," "Research and development expenses" and "Selling, general and administrative expenses" to "Sundry income (expense) - net" in the consolidated statements of income. See Note 1 for additional information.
Accounting Guidance Issued But Not Adopted at December 31, 2018
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," and associated ASUs related to Topic 842, which requires organizations that lease assets to recognize on the 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 will requirerequires 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 currentlegacy U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014 (Topic 606).Topic 606. The new standard iswas effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption iswas permitted.
The Company has a cross-functional team in place to evaluate and implementadopted Topic 842 using the new guidance and the Company has substantially completed the implementation of a third-party software solution to facilitate compliance with accounting and reporting requirements. The team continues to review existing lease arrangements and has collected and loaded a significant portion of the lease portfolio into the software. The Company continues to enhance accounting systems and update business processes and controls related to the new guidance for leases. Collectively, these activities are expected to enable the Company to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019.
The ASU requires 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) the effective date or (2) the beginning of the earliest comparative period presented in the financial statements at the 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 forpresented with a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, and prior periods willwere not be restated. In addition, the Company has elected to apply the package of practical expedients permitted under the transition guidance which 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 did not elect to use the Company will exclude short-term leases (termhindsight practical expedient in determining the lease term or assessing impairment of 12 months or less) fromROU assets. Adoption of the balance sheet presentation and will account for non-leasenew standard resulted in the recording of operating lease ROU assets and lease components inliabilities of $2.3 billion at January 1, 2019. The net impact to retained earnings was an increase of $32 million and was primarily a contract as a single lease component for all asset classes. The Company is finalizing the evaluationresult of the January 1, 2019, impact and estimatesrecognition of a deferred gain associated with a prior sale-leaseback transaction. The adoption of the new guidance did not have a material increase of lease-related assets and liabilities, ranging from $2.4 billion to $2.8 billion in the consolidated balance sheets. The impact to the Company'son Dow's consolidated statements of income and consolidated statements ofhad no impact on cash flows is not expected to be material.flows. See Notes 1 and 18 for additional information.
Accounting Guidance Issued But Not Adopted at December 31, 2019
In August 2018, the FASBFinancial Accounting Standards Board ("FASB") issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which is part of the FASB disclosure framework project to improve the effectiveness of disclosures in the notes to the financial statements. The amendments in the new guidance remove, modify and
add certain disclosure requirements related to fair value measurements covered in Topic 820, "Fair Value Measurement." 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 either the entire standard or only the requirements that modify or eliminate the disclosure requirements, with certain requirements applied prospectively, and all other requirements applied retrospectively to all periods presented. The Company expects to adopt the new guidance in the first quarter of 2020 and the adoption of this guidance is currently evaluatingnot expected to have a material impact on the impact of adopting this guidance.consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract," which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Topic 350, "Intangibles - Goodwill and Other" to determine which implementation costs to capitalize as assets or expense as incurred. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and an entity can elect to apply the new guidance on a prospective or retrospective basis. The Company expects to adopt the new guidance in the first quarter of 2020 and the adoption of this guidance is not expected to have a material impact on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, "Income Taxes" and also improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating the impact of adopting this guidance.
NOTE 3 –- MERGER WITH HISTORICAL DUPONT
Effective August 31, 2017, DowTDCC and Historical DuPont completed the merger of equals transaction contemplated by the Agreement and Plan of Merger dated as of December 11, 2015, as amended on March 31, 2017 (the "Merger Agreement"),Agreement, by and among the Company,TDCC, Historical DuPont, DowDuPont, Diamond Merger Sub, Inc. and Orion Merger Sub, Inc. Pursuant to the Merger Agreement, (i) Diamond Merger Sub, Inc. was merged with and into Dow,TDCC, with DowTDCC surviving the merger as a subsidiary of DowDuPont (the "Diamond Merger") and (ii) Orion Merger Sub, Inc. was merged with and into Historical DuPont, with Historical DuPont surviving the merger as a subsidiary of DowDuPont (the "Orion Merger" and, together with the Diamond Merger, the "Mergers"). Following the consummation of the Mergers, each of DowTDCC and Historical DuPont became subsidiaries of DowDuPont (collectively, the "Merger"). FollowingDowDuPont. Subsequent to the Merger, DowTDCC and Historical DuPont intendengaged in a series of internal reorganization and realignment steps to pursue, subject to certain customary conditions, including, among others, the effectiveness of registration statements filed with the SEC and approval by the board of directors of DowDuPont ("DowDuPont Board"), the separation of the combined company'srealign their businesses into three subgroups: agriculture, materials science and specialty products businesses through one or more tax-efficient transactions ("Intended Business Separations"). Additional information aboutproducts. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the Merger is included in Current Reports on Form 8-K filed withholding company for the SEC on December 11, 2015, March 31, 2017, August 4, 2017 and September 1, 2017.materials science business.
Upon completion of the Diamond Merger, each share of common stock, par value $2.50 per share, of DowTDCC ("DowTDCC Common Stock") (excluding any shares of DowTDCC Common Stock that were held in treasury immediately prior to the effective time of the Diamond Merger, which were automatically canceled and retired for no consideration) was converted into the right to receive one1 fully paid and non-assessable share of common stock, par value $0.01 per share, of DowDuPont ("DowDuPont Common Stock"). As provided in the Merger Agreement, at the effective time of the Mergers, (i) all options, deferred stock, performance deferred stock and other equity awards relating to shares of DowTDCC Common Stock outstanding immediately prior to the effective time of the Mergers were generally automatically converted into options and deferred stock and other equity awards relating to shares of DowDuPont Common Stock after giving effect to appropriate adjustments to reflect the Mergers and otherwise generally on the same terms and conditions as applied under the applicable plans and award agreements immediately prior to the effective time of the Mergers. See Note 2022 for additional information on the conversion of the equity awards.
In the third quarter of 2017, as a result of the Diamond Merger and the Merger, the CompanyTDCC recorded a reduction in "Treasury stock" of $935 million, a reduction in "Common stock" of $3,107 million and an increase in "Additional paid in capital" of $2,172 million. At September 1, 2017, the Company hasTDCC had 100 shares of common stock issued and outstanding, par value $0.01 per share, owned solely by its parent, DowDuPont. Following the separation from DowDuPont, these shares are now solely owned by Dow Inc.
On August 31, 2017, following the Diamond Merger, DowTDCC requested that the New York Stock Exchange ("NYSE") withdraw the shares of DowTDCC Common Stock from listing on the NYSE and filed a Form 25 with the SEC to report that the shares of DowTDCC Common Stock are no longer listed on the NYSE. The shares of DowTDCC Common Stock were suspended from trading on the NYSE prior to the open of trading on September 1, 2017.
As a condition of the regulatory approval of the Merger, DowTDCC and Historical DuPont agreed to certain closing conditions, which are as follows:
DowTDCC divested its global Ethylene Acrylic Acid copolymers and ionomers business ("EAA Business") to SK Global Chemical Co., Ltd., on September 1, 2017, as part of a divestiture commitment given to the European Commission ("EC") in connection with the EC's conditional approval of the Merger granted on March 27, 2017. See Note 6 for additional information on this transaction.
Historical DuPont divested its Cereal Broadleaf Herbicides and Chewing Insecticides portfolios as well as its Crop Protection research and development ("R&D") pipeline and organization (excluding seed treatment, nematicides, late-stage R&D programs and certain personnel needed to support marketed products and R&D programs that will remainremained with Historical DuPont) (collectively, the "DuPont Divested Assets") to FMC Corporation ("FMC") on November 1, 2017, as part of the EC's conditional approval granted on March 27, 2017. Also on November 1, 2017, Historical DuPont completed its acquisition of FMC's Health and Nutrition business, excluding its Omega-3 products.
On May 2, 2017, DowTDCC and Historical DuPont announced that China's Ministry of Commerce ("MOFCOM") granted conditional regulatory approval for the companies' proposed merger of equals which included commitments already made to the EC including Historical DuPont's divestiture of the DuPont Divested Assets and Dow'sTDCC's divestiture of the EAA Business. In addition, DowTDCC and Historical DuPont made commitments related to the supply and distribution in China of certain herbicide and insecticide ingredients and formulations for rice crops for five years after the closing of the Merger.
Dow
TDCC divested a select portion of Dow AgroSciences' corn seed business in Brazil ("DAS Divested Ag Business") to CITIC Agri Fund on November 30, 2017. The divestiture was part of the commitment given to Brazil's Administrative Council for Economic Defense ("CADE") in connection with the CADE's conditional approval of the Merger granted on May 17, 2017, which was incremental to commitments already made to the EC, China and regulatory agencies in other jurisdictions. See Note 6 for additional information on this transaction.This divestiture was included in discontinued operations of the Company.
On June 15, 2017, DowTDCC and Historical DuPont announced that a proposed agreement had been reached with the Antitrust Division of the United States Department of Justice that permitted the companies to proceed with the proposed merger of equals transaction. The proposed agreement was consistent with commitments already made to the EC.
Intended Business Separations
In furtherance of the Intended Business Separations, Dow and DuPont are engaged in a series of internal reorganization and realignment steps (the “Internal Reorganization”) to realign their businesses into three subgroups: agriculture, materials science and specialty products. DowDuPont has also formed two wholly owned subsidiaries: Dow Holdings Inc. (“DHI”), to serve as a holding company for its materials science business, and Corteva, Inc. (“Corteva”), to serve as a holding company for its agriculture business. Following the separation and distribution of DHI, which is targeted to occur by April 1, 2019, DowDuPont, as the remaining company, which is referred to herein as “New DuPont,” will continue to hold the agriculture and specialty products businesses. New DuPont is then targeted to complete the separation and distribution of Corteva on June 1, 2019, resulting in New DuPont holding the specialty products businesses of DowDuPont. Following the distributions, DowDuPont will be known as DuPont.
As part of the Internal Reorganization, 1) the assets and liabilities of the materials science business will be transferred or conveyed to legal entities that then will be aligned under DHI, 2) the assets and liabilities of the agriculture business will be transferred or conveyed to legal entities that then will be aligned under Corteva, and 3) the assets and liabilities of the specialty products business will be transferred or conveyed to legal entities that then will be aligned with New DuPont. Following the Internal Reorganization, DowDuPont expects to distribute DHI and Corteva through separate, pro rata U.S. federal tax-free spin-offs in which DowDuPont stockholders, at such time, would receive shares of common stock of DHI and of Corteva.
Additional information is included in the Form 10 registration statements for the separation of DowDuPont's materials science business (filed as Dow Holdings Inc.) filed with the SEC on September 7, 2018, as amended on October 19, 2018 and November 19, 2018, and the agriculture business (filed as Corteva, Inc.) filed with the SEC on October 18, 2018, as amended on December 19, 2018.
NOTE 4 – REVENUESEPARATION FROM DOWDUPONT
Revenue RecognitionOn April 1, 2019, DowDuPont completed the previously announced separation of its materials science business. The separation was effected by way of a pro rata distribution of all of the then-issued and outstanding shares of Dow Inc. common stock to DowDuPont stockholders of record as of the close of business, Eastern Time, on March 21, 2019 (the “Record Date”). The shareholders of record of DowDuPont received one share of Dow Inc. common stock, par value $0.01 per share, for every three shares of DowDuPont common stock, par value $0.01 per share, held as of the Record Date ("Distribution Ratio"). No fractional shares of Dow Inc. common stock were issued. Instead, cash in lieu of any fractional shares was paid to DowDuPont registered shareholders. The number of shares of Dow Inc. common stock issued on April 1, 2019 was 748.8 million shares. Dow Inc. is now an independent, publicly traded company and Dow Inc. common stock is listed on the NYSE under the symbol “DOW.” Dow Inc. common stock began regular-way trading on April 2, 2019, the first day following the distribution.
Effective April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. As of the effective date and time of the distribution, DowDuPont does not beneficially own any equity interest in Dow and will no longer consolidate Dow and its consolidated subsidiaries into its financial results. Beginning in the second quarter of 2019, Dow’s consolidated financial results reflect the results of Dow Inc. and its consolidated subsidiaries - that is, TDCC after giving effect to the distribution of AgCo and SpecCo and the receipt of ECP. The consolidated financial results of Dow for periods prior to April 1, 2019, reflect the distribution of AgCo and SpecCo as discontinued operations for each period presented as well as reflect the receipt of ECP as a common control transaction from the closing of the Merger on August 31, 2017.
On April 1, 2019, Dow Inc. received a cash contribution of $2,024 million from DowDuPont as part of the internal reorganization and business realignment steps between Dow Inc., TDCC and DowDuPont. Dow Inc. recognized a reduction to "Retained earnings" of $14,806 million in 2019 as a result of the cash contribution, the distribution of AgCo and SpecCo, and other separation related adjustments. TDCC recognized a reduction to "Retained earnings" of $16,009 million in 2019 as a result of the distribution of AgCo and SpecCo.
Receipt of ECP
As the receipt of ECP was accounted for as a transfer between entities under common control, the consolidated financial statements have been retrospectively adjusted to reflect the receipt of ECP from the closing of the Merger on August 31, 2017. All intercompany transactions have been eliminated in consolidation.
Distribution of AgCo and SpecCo
Upon distribution, the Company retrospectively adjusted the previously issued consolidated financial statements and presented AgCo and SpecCo as discontinued operations based on the guidance in Accounting Standards Codification (“ASC”) 205-20 “Discontinued Operations” (“ASC 205-20”). The results of operations of AgCo and SpecCo are presented as discontinued operations in the consolidated statements of income and are summarized in the following table:
|
| | | | | | | | | |
| Results of Operations of AgCo and SpecCo | 2019 1 | 2018 | 2017 |
| In millions |
| Net sales | $ | 2,953 |
| $ | 12,187 |
| $ | 12,337 |
|
| Cost of sales | 1,804 |
| 7,668 |
| 7,769 |
|
| Research and development expenses | 175 |
| 761 |
| 854 |
|
| Selling, general and administrative expenses | 262 |
| 1,108 |
| 1,143 |
|
| Amortization of intangibles | 61 |
| 249 |
| 255 |
|
| Restructuring and asset related charges - net | 78 |
| 411 |
| 376 |
|
| Integration and separation costs | — |
| — |
| 18 |
|
| Equity in earnings of nonconsolidated affiliates | 28 |
| 400 |
| 372 |
|
| Sundry income (expense) - net | (18 | ) | (13 | ) | 245 |
|
| Interest income | 3 |
| 26 |
| 40 |
|
| Interest expense and amortization of debt discount | 7 |
| 56 |
| 61 |
|
| Income from discontinued operations before income taxes | $ | 579 |
| $ | 2,347 |
| $ | 2,518 |
|
| Provision for income taxes | 134 |
| 512 |
| 636 |
|
| Income from discontinued operations, net of tax | $ | 445 |
| $ | 1,835 |
| $ | 1,882 |
|
The carrying amount of major classes of assets and liabilities related to the distribution of AgCo and SpecCo consisted of the following:
|
| | | |
Carrying Values of AgCo and SpecCo 1 | Dec 31, 2018 |
| In millions |
| Accounts and notes receivable - Trade | $ | 2,768 |
|
| Accounts and notes receivable - Other | 773 |
|
| Inventories | 2,826 |
|
| Other current assets | 151 |
|
| Investment in nonconsolidated affiliates | 612 |
|
| Other investments | 2 |
|
| Noncurrent receivables | 35 |
|
| Net property | 3,014 |
|
| Goodwill | 7,590 |
|
| Other intangible assets | 1,830 |
|
| Deferred income tax assets | 239 |
|
| Deferred charges and other assets | 60 |
|
| Total assets of discontinued operations | $ | 19,900 |
|
| Notes payable | $ | 7 |
|
| Long-term debt due within one year | 4 |
|
| Accounts payable - Trade | 1,118 |
|
| Accounts payable - Other | 868 |
|
| Income taxes payable | 234 |
|
| Accrued and other current liabilities | 716 |
|
| Long-Term Debt | 5 |
|
| Deferred income tax liabilities | 568 |
|
| Pension and other postretirement benefits - noncurrent | 306 |
|
| Other noncurrent obligations | 662 |
|
| Total liabilities of discontinued operations | $ | 4,488 |
|
| |
| 1. | Includes assets and liabilities of consolidated variable interest entities related to discontinued operations. |
Agreements Related to the Separation and Distribution
In connection with the separation, Dow Inc. entered into certain agreements with DuPont and/or Corteva, Inc. ("Corteva"), including the following: Separation and Distribution Agreement, Tax Matters Agreement and Employee Matters Agreement (collectively, the "Agreements"). In addition to establishing the terms of the separation, the Agreements provide a framework for Dow’s interaction with DuPont and Corteva after the separation and also provide for the allocation among Dow, DuPont and Corteva of assets, liabilities and obligations attributable to periods prior to, at and after the completion of the separation. The Agreements also contain certain indemnity and/or cross-indemnity provisions that are intended to set forth each party’s respective rights, responsibilities and obligations for matters subject to indemnification. Except in certain instances, the parties’ indemnification obligations are uncapped. Certain indemnification obligations will be subject to reduction by insurance proceeds or other third-party proceeds of the indemnified party that reduces the amount of the loss. In addition, indemnifiable losses will be subject to, in certain cases, “de minimis” threshold amounts and, in certain cases, deductible amounts.
The impacts of indemnifications and other post-separation matters relating to the Agreements are primarily reflected in the consolidated financial statements of Dow Inc. In 2019, the Company recorded pretax charges related to the Agreements of $24 million in "Integration and separation costs" and $69 million in "Sundry income (expense) - net" in the consolidated statements of income of Dow Inc., and related to Corporate. At December 31, 2019, the Company had assets of $58 million included in "Other current assets" and $52 million included in "Noncurrent receivables," and liabilities of $352 million included in "Accrued and other current liabilities" and $96 million included in "Other noncurrent obligations" in the consolidated balance sheets of Dow Inc. related to the Agreements. Any adjustments to these assets and liabilities in subsequent periods will be recorded in Dow Inc.'s results of operations. In addition, the Company deferred approximately $400 million of the cash distribution received from DowDuPont at separation and recorded an associated liability with an offset to "Retained earnings" in the consolidated balance sheets of Dow Inc. At December 31, 2019, $130 million of this liability was recorded in "Accrued and other current liabilities" and $270 million was recorded in "Other noncurrent obligations" in the consolidated balance sheets of Dow Inc. The final resolution of this liability is uncertain and any subsequent adjustments to the carrying value of this liability will be reflected in equity of Dow Inc. Following the separation, Dow Inc. made cash payments of $215 million related to the Agreements, recorded in "Cash flows from operating activities - discontinued operations" in the Dow Inc. consolidated statements of cash flows. The Company also received $98 million related to the Agreements, recorded in "Other assets and liabilities, net" within "Cash flows from operating activities - continuing operations" in the Dow Inc. consolidated statements of cash flows.
Continuing Involvement
The Company has certain product and service agreements with DuPont and Corteva that were considered intercompany transactions prior to the separation, but are trade transactions subsequent to the separation. These transactions have been retrospectively reclassified as trade transactions in the consolidated financial statements. Based on the Company’s assessment of the specific factors identified in ASC Topic 205, “Presentation of Financial Statements,” the Company concluded that these agreements do not constitute significant continuing involvement in AgCo or SpecCo.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to post-Merger integration and business separation activities, as well as the ownership restructure of Dow Silicones (through May 31, 2018), were $1,063 million and $1,039 million for Dow Inc. and TDCC, respectively, in 2019, compared with $1,179 million in 2018 and $798 million in 2017. Integration and separation costs related to post-Merger integration and business separation activities are expected to be substantially complete by the end of 2020.
NOTE 5 – REVENUE
The majority of the Company's revenue is derived from product sales. In 2018, 992019, 98 percent of the Company's salesrevenue related to product sales (98(99 percent in 20172018 and 9998 percent in 2016)2017). The remaining sales were primarily related to Dow'sthe Company's insurance operations and licensing of patents and technologies. As of January 1, 2018, the Company accounts for revenue in accordance with Topic 606, "Revenue from Contracts with Customers," except for revenue from Dow's insurance operations, which is accounted for in accordance with Topic 944, "Financial Services - Insurance."
Product Sales
Product sales consist of sales of the Company's products to manufacturers and distributors. The Company considers order confirmations or purchase orders, which in some cases are governed by master supply agreements, to be contracts with a customer.
Product sale contracts are generally short-term contracts where the time between order confirmation and satisfaction of all performance obligations is less than one year. However, the Company has some long-term contracts which can span multiple years.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, usually upon shipment, with payment terms typically in the range of 30 to 60 days after invoicing, depending on business and geographic region. When the Company performs shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to shipment), these are considered fulfillment activities, and accordingly, the costs are accrued when
the related revenue is recognized. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. The Company elected to use the practical expedient to expense cash and non-cash sales incentives, as the amortization period for the costs to obtain the contract would have been one year or less.
Certain long-term contracts include a series of distinct goods that are delivered continuously to the customer through a pipeline (e.g., feedstocks). For these types of product sales, the Company invoices the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date. As a result, the Company recognizes revenue based on the amount billable to the customer in accordance with the right to invoice practical expedient.
The transaction price includes estimates for reductions in revenue from customer rebates and right of returns on product sales. These amounts are estimated based upon the most likely amount of consideration to which the customer will be entitled. The Company’s obligation for right of returns is limited primarily to the Seed principal product group. All estimates are based on historical experience, anticipated performance and the Company’s best judgment at the time to the extent it is probable that a significant reversal of revenue recognized will not occur. All estimates for variable consideration are reassessed periodically. The Company elected the practical expedient to not adjust the amount of consideration for the effects of a significant financing component for all instances in which the period between payment and transfer of the goods will be one year or less.
For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative standalone selling price. The standalone selling price is the observable price which depicts the price as if sold to a similar customer in similar circumstances.
Patents, Trademarks and Licenses
The Company enters into licensing arrangements in which it licenses certain rights of its patents and technology to customers. Revenue from the majority of the Company’s licenses for patents and technology is derived from sales-based royalties. The Company estimates the amount of sales-based royalties it expects to be entitled to based on historical sales to the customer. For the remaining revenue from licensing arrangements, payments are typically received from the Company’sCompany's licensees based on billing schedules established in each contract. Revenue is recognized by the Company when the performance obligation is satisfied.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. At December 31, 2018,2019, the Company had remaining performance obligations related to material rights granted to customers for contract renewal options of $102 million and unfulfilled performance obligations for the licensing of technology of $407 million. The Company$826 million, and expects revenue to be recognized for the remaining performance obligations over the next one to sixseven years.
The remaining performance obligations are for product sales that have expected durations of one year or less, product sales of materials delivered through a pipeline for which the Company has elected the right to invoice practical expedient, or variable consideration attributable to royalties for licenses of patents and technology. The Company has received advance payments from customers related to long-term supply agreements that are deferred and recognized over the life of the contract, with remaining contract terms that range up to 2221 years. The Company will have rights to future consideration for revenue recognized when product is delivered to the customer. These payments are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets.
Disaggregation of Revenue
The Company disaggregates its revenue from contracts with customers by principal product groupsegment and geographic region,business, as the Company believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash flows. See Note 25 for net trade revenue by principal product groupdetails in the tables below:
|
| | | | | | |
| Net Trade Sales by Segment and Business | 2019 | 2018 |
| In millions |
| Hydrocarbons & Energy | $ | 5,357 |
| $ | 7,587 |
|
| Packaging and Specialty Plastics | 14,888 |
| 16,608 |
|
| Packaging & Specialty Plastics | $ | 20,245 |
| $ | 24,195 |
|
| Industrial Solutions | $ | 4,310 |
| $ | 4,812 |
|
| Polyurethanes & Construction Chemicals | 9,117 |
| 10,615 |
|
| Others | 13 |
| 20 |
|
| Industrial Intermediates & Infrastructure | $ | 13,440 |
| $ | 15,447 |
|
| Coatings & Performance Monomers | $ | 3,517 |
| $ | 3,979 |
|
| Consumer Solutions | 5,406 |
| 5,698 |
|
| Performance Materials & Coatings | $ | 8,923 |
| $ | 9,677 |
|
| Corporate | $ | 343 |
| $ | 285 |
|
| Total | $ | 42,951 |
| $ | 49,604 |
|
|
| | | | | | |
| Net Trade Sales by Geographic Region | 2019 | 2018 |
| In millions |
| U.S. & Canada | $ | 15,549 |
| $ | 17,809 |
|
EMEAI 1 | 14,612 |
| 17,406 |
|
| Asia Pacific | 8,676 |
| 9,404 |
|
| Latin America | 4,114 |
| 4,985 |
|
| Total | $ | 42,951 |
| $ | 49,604 |
|
1. Europe, Middle East, Africa and geographic region for 2018.India.
Contract BalancesAssets and Liabilities
The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Contract liabilities include payments received in advance of performance under the contract, and are realized when the associated revenue is recognized under the contract. "Contract liabilities - current" primarily reflects deferred revenue from prepayments from customers for product to be delivered in a time period of 12 months or less. "Contract liabilities - noncurrent" includes advance payments that the Company has received from customers related to long-term supply agreements and royalty payments that are deferred and recognized over the life of the contract.
The Company's contract liabilities increased from December 31, 2018 to December 31, 2019 due to advanced payments from customers related to long-term product supply agreements. Revenue recognized in 20182019 from amounts included in contract liabilities at the beginning of the period was approximately $240 million.$145 million ($205 million in 2018). In 2018,2019, the amount of contract assets reclassified to receivables as a result of the right to the transaction consideration becoming unconditional was approximately $12 million.$15 million ($12 million in 2018). The Company did not recognize any asset impairment charges related to contract assets in 2019 or 2018.
The following table summarizes the contract balancesassets and liabilities at December 31, 20182019 and 2017:2018:
| | | Contract Balances | Dec 31, 2018 | Topic 606 Adjustments Jan 1, 2018 | Dec 31, 2017 | |
| Contract Assets and Liabilities at Dec 31 | 2019 | 2018 |
| In millions | Dec 31, 2018 | Topic 606 Adjustments Jan 1, 2018 | Dec 31, 2017 |
| Accounts and notes receivable - Trade | $ | 4,844 |
| $ | 5,646 |
|
Contract assets - current 1 | $ | 37 |
| $ | 18 |
| $ | — |
| $ | 41 |
| $ | 19 |
|
Contract assets - noncurrent 2 | $ | 47 |
| $ | 43 |
| $ | — |
| $ | 4 |
| $ | 1 |
|
Contract liabilities - current 3 | $ | 165 |
| $ | 50 |
| $ | 117 |
| $ | 193 |
| $ | 134 |
|
Contract liabilities - noncurrent 4 | $ | 1,390 |
| $ | 117 |
| $ | 1,365 |
| $ | 1,607 |
| $ | 1,318 |
|
1. Included in "Other current assets" in the consolidated balance sheets.
2. Included in "Deferred charges and other assets" in the consolidated balance sheets.
3. Included in "Accrued and other current liabilities" in the consolidated balance sheets.
4. Included in "Other noncurrent obligations" in the consolidated balance sheets.
NOTE 5 – ACQUISITIONS
Ownership Restructure of Dow Silicones
On June 1, 2016, the Company announced the closing of the transaction with Corning Incorporated ("Corning"), Dow Silicones and HS Upstate Inc., (“Splitco”), pursuant to which Corning exchanged with Dow Silicones its 50 percent equity interest in Dow Silicones for 100 percent of the stock of Splitco which held Corning's historical proportional interest in the Hemlock Semiconductor Group ("HSC Group") and approximately $4.8 billion in cash. As a result, Dow Silicones, previously a 50:50 joint venture between Dow and Corning, became a wholly owned subsidiary of Dow. In connection with the ownership restructure, on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness in order to fund the contribution of cash to Splitco. See Notes 12, 15 and 23 for additional information.
At June 1, 2016, the Company's equity interest in Dow Silicones, excluding the HSC Group, was $1,968 million. This equity interest was remeasured to fair value. As a result, the Company recognized a non-taxable gain of $2,445 million in the second quarter of 2016, net of closing costs and other comprehensive loss related to the Company's interest in Dow Silicones. The gain was included in "Sundry income (expense) - net" in the consolidated statements of income. The Company recognized a tax benefit of $141 million on the ownership restructure in the second quarter of 2016, primarily due to the reassessment of a previously recognized deferred tax liability related to the basis difference in the Company’s investment in Dow Silicones. In addition, the fair value step-up of "Inventories" acquired was an increase of $317 million, which was expensed to "Cost of sales" over a three-month period beginning on June 1, 2016. In 2018, the Company recorded a pretax loss of $47 million for post-closing adjustments related to the Dow Silicones ownership restructure, included in "Sundry income (expense) - net" in the consolidated statements of income.
The ownership restructure resulted in the recognition of $3,229 million of "Goodwill" which was not deductible for tax purposes. Goodwill largely consisted of expected synergies resulting from the ownership restructure. Cost synergies were achieved through a combination of workforce consolidation and savings from actions such as harmonizing energy contracts at large sites, optimizing warehouse and logistics footprints, implementing materials and maintenance best practices, combining information technology service structures and leveraging existing R&D knowledge management systems.
The Company evaluated the disclosure requirements under ASC 805 "Business Combinations" and determined the ownership restructure was not considered a material business combination for purposes of disclosing the revenue and earnings of Dow Silicones since the date of the ownership restructure as well as supplemental pro forma information.
Beginning in June 2016, the results of Dow Silicones, excluding the HSC Group, were fully consolidated in the Company’s consolidated statements of income. Prior to June 2016, the Company’s 50 percent share of Dow Silicones’ results of operations was reported in “Equity in earnings of nonconsolidated affiliates” in the consolidated statements of income. The results of the HSC Group continue to be treated as an equity method investment and reported as “Equity in earnings of nonconsolidated affiliates” in the consolidated statements of income.
NOTE 6 – DIVESTITURES
Merger Remedy - Divestiture of the Global Ethylene Acrylic Acid Copolymers and Ionomers Business
On February 2, 2017, as a condition of regulatory approval of the Merger, Dowthe Company announced it would divest theits global EAA Business to SK Global Chemical Co., Ltd. The divestiture included production assets located in Freeport, Texas, and Tarragona, Spain, along with associated intellectual property and product trademarks. Under terms of the purchase agreement, SK Global Chemical Co., Ltd will honor certain customer and supplier contracts and other agreements. On September 1, 2017, the sale was completed for $296 million, net of working capital adjustments, costs to sell and other adjustments, with proceeds subject to customary post-closing adjustments. As a result, in 2017, the Company recognized a pretax gain of $227 million on the sale, included in "Sundry income (expense) - net" in the consolidated statements of income.income and related to the Packaging & Specialty Plastics segment.
Merger Remedy - Divestiture of a Portion of Dow AgroSciences' Brazil Corn Seed Business
On July 11, 2017, as a condition of regulatory approval of the Merger, Dow announced it had entered into a definitive agreement with CITIC Agri Fund to sell a select portion of Dow AgroSciences' corn seed business in Brazil, including some seed processing plants and seed research centers, a copy of Dow AgroSciences' Brazilian corn germplasm bank, the MORGAN™ brand and a license for the use of the DOW SEMENTES™ brand for a certain period of time. On November 30, 2017, the sale was completed for $1,093 million, net of working capital adjustments, costs to sell and other adjustments, with proceeds subject to customary post-closing adjustments. As a result, in 2017, the Company recognized a pretax gain of $635 million on the sale, included in "Sundry income (expense) - net" in the consolidated statements of income.
The Company evaluated the divestiture of the EAA Business and determined it did not represent a strategic shift that had a major effect on the Company’s operations and financial results and did not qualify as an individually significant component of the Company. The divestiture of a portion of Dow AgroSciences' corn seed business did not qualify as a component of the Company. As a result, these divestitures werethis divestiture was not reported asin discontinued operations.
NOTE 7 – RESTRUCTURING, GOODWILL IMPAIRMENT AND ASSET RELATED CHARGES - NET
The "Restructuring, goodwill impairment and asset related charges - net" line in the consolidated statements of income is used to record charges for restructuring programs, goodwill impairments, and other asset related charges, which includes other asset impairments.
DowDuPont Agriculture Division Restructuring Program
During the fourth quarter of 2018 and in connection with the ongoing integration activities, DowDuPont approved restructuring actions to simplify and optimize certain organizational structures within the Agriculture division in preparation for its intended separation as a standalone company ("Agriculture Division Program"). As a result of these actions, the Company expects to record total pretax restructuring charges of $31 million, comprised of $28 million of severance and related benefit costs and $3 million of asset write-downs and write-offs. For the year ended December 31, 2018, the Company recorded pretax restructuring charges of $25 million, consisting of severance and related benefit costs of $24 million and asset write-downs and write-offs of $1 million. The impact of these charges is shown as "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. The Company expects actions related to the Agriculture Division Program to be substantially complete by mid 2019.
The following table summarizes the activities related to the Agriculture Division Program. At December 31, 2018, $23 million was included in "Accrued and other current liabilities" in the consolidated balance sheets.
|
| | | | | | | | | |
| DowDuPont Agriculture Division Program | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Total |
| In millions |
| 2018 restructuring charges | $ | 24 |
| $ | 1 |
| $ | 25 |
|
| Charges against the reserve | — |
| (1 | ) | (1 | ) |
| Cash payments | (1 | ) | — |
| (1 | ) |
| Reserve balance at Dec 31, 2018 | $ | 23 |
| $ | — |
| $ | 23 |
|
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont approved post-merger restructuring actions under the DowDuPont Cost Synergy Program (the "Synergy Program") which iswas designed to integrate and optimize the organization following the Merger and in preparation for the Intended Business Separations.business separations. The Company expectsexpected (prior to the impact of any discontinued operations) to record total pretax restructuring charges of approximately $1.3 billion, which included initial estimates of approximately $525 million to $575 million of severance and related benefit costs;costs, $400 million to $440 million of asset write-downs and write-offs, and $290 million to $310 million of costs associated with exit and disposal activities. The restructuring charges below reflect charges from continuing operations.
As a result of the Synergy Program, theThe Company recorded pretax restructuring charges of $687$399 million in 2017, consisting of severance and related benefit costs of $357$307 million, asset write-downs and write-offs of $287$87 million and costs associated with exit and disposal activities of $43$5 million. For the year ended December 31, 2018, the
The Company recorded pretax restructuring charges of $551$184 million in 2018, consisting of severance and related benefit costs of $204$137 million, assetassets write-downs and write-offs of $226$33 million and costs associated with exit and disposal activities of $121$14 million.
For the year ended December 31, 2019, the Company recorded pretax restructuring charges of $292 million, consisting of severance and related benefit costs of $123 million, asset write-downs and write-offs of $143 million and costs associated with exit and disposal activities of $26 million. The impact of these charges is shown as "Restructuring, goodwill impairment and asset related charges -‑ net" in the consolidated statements of income. The Company expects to record additional restructuring charges during 2019 and substantially complete the Synergy Program to be substantially complete by the end of 2019.the second quarter of 2020.
The following table summarizes the activities related to the Synergy Program. At December 31, 2018, $2722019, $52 million was included in "Accrued and other current liabilities" ($231205 million at December 31, 2017)2018) and $55$19 million was included in "Other noncurrent obligations" ($11812 million at December 31, 2017)2018) in the consolidated balance sheets.
|
| | | | | | | | | | | | |
| DowDuPont Synergy Program | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Costs Associated with Exit and Disposal Activities | Total |
| In millions |
| 2017 restructuring charges | | | | |
| Packaging & Specialty Plastics | $ | — |
| $ | 33 |
| $ | 3 |
| $ | 36 |
|
| Industrial Intermediates & Infrastructure | — |
| 12 |
| — |
| 12 |
|
| Performance Materials & Coatings | — |
| 9 |
| 2 |
| 11 |
|
| Corporate | 307 |
| 33 |
| — |
| 340 |
|
| Total 2017 restructuring charges | $ | 307 |
| $ | 87 |
| $ | 5 |
| $ | 399 |
|
| Charges against the reserve | — |
| (87 | ) | — |
| (87 | ) |
| Cash payments | (37 | ) | — |
| — |
| (37 | ) |
| Reserve balance at Dec 31, 2017 | $ | 270 |
| $ | — |
| $ | 5 |
| $ | 275 |
|
| 2018 restructuring charges | | | |
|
| Packaging & Specialty Plastics | $ | — |
| $ | 10 |
| $ | 3 |
| $ | 13 |
|
| Industrial Intermediates & Infrastructure | — |
| — |
| 11 |
| 11 |
|
| Performance Materials & Coatings | — |
| 7 |
| — |
| 7 |
|
| Corporate | 137 |
| 16 |
| — |
| 153 |
|
| Total 2018 restructuring charges | $ | 137 |
| $ | 33 |
| $ | 14 |
| $ | 184 |
|
| Charges against the reserve | — |
| (33 | ) | — |
| (33 | ) |
| Cash payments | (197 | ) | — |
| (12 | ) | (209 | ) |
| Reserve balance at Dec 31, 2018 | $ | 210 |
| $ | — |
| $ | 7 |
| $ | 217 |
|
| 2019 restructuring charges | | | | |
| Packaging & Specialty Plastics | $ | — |
| $ | — |
| $ | 1 |
| $ | 1 |
|
| Industrial Intermediates & Infrastructure | — |
| 2 |
| 5 |
| 7 |
|
| Performance Materials & Coatings | — |
| 28 |
| — |
| 28 |
|
| Corporate | 123 |
| 113 |
| 20 |
| 256 |
|
| Total 2019 restructuring charges | $ | 123 |
| $ | 143 |
| $ | 26 |
| $ | 292 |
|
| Charges against the reserve | — |
| (143 | ) | — |
| (143 | ) |
| Cash payments | (279 | ) | — |
| (16 | ) | (295 | ) |
| Reserve balance at Dec 31, 2019 | $ | 54 |
| $ | — |
| $ | 17 |
| $ | 71 |
|
|
| | | | | | | | | | | | |
| DowDuPont Synergy Program | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Costs Associated with Exit and Disposal Activities | Total |
| In millions |
| 2017 restructuring charges | $ | 357 |
| $ | 287 |
| $ | 43 |
| $ | 687 |
|
| Charges against the reserve | — |
| (287 | ) | — |
| (287 | ) |
| Cash payments | (51 | ) | — |
| — |
| (51 | ) |
| Reserve balance at Dec 31, 2017 | $ | 306 |
| $ | — |
| $ | 43 |
| $ | 349 |
|
| 2018 restructuring charges | 204 |
| 226 |
| 121 |
| 551 |
|
| Charges against the reserve | — |
| (226 | ) | — |
| (226 | ) |
| Cash payments | (248 | ) | — |
| (99 | ) | (347 | ) |
| Reserve balance at Dec 31, 2018 | $ | 262 |
| $ | — |
| $ | 65 |
| $ | 327 |
|
Asset Write-downs and Write-offs
The restructuring charges related to the write-down and write-off of assets in 2017 totaled $287 million. Details regarding the write-downs and write-offs are as follows:
The Company will close or consolidate several manufacturing, R&D and administrative facilities around the world aligned with seed and crop protection activities, including the write-down of other non-manufacturing assets. As a result, the Company recorded a charge of $94 million. These facilities will be shut down or consolidated by the end of 2019.
The Company recorded a charge of $83 million for asset write-downs and write-offs aligned with electronics and imaging product lines, including the shutdown of a metalorganic manufacturing facility in Cheonan, South Korea, the write-off of in-process research and development and other intangible assets, and the consolidation of certain R&D facilities. The South Korean facility was shut down in the second quarter of 2018.
The Company recorded a charge of $22 million for asset write-downs and write-offs aligned with an energy project, including the write-off of capital projects and other non-manufacturing assets.assets in Packaging & Specialty Plastics.
The Company wrote-off $21 million of assets aligned with safety and construction products, including intangible assets as a result of the Clean Filtration Technologies plant shutdown in the fourth quarter of 2017.
The Company recorded a charge of $67$65 million for other miscellaneous asset write-downs and write-offs, including the shutdown of several small manufacturing facilities and the write-off of non-manufacturing assets, certain corporate facilities and data centers. The charge related to Packaging & Specialty Plastics ($11 million), Industrial Intermediates & Infrastructure ($12 million), Performance Materials & Coatings ($9 million) and Corporate ($33 million). These manufacturing facilities will bewere shut down primarily by the end of 2019.
The restructuring charges related to the write-down and write-off of assets in 2018 totaled $226 million. Details regarding the write-downs and write-offs are as follows:
The Company recorded a charge of $171$33 million related primarily to the consolidation or shutdown of manufacturing, R&D andfor other non-manufacturing facilities and the write-down of inventory aligned with seed and crop protection activities. These facilities will be shut down primarily by the end of the third quarter of 2019.
The Company recorded a charge of $27 million formiscellaneous asset write-downs and write-offs, aligned with industrial biosciences product lines, including the shutdown of a microbial controlseveral small manufacturing facility.facilities and the write-off of leased, non-manufacturing assets and certain corporate facilities. The charge related to Packaging & Specialty Plastics ($10 million), Performance Materials & Coatings ($7 million) and Corporate ($16 million). These manufacturing facility will befacilities were shut down by the end of 2019.
The restructuring charges related to the write-down and write-off of assets in 2019 are as follows:
The Company recorded a charge of $28$143 million for other miscellaneous asset write-downs and write-offs, including the shutdown of several small manufacturing facilities and the write-off of non-manufacturing assets and certain corporate facilities. The charge related to Industrial Intermediates & Infrastructure ($2 million), Performance Materials & Coatings ($28 million) and Corporate ($113 million). These manufacturing facilities will be shut down by the end of the thirdsecond quarter of 2019.2020.
Costs Associated with Exit and Disposal Activities
The restructuring charges for costs associated with exit and disposal activities, including contract cancellation penalties and environmental remediation liabilities, totaled $43$5 million in 2017, and $121$14 million in 2018.
2016 Restructuring
On June 27, 2016, Dow's Board approved a restructuring plan that incorporated actions related to the ownership restructure of Dow Silicones. These actions, aligned with Dow’s value growth2018 and synergy targets, resulted in a global workforce reduction of approximately 2,500 positions, with most of these positions resulting from synergies related to the ownership restructure of Dow Silicones.
As a result of these actions, the Company recorded pretax restructuring charges of $449$26 million in the second quarter of 2016, consisting of severance and related benefit costs of $268 million, asset write-downs and write-offs of $153 million and costs associated with exit and disposal activities of $28 million. The impact of these charges is shown as "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. The 2016 restructuring activities were substantially complete at June 30, 2018, with remaining liabilities for severance and related benefit costs and costs associated with exit and disposal activities to be settled over time.2019.
The following table summarizes the activities related to the Company's 2016 restructuring reserve.
|
| | | | | | | | | | | | |
| 2016 Restructuring Charges | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Costs Associated with Exit and Disposal Activities | Total |
| In millions |
| 2016 restructuring charges | $ | 268 |
| $ | 153 |
| $ | 28 |
| $ | 449 |
|
| Charges against the reserve | — |
| (153 | ) | — |
| (153 | ) |
| Cash payments | (67 | ) | — |
| (1 | ) | (68 | ) |
| Reserve balance at Dec 31, 2016 | $ | 201 |
| $ | — |
| $ | 27 |
| $ | 228 |
|
Adjustments to the reserve 1 | — |
| — |
| (7 | ) | (7 | ) |
| Cash payments | (150 | ) | — |
| (3 | ) | (153 | ) |
| Reserve balance at Dec 31, 2017 | $ | 51 |
| $ | — |
| $ | 17 |
| $ | 68 |
|
Adjustments to the reserve 1 | (8 | ) | — |
| 14 |
| 6 |
|
| Cash payments | (37 | ) | — |
| (4 | ) | (41 | ) |
| Reserve balance at Jun 30, 2018 | $ | 6 |
| $ | — |
| $ | 27 |
| $ | 33 |
|
| |
1. | Included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. |
Asset Write-downs and Write-offs
The restructuring charges related to the write-down and write-off of assets in the second quarter of 2016 totaled $153 million. Details regarding the write-downs and write-offs are as follows:
The Company recorded a charge of $70 million for asset write-downs and write-offs including the shutdown of a solar manufacturing facility in Midland, Michigan; the write-down of a solar facility in Milpitas, California; and, the write-off of capital projects and in-process research and development. The Midland facility was shut down in the third quarter of 2016.
To enhance competitiveness and streamline costs associated with the ownership restructure of Dow Silicones, a silicones manufacturing facility in Yamakita, Japan, was shut down in the fourth quarter of 2018. In addition, an idled facility was shut down in the second quarter of 2016. As a result, the Company recorded a charge of $25 million.
The Company recorded a charge of $25 million to close and/or consolidate certain corporate facilities and data centers.
A decision was made to shut down a small manufacturing facility and to write-down other non-manufacturing assets, including a cost method investment and certain aircraft. As a result, the Company recorded a charge of $33 million. The manufacturing facility was shut down in the second quarter of 2016.
Costs Associated with Exit and Disposal Activities
The restructuring charges for costs associated with exit and disposal activities, including contract cancellation penalties, environmental remediation and warranty liabilities, were $28 million in the second quarter of 2016.
Dow expects to incur additional costs in the future related to its restructuring activities. Future costs are expected to include demolition costs related to closed facilities and restructuring plan implementation costs; thesefacilities. These costs will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.
Goodwill Impairment
Upon completion of the goodwill impairment testing in the fourth quarter of 2017,2019, the Company determined the fair value of the Coatings & Performance Monomers reporting unit was lower than its carrying amount. As a result, the Company recorded an impairment charge of $1,039 million in the fourth quarter of 2019, included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Performance Materials & Coatings.
In 2017, upon completion of the annual goodwill impairment testing, the Company determined the fair value of the Coatings & Performance Monomers reporting unit was lower than its carrying amount and as a result, recorded an impairment charge of $1,491 million in the fourth quarter of 2017, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.income and related to Performance Materials & Coatings. See Note 1314 for additional information on thethese impairment charge.charges.
Asset Related Charges
2019 Charges
In 2019, the Company recognized additional pretax impairment charges of $58 million related primarily to capital additions made to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil ("Santa Vitoria"), which was impaired in 2017. The impairment charges were included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Packaging & Specialty Plastics ($44 million), Performance Materials & Coatings ($9 million) and Corporate ($5 million). See Note 24 for additional information.
On August 13, 2019, the Company entered into a definitive agreement to sell its acetone derivatives business to ALTIVIA Ketones & Additives, LLC. The transaction closed on November 1, 2019 and included the Company's acetone derivatives related inventory and production assets, located in Institute, West Virginia, in addition to the site infrastructure, land, utilities and certain railcars. The Company remains at the Institute site as a tenant. As a result of the planned transaction, the Company recognized a pretax impairment charge of $75 million in the third quarter of 2019, included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Packaging & Specialty Plastics ($24 million) and Corporate ($51 million). See Note 24 for additional information.
In the fourth quarter of 2019, upon completion of an evaluation of its equity method investment in Sadara Chemical Company ("Sadara") for other-than-temporary impairment, the Company determined that its investment in Sadara was other-than-temporarily impaired and it was written down to zero. Additionally, as part of Dow's evaluation of Sadara, the Company reserved certain of its notes and accounts receivable with Sadara due to uncertainty on the timing of collection. As a result, the Company recorded a $1,755 million charge related to Sadara, included in “Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Packaging & Specialty Plastics ($370 million), Industrial Intermediates & Infrastructure ($1,168 million) and Corporate ($217 million). See Notes 13 and 24 for additional information.
2018 Charges
In 2018, the Company recognized an additional pretax impairment charge of $34 million related primarily to capital additions made to a biopolymers manufacturing facility inat Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017.Vitoria. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.income and related to the Packaging & Specialty Plastics segment. See Note 24 for additional information.
2017 Charges
In the fourth quarter of 2017, the Company recognized a $622 million pretax impairment charge related to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil.Vitoria. The Company determined it would not pursue an expansion of the facility’s ethanol mill into downstream derivative products, primarily as a result of cheaper ethane-based production as well as the Company’s new assets coming online on the U.S. Gulf Coast which can be used to meet growing market demands in Brazil. As a result of this decision, cash flow analysis indicated the carrying amount of the impacted assets was not recoverable. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.income and related to the Packaging & Specialty Plastics segment. See Notes 22 and 23Note 24 for additional information.
The Company also recognized other pretax impairment charges of $317$246 million in the fourth quarter of 2017, including charges related to manufacturing assets of $230$159 million, an equity method investment of $81 million and other assets of $6 million. The impairment charges were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income.income and related to Packaging & Specialty Plastics ($58 million), Industrial Intermediates & Infrastructure ($5 million), Performance Materials & Coatings ($83 million) and Corporate ($100 million). See Note 2224 for additional information.
2016 Charges
In the fourth quarter of 2016, the Company recognized a $143 million pretax impairment charge related to its equity interest in AgroFresh Solutions, Inc. (“AFSI”) due to a decline in the market value of AFSI. The impairment charge was included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Notes 12, 22 and 23 for additional information.
NOTE 8 – SUPPLEMENTARY INFORMATION
|
| | | | | | | | | |
| Sundry Income (Expense) – Net | | | |
| In millions | 2018 | 2017 | 2016 |
Non-operating pension and other postretirement benefit plan net credits (costs) 1 | $ | 119 |
| $ | (682 | ) | $ | 34 |
|
| Gain on sales of other assets and investments | 59 |
| 182 |
| 170 |
|
| Interest income | 109 |
| 106 |
| 107 |
|
| Foreign exchange losses | (119 | ) | (72 | ) | (126 | ) |
| Post-closing adjustments on divestiture of MEGlobal | 20 |
| — |
| (1 | ) |
Gain and post-closing adjustments related to Dow Silicones ownership restructure 2 | (47 | ) | — |
| 2,445 |
|
Loss on early extinguishment of debt 3 | (54 | ) | — |
| — |
|
| Loss on divestitures | (14 | ) | — |
| (25 | ) |
Gain on divestiture of DAS Divested Ag Business 4 | — |
| 635 |
| — |
|
Gain on divestiture of the EAA Business 4 | — |
| 227 |
| — |
|
Gain related to Nova patent infringement award 5 | — |
| 137 |
| — |
|
Loss related to Bayer CropScience arbitration matter 5 | — |
| (469 | ) | — |
|
| Impact of split-off of chlorine value chain | — |
| 7 |
| 6 |
|
Settlement of the urethane matters class action lawsuit and opt-out cases 5 | — |
| — |
| (1,235 | ) |
| Costs associated with transactions and productivity actions | — |
| — |
| (41 | ) |
Implant liability adjustment 5 | — |
| — |
| 27 |
|
| Reclassification of cumulative translation adjustments | 4 |
| 8 |
| — |
|
| Other - net | 104 |
| 116 |
| 125 |
|
| Total sundry income (expense) – net | $ | 181 |
| $ | 195 |
| $ | 1,486 |
|
|
| | | | | | | | | | | | | | | | | | |
| Sundry Income (Expense) – Net | Dow Inc. | TDCC |
| In millions | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 |
Non-operating pension and other postretirement benefit plan net credits (costs) 1 | $ | 205 |
| $ | 123 |
| $ | (676 | ) | $ | 205 |
| $ | 123 |
| $ | (676 | ) |
| Foreign exchange gains (losses) | 91 |
| (119 | ) | (72 | ) | 77 |
| (119 | ) | (72 | ) |
Gain related to Nova ethylene asset matter 2 | 170 |
| — |
| — |
| 170 |
| — |
| — |
|
Dow Silicones breast implant liability adjustment 2 | 85 |
| — |
| — |
| 85 |
| — |
| — |
|
Gain (loss) on Dow Silicones commercial creditor matters 2 | (50 | ) | — |
| 33 |
| (50 | ) | — |
| 33 |
|
Indemnification and other transaction related costs 3 | (69 | ) | — |
| — |
| 6 |
| — |
| — |
|
Loss on early extinguishment of debt 4 | (102 | ) | (54 | ) | — |
| (102 | ) | (54 | ) | — |
|
Gain (loss) on divestitures 5 | (49 | ) | — |
| 7 |
| 2 |
| — |
| 7 |
|
| Gain on sales of other assets and investments | 67 |
| 18 |
| 117 |
| 67 |
| 18 |
| 117 |
|
| Reclassification of cumulative translation adjustments | 10 |
| 4 |
| 8 |
| 10 |
| 4 |
| 8 |
|
| Post-closing adjustments related to Dow Silicones ownership restructure | — |
| (20 | ) | — |
| — |
| (20 | ) | — |
|
| Post-closing adjustments on divestiture of MEGlobal | — |
| 20 |
| — |
| — |
| 20 |
| — |
|
Gain on divestiture of the EAA business 6 | — |
| — |
| 227 |
| — |
| — |
| 227 |
|
Gain related to Nova patent infringement award 2 | — |
| — |
| 137 |
| — |
| — |
| 137 |
|
| Other - net | 103 |
| 124 |
| 65 |
| 103 |
| 124 |
| 65 |
|
| Total sundry income (expense) – net | $ | 461 |
| $ | 96 |
| $ | (154 | ) | $ | 573 |
| $ | 96 |
| $ | (154 | ) |
| |
| 1. | Presented in accordance with ASU 2017-07. See Notes 1, 2 and 19Note 21 for additional information. |
| |
| 2. | See Note 517 for additional information. |
| |
| 3. | See Note 154 for additional information. |
| |
| 4. | See Note 616 for additional information. |
| |
| 5. | Primarily related to post-closing adjustments on previous divestitures. |
| |
| 6. | See Note 166 for additional information. |
Accrued and Other Current Liabilities
“Accrued and other current liabilities” were $3,611$2,762 million and $2,233 million at December 31, 20182019 for Dow Inc. and $4,025TDCC, respectively, and $2,931 million at December 31, 2017.2018. Accrued payroll, which is a component of "Accrued and other current liabilities" and includes liabilities" related to payroll, incentive compensation and severance, was $926$284 million at December 31, 20182019 and $1,109$759 million at December 31, 2017.2018. No other components of "Accrued and other current liabilities" were more than 5 percent of total current liabilities.
Supplemental Cash Flow Information
The following table shows cash paid for interest and income taxes for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | |
| Supplemental Cash Flow Information | 2019 | 2018 | 2017 |
| In millions |
| Cash paid during year for: | | | |
| Interest, net of amounts capitalized | $ | 993 |
| $ | 1,143 |
| $ | 1,115 |
|
| Income taxes | $ | 881 |
| $ | 1,193 |
| $ | 1,259 |
|
NOTE 9 – INCOME TAXES
On December 22, 2017, The Act was enacted. The Act reducesfinancial statements for Dow Inc. and TDCC are substantially similar, including the U.S. federal corporate income tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earningsreporting of certain foreign subsidiaries that were previously deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deductioncurrent and moves to a hybrid territorial system. At December 31, 2017, the Company had not completed its accounting for the tax effects of The Act; however, the Company made a reasonable estimate of the effects on its existing deferred tax balancesexpense (benefit), provision for income taxes on continuing operations, and the one-time transition tax. In accordance with Staff Accounting Bulletin 118 ("SAB 118"), incomedeferred tax effects of The Act were refined upon obtaining, preparing,asset and analyzing additional information during the measurement period. At December 31, 2018, the Company had completed its accounting for the tax effects of The Act.
liability balances. As a result, of The Act, the Company remeasured its U.S. federal deferredfollowing income tax assets and liabilities based on the rates at which they are expecteddiscussion pertains to reverse in the future, which is generally 21 percent. The Company recorded a cumulative benefit of $29 million ($79 million benefit in 2018 and $50 million charge in 2017) to “Provision for income taxes” in the consolidated statements of income with respect to the remeasurement of the Company's deferred tax balances.Dow Inc. only.
The Act requires a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits, which results in a one-time transition tax. The Company recorded a cumulative charge of $780 million ($85 million benefit in 2018 and $865 million charge in 2017) to "Provision for income taxes" in the consolidated statements of income with respect to the one-time transition tax.
In 2018, the Company recorded an indirect impact of The Act related to prepaid tax on the intercompany sale of inventory. The amount recorded related to inventory was a charge of $38 million to "Provision for income taxes" in the consolidated statements of income.
For tax years beginning after December 31, 2017, The Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). The Company has made the policy election to record any liability associated with GILTI in the period in which it is incurred.
| | | Geographic Allocation of Income and Provision for Income Taxes | | | | |
| Geographic Allocation of Income and Provision for Income Taxes on Continuing Operations | | | | |
| In millions | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| Income (Loss) before income taxes | | | | |
Domestic 1, 2 | $ | 1,668 |
| $ | (1,973 | ) | $ | 485 |
| |
Foreign 1 | 4,250 |
| 4,772 |
| 3,928 |
| |
| Income before income taxes | $ | 5,918 |
| $ | 2,799 |
| $ | 4,413 |
| |
| Income (loss) from continuing operations before income taxes | | | | |
Domestic 1 | | $ | (1,196 | ) | $ | 745 |
| $ | (2,226 | ) |
Foreign 2 | | (51 | ) | 3,004 |
| 2,463 |
|
| Income (loss) from continuing operations before income taxes | | $ | (1,247 | ) | $ | 3,749 |
| $ | 237 |
|
| Current tax expense (benefit) | | | | | |
| Federal | $ | 290 |
| $ | (308 | ) | $ | 91 |
| $ | (287 | ) | $ | 324 |
| $ | (864 | ) |
| State and local | 8 |
| — |
| 21 |
| 25 |
| 13 |
| 4 |
|
| Foreign | 1,517 |
| 1,579 |
| 1,156 |
| 960 |
| 901 |
| 971 |
|
| Total current tax expense | $ | 1,815 |
| $ | 1,271 |
| $ | 1,268 |
| $ | 698 |
| $ | 1,238 |
| $ | 111 |
|
| Deferred tax expense (benefit) | | | | |
Federal 3 | $ | (323 | ) | $ | 1,027 |
| $ | (1,255 | ) | $ | 52 |
| $ | (318 | ) | $ | 1,499 |
|
| State and local | (7 | ) | 56 |
| (10 | ) | 19 |
| (32 | ) | 85 |
|
| Foreign | (200 | ) | (150 | ) | 6 |
| (299 | ) | (79 | ) | (171 | ) |
| Total deferred tax expense (benefit) | $ | (530 | ) | $ | 933 |
| $ | (1,259 | ) | $ | (228 | ) | $ | (429 | ) | $ | 1,413 |
|
| Provision for income taxes | $ | 1,285 |
| $ | 2,204 |
| $ | 9 |
| |
| Net income | $ | 4,633 |
| $ | 595 |
| $ | 4,404 |
| |
| Provision for income taxes on continuing operations | | $ | 470 |
| $ | 809 |
| $ | 1,524 |
|
| Income (loss) from continuing operations, net of tax | | $ | (1,717 | ) | $ | 2,940 |
| $ | (1,287 | ) |
| |
| 1. | InThe 2019 amount includes approximately $1.4 billion of expense related to goodwill impairment and environmental matters. The 2017 the domestic componentamount includes approximately $1.4 billion of "Income before income taxes" included approximately $308 million ($2.1 billion in 2016)expense related to goodwill impairment and the foreign component contained $562 million (zero in 2016) of income from portfolio actions.litigation settlements. See Notes 514 and 617 for additional information. |
| |
| 2. | In 2017, the domestic component of "Income before income taxes" includedThe 2019 amount includes approximately $2.7$1.8 billion of expense related to a goodwill impairment, non-qualified pension plan change in control charges and litigation settlements. In 2016, the domestic component of "Income before income taxes" included approximately $2.6 billion of expensesSadara related to the urethane matters class action lawsuit and opt-out cases settlements, asbestos-related charge and charges for environmental matters.charges. See NotesNote 13 16 and 19 for additional information. |
| |
| 3. | The 2018 and 2017 amounts reflect the tax impact of The Act which accelerated the utilization of tax credits and required remeasurement of all U.S. deferred tax assets and liabilities. The 2016 amount reflects the tax impact of accrued one-time items and reduced domestic income which limited the utilization of tax credits. |
In 2017, as a result of the Merger and subsequent change in the Company's ownership, certain net operating loss carryforwards available for the Company’s consolidated German tax group were derecognized. In addition, the sale of stock between two consolidated subsidiaries in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the Intended Business Separations.business separations. As a result, in 2017, the Company recorded a charge of $267 million to “Provision for income taxes”taxes on continuing operations” in the consolidated statements of income.
| | | Reconciliation to U.S. Statutory Rate | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| Statutory U.S. federal income tax rate | 21.0 | % | 35.0 | % | 35.0 | % | 21.0 | % | 21.0 | % | 35.0 | % |
| Equity earnings effect | (2.1 | ) | (4.2 | ) | (1.2 | ) | (3.2 | ) | (3.3 | ) | (52.7 | ) |
Foreign income taxed at rates other than the statutory U.S. federal income tax rate 1 | 5.2 |
| (15.9 | ) | (7.0 | ) | (14.8 | ) | 6.7 |
| (61.2 | ) |
| U.S. tax effect of foreign earnings and dividends | (0.5 | ) | (1.6 | ) | (4.6 | ) | 1.9 |
| (0.7 | ) | (8.4 | ) |
| Unrecognized tax benefits | 0.1 |
| 1.1 |
| (0.8 | ) | 1.0 |
| 0.2 |
| 13.5 |
|
Acquisitions, divestitures and ownership restructuring activities 2 | 0.3 |
| 11.7 |
| (21.2 | ) | |
| Impact of U.S. tax reform | (2.1 | ) | 32.7 |
| — |
| |
Divestitures 2 | | — |
| 0.8 |
| 142.0 |
|
Impact of tax reform 3 | | 11.1 |
| (3.4 | ) | 367.8 |
|
Federal tax accrual adjustment 4 | | 10.4 |
| — |
| — |
|
| State and local income taxes | 0.4 |
| 3.2 |
| 0.2 |
| (4.4 | ) | 0.4 |
| 11.4 |
|
| Goodwill impairment | — |
| 19.2 |
| — |
| |
Excess tax benefits from stock-based compensation 3 | (0.9 | ) | (3.5 | ) | — |
| |
Sadara related charges 5 | | (29.5 | ) | — |
| — |
|
Goodwill impairment 6 | | (17.5 | ) | — |
| 220.8 |
|
| Excess tax benefits from stock-based compensation | | 1.2 |
| (1.0 | ) | (39.7 | ) |
| Other - net | 0.3 |
| 1.0 |
| (0.2 | ) | (14.9 | ) | 0.9 |
| 14.5 |
|
| Effective Tax Rate | 21.7 | % | 78.7 | % | 0.2 | % | (37.7 | )% | 21.6 | % | 643.0 | % |
| |
| 1. | Includes the impact of valuation allowances in foreign jurisdictions. |
| |
| 2. | See Notes 5 andNote 6 for additional information. |
| |
| 3. | ReflectsIncludes the impact of tax reform in Switzerland and the adoption of ASU 2016-09, "Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting," which was adopted January 1, 2017, and resulted in the recognition of excess tax benefitsU.S. |
| |
| 4. | Primarily related to stock-based compensationthe favorable impact of the restoration of tax basis in "Provisionassets, driven by a recent court judgment that did not involve the Company. |
| |
| 5. | See Note 13 for income taxes."additional information. |
| |
| 6. | See Note 14 for additional information. |
On December 22, 2017, 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 on earnings of certain foreign subsidiaries that were previously deferred, created new provisions related to foreign sourced earnings, eliminated the domestic manufacturing deduction and moved to a hybrid territorial system. At December 31, 2017, the Company had not completed its accounting for the tax effects of The Act; however, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118, income tax effects of The Act were refined upon obtaining, preparing, and analyzing additional information during the measurement period. 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. The Company recorded a cumulative benefit of $81 million ($79 million benefit in 2018 and $2 million benefit in 2017) to “Provision for income taxes on continuing operations” in the consolidated statements of income with respect to the remeasurement of the Company's deferred tax balances.
The Act required a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits, which resulted in a one-time transition tax. The Company recorded a cumulative charge of $789 million ($85 million benefit in 2018 and $874 million charge in 2017) to "Provision for income taxes on continuing operations" in the consolidated statements of income with respect to the one-time transition tax.
In 2018, the Company recorded an indirect impact of The Act related to prepaid tax on the intercompany sale of inventory. The amount recorded related to inventory was a charge of $38 million to "Provision for income taxes on continuing operations" in the consolidated statements of income.
For tax years beginning after December 31, 2017, The Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). The Company has made the policy election to record any liability associated with GILTI in the period in which it is incurred.
| | | Deferred Tax Balances at Dec 31 | 2018 | 2017 | 2019 | 2018 |
| In millions | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities | Assets | Liabilities |
| Property | $ | 460 |
| $ | 2,550 |
| $ | 508 |
| $ | 2,474 |
| $ | 494 |
| $ | 3,177 |
| $ | 406 |
| $ | 2,519 |
|
| Tax loss and credit carryforwards | 2,244 |
| — |
| 1,734 |
| — |
| 1,920 |
| — |
| 2,079 |
| — |
|
| Postretirement benefit obligations | 2,226 |
| 213 |
| 2,442 |
| 136 |
| 2,432 |
| 210 |
| 2,115 |
| 143 |
|
| Other accruals and reserves | 1,250 |
| 110 |
| 1,251 |
| 146 |
| 1,678 |
| 43 |
| 1,220 |
| 151 |
|
| Intangibles | 151 |
| 942 |
| 176 |
| 1,010 |
| 120 |
| 688 |
| 157 |
| 954 |
|
| Inventory | 68 |
| 163 |
| 35 |
| 171 |
| 28 |
| 234 |
| 53 |
| 239 |
|
| Investments | 181 |
| 60 |
| 272 |
| 158 |
| 125 |
| 48 |
| 190 |
| 84 |
|
| Other – net | 587 |
| 442 |
| 420 |
| 414 |
| 851 |
| 120 |
| 620 |
| 247 |
|
| Subtotal | $ | 7,167 |
| $ | 4,480 |
| $ | 6,838 |
| $ | 4,509 |
| $ | 7,648 |
| $ | 4,520 |
| $ | 6,840 |
| $ | 4,337 |
|
| Valuation allowances | (1,320 | ) | — |
| (1,371 | ) | — |
| (1,262 | ) | — |
| (1,225 | ) | — |
|
| Total | $ | 5,847 |
| $ | 4,480 |
| $ | 5,467 |
| $ | 4,509 |
| $ | 6,386 |
| $ | 4,520 |
| $ | 5,615 |
| $ | 4,337 |
|
| | | Operating Loss and Tax Credit Carryforwards at Dec 31 | 2018 | 2017 | 2019 | 2018 |
| In millions | Assets | Assets | Assets | Assets |
| Operating loss carryforwards | | | | |
| Expire within 5 years | $ | 268 |
| $ | 246 |
| $ | 263 |
| $ | 245 |
|
| Expire after 5 years or indefinite expiration | 1,319 |
| 1,305 |
| 1,133 |
| 1,196 |
|
| Total operating loss carryforwards | $ | 1,587 |
| $ | 1,551 |
| $ | 1,396 |
| $ | 1,441 |
|
| Tax credit carryforwards | | | | |
| Expire within 5 years | $ | 32 |
| $ | 39 |
| $ | 32 |
| $ | 32 |
|
| Expire after 5 years or indefinite expiration | 625 |
| 144 |
| 492 |
| 606 |
|
| Total tax credit carryforwards | $ | 657 |
| $ | 183 |
| $ | 524 |
| $ | 638 |
|
| Total operating loss and tax credit carryforwards | $ | 2,244 |
| $ | 1,734 |
| $ | 1,920 |
| $ | 2,079 |
|
Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $6,800$6,851 million at December 31, 20182019 and $7,052$6,014 million at December 31, 2017.2018. The Act imposed U.S. tax on all post-1986 foreign unrepatriated earnings accumulated through December 31, 2017. Unrepatriated earnings generated after December 31, 2017, are now subject to tax in the current year. All undistributed earnings are still subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply. It is not practicable to calculate the unrecognized deferred tax liability on undistributed earnings.
The following table provides a reconciliation of the Company's unrecognized tax benefits:
|
| | | | | | | | | |
| Total Gross Unrecognized Tax Benefits | | | |
| In millions | 2018 | 2017 | 2016 |
| Total unrecognized tax benefits at Jan 1 | $ | 253 |
| $ | 231 |
| $ | 280 |
|
| Decreases related to positions taken on items from prior years | (7 | ) | (4 | ) | (12 | ) |
Increases related to positions taken on items from prior years 1 | 68 |
| 37 |
| 153 |
|
Increases related to positions taken in the current year 2 | 2 |
| 10 |
| 135 |
|
Settlement of uncertain tax positions with tax authorities 1 | — |
| (12 | ) | (325 | ) |
| Decreases due to expiration of statutes of limitations | (1 | ) | (9 | ) | — |
|
| Foreign exchange gain | (2 | ) | — |
| — |
|
| Total unrecognized tax benefits at Dec 31 | $ | 313 |
| $ | 253 |
| $ | 231 |
|
| Total unrecognized tax benefits that, if recognized, would impact the effective tax rate | $ | 236 |
| $ | 243 |
| $ | 223 |
|
| Total amount of interest and penalties (benefit) recognized in "Provision for income taxes" | $ | (12 | ) | $ | 2 |
| $ | (55 | ) |
| Total accrual for interest and penalties recognized in the consolidated balance sheets | $ | 109 |
| $ | 110 |
| $ | 89 |
|
| |
1. | The 2016 balance includes the impact of a settlement agreement related to a historical change in the legal ownership structure of a nonconsolidated affiliate discussed below. |
| |
2. | The 2016 balance includes $126 million assumed in the Dow Silicones ownership restructure. |
|
| | | | | | | | | |
| Total Gross Unrecognized Tax Benefits | | | |
| In millions | 2019 | 2018 | 2017 |
| Total unrecognized tax benefits at Jan 1 | $ | 314 |
| $ | 255 |
| $ | 231 |
|
| Decreases related to positions taken on items from prior years | (1 | ) | (8 | ) | (4 | ) |
| Increases related to positions taken on items from prior years | 16 |
| 68 |
| 37 |
|
| Increases related to positions taken in the current year | 10 |
| 2 |
| 12 |
|
| Settlement of uncertain tax positions with tax authorities | (19 | ) | — |
| (12 | ) |
| Decreases due to expiration of statutes of limitations | — |
| (1 | ) | (9 | ) |
| Foreign exchange gain | (1 | ) | (2 | ) | — |
|
| Total unrecognized tax benefits at Dec 31 | $ | 319 |
| $ | 314 |
| $ | 255 |
|
| Total unrecognized tax benefits that, if recognized, would impact the effective tax rate | $ | 234 |
| $ | 235 |
| $ | 245 |
|
| Total amount of interest and penalties (benefit) recognized in "Provision for income taxes on continuing operations" | $ | (11 | ) | $ | (12 | ) | $ | 2 |
|
| Total accrual for interest and penalties recognized in the consolidated balance sheets | $ | 100 |
| $ | 109 |
| $ | 110 |
|
On January 9, 2017, the U.S. Supreme Court denied certiorari in the Company’s tax treatment of partnerships and transactions associated with Chemtech, a wholly owned subsidiary. The Company has fully accrued the position and does not expect a future impact to “Provision for income taxes”taxes on continuing operations” in the consolidated statements of income as a result of the ruling.
In
Prior to the fourth quarter of 2016, a settlement of $206 million was reached on a tax matter associated with a historical change in the legal ownership structure of a nonconsolidated affiliate. As a result of the settlement, the Company recorded a charge of $13 million to “Provision for income taxes” in the consolidated statements of income.
Dowseparation, TDCC and its consolidated subsidiaries arewere 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 will be apportioned among the members of the consolidated group based on each member’s separate taxable income. DowTDCC and DuPont 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 sharing agreement and/or tax matters agreement. At December 31, 2019, the Company had a receivable of $312 million as part of the tax sharing agreement, which is included in "Noncurrent receivables" in the consolidated balance sheets. At December 31, 2018, the Company had a receivable related to the tax sharing agreement of $89 million, included in "Accounts and notes receivable - Other" in the consolidated balance sheets.
Each year, the Company files 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.
Tax years that remain subject to examination for the Company’s major tax jurisdictions are shown below:
|
| |
Tax Years Subject to Examination by Major Tax Jurisdiction at Dec 31, 20182019 | Earliest Open Year |
| Jurisdiction |
| Argentina | 20112013 |
| Brazil | 2006 |
| Canada | 2012 |
| China | 20082009 |
| Germany | 20092010 |
| Italy | 20132015 |
| The Netherlands | 2016 |
| Switzerland | 20122016 |
| United States: | |
| Federal income tax | 2004 |
| State and local income tax | 2004 |
The reserve for non-income tax contingencies related to issues in the United States and foreign locations was $91$44 million at December 31, 2018 and $1102019 ($91 million at December 31, 2017.2018). This is management’s best estimate of the potential liability for non-income tax contingencies. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions’ tax court systems. It is the opinion of the Company’s management that the possibility is remote that costs in excess of those accrued will have a material impact on the Company’s consolidated financial statements.
NOTE 10 - EARNINGS PER SHARE CALCULATIONS
The following tables provide earnings per share calculations of Dow Inc. for the years ended December 31, 2019, 2018, and 2017. In accordance with the accounting guidance for earnings per share, earnings per share of TDCC is not presented as this information is not required in financial statements of wholly owned subsidiaries.
|
| | | | | | | | | |
| Net Income (Loss) for Earnings Per Share Calculations | 2019 | 2018 | 2017 |
| In millions |
| Income (loss) from continuing operations, net of tax | $ | (1,717 | ) | $ | 2,940 |
| $ | (1,287 | ) |
| Net income attributable to noncontrolling interests - continuing operations | (74 | ) | (102 | ) | (102 | ) |
Net income attributable to participating securities - continuing operations 1 | (6 | ) | — |
| (8 | ) |
| Income (loss) from continuing operations attributable to common stockholders | $ | (1,797 | ) | $ | 2,838 |
| $ | (1,397 | ) |
| Income from discontinued operations, net of tax | $ | 445 |
| $ | 1,835 |
| $ | 1,882 |
|
| Net income attributable to noncontrolling interests - discontinued operations | (13 | ) | (32 | ) | (28 | ) |
Net income attributable to participating securities - discontinued operations 1 | — |
| — |
| (6 | ) |
| Income from discontinued operations attributable to common stockholders | $ | 432 |
| $ | 1,803 |
| $ | 1,848 |
|
| Net income (loss) attributable to common stockholders | $ | (1,365 | ) | $ | 4,641 |
| $ | 451 |
|
|
| | | | | | | | | |
| Earnings Per Share Calculations - Basic | 2019 | 2018 | 2017 |
| Dollars per share |
| Income (loss) from continuing operations attributable to common stockholders | $ | (2.42 | ) | $ | 3.80 |
| $ | (1.88 | ) |
| Income from discontinued operations, net of tax | 0.58 |
| 2.41 |
| 2.48 |
|
| Net income (loss) attributable to common stockholders | $ | (1.84 | ) | $ | 6.21 |
| $ | 0.60 |
|
|
| | | | | | | | | |
| Earnings Per Share Calculations - Diluted | 2019 | 2018 | 2017 |
| Dollars per share |
| Income (loss) from continuing operations attributable to common stockholders | $ | (2.42 | ) | $ | 3.80 |
| $ | (1.88 | ) |
| Income from discontinued operations, net of tax | 0.58 |
| 2.41 |
| 2.48 |
|
| Net income (loss) attributable to common stockholders | $ | (1.84 | ) | $ | 6.21 |
| $ | 0.60 |
|
|
| | | | | | |
| Share Count Information | 2019 | 2018 | 2017 |
| Shares in millions |
Weighted-average common shares - basic 2, 3 | 742.5 |
| 747.2 |
| 744.8 |
|
| Plus dilutive effect of equity compensation plans | — |
| — |
| — |
|
Weighted-average common shares - diluted 2, 3, 4 | 742.5 |
| 747.2 |
| 744.8 |
|
Stock options and restricted stock units excluded from EPS calculations 5 | 20.8 |
| — |
| 1.1 |
|
| |
| 1. | Restricted stock units (formerly termed deferred stock) are considered participating securities due to the Company's practice of paying dividend equivalents on unvested shares. |
| |
| 2. | Share amounts for the year ended December 31, 2018 were based on 2,246.3 million DowDuPont common shares outstanding as of the Record Date for the April 1, 2019 distribution, less 4.6 million Employee Stock Ownership Plan ("ESOP") shares that had not been released and were not considered outstanding, adjusted for the Distribution Ratio. There was no dilutive effect for the year ended December 31, 2018 as the Company did not engage in activities giving rise to dilution. |
| |
| 3. | Share amounts for the year ended December 31, 2017 were based on 2,246.3 million DowDuPont common shares outstanding as of the Record Date for the April 1, 2019 distribution, less 4.6 million ESOP shares that had not been released and were not considered outstanding, adjusted for the Distribution Ratio and further adjusted by 2.4 million shares for the effect of TDCC basic common shares outstanding during the pre-Merger period. The year ended December 31, 2017 reflected a loss from continuing operations, and as such, the basic share count was used for purposes of calculating earnings per share on a diluted basis. |
| |
| 4. | The year ended December 31, 2019 reflected a loss from continuing operations, and as such, the basic share count was used for purposes of calculating earnings per share on a diluted basis. |
| |
| 5. | These outstanding options to purchase shares of common stock and restricted stock units were excluded from the calculation of diluted earnings per share because the effect of including them would have been antidilutive. For the year ended December 31, 2018, the Company did not engage in activities giving rise to dilution. |
NOTE 11 – INVENTORIES
The following table provides a breakdown of inventories:
|
| | | | | | |
| Inventories at Dec 31 | | |
| In millions | 2019 | 2018 |
| Finished goods | $ | 3,505 |
| $ | 4,313 |
|
| Work in process | 1,122 |
| 1,335 |
|
| Raw materials | 628 |
| 674 |
|
| Supplies | 845 |
| 826 |
|
| Total | $ | 6,100 |
| $ | 7,148 |
|
| Adjustment of inventories to a LIFO basis | 114 |
| (249 | ) |
| Total inventories | $ | 6,214 |
| $ | 6,899 |
|
|
| | | | | | |
| Inventories at Dec 31 | | |
| In millions | 2018 | 2017 |
| Finished goods | $ | 5,640 |
| $ | 5,213 |
|
| Work in process | 2,214 |
| 1,747 |
|
| Raw materials | 941 |
| 898 |
|
| Supplies | 880 |
| 848 |
|
| Total | $ | 9,675 |
| $ | 8,706 |
|
| Adjustment of inventories to a LIFO basis | (415 | ) | (330 | ) |
| Total inventories | $ | 9,260 |
| $ | 8,376 |
|
NOTE 1112 – PROPERTY
The following table provides a breakdown of property:
|
| | | | | | | | |
| Property at Dec 31 | Estimated Useful Lives (Years) | 2019 | 2018 |
| In millions |
| Land and land improvements | 0-25 |
| $ | 2,177 |
| $ | 2,059 |
|
| Buildings | 5-50 |
| 4,742 |
| 4,745 |
|
| Machinery and equipment | 3-25 |
| 40,651 |
| 40,250 |
|
| Other property | 3-50 |
| 5,354 |
| 5,084 |
|
| Construction in progress | — |
| 1,986 |
| 1,846 |
|
| Total property | | $ | 54,910 |
| $ | 53,984 |
|
|
| | | | | | | | |
| Property at Dec 31 | Estimated Useful Lives (Years) | 2018 | 2017 |
| In millions |
| Land and land improvements | 0-25 |
| $ | 2,557 |
| $ | 2,535 |
|
| Buildings | 5-50 |
| 6,067 |
| 5,920 |
|
| Machinery and equipment | 3-25 |
| 45,133 |
| 43,208 |
|
| Other property | 3-50 |
| 5,414 |
| 5,277 |
|
| Construction in progress | — |
| 2,266 |
| 3,486 |
|
| Total property | | $ | 61,437 |
| $ | 60,426 |
|
|
| | | | | | | | | |
| In millions | 2019 | 2018 | 2017 |
| Depreciation expense | $ | 2,156 |
| $ | 2,174 |
| $ | 1,955 |
|
| Capitalized interest | $ | 80 |
| $ | 88 |
| $ | 240 |
|
|
| | | | | | | | | |
| In millions | 2018 | 2017 | 2016 |
| Depreciation expense | $ | 2,432 |
| $ | 2,329 |
| $ | 2,130 |
|
| Capitalized interest | $ | 88 |
| $ | 240 |
| $ | 243 |
|
NOTE 1213 – NONCONSOLIDATED AFFILIATES
The Company’s investments in companies accounted for using the equity method (“nonconsolidated affiliates”), by classification in the consolidated balance sheets, and dividends received from nonconsolidated affiliates are shown in the following tables:
| | | Investments in Nonconsolidated Affiliates at Dec 31 | 2018 1 | 2017 1 | 2019 1 | 2018 1 |
| In millions |
| Investment in nonconsolidated affiliates | $ | 3,823 |
| $ | 3,742 |
| $ | 1,404 |
| $ | 3,320 |
|
| Other noncurrent obligations | (495 | ) | (752 | ) | (80 | ) | — |
|
| Net investment in nonconsolidated affiliates | $ | 3,328 |
| $ | 2,990 |
| $ | 1,324 |
| $ | 3,320 |
|
| |
| 1. | The carrying amount of the Company’s investments in nonconsolidated affiliates at December 31, 2018,2019, was $10$51 million less than its share of the investees’ net assets, ($3239 million less at December 31, 2017)2018), exclusive of additional differences relating to EQUATE Petrochemical Company K.S.C.C. ("EQUATE"), Sadara and AFSI,AgroFresh Solutions Inc. ("AFSI"), which are discussed separately in the disclosures that follow. |
|
| | | | | | | | | |
| Dividends Received from Nonconsolidated Affiliates | 2019 | 2018 | 2017 1 |
| In millions |
| Dividends from nonconsolidated affiliates | $ | 1,020 |
| $ | 663 |
| $ | 654 |
|
|
| | | | | | | | | |
| Dividends Received from Nonconsolidated Affiliates | 2018 | 2017 1 | 2016 |
| In millions |
| Dividends from nonconsolidated affiliates | $ | 908 |
| $ | 865 |
| $ | 685 |
|
| |
| 1. | Includes a non-cash dividend of $8$7 million. |
Except for AFSI, the nonconsolidated affiliates in which the Company has investments are privately held companies; therefore, quoted market prices are not available.
Dow SiliconesSadara
In 2011, the Company and the HSC Group
AsSaudi Arabian Oil Company formed Sadara - a result of the Dow Silicones ownership restructure, Dow Silicones, previously a 50:50 joint venture between Dowthe two companies that subsequently constructed and Corning, becamenow operates a wholly owned subsidiaryworld-scale, fully integrated chemicals complex in Jubail Industrial City, Kingdom of Dow as of June 1, 2016.Saudi Arabia. The Company'sCompany has a 35 percent equity interest in this joint venture and has been, and continues to be, responsible for marketing the majority of Sadara’s products through the Company’s established sales channels.
In 2017, Sadara achieved full commercial operations of all its facilities. In December 2018, the joint venture successfully completed its Creditors Reliability Test, an extensive operational testing program designed to demonstrate the reliability of the joint venture’s full chemical complex by operating at high rates for an extended period of time. While Sadara has reached these operational milestones and has been generating positive EBITDA (a non-GAAP measure defined as earnings before interest, taxes, depreciation and amortization), the joint venture has yet to report positive net income. During the fourth quarter of 2019, Sadara tested its long-lived assets for impairment using long-term cash flow projections. Sadara’s U.S. GAAP impairment test utilized an undiscounted cash flow methodology, under which Sadara concluded its long-lived assets were recoverable. Due to Sadara's financial condition and its long-lived asset impairment test, Dow Silicones,evaluated its equity method investment in Sadara for other-than-temporary impairment. The Company utilized a discounted cash flow methodology to measure the estimated fair value of its investment in Sadara, which was previously classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets, was remeasuredestimated to fair value. Seebe zero (see Note 524 for additional information on the Dow Silicones ownership restructure. Dow Silicones continuesfair value measurement). The Company determined the decline in value of its investment in Sadara was other-than-temporary due to maintain equity interestsSadara’s financial performance since becoming commercially operational in 2017 and uncertainty around prospects for recovery in Sadara’s financial condition. In addition, the Company reserved certain accounts and notes receivable and accrued interest balances associated with Sadara due to uncertainty around the timing of collection. In total, the Company recorded a $1,755 million pretax charge in the HSC Group,fourth quarter of 2019 related to Sadara, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Packaging & Specialty Plastics ($370 million), Industrial Intermediates & Infrastructure ($1,168 million) and Corporate ($217 million).
At December 31, 2019, the Company’s investment in Sadara was $1,705 million less than Dow’s proportionate share of the carrying value of the underlying net assets held by Sadara. This basis difference is attributed to the long-lived assets of Sadara and will be amortized over a period of 22 years as Sadara recognizes the associated depreciation expense, which includes Hemlock Semiconductor L.L.C.represents the estimated remaining useful lives of Sadara’s long-lived assets. Due to the potential for Dow to continue providing financial support to Sadara, the Company expects to continue to recognize its share of potential future losses reported by Sadara.
Prior to the impairment of the Company’s investment in Sadara and DC HSC Holdings LLC. reserve of certain notes receivable at December 31, 2019, the Company loaned $473 million to Sadara and converted $380 million of the notes and accounts receivable into equity during 2019. In 2018, the Company converted $382 million of outstanding notes and accounts receivable with Sadara into equity, primarily due to a shareholder loan reduction agreement with Sadara. In 2017, the Company loaned $735 million to Sadara and converted $718 million to equity. At December 31, 2019 and 2018, the Company's note receivable with Sadara was 0. Potential future loans and investments will continue to be subject to evaluation for reserve and impairments.
EQUATE
The Company had a negative investment balance in Hemlock Semiconductor L.L.C. was $495EQUATE of $80 million at December 31, 2018 ($752 million at December 31, 2017).
EQUATE
2019, classified as "Other noncurrent obligations" in the consolidated balance sheets. At December 31, 2018, the Company had an investment balance in EQUATE of $131 million, ($42 million at December 31, 2017), which is classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets. The Company's investment in EQUATE was $502$489 million less than the Company's proportionate share of EQUATE's underlying net assets at December 31, 20182019 ($516502 million less at December 31, 2017)2018), which represents the difference between the fair values of certain MEGlobal assets acquired by EQUATE and the Company's related valuation on a U.S. GAAP basis. A basis difference of $184$169 million at December 31, 20182019 ($200184 million at December 31, 2017)2018) is being amortized over the remaining useful lives of the assets and the remainder is considered a permanent difference.
AFSI
On JulyAt December 31, 2015,2019, the Company sold its AgroFresh business to AFSI. Proceeds received on the divestiturehad an investment in AFSI of AgroFresh included 17.5$35 million common shares of AFSI, which were valued($48 million at $210 million and represented an approximate 35 percent ownership interest in AFSI. Based on the December 31, 2016 closing stock price of AFSI, the value of this investment would have been lower than the carrying value by $143 million. In the fourth quarter of 2016, the Company determined the decline2018), classified as "Investment in market value of AFSI was other-than-temporary and recognized a $143 million pretax impairment charge related to its equity interest in AFSI. The impairment charge was included in "Restructuring, goodwill impairment and asset related charges - net"nonconsolidated affiliates" in the consolidated statements of income.balance sheets. At December 31, 2018,2019, the Company's investment in AFSI was $101$102 million less than the Company's proportionate share of AFSI's underlying net assets ($92101 million less at December 31, 2017)2018). This amount primarily relates to thean other-than-temporary decline in the Company's investment in AFSI.
On April 4, 2017, the Company and AFSI revised certain agreements related to the divestiture of the AgroFresh business and Dow entered into a stock purchase agreement to purchase up to 5,070,358 shares of AFSI's common stock, which represented approximately 10 percent of AFSI's common stock outstanding at signing of the agreement, subject to certain terms and conditions. On November 19, 2018, the stock purchase agreement concluded. At December 31, 2018,2019, the Company held a 4241 percent ownership interest in AFSI (36(42 percent at December 31, 2017)2018). See Notes 22 and 23Note 25 for furtheradditional information on this investment.
Sadara
The Company and Saudi Arabian Oil Company formed Sadara Chemical Company ("Sadara") to build and operate a world-scale, fully integrated chemicals complex in Jubail Industrial City, Kingdom97
Table of Saudi Arabia. Sadara achieved its first polyethylene production in December 2015 and announced the start-up of its mixed feed cracker and a third polyethylene train (which added to the two polyethylene trains already in operation) in August 2016. Sadara achieved successful startup of its remaining production units in 2017. In 2018, the Company entered into a shareholder loan reduction agreement with Sadara and converted $312 million of the remaining loan and accrued interest balance into equity. At December 31, 2018, the Company's note receivable with Sadara was zero. In addition, in the fourth quarter of 2018, the Company waived $70 million of accounts receivable with Sadara, which was converted into equity. In 2017, the Company loaned $735 million to Sadara and converted $718 million into equity, and had a note receivable from Sadara of $275 million at December 31, 2017, included in "Noncurrent receivables" in the consolidated balance sheets.Contents
Transactions with Nonconsolidated Affiliates
The Company has service agreements with certain nonconsolidated affiliates, including contracts to manage the operations of manufacturing sites and the construction of new facilities; licensing and technology agreements; and marketing, sales, purchase, lease and sublease agreements.
The Company sells excess ethylene glycol produced at Dow's manufacturing facilities in the United States and Europe to MEGlobal, a subsidiary of EQUATE. The Company also sells ethylene to MEGlobal as a raw material for its ethylene glycol plants in Canada. Sales of these products to MEGlobal represented 1 percent of total net sales in 2019, 2018 2017 and 2016.
Dow Silicones supplies trichlorosilane, a raw material used2017. Sales of ethylene to MEGlobal are reflected in the production of polycrystalline silicon, to the HSC Group. Sales of this material to the HSC GroupPackaging & Specialty Plastics segment and represented less than 1 percent of total netthe segment's sales in 2019, 2018 and 2017. Sales of ethylene glycol to MEGlobal are reflected in the Industrial Intermediates & Infrastructure segment and represented 1 percent of the segment's sales in 2019, and 2 percent of the segment's sales in 2018 and 2017. Sales of this material to the HSC Group for the period of June 1, 2016 through December 31, 2016 represented less than 1 percent of total net sales in 2016.
DowThe Company is responsible for marketing the majority of Sadara products outside of the Middle East zone through the Company’s established sales channels. Under this arrangement, the Company purchases and sells Sadara products for a marketing fee. Purchases of Sadara products represented 8 percent of "Cost of sales" in 2018 (32019 (9 percent in 20172018 and not material4 percent in 2016)2017).
DowThe Company purchases products from The SCG-Dow Group, primarily for marketing and distribution in Asia Pacific. Purchases of products from The SCG-Dow Group represented 2 percent of "Cost of sales" in 20182019 (2 percent in 20172018 and 3 percent in 2016)2017).
Sales to and purchases from other nonconsolidated affiliates were not material to the consolidated financial statements.
Balances due to or due from nonconsolidated affiliates at December 31, 20182019 and 20172018 were as follows:
|
| | | | | | |
| Balances Due To or Due From Nonconsolidated Affiliates at Dec 31 | 2019 | 2018 |
| In millions |
| Accounts and notes receivable - Other | $ | 211 |
| $ | 556 |
|
| Noncurrent receivables | — |
| 8 |
|
| Total assets | $ | 211 |
| $ | 564 |
|
| Accounts payable - Other | $ | 1,092 |
| $ | 1,347 |
|
|
| | | | | | |
| Balances Due To or Due From Nonconsolidated Affiliates at Dec 31 | 2018 | 2017 |
| In millions |
| Accounts and notes receivable - Other | $ | 562 |
| $ | 474 |
|
| Noncurrent receivables | 8 |
| 283 |
|
| Total assets | $ | 570 |
| $ | 757 |
|
| Accounts payable - Other | $ | 1,328 |
| $ | 1,260 |
|
Principal Nonconsolidated Affiliates
DowThe Company had an ownership interest in 5137 nonconsolidated affiliates at December 31, 2018 (532019 (38 at December 31, 2017)2018). The Company's principal nonconsolidated affiliates and its ownership interest (direct and indirect) for each at December 31, 2019, 2018 2017 and 20162017 are as follows:
|
| | | | | | | |
| Principal Nonconsolidated Affiliates at Dec 31 | Country | Ownership Interest |
| | 2019 | 2018 | 2017 |
| EQUATE Petrochemical Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| The Kuwait Olefins Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| The Kuwait Styrene Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
Map Ta Phut Olefins Company Limited 1 | Thailand | 32.77 | % | 32.77 | % | 32.77 | % |
| Sadara Chemical Company | Saudi Arabia | 35 | % | 35 | % | 35 | % |
| The SCG-Dow Group: | | | | |
| Siam Polyethylene Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Polystyrene Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Styrene Monomer Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Synthetic Latex Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
|
| | | | | | | |
| Principal Nonconsolidated Affiliates at Dec 31 | Country | Ownership Interest |
| | 2018 | 2017 | 2016 |
| EQUATE Petrochemical Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| The HSC Group: | | | | |
DC HSC Holdings LLC 1 | United States | 50 | % | 50 | % | 50 | % |
| Hemlock Semiconductor L.L.C. | United States | 50.1 | % | 50.1 | % | 50.1 | % |
| The Kuwait Olefins Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| The Kuwait Styrene Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
Map Ta Phut Olefins Company Limited 2 | Thailand | 32.77 | % | 32.77 | % | 32.77 | % |
| Sadara Chemical Company | Saudi Arabia | 35 | % | 35 | % | 35 | % |
| The SCG-Dow Group: | | | | |
| Siam Polyethylene Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Polystyrene Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Styrene Monomer Co., Ltd. | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Synthetic Latex Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| |
| 1. | DC HSC Holdings LLC holds an 80.5 percent indirect ownership interest in Hemlock Semiconductor Operations LLC. |
| |
2. | The Company's effective ownership of Map Ta Phut Olefins Company Limited ("Map Ta Phut") is 32.77 percent, of which the Company directly owns 20.27 percent and indirectly owns 12.5 percent through its equity interest in Siam Polyethylene Company Limited. |
The Company’s investment in and equity earnings from its principal nonconsolidated affiliates are shown in the tables below:
|
| | | | | | |
| Investment in Principal Nonconsolidated Affiliates at Dec 31 | 2019 | 2018 |
| In millions |
| Investment in nonconsolidated affiliates | $ | 963 |
| $ | 2,876 |
|
| Other noncurrent obligations | (80 | ) | — |
|
| Net investment in principal nonconsolidated affiliates | $ | 883 |
| $ | 2,876 |
|
|
| | | | | | |
| Investment in Principal Nonconsolidated Affiliates at Dec 31 | 2018 | 2017 |
| In millions |
| Investment in nonconsolidated affiliates | $ | 3,411 |
| $ | 3,323 |
|
| Other noncurrent obligations | (495 | ) | (752 | ) |
| Net investment in principal nonconsolidated affiliates | $ | 2,916 |
| $ | 2,571 |
|
|
| | | | | | | | | |
| Equity Earnings from Principal Nonconsolidated Affiliates | 2019 | 2018 | 2017 |
| In millions |
| Equity in earnings of principal nonconsolidated affiliates | $ | 21 |
| $ | 561 |
| $ | 347 |
|
|
| | | | | | | | | |
| Equity Earnings from Principal Nonconsolidated Affiliates | 2018 | 2017 | 2016 1 |
| In millions |
| Equity in earnings of principal nonconsolidated affiliates | $ | 950 |
| $ | 701 |
| $ | 449 |
|
| |
1. | Equity in earnings of principal nonconsolidated affiliates for 2016 includes the results of Dow Silicones through May 31, 2016. |
The summarized financial information that follows represents the combined accounts (at 100 percent) of the principal nonconsolidated affiliates.
|
| | | | | | |
| Summarized Balance Sheet Information at Dec 31 | 2019 | 2018 |
| In millions |
| Current assets | $ | 5,302 |
| $ | 7,553 |
|
| Noncurrent assets | 26,477 |
| 25,971 |
|
| Total assets | $ | 31,779 |
| $ | 33,524 |
|
| Current liabilities | $ | 3,743 |
| $ | 5,163 |
|
| Noncurrent liabilities | 20,271 |
| 19,089 |
|
| Total liabilities | $ | 24,014 |
| $ | 24,252 |
|
| Noncontrolling interests | $ | 110 |
| $ | 72 |
|
|
| | | | | | |
| Summarized Balance Sheet Information at Dec 31 | 2018 | 2017 |
| In millions |
| Current assets | $ | 8,741 |
| $ | 8,039 |
|
| Noncurrent assets | 27,385 |
| 28,300 |
|
| Total assets | $ | 36,126 |
| $ | 36,339 |
|
| Current liabilities | $ | 5,706 |
| $ | 5,164 |
|
| Noncurrent liabilities | 20,807 |
| 22,240 |
|
| Total liabilities | $ | 26,513 |
| $ | 27,404 |
|
| Noncontrolling interests | $ | 332 |
| $ | 304 |
|
|
| | | | | | | | | |
Summarized Income Statement Information 1 | 2019 | 2018 | 2017 |
| In millions |
| Sales | $ | 10,905 |
| $ | 14,461 |
| $ | 11,629 |
|
| Gross profit | $ | 644 |
| $ | 2,320 |
| $ | 1,992 |
|
| Income (loss) from continuing operations, net of tax | $ | (277 | ) | $ | 1,173 |
| $ | 689 |
|
|
| | | | | | | | | |
Summarized Income Statement Information 1 | 2018 | 2017 | 2016 2 |
| In millions |
| Sales | $ | 15,619 |
| $ | 13,345 |
| $ | 12,003 |
|
| Gross profit | $ | 3,130 |
| $ | 2,461 |
| $ | 2,518 |
|
| Net income | $ | 1,943 |
| $ | 1,401 |
| $ | 831 |
|
| |
| 1. | The results in this table reflect purchase and sale activity between certain principal nonconsolidated affiliates and the Company, as previously discussed in the "Transactions with Nonconsolidated Affiliates" section. |
| |
2. | The summarized income statement information for 2016 includes the results of Dow Silicones through May 31, 2016. |
NOTE 1314 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows changes in the carrying amountamounts of goodwill by reportable segment for the years ended December 31, 20182019 and 2017:2018:
|
| | | | | | | | | | | | |
| Goodwill | Packaging & Specialty Plastics | Industrial Intermediates & Infrastructure | Performance Materials & Coatings | Total |
| In millions |
| Balance at Jan 1, 2018 | $ | 5,043 |
| $ | 1,101 |
| $ | 3,689 |
| $ | 9,833 |
|
| Foreign currency impact | (24 | ) | (6 | ) | (39 | ) | (69 | ) |
Measurement period adjustment - ECP 1 | 82 |
| — |
| — |
| 82 |
|
| Balance at Dec 31, 2018 | $ | 5,101 |
| $ | 1,095 |
| $ | 3,650 |
| $ | 9,846 |
|
| Foreign currency impact | 8 |
| 6 |
| (24 | ) | (10 | ) |
| Goodwill impairment | — |
| — |
| (1,039 | ) | (1,039 | ) |
| Other | — |
| (1 | ) | — |
| (1 | ) |
| Balance at Dec 31, 2019 | $ | 5,109 |
| $ | 1,100 |
| $ | 2,587 |
| $ | 8,796 |
|
1. Goodwill recognized from the receipt of the ECP businesses as part of the separation from DowDuPont. See Note 4 for additional information.
|
| | | |
| Goodwill |
| In millions |
| Balance at Jan 1, 2017 | $ | 15,272 |
|
Sale of SKC Haas Display Films 1 | (34 | ) |
Divestiture of the EAA Business 2 | (23 | ) |
Divestiture of the DAS Divested Ag Business 3 | (128 | ) |
Dissolution of joint venture 4 | 48 |
|
| Goodwill impairment | (1,491 | ) |
| Foreign currency impact | 299 |
|
| Other | (5 | ) |
| Balance at Dec 31, 2017 | $ | 13,938 |
|
| Foreign currency impact | (80 | ) |
| Other | (10 | ) |
| Balance at Dec 31, 2018 | $ | 13,848 |
|
| |
1. | On June 30, 2017, the Company sold its ownership interest in the SKC Haas Display Films group of companies. See Note 18 for additional information. |
| |
2. | On September 1, 2017, the Company divested its EAA Business to SK Global Chemical Co., Ltd. See Note 6 for additional information. |
| |
3. | On November 30, 2017, the Company divested the DAS Divested Ag Business to CITIC Agri Fund. See Note 6 for additional information. |
| |
4. | On December 31, 2017, the Company dissolved a crude acrylic acid joint venture. See Note 23 for additional information. |
Effective with the Merger, the Company updated its reporting units to align with the level at which discrete financial information is available for review by management. A relative fair value method was used to reallocate goodwill for reporting units of whichThe separation from DowDuPont did not impact the composition had changed. The newof the Company's six reporting units are: Agriculture,units: Coatings & Performance Monomers, Construction Chemicals, Consumer Solutions, Electronics & Imaging, Energy Solutions, Hydrocarbons & Energy, Industrial Biosciences, Industrial Solutions, Nutrition & Health, Packaging and Specialty Plastics and Polyurethanes & CAV, SafetyConstruction Chemicals. The ECP businesses received as part of the separation from DowDuPont are included in the Hydrocarbons & ConstructionEnergy and Transportation & Advanced Polymers.Packaging and Specialty Plastics reporting units. At December 31, 2017, goodwill was carried by all of these reporting units.
In 2018, the Energy Solutions and Construction Chemicals reporting units were combined into Industrial Solutions and Polyurethanes & CAV, respectively. At December 31, 2018,2019, goodwill was carried by all reporting units.units except Coatings & Performance Monomers (“C&PM”).
Goodwill Impairments
The carrying amounts of goodwill at December 31, 2018 and 2017,2019 were net of accumulated impairments of $1,920 million.$309 million in Industrial Intermediates & Infrastructure ($309 million at December 31, 2018) and $2,530 million in Performance Materials & Coatings ($1,491 million at December 31, 2018).
Goodwill Impairment Testing
The Company performs an impairment test of goodwill annually in the fourth quarter. In 2018,2019, the Company performed quantitative testing for 2 reporting units (11(1 in 20172018 and 34 in 2016)2017) and a qualitative assessment was performed for the remaining reporting units. The qualitative assessments indicated that it was not more likely than not that fair value was less than the carrying value for those reporting units included in the qualitative test.
The quantitative testing conducted in 2018 and 2016 concluded that no goodwill impairments existed.
Upon completion of the quantitative testing in the fourth quarter of 2017, the Company determined the Coatings & Performance MonomersC&PM reporting unit was impaired. Throughout 2017, the Coatings & Performance MonomersC&PM reporting unit did not consistently meet expected financial performance targets, primarily due to increasing commoditization in coatings markets and competition, as well as customer consolidation in end markets which reduced growth opportunities. As a result, the Coatings & Performance MonomersC&PM reporting unit lowered future revenue and profitability expectations. The fair value of the Coatings & Performance MonomersC&PM reporting unit was determined using a discounted cash flow methodology that reflected reductions in projected revenue growth rates, primarily driven by modified sales volume and pricing assumptions, as well as revised expectations for future growth rates. These discounted cash flows did not support the carrying value of the Coatings & Performance MonomersC&PM reporting unit. As a result, the Company recorded a goodwill impairment charge for the Coatings & Performance MonomersC&PM reporting unit of $1,491 million in the fourth quarter of 2017, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.income and related to the Performance Materials & Coatings segment. The Coatings & Performance MonomersC&PM reporting unit carried $1,071 million of goodwill at December 31, 2017. No other goodwill impairments were identified as a result of the 2017 testing.
Quantitative testing was performed on the C&PM reporting unit in the fourth quarter of 2018. The fair value of the reporting unit was determined using a discounted cash flow methodology that included plans to undertake modest, higher-return investments in several existing assets, improvements in cost performance and leveraging of technologies. While assessments supported a case for sustaining market growth consistent with GDP projections, the valuation also included adverse impacts related to increased customer purchasing leverage from ongoing customer consolidation. The resulting valuation was compared with the carrying value of the C&PM reporting and the Company concluded that no goodwill impairment existed.
Upon completion of the quantitative testing in the fourth quarter of 2019, the Company determined the C&PM reporting unit was impaired. During 2019, the C&PM reporting unit did not consistently meet expected financial performance targets, primarily due to the industry’s increased captive use of coatings products, which led to volume reductions; reduced margins for products across the portfolio due to changes in customer buying patterns and supply and demand balances; as well as a continuous trend of customer consolidation in end markets, which reduced growth opportunities. As a result, the C&PM reporting unit lowered its future revenue and profitability projections. The fair value of the C&PM reporting unit was determined using a discounted cash flow methodology that reflected reductions in projected revenue growth rates due to lower sales volume and price assumptions, as well as reductions to future growth rates. These discounted cash flows did not support the carrying value of the C&PM reporting unit. As a result, the Company recorded a goodwill impairment charge of $1,039 million in the fourth quarter of 2019, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to the Performance Materials & Coatings segment. The carrying value of the C&PM reporting unit's goodwill was 0 at December 31, 2019. No other goodwill impairments were identified as a result of the 2019 testing.
Other Intangible Assets
The following table provides information regarding the Company’s other intangible assets:
|
| | | | | | | | | | | | | | | | | | |
| Other Intangible Assets at Dec 31 | 2019 | 2018 |
| In millions | Gross Carrying Amount | Accum Amort | Net | Gross Carrying Amount | Accum Amort | Net |
| Intangible assets with finite lives: | | | | | | |
| Developed technology | $ | 2,634 |
| $ | (1,467 | ) | $ | 1,167 |
| $ | 2,634 |
| $ | (1,252 | ) | $ | 1,382 |
|
| Software | 1,449 |
| (893 | ) | 556 |
| 1,404 |
| (805 | ) | 599 |
|
| Trademarks/tradenames | 352 |
| (342 | ) | 10 |
| 352 |
| (329 | ) | 23 |
|
| Customer-related | 3,207 |
| (1,184 | ) | 2,023 |
| 3,211 |
| (993 | ) | 2,218 |
|
| Total other intangible assets, finite lives | $ | 7,642 |
| $ | (3,886 | ) | $ | 3,756 |
| $ | 7,601 |
| $ | (3,379 | ) | $ | 4,222 |
|
| In-process research and development | 3 |
| — |
| 3 |
| 3 |
| — |
| 3 |
|
| Total other intangible assets | $ | 7,645 |
| $ | (3,886 | ) | $ | 3,759 |
| $ | 7,604 |
| $ | (3,379 | ) | $ | 4,225 |
|
|
| | | | | | | | | | | | | | | | | | |
| Other Intangible Assets at Dec 31 | 2018 | 2017 |
| In millions | Gross Carrying Amount | Accum Amort | Net | Gross Carrying Amount | Accum Amort | Net |
| Intangible assets with finite lives: | | | | | | |
| Developed technology | $ | 3,255 |
| $ | (1,934 | ) | $ | 1,321 |
| $ | 3,263 |
| $ | (1,690 | ) | $ | 1,573 |
|
| Software | 1,529 |
| (876 | ) | 653 |
| 1,420 |
| (780 | ) | 640 |
|
| Trademarks/tradenames | 688 |
| (631 | ) | 57 |
| 697 |
| (570 | ) | 127 |
|
| Customer-related | 4,911 |
| (2,151 | ) | 2,760 |
| 5,035 |
| (1,965 | ) | 3,070 |
|
| Other | 243 |
| (170 | ) | 73 |
| 245 |
| (156 | ) | 89 |
|
| Total other intangible assets, finite lives | $ | 10,626 |
| $ | (5,762 | ) | $ | 4,864 |
| $ | 10,660 |
| $ | (5,161 | ) | $ | 5,499 |
|
| In-process research and development ("IPR&D") | 49 |
| — |
| 49 |
| 50 |
| — |
| 50 |
|
| Total other intangible assets | $ | 10,675 |
| $ | (5,762 | ) | $ | 4,913 |
| $ | 10,710 |
| $ | (5,161 | ) | $ | 5,549 |
|
The following table provides information regarding amortization expense from continuing operations related to intangible assets:
|
| | | | | | | | | |
| Amortization Expense from Continuing Operations | 2019 | 2018 | 2017 |
| In millions |
| Other intangible assets, excluding software | $ | 419 |
| $ | 469 |
| $ | 400 |
|
Software 1 | $ | 96 |
| $ | 93 |
| $ | 82 |
|
| |
| 1. | Included in "Cost of sales" in the consolidated statements of income. |
|
| | | | | | | | | |
| Amortization Expense | 2018 | 2017 | 2016 |
| In millions |
| Other intangible assets, excluding software | $ | 622 |
| $ | 624 |
| $ | 544 |
|
| Software, included in “Cost of sales” | $ | 100 |
| $ | 87 |
| $ | 73 |
|
In the fourth quarter of 2017, the Company wrote-off $69 million of intangible assets (including $11 million of IPR&D) as part of the Synergy Program. In the second quarter of 2016, the Company wrote-off $11 million of IPR&D as part of the 2016 restructuring charge. These charges were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note 7 for additional information.
Total estimated amortization expense from continuing operations for the next five fiscal years, including amounts expected to be capitalized, is as follows:
|
| | | |
| Estimated Amortization Expense for Next Five Years |
| In millions |
| 2020 | $ | 492 |
|
| 2021 | $ | 472 |
|
| 2022 | $ | 411 |
|
| 2023 | $ | 380 |
|
| 2024 | $ | 364 |
|
|
| | | |
| Estimated Amortization Expense for Next Five Years |
| In millions |
| 2019 | $ | 648 |
|
| 2020 | $ | 614 |
|
| 2021 | $ | 585 |
|
| 2022 | $ | 516 |
|
| 2023 | $ | 488 |
|
NOTE 1415 – TRANSFERS OF FINANCIAL ASSETS
Accounts Receivable Securitization Facilities
The Company has historically sold trade accounts receivable of select North American entities and qualifying trade accounts receivable of select European entities on a revolving basis to certain multi-seller commercial paper conduit entities ("conduits"). The proceeds received arewere comprised of cash and interests in specified assets of the conduits (the receivables sold by the Company) that entitleentitled the Company to the residual cash flows of such specified assets in the conduits after the commercial paper hashad been repaid. Neither the conduits nor the investors in those entities havehad recourse to other assets of the Company in the event of nonpayment by the debtors.
In the fourth quarter of 2017, the Company suspended further sales of trade accounts receivable through these facilities and began reducing outstanding balances through collections of trade accounts receivable previously sold to such conduits. In September and October 2018, the North American and European facilities, respectively, were amended and the terms of the agreements changed from off-balance sheet arrangements to secured borrowing arrangements. See Note 1516 for additional information on the secured borrowing arrangements.
For the year ended December 31,In 2018, the Company recognized a loss of $7 million on the sale of these receivables ($25(loss of $25 million loss for the year ended December 31, 2017 and $20 million loss for the year ended December 31, 2016)in 2017), which is included in “Interest expense and amortization of debt discount” in the consolidated statements of income. There were no sales of receivables through these facilities in 2019.
The following table summarizes the carrying value of interests held, which represents the Company's maximum exposure to loss related to the receivables sold, and the percentage of anticipated credit losses related to the trade accounts receivable sold. Also provided is the sensitivity of the fair value of the interests held to hypothetical adverse changes in the anticipated credit losses; amounts shown below are the corresponding hypothetical decreases in the carrying value of interests.
|
| | | | | | |
| Interests Held at Dec 31 | | |
| In millions | 2018 | 2017 |
Carrying value of interests held 1 | $ | — |
| $ | 677 |
|
| Percentage of anticipated credit losses | — | % | 2.64 | % |
| Impact to carrying value - 10% adverse change | $ | — |
| $ | — |
|
| Impact to carrying value - 20% adverse change | $ | — |
| $ | 1 |
|
| |
1. | Included in "Accounts and notes receivable - other" in the consolidated balance sheets. |
Credit losses, net of any recoveries, on receivables sold were insignificant for the years ended December 31, 2018, 2017 and 2016.
Following is an analysis of certain cash flows between the Company and the conduits:
|
| | | | | | |
| Cash Proceeds | | |
| In millions | 2018 | 2017 |
| Sale of receivables | $ | — |
| $ | 1 |
|
| Collections reinvested in revolving receivables | $ | — |
| $ | 21,293 |
|
Interests in conduits 1 | $ | 657 |
| $ | 9,462 |
|
|
| | | | | | | | | |
| Cash Proceeds | | | |
| In millions | 2018 | 2017 | 2016 |
| Sale of receivables | $ | — |
| $ | 1 |
| $ | 1 |
|
| Collections reinvested in revolving receivables | $ | — |
| $ | 21,293 |
| $ | 21,652 |
|
Interests in conduits 1 | $ | 657 |
| $ | 9,462 |
| $ | 8,551 |
|
| |
| 1. | Presented in "Investing Activities" in the consolidated statements of cash flows in accordance with ASU 2016-15. See Notes 1 and 2 for additional information. In connection with the review and implementation of ASU 2016-15, the Company also changed the prior year value of “Interests in conduits” due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits, including additional guidance from the SEC's Office of the Chief Accountant issued in the third quarter of 2018 that indicated an entity must evaluate daily transaction activity to calculate the value of cash received from beneficial interests in conduits.flows. |
North America Accounts Receivable Program
72
Following isthe North America A/R Program, the Company may sell certain eligible trade accounts receivable, up to $900 million, at any point in time. The Company continues to service the receivables from the customer, but retains no interest in the receivables, and remits payment to the financial institutions. The Company also provides a guarantee to the financial institutions for the creditworthiness and collection of the receivables in satisfaction of the facility. See Note 17 for additional information related to guarantees. There were 0 receivables sold during the sale of receivables under these facilities:year ended December 31, 2019.
|
| | | | | | |
| Trade Accounts Receivable Sold at Dec 31 | | |
| In millions | 2018 | 2017 |
| Delinquencies on sold receivables still outstanding | $ | — |
| $ | 82 |
|
| Trade accounts receivable outstanding and derecognized | $ | — |
| $ | 612 |
|
In 2017, the Company repurchased $5 million of previously sold receivables.
NOTE 1516 – NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
|
| | | | | | |
| Notes Payable at Dec 31 | | |
| In millions | 2019 | 2018 |
| Commercial paper | $ | 151 |
| $ | 10 |
|
| Notes payable to banks and other lenders | 435 |
| 288 |
|
| Total notes payable | $ | 586 |
| $ | 298 |
|
| Year-end average interest rates | 6.30 | % | 8.28 | % |
|
| | | | | | |
| Notes Payable at Dec 31 | | |
| In millions | 2018 | 2017 |
| Commercial paper | $ | 10 |
| $ | 231 |
|
| Notes payable to banks and other lenders | 295 |
| 253 |
|
| Total notes payable | $ | 305 |
| $ | 484 |
|
| Year-end average interest rates | 8.61 | % | 4.42 | % |
|
| | | | | | | | | | |
| Long-Term Debt at Dec 31 | 2019 Average Rate | 2019 | 2018 Average Rate | 2018 |
| In millions |
| Promissory notes and debentures: | | | | |
| Final maturity 2019 | — | % | $ | — |
| 9.80 | % | $ | 7 |
|
| Final maturity 2020 | 8.44 | % | 76 |
| 4.46 | % | 1,547 |
|
| Final maturity 2021 | 8.95 | % | 174 |
| 4.71 | % | 1,424 |
|
| Final maturity 2022 | 3.50 | % | 1,372 |
| 3.50 | % | 1,373 |
|
| Final maturity 2023 | 7.64 | % | 325 |
| 7.64 | % | 325 |
|
| Final maturity 2024 | 3.37 | % | 1,397 |
| 3.50 | % | 896 |
|
| Final maturity 2025 and thereafter | 5.70 | % | 9,482 |
| 5.98 | % | 7,963 |
|
| Other facilities: | | | | |
| U.S. dollar loans, various rates and maturities | 2.55 | % | 2,000 |
| 3.59 | % | 4,533 |
|
| Foreign currency loans, various rates and maturities | 3.26 | % | 592 |
| 3.20 | % | 708 |
|
| InterNotes®, varying maturities through 2049 | 3.44 | % | 928 |
| 3.26 | % | 778 |
|
Finance lease obligations 1 | | 395 |
| | 371 |
|
| Unamortized debt discount and issuance costs | | (331 | ) | | (334 | ) |
Long-term debt due within one year 2 | | (435 | ) | | (338 | ) |
| Long-term debt |
|
| $ | 15,975 |
|
|
| $ | 19,253 |
|
|
| | | | | | | | | | |
| Long-Term Debt at Dec 31 | 2018 Average Rate | 2018 | 2017 Average Rate | 2017 |
| In millions |
| Promissory notes and debentures: | | | | |
| Final maturity 2018 | — | % | $ | — |
| 5.78 | % | $ | 339 |
|
| Final maturity 2019 | 9.80 | % | 7 |
| 8.55 | % | 2,122 |
|
| Final maturity 2020 | 4.46 | % | 1,547 |
| 4.46 | % | 1,547 |
|
| Final maturity 2021 | 4.71 | % | 1,424 |
| 4.71 | % | 1,424 |
|
| Final maturity 2022 | 3.50 | % | 1,373 |
| 3.50 | % | 1,373 |
|
| Final maturity 2023 | 7.64 | % | 325 |
| 7.64 | % | 325 |
|
| Final maturity 2024 and thereafter | 5.73 | % | 8,859 |
| 5.92 | % | 6,857 |
|
| Other facilities: | | | | |
| U.S. dollar loans, various rates and maturities | 3.59 | % | 4,533 |
| 2.44 | % | 4,564 |
|
| Foreign currency loans, various rates and maturities | 3.21 | % | 713 |
| 3.00 | % | 814 |
|
| Medium-term notes, varying maturities through 2025 | 3.26 | % | 778 |
| 3.20 | % | 873 |
|
| Tax-exempt bonds | — | % | — |
| 5.66 | % | 343 |
|
| Capital lease obligations | | 369 |
| | 282 |
|
| Unamortized debt discount and issuance costs | | (334 | ) | | (346 | ) |
Long-term debt due within one year 1 | | (340 | ) | | (752 | ) |
| Long-term debt |
|
| $ | 19,254 |
|
|
| $ | 19,765 |
|
| |
| 1. | See Note 18 for additional information. |
| |
| 2. | Presented net of current portion of unamortized debt issuance costs. |
|
| | | |
Maturities of Long-Term Debt for Next Five Years at Dec 31, 2018 1 |
| In millions |
| 2019 | $ | 340 |
|
| 2020 | $ | 1,833 |
|
| 2021 | $ | 6,247 |
|
| 2022 | $ | 1,510 |
|
| 2023 | $ | 480 |
|
|
| | | |
| Maturities of Long-Term Debt for Next Five Years at Dec 31, 2019 |
| In millions |
| 2020 | $ | 435 |
|
| 2021 | $ | 511 |
|
| 2022 | $ | 1,513 |
|
2023 1 | $ | 2,508 |
|
| 2024 | $ | 1,528 |
|
| |
| 1. | Assumes the option to extend a term loan facility relatedmaturity to 2023 will be exercised for the $2 billion Dow Silicones ownership restructure will be exercised.Term Loan Facility. |
2019 Activity
TableIn 2019, the Company issued $2 billion of Contentssenior unsecured notes in an offering under Rule 144A of the Securities Act of 1933. The offering included $750 million aggregate principal amount of 4.80 percent notes due 2049; $750 million aggregate principal amount of 3.625 percent notes due 2026; and $500 million aggregate principal amount of 3.15 percent notes due 2024. In addition, the Company redeemed $1.5 billion of 4.25 percent notes with maturity in 2020 and $1.25 billion of 4.125 percent notes with maturity in 2021. As a result, the Company recognized a pretax loss of $100 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income and related to the Corporate segment. The Company also issued an aggregate principal amount of $277 million of InterNotes®, and redeemed an aggregate principal amount of $122 million at maturity. Approximately $149 million of long-term debt (net of $16 million of issuances) was repaid by consolidated variable interest entities.
In 2019, Dow Silicones voluntarily repaid $2.5 billion of principal under a certain third party credit agreement ("Term Loan Facility"). As a result, Dow Silicones recognized a pretax loss of $2 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income and related to the Corporate segment. Dow Silicones also amended the Term Loan Facility to extend the maturity date on the remaining principal balance of $2 billion, making amounts borrowed under the Term Loan Facility payable in September 2021. In addition, this amendment includes options to extend the maturity date through September 2023, at Dow Silicones' election, which the Company intends to exercise.
In October 2019, TDCC launched exchange offers for $4 billion of all the outstanding, unregistered senior notes that were issued in private offerings on November 30, 2018 and May 20, 2019, for identical, registered notes under the Securities Act of 1933 (the “Exchange Offers”). The Exchange Offers are with respect to the Company’s 3.15 percent notes due 2024, 4.55 percent notes due 2025, 3.625 percent notes due 2026, 4.80 percent notes due 2028, 5.55 percent notes due 2048 and 4.80 percent notes due 2049, and fulfilled the Company’s obligations contained in the registration rights agreements entered into in connection with the issuance of the aforementioned notes.
2018 Activity
In 2018, the Company redeemed $333 million of 5.70 percent notes at maturity and an aggregate principal amount of $91 million of International Notes ("InterNotes")InterNotes® at maturity. In addition, approximately $138 million of long-term debt was repaid by consolidated variable interest entities. The Company also called an aggregate principal amount of $343 million tax-exempt bonds of various interest rates and maturities in 2029, 2033 and 2038. As a result of these redemptions, the Company recognized a pretax loss of $6 million on the early extinguishment of debt, included in “Sundry income (expense) - net” in the consolidated statements of income.income and related to Corporate.
In November 2018, the Company issued $2.0$2 billion of senior unsecured notes in an offering under Rule 144A of the Securities Act of 1933. The offering included $900 million aggregate principal amount of 5.55 percent notes due 2048; $600 million aggregate principal amount of 4.80 percent notes due 2028; and $500 million aggregate principal amount of 4.55 percent notes due 2025.
In December 2018, the Company tendered and redeemed $2.1 billion of 8.55 percent notes issued by the Company with maturity in 2019. As a result, the Company recognized a pretax loss of $48 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income.income and related to Corporate.
2017 Activity
In 2017, the Company redeemed $436 million of 6.00 percent notes that matured on September 15, 2017, and $32 millionan aggregate principal amount of InterNotes$32 million of InterNotes® at maturity. In addition, approximately $119 million of long-term debt was repaid by consolidated variable interest entities.
2016 Activity
In 2016, the Company redeemed $349 million103
As part of the Dow Silicones ownership restructure, the fair value of debt assumed by Dow was $4,672 million and is reflected in the long-term debt table above.
Available Credit Facilities
The following table summarizes the Company's credit facilities:
|
| | | | | | | | |
| Committed and Available Credit Facilities at Dec 31, 2019 |
| In millions | Committed Credit | Credit Available | Maturity Date | Interest |
| Five Year Competitive Advance and Revolving Credit Facility | $ | 5,000 |
| $ | 5,000 |
| October 2024 | Floating rate |
Term Loan Facility 1 | 2,000 |
| — |
| September 2023 | Floating rate |
European Securitization Facility 2 | 448 |
| 448 |
| October 2020 | Floating rate |
| Bilateral Revolving Credit Facility | 100 |
| 100 |
| March 2020 | Floating rate |
| Bilateral Revolving Credit Facility | 100 |
| 100 |
| March 2020 | Floating rate |
| Bilateral Revolving Credit Facility | 280 |
| 280 |
| March 2020 | Floating rate |
| Bilateral Revolving Credit Facility | 200 |
| 200 |
| May 2020 | Floating rate |
| Bilateral Revolving Credit Facility | 200 |
| 200 |
| July 2020 | Floating rate |
| Bilateral Revolving Credit Facility | 100 |
| 100 |
| August 2020 | Floating rate |
| Bilateral Revolving Credit Facility | 300 |
| 300 |
| December 2020 | Floating rate |
| Bilateral Revolving Credit Facility | 300 |
| 300 |
| December 2021 | Floating rate |
| Bilateral Revolving Credit Facility | 100 |
| 100 |
| October 2024 | Floating rate |
| Bilateral Revolving Credit Facility | 100 |
| 100 |
| October 2024 | Floating rate |
| Bilateral Revolving Credit Facility | 200 |
| 200 |
| November 2024 | Floating rate |
| Total Committed and Available Credit Facilities | $ | 9,428 |
| $ | 7,428 |
| | |
|
| | | | | | | | | |
| Committed and Available Credit Facilities at Dec 31, 2018 |
| In millions | Effective Date | Committed Credit | Credit Available | Maturity Date | Interest |
| Five Year Competitive Advance and Revolving Credit Facility | October 2018 | $ | 5,000 |
| $ | 5,000 |
| October 2023 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 100 |
| 100 |
| March 2019 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 100 |
| 100 |
| October 2019 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 100 |
| 100 |
| March 2020 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 280 |
| 280 |
| March 2020 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 100 |
| 100 |
| March 2020 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 200 |
| 200 |
| March 2020 | Floating rate |
| Term Loan Facility | February 2016 | 4,500 |
| — |
| December 2021 | Floating rate |
| Bilateral Revolving Credit Facility | May 2016 | 200 |
| 200 |
| May 2020 | Floating rate |
| Bilateral Revolving Credit Facility | July 2016 | 200 |
| 200 |
| July 2020 | Floating rate |
| Bilateral Revolving Credit Facility | August 2016 | 100 |
| 100 |
| August 2020 | Floating rate |
| North American Securitization Facility | September 2018 | 800 |
| 800 |
| September 2019 | Floating rate |
European Securitization Facility 1 | October 2018 | 457 |
| 457 |
| October 2020 | Floating rate |
| Total Committed and Available Credit Facilities |
| $ | 12,137 |
| $ | 7,637 |
|
|
|
| |
| 1. | Assumes the option to extend the Term Loan Facility will be exercised. |
| |
| 2. | Equivalent to Euro 400 million. |
Term Loan Facility
In connection with the ownership restructure of Dow Silicones on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness under a certain third party credit agreement ("Term Loan Facility"). The Company subsequently guaranteed the obligations of Dow Silicones under the Term Loan Facility and, as a result, the covenants and events of default applicable to the Term Loan Facility are substantially similar to the covenants and events of default set forth in the Company's Five Year Competitive Advance and Revolving Credit Facility. In the second quarter of 2018, Dow Silicones exercised the 19-month extension option making amounts borrowed under the Term Loan Facility repayable on December 30, 2019. In addition, Dow Silicones amended the Term Loan Facility to include an additional 2-year extension option, at Dow Silicones' election, upon satisfaction of certain customary conditions precedent. Dow Silicones intends to exercise the 2-year extension option on the Term Loan Facility.
Secured Borrowings
In September 2018, the Company renewed its North American accounts receivable securitization facility for a one year term and amended the terms of the agreement from an off-balance sheet arrangement to a secured borrowing arrangement, with a borrowing capacity up to $800 million. Under the structure of the amended agreement, the Company willhad the option to use select trade accounts receivable to collateralize the credit facility with certain lenders. At December 31, 2018,In November 2019, the facility was amended and is no longer a secured borrowing arrangement. It had not been drawn upon.upon during its term as a secured borrowing arrangement.
In October 2018, the Company renewed its European accounts receivable securitization facility for a two year term and amended the terms of the agreement from an off-balance sheet arrangement to a secured borrowing arrangement, with a borrowing capacity up to Euro 400 million. Under the structure of the amended agreement, the Company will use select trade accounts receivable to collateralize the credit facility with certain lenders. At December 31, 2019 and 2018, the facility had not been drawn upon.
Uncommitted Credit Facilities and Outstanding Letters of Credit
The Company had uncommitted credit facilities in the form of unused bank credit lines of approximately $3,480 million at December 31, 2018. These lines can be used to support short-term liquidity needs and general purposes, including letters of credit. Outstandingutilizes letters of credit were $439 million at December 31, 2018 ($433 million at December 31, 2017). These letters of creditto support commitments made in the ordinary course of business. While the terms and amounts of letters of credit change, the Company generally has approximately $400 million of outstanding letters of credit at any given time.
Debt Covenants and Default Provisions
The Company’sTDCC’s outstanding long-term debt has been issued primarily under indentures which contain, among other provisions, certain customary restrictive covenants with which the CompanyTDCC must comply while the underlying notes are outstanding. Failure of the CompanyTDCC to comply with any of its covenants, could result in a default under the applicable indenture and allow the note holders to accelerate the due date of the outstanding principal and accrued interest on the underlying notes.
The Company'sTDCC's indenture covenants include obligations to not allow liens on principal U.S. manufacturing facilities, enter into sale and lease-back transactions with respect to principal U.S. manufacturing facilities, merge or consolidate with any other corporation, or sell, lease or convey, directly or indirectly, all or substantially all of the Company’sTDCC’s assets. The outstanding debt also contains customary default provisions. The CompanyTDCC remains in compliance with these covenants after the Merger.covenants.
The Company’s
TDCC’s primary, private credit agreements also contain certain customary restrictive covenant and default provisions in addition to the covenants set forth above with respect to the Company’sTDCC’s debt. Significant other restrictive covenants and default provisions related to these agreements include:
| |
| (a) | the obligation to maintain the ratio of the Company’sTDCC’s consolidated indebtedness to consolidated capitalization at no greater than 0.65 to 1.00 at any time the aggregate outstanding amount of loans under the Five Year Competitive Advance and Revolving Credit Facility Agreement ("Revolving Credit Agreement") dated October 30, 2018, equals or exceeds $500 million, |
| |
| (b) | a default if the CompanyTDCC or an applicable subsidiary fails to make any payment, including principal, premium or interest, under the applicable agreement on other indebtedness of, or guaranteed by, the CompanyTDCC or such applicable subsidiary in an aggregate amount of $100 million or more when due, or any other default or other event under the applicable agreement with respect to such indebtedness occurs which permits or results in the acceleration of $400 million or more in the aggregate of principal, and |
| |
| (c) | a default if the CompanyTDCC or any applicable subsidiary fails to discharge or stay within 60 days after the entry of a final judgment against the CompanyTDCC or such applicable subsidiary of more than $400 million. |
Failure of the CompanyTDCC to comply with any of the covenants or default provisions could result in a default under the applicable credit agreement which would allow the lenders to not fund future loan requests and to accelerate the due date of the outstanding principal and accrued interest on any outstanding indebtedness.
On April 1, 2019, DowDuPont completed the separation of its materials science business and Dow Inc. became the direct parent company of TDCC. In conjunction with the separation, Dow Inc. is obligated, substantially concurrently with the issuance of any guarantee in respect of outstanding or committed indebtedness under TDCC's Revolving Credit Agreement, to enter into a supplemental indenture with TDCC and the trustee under TDCC’s existing 2008 base indenture governing certain notes issued by TDCC. Under such supplemental indenture, Dow Inc. will guarantee all outstanding debt securities and all amounts due under such existing base indenture and will become subject to certain covenants and events of default under the existing base indenture.
75In addition, the Revolving Credit Agreement includes an event of default which would be triggered in the event Dow Inc. incurs or guarantees third party indebtedness for borrowed money in excess of $250 million or engages in any material activity or directly owns any material assets, in each case, subject to certain conditions and exceptions. Dow Inc. may, at its option, cure the event of default by delivering an unconditional and irrevocable guarantee to the administrative agent within thirty days of the event or events giving rise to such event of default.
No such events have occurred or have been triggered at the time of the filing of this Annual Report on Form 10-K.
NOTE 1617 – COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
Introduction
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 December 31, 2018,2019, the Company had accrued obligations of $820$1,155 million for probable environmental remediation and restoration costs, including $156$207 million for the remediation of Superfund sites. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the 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 approximately twoone and a half times that amount. 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. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s results of operations, financial condition or 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. As new or additional information becomes available and/or certain spending trends become known, management will evaluate such information in determination of the current estimate of the environmental liability. At December 31, 2017,2018, the Company had accrued obligations of $878$810 million for probable environmental remediation and restoration costs, including $152$156 million for the remediation of Superfund sites.
In the fourththird quarter of 2016,2019, the Company recorded a pretax charge of $295 million forrelated to environmental remediation matters at a number of current and historical locations, including the Midland manufacturing site/off-site matters and the Wood-Ridge sites,locations. The charge primarily resulting fromresulted from: the culmination of long-standing negotiations and discussions with regulators and/and agencies, including technical studies supporting higher cost estimates for final or final agency approval. These charges werestaged remediation plans; the Company’s evaluation of the cost required to manage remediation activities at sites affected by Dow’s separation from DowDuPont and related agreements with Corteva and DuPont; and, the Company’s review of its closure strategies and obligations to monitor ongoing operations and maintenance activities. In addition, the Company recorded indemnification assets of $48 million related to Dow Silicones’ environmental matters. The Company recognized a pretax charge, net of indemnifications, of $399 million related to these environmental matters, included in "Cost“Cost of sales"sales” in the consolidated statements of income.income and related to Packaging & Specialty Plastics ($5 million), Industrial Intermediates & Infrastructure ($8 million), Performance Materials & Coatings ($50 million) and Corporate ($336 million).
The following table summarizes the activity in the Company's accrued obligations for environmental matters for the years ended December 31, 20182019 and 2017:2018:
|
| | | | | | |
| Accrued Obligations for Environmental Matters | 2019 | 2018 |
| In millions |
| Balance at Jan 1 | $ | 810 |
| $ | 865 |
|
| Accrual adjustment | 590 |
| 176 |
|
| Payments against reserve | (241 | ) | (208 | ) |
| Foreign currency impact | (4 | ) | (23 | ) |
| Balance at Dec 31 | $ | 1,155 |
| $ | 810 |
|
|
| | | | | | |
| Accrued Obligations for Environmental Matters | 2018 | 2017 |
| In millions |
| Balance at Jan 1 | $ | 878 |
| $ | 909 |
|
| Accrual adjustment | 175 |
| 172 |
|
| Payments against reserve | (209 | ) | (220 | ) |
| Foreign currency impact | (24 | ) | 17 |
|
| Balance at Dec 31 | $ | 820 |
| $ | 878 |
|
The amounts charged to income on a pretax basis related to environmental remediation totaled $174$588 million in 2019, $176 million in 2018 $171and $163 million in 2017 and $504 million in 2016.2017. Capital expenditures for environmental protection were $76$83 million in 2019, $55 million in 2018 $79and $57 million in 2017 and $66 million in 2016.2017.
Midland Off-Site Environmental Matters
On June 12, 2003, the Michigan Department of Environmental Quality ("MDEQ") issued a Hazardous Waste Operating License (the "License") to the Company’s Midland, Michigan, manufacturing site (the “Midland site”Site”), which was renewed and replaced by the MDEQ on September 25, 2015, and included provisions requiring the Company to conduct an investigation to determine the nature and extent of off-site contamination in the City of Midland soils, the Tittabawassee River and Saginaw River sediment and floodplain soils, and the Saginaw Bay, and, if necessary, undertake remedial action. In 2016, final regulatory approval was received from the MDEQ for the City of Midland and Dowthe Company is continuing the long term monitoring requirements of the Remedial Action Plan.
Tittabawassee and Saginaw Rivers, Saginaw Bay
The Company, the U.S. Environmental Protection Agency (“EPA”) and the State of Michigan ("State") entered into an administrative order on consent (“AOC”), effective January 21, 2010, that requires the Company to conduct a remedial investigation, a feasibility study and a remedial design for the Tittabawassee River, the Saginaw River and the Saginaw Bay, and pay the oversight costs of the EPA and the State under the authority of the Comprehensive Environmental Response, Compensation, and Liability Act. These actions, to be conducted under the lead oversight of the EPA, will build upon the investigative work completed under the State Resource Conservation Recovery Act program from 2005 through 2009.
The Tittabawassee River, beginning at the Midland Site and extending down to the first six miles of the Saginaw River, are designated as the first Operable Unit for purposes of conducting the remedial investigation, feasibility study and remedial design work. This work will be performed in a largely upriver to downriver sequence for eight geographic segments of the Tittabawassee and upper Saginaw Rivers. In the first quarter of 2012, the EPA requested the Company address the Tittabawassee River floodplain ("Floodplain") as an additional segment. In January 2015, the Company and the EPA entered into an order to address remediation of the Floodplain. The remedial work is expected to take placecontinue over the next three years. The remainder of the Saginaw River and the Saginaw Bay are designated as a second Operable Unit and the work associated with that unit may also be geographically segmented. The AOC does not obligate the Company to perform removal or remedial action; that action can only be required by a separate order. The Company and the EPA have been negotiating orders separate from the AOC that obligate the Company to perform remedial actions under the scope of work of the AOC. The Company and the EPA have entered into foursix separate orders to perform limited remedial actions in fiveseven of the eight geographic segments in the first Operable Unit, including the Floodplain. Dow has received from the EPA a Notice of Completion of Work for three of these six orders and the order to addressCompany continues the Floodplain.long-term monitoring requirements.
Alternative Dispute Resolution Process
The Company, the EPA, the U.S. Department of Justice ("DOJ"), and the natural resource damage trustees (which include the Michigan Office of the Attorney General, the MDEQ,Michigan Department of Environment, Great Lakes and Energy, the Michigan Department of Natural Resources, the U.S. Fish and Wildlife Service, the U.S. Bureau of Indian Affairs and the Saginaw-Chippewa tribe)Indian Tribe of Michigan) have been engaged in negotiations to seek to resolve potential governmental claims against the Company for natural resource damages related to historical off-site contamination associated with the City of Midland, the Tittabawassee and Saginaw Rivers and the Saginaw Bay. The Company and the governmental parties started meeting in the fall of 2005 and entered into a Confidentiality Agreement in December 2005. The Company continues to conduct negotiations under the Federal Alternative Dispute Resolution Act with all of the governmental parties, except the EPA which withdrew from the alternative dispute resolution process on September 12, 2007.
On September 28, 2007,November 8, 2019, a proposed consent decree on this matter was filed in the U.S. District Court for the Eastern District of Michigan ("District Court"), Civil Action No. 1:19-cv-13292 between the Company and the natural resource damagefederal, state and tribal trustees entered into a Funding and Participation Agreement that addressed the Company’s payment of past costs incurred by the natural resource damage trustees, payment of the costs of a trustee coordinator and a process to review additional cooperative studies that the Company might agree to fund or conduct with the natural resource damage trustees. On March 18, 2008, the Company and the natural resource damage trustees entered into a Memorandum of Understanding ("MOU") to provide a mechanism for the Company to fund cooperative studies related to the assessmentresolve allegations of natural resource damages. This MOUdamages arising from the historic operations of the Company’s Midland Site. On November 14, 2019, a Notice of Lodging and Notice of Availability and Request for Comments on Draft Restoration Plan/Environmental Assessment was amendedpublished in the Federal Register. Public comments on the proposed consent decree and fundingthe draft Restoration Plan/Environmental Assessment were required to be submitted within 45 days of cooperative studies was extended until March 2014. All cooperative studies have been completed. On April 7, 2008, the natural resource damage trustees released their “Natural Resource Damage Assessment Plan for the Tittabawassee River System Assessment Area.”that publication.
At December 31, 2018,2019, the accrual for these off-site matters was $95$135 million (included in the total accrued obligation of $820$1,155 million). At December 31, 2017,2018, the Company had an accrual for these off-site matters of $83$95 million (included in the total accrued obligation of $878$810 million).
Environmental Matters Summary
It is the opinion of the Company’s management that the possibility is remote that costs in excess of those disclosed will have a material impact on the Company’s results of operations, financial condition or cash flows.
Litigation
Asbestos-Related Matters of Union Carbide Corporation
Introduction
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.
Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
Estimating the Asbestos-Related Liability
Based on a study completed in January 2003 by Ankura Consulting Group, LLC ("Ankura"), in January 2003, Union Carbide increased its December 31, 2002, asbestos-related liability for pending and future claims for a 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then,In subsequent years, Union Carbide has compared current asbestos claim and resolution activity to the results of the most recent Ankura study at each balance sheet date to determine whether the accrual continuescontinued to be appropriate.
appropriate. In addition, Union Carbide has requested Ankura to review Union Carbide’s historical asbestos claim and resolution activity each year since 2004 to determine the appropriateness of updating the most recent Ankura study.
In October 2016, Union Carbide requested Ankura completed a study to review its historical asbestos claim and resolution activity and determine the appropriateness of updating its December 2014 study. In response to the request, Ankura reviewed and analyzed asbestos-related claim and resolution data through September 30, 2016. The resulting study, completed by Ankura in December 2016, providedprovide estimates for the undiscounted cost of disposing of pending and future claims against Union Carbide and Amchem excluding future defense and processing costs, for both a 15-year period and through the terminal year of 2049.
2049, including a reasonable forecast of future defense and processing costs. Based on the study completed in December 2016 by Ankura, and Union Carbide's ownCarbide’s internal review it was determined that an adjustment to the accrual was necessary.of asbestos claim and resolution activity, Union Carbide determined that usingestimating the estimateliability through the terminal year of 2049 was more appropriate due to increasingincreased knowledge and data about the costs to resolve claims and diminished volatility in filing rates. Using the range in the Ankura December 2016 study, which was estimated to be between $502 million and $565 million for the undiscounted cost of disposing of pending and future claims, Union Carbide increased its asbestos-relatedand the Company also determined that estimating and accruing a liability for pending and future claims through the terminal year of 2049 by $104 million, included in "Asbestos-related charge" in the consolidated statements of income.
In September 2014, Union Carbide began to implement a strategy designed to reduce and to ultimately stabilize and forecast defense costs associated with asbestos-related matters. The strategy included a number of important changes including: invoicing protocols including capturing costs by plaintiff; review of existing counsel roles, work processes and workflow; and the utilization of enterprise legal management software, which enabled claim-specific tracking of asbestos-related defense and processing costs. Union Carbide reviewed the information generated from this new strategy and determined that it now had the ability to reasonably estimate asbestos-related defense and processing costs for the same periods that it estimates its asbestos-related liability for pending and future claims. Union Carbide believes that including estimates of the liability for asbestos-related defense and processing costs provides awas more complete assessment and measure of the liability associated with resolving asbestos-related matters, which Union Carbide and the Company believe is preferable in these circumstances.
In October 2016, in addition to the study for asbestos claim and resolution activity, Union Carbide requested Ankura to review asbestos-related defense and processing costs and provide an estimate of defense and processing costs associated with resolving pending and future asbestos-related claims facing Union Carbide and Amchem for the same periods of time that Union Carbide uses for estimating resolution costs. In December 2016, Ankura conducted the study and provided Union Carbide with an estimate of future defense and processing costs for both a 15-year period and through the terminal year of 2049. The resulting study estimated asbestos-related defense and processing costs for pending and future asbestos claims to be between $1,009 million and $1,081 million through the terminal year of 2049.
In the fourth quarter of 2016, Union Carbide and the Company elected to change their method of accounting for asbestos-related defense and processing costs from expensingappropriate as incurred to estimating and accruing a liability. This change is believed to be preferable as asbestos-related defense and processingsuch costs represent expenditures related to legacy activities that do not contribute to current or future revenue generating activities of Union Carbide and the Company. The changeCompany and is also reflective of the manner in which Union Carbide manages its asbestos-related exposure, including careful monitoring of the correlation between defense spending and resolution costs. Together, these two sources of cost more accurately represent the “total cost” of resolving asbestos-related claims now and in the future.
This accounting policy change was reflected as a change in accounting estimate effected by a change in accounting principle. As a result, of this accounting policy change and based on the December 2016 Ankura study of asbestos-related defense and processing costs and Union Carbide's own review of the data, Union Carbide recorded a pretax charge for asbestos-related defense and processing costs of $1,009 million in the fourth quarter of 2016, included in “Asbestos-related charge” in the consolidated statements of income.
In October 2017, Union Carbide requestedrecorded a $1,113 million increase in its asbestos-related liability for pending and future claims, including future defense and processing costs. Each October, Union Carbide requests Ankura to review its historical asbestos claim and resolution activity (includingthrough the third quarter of the current year, including asbestos-related defense and processing costs) andcosts, to determine the appropriateness of updating its December 2016the most recent study. In response to that request, Ankura reviewed and analyzed data through September 30, 2017.
In December 2017, Ankura stated that an update of its December 2016 study would not provide a more likely estimate of future events than the estimate reflected in the study and, therefore, the estimate in thatthe study remained applicable. Based on Union Carbide's owninternal review of the asbestos claim and resolution activity (including asbestos-related defense and processing costs)process and Ankura's response, Union Carbide determined that no change to the accrual was required. At December 31, 2017, the asbestos-related liability for pending and future claims against Union Carbide and Amchem, including future asbestos-related defense and processing costs, was $1,369 million, and approximately 16 percent of the recorded liability related to pending claims and approximately 84 percent related to future claims.
In OctoberDecember 2018, Ankura completed a study of Union Carbide requested Ankura to review itsCarbide's historical asbestos claim and resolution activity (includingthrough September 30, 2018, including asbestos-related defense and processing costs)costs, and determine the appropriateness of updating its December 2016 study. In response to that request, Ankura reviewed and analyzed data through September 30, 2018. The resulting study, completed by Ankura in December 2018, provided estimates for the undiscounted cost of disposing of pending and future claims against Union Carbide and Amchem including future defense and processing costs, through the terminal year of 2049. Based on the study completed in December 2018 by Ankura, and Union Carbide's owninternal review process, it was determined that no adjustment to the accrual was required. At December 31, 2018, Union Carbide's asbestos-related liability for pending and future claims and defense and processing costs was $1,260 million, and approximately 16 percent of the recorded liability related to pending claims and approximately 84 percent related to future claims.
In December 2019, Ankura stated that an update of its December 2018 study would not provide a more likely estimate of future events than the estimate reflected in the study and, therefore, the estimate in the study remained applicable. Based on Union Carbide's internal review process and Ankura's response, Union Carbide determined that no change to the accrual was required. At December 31, 2019, the asbestos-related liability for pending and future claims against Union Carbide and Amchem, including future asbestos-related defense and processing costs, was $1,165 million, and approximately 18 percent of the recorded liability related to pending claims and approximately 82 percent related to future claims.
Summary
The Company's management believes the amounts recorded by Union Carbide for the asbestos-related liability, (includingincluding defense and processing costs)costs, reflect reasonable and probable estimates of the liability based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of defending and disposing of each such claim, as well as the numerous uncertainties surrounding asbestos litigation in the United States over a significant period of time, could cause the actual costs for Union Carbide to be higher or lower than those projected or those recorded. Any such events could result in an increase or decrease in the recorded liability.
Because of the uncertainties described above, Union Carbide cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing Union Carbide and Amchem. As a result, it is reasonably possible that an additional cost of disposing of Union Carbide's asbestos-related claims, including future defense and processing costs, could have a material impact on the Company's results of operations and cash flows for a particular period and on the consolidated financial position.
Urethane Matters
Class Action Lawsuit
On February 16, 2006, the Company, among others, received a subpoena from the DOJ as part of a previously announced antitrust investigation of manufacturers of polyurethane chemicals, including methylene diphenyl diisocyanate, toluene diisocyanate, polyether polyols and system house products. The Company cooperated with the DOJ and, following an extensive investigation, on December 10, 2007, the Company received notice from the DOJ that it had closed its investigation of potential antitrust violations involving these products without indictments or pleas.
In 2005, the Company, among others, was named as a defendant in multiple civil class action lawsuits alleging a conspiracy to fix the price of various urethane chemical products, namely the products that were the subject of the above described DOJ antitrust investigation. On July 29, 2008, a Kansas City federal district court (the "district court") certified a class of purchasers of the products for the six-year period from 1999 through 2004 ("plaintiff class"). In January 2013, the class action lawsuit went to trial with the Company as the sole remaining defendant, the other defendants having previously settled. On February 20, 2013, the federal jury returned a damages verdict of approximately $400 million against the Company, which ultimately was trebled under applicable antitrust laws, less offsets from other settling defendants, resulting in a judgment entered in July 2013 in the amount of $1.06 billion. The Company appealed this judgment to the U.S. Tenth Circuit Court of Appeals ("Court of Appeals"), and on September 29, 2014, the Court of Appeals issued an opinion affirming the district court judgment.
On March 9, 2015, the Company filed a petition for writ of certiorari ("Writ Petition") with the United States Supreme Court, seeking judicial review and requesting that it correct fundamental errors in the Court of Appeals decision. In the first quarter of 2016, the Company changed its risk assessment on this matter as a result of growing political uncertainties due to events within the Supreme Court, including Justice Scalia's death, and the increased likelihood for unfavorable outcomes for businesses involved in class action lawsuits. On February 26, 2016, the Company announced a proposed settlement under which the Company would pay the plaintiff class $835 million, which included damages, class attorney fees and post-judgment interest. On July 29, 2016, the U.S. District Court for the District of Kansas granted final approval of the settlement. The settlement resolved the $1.06 billion judgment and any subsequent claim for attorneys' fees, costs and post-judgment interest against the Company. As a result, in the first quarter of 2016, the Company recorded a loss of $835 million, included in "Sundry income (expense) - net" in the consolidated statements of income. The Company continues to believe that it was not part of any conspiracy and the judgment was fundamentally flawed as a matter of class action law. The case is now concluded.
Opt-Out Cases
Shortly after the July 2008 class certification ruling, a series of "opt-out" cases were filed by a number of large volume purchasers who elected not to be class members in the district court case. These opt-out cases were substantively identical to the class action lawsuit, but expanded the period of time to include 1994 through 1998. A consolidated jury trial of the opt-out cases began on March 8, 2016. Prior to a jury verdict, on April 5, 2016, the Company entered into a binding settlement for the opt-out cases under which the Company would pay the named plaintiffs $400 million, inclusive of damages and attorney fees. Payment of this settlement occurred on May 4, 2016. The Company changed its risk assessment on this matter as a result of the class settlement and the uncertainty of a jury trial outcome along with the automatic trebling of an adverse verdict. As a result, the Company recorded a loss of $400 million in the first quarter of 2016, included in "Sundry income (expense) - net" in the consolidated statements of income. As with the class action case, the Company continues to deny allegations of price fixing and maintains that it was not part of any conspiracy. The case is now concluded.
Bayer CropScience v. Dow AgroSciences ICC Arbitration
On August 13, 2012, Bayer CropScience AG and Bayer CropScience NV (together, “Bayer”) filed a request for arbitration with the International Chamber of Commerce ("ICC") International Court of Arbitration against Dow AgroSciences LLC, a wholly owned subsidiary of the Company, and other subsidiaries of the Company (collectively, “DAS”) under a 1992 license agreement executed by predecessors of the parties (the “License Agreement”). In its request for arbitration, Bayer alleged that (i) DAS breached the License Agreement, (ii) the License Agreement was properly terminated with no ongoing rights to DAS, (iii) DAS infringed its patent rights related to the use of the pat gene in certain soybean and cotton seed products, and (iv) Bayer was entitled to monetary damages and injunctive relief. DAS denied that it breached the License Agreement and asserted that the License Agreement remained in effect because it was not properly terminated. DAS also asserted that all of Bayer’s patents at issue are invalid and/or not infringed, and, therefore, for these reasons (and others), a license was not required. During the pendency of the arbitration proceeding, DAS filed six re-examination petitions with the United States Patent & Trademark Office (“USPTO”) against the Bayer patents, asserting that each patent is invalid based on the doctrine against double-patenting and/or prior art. The USPTO granted all six petitions, and, on February 26, 2015, the USPTO issued an office action rejecting the patentability of the sole Bayer patent claim in the only asserted Bayer patent that has not expired and that forms the basis for the vast majority of the damages in the arbitral award discussed below.
A three-member arbitration tribunal presided over the arbitration proceeding (the “tribunal”). In a decision dated October 9, 2015, the tribunal determined that (i) DAS breached the License Agreement, (ii) Bayer properly terminated the License Agreement, (iii) all of the patents remaining in the proceeding are valid and infringed, and (iv) that Bayer is entitled to monetary damages in the amount of $455 million inclusive of pre-judgment interest and costs (the “arbitral award”). One of the arbitrators, however, issued a partial dissent finding that all of the patents are invalid based on the double-patenting doctrine. The tribunal also denied Bayer’s request for injunctive relief.
On October 16, 2015, Bayer filed a motion in U.S. District Court for the Eastern District of Virginia ("Federal District Court") seeking to confirm the arbitral award. DAS opposed the motion and filed separate motions to vacate the award, or in the alternative, to stay enforcement of the award until the USPTO issued final office actions with respect to the re-examination proceedings. On January 15, 2016, the Federal District Court denied DAS's motions and confirmed the award. DAS appealed the Federal District Court's decision. On March 1, 2017, the U.S. Court of Appeals for the Federal Circuit ("Federal Circuit") affirmed the arbitral award. As a result of this action, in the first quarter of 2017, the Company recorded a loss of $469 million, inclusive of the arbitral award and post-judgment interest, which was included in "Sundry income (expense) - net" in the consolidated statements of income. On May 19, 2017, the Federal Circuit issued a mandate denying DAS's request to stay the arbitral award pending judicial review by the United States Supreme Court. On May 26, 2017, the Company paid the $469 million arbitral award to Bayer as a result of that decision. On September 11, 2017, DAS filed a petition for writ of certiorari with the United States Supreme Court to review the case, but the Court denied DAS’s petition.
The litigation is now concluded with no risk of further liability. The Company continues to believe that the arbitral award is fundamentally flawed because, among other things, it allowed for the enforcement of invalid patents. The arbitral award and subsequent related judicial decisions will not impact DAS’s commercialization of its soybean and cotton seed products, including those containing the ENLIST™ technologies.
Rocky Flats Matter
The Company and Rockwell International Corporation ("Rockwell") (collectively, the "defendants") were defendants in a class action lawsuit filed in 1990 on behalf of property owners ("plaintiffs") in Rocky Flats, Colorado, who asserted claims for nuisance and trespass based on alleged property damage caused by plutonium releases from a nuclear weapons facility owned by the U.S. Department of Energy ("DOE") (the "facility"). Dow and Rockwell were both DOE contractors that operated the facility - Dow from 1952 to 1975 and Rockwell from 1975 to 1989. The facility was permanently shut down in 1989.
In 1993, the United States District Court for the District of Colorado ("District Court") certified the class of property owners. The plaintiffs tried their case as a public liability action under the Price Anderson Act ("PAA"). In 2005, the jury returned a damages verdict of $926 million. Dow and Rockwell appealed the jury award to the U.S. Tenth Circuit Court of Appeals ("Court of Appeals") which concluded the PAA had its own injury requirements, on which the jury had not been instructed, and also vacated the District Court's class certification ruling, reversed and remanded the case, and vacated the District Court's judgment. The plaintiffs argued on remand to the District Court that they were entitled to reinstate the judgment as a state law nuisance claim, independent of the PAA. The District Court rejected that argument and entered judgment in favor of the defendants. The plaintiffs appealed to the Court of Appeals, which reversed the District Court's ruling, holding that the PAA did not preempt the plaintiffs' nuisance claim under Colorado law and that the plaintiffs could seek reinstatement of the prior nuisance verdict under Colorado law.
Dow and Rockwell continued to litigate this matter in the District Court and in the United States Supreme Court following the appellate court decision. On May 18, 2016, Dow, Rockwell and the plaintiffs entered into a settlement agreement for $375 million, of which $131 million was paid by Dow. The DOE authorized the settlement pursuant to the PAA and the nuclear hazards indemnity provisions contained in Dow's and Rockwell's contracts. The District Court granted preliminary approval to the class settlement on August 5, 2016. On April 28, 2017, the District Court conducted a fairness hearing and granted final judgment approving the class settlement and dismissed class claims against the defendants ("final judgment order").
On December 13, 2016, the United States Civil Board of Contract Appeals unanimously ordered the United States government to pay the amounts stipulated in the settlement agreement. On January 17, 2017, the Company received a full indemnity payment of $131 million from the United States government for Dow's share of the class settlement. On January 26, 2017, the Company placed $130 million in an escrow account for the settlement payment owed to the plaintiffs. The funds were subsequently released from escrow as a result of the final judgment order. The litigation is now concluded.
Dow Silicones Chapter 11 Related Matters
Introduction
In 1995, Dow Silicones, then a 50:50 joint venture between Dowthe Company and Corning Incorporated ("Corning"), voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code in order to resolve Dow Silicones’ breast implant liabilities and related matters (the “Chapter 11 Proceeding”). Dow Silicones emerged from the Chapter 11 Proceeding on June 1, 2004 (the “Effective Date”) and is implementing the Joint Plan of Reorganization (the “Plan”). The Plan provides funding for the resolution of breast implant and other product liability litigation covered by the Chapter 11 Proceeding and provides a process for the satisfaction of commercial creditor claims in the Chapter 11 Proceeding. As of June 1, 2016, Dow Silicones is a wholly owned subsidiary of Dow.the Company.
Breast Implant and Other Product Liability Claims
Under the Plan, a product liability settlement program administered by an independent claims office (the “Settlement Facility”) was created to resolve breast implant and other product liability claims. Product liability claimants rejecting the settlement program in favor of pursuing litigation must bring suit against a litigation facility (the “Litigation Facility”). Under the Plan, total payments committed by Dow Silicones to resolving product liability claims are capped at a maximum $2,350 million net present value (“NPV”) determined as of the Effective Date using a discount rate of seven7 percent (approximately $3,876$4,019 million undiscounted at December 31, 2018)2019). Of this amount, no more than $400 million NPV determined as of the Effective Date can be used to fund the Litigation Facility.
Dow Silicones has an obligation to fund the Settlement Facility and the Litigation Facility over a 16-year period, commencing at the Effective Date. At December 31, 2018,2019, Dow Silicones and its insurers have made life-to-date payments of $1,762 million to the Settlement Facility and the Settlement Facility reported an unexpended balance of $118$74 million.
On June 1, 2016, as part
In accordance with ASC 450 "Accounting for Contingencies," the Company recordedrecords a liability of $290 million for breast implant and other product liability claims (“Implant Liability”), which reflectedreflects the estimated impact of the settlement of future claims primarily based on reported claim filing levels in the Revised Settlement Program (the “RSP”) and on the resolution of almost all cases pending against the Litigation Facility. The RSP was a program sponsored by certain other breast implant manufacturers in the context of multi-district, coordinated federal breast implant cases and was open from 1995 through 2010. The RSP was also a revised successor to an earlier settlement plan involving Dow Silicones (prior to its bankruptcy filing). While Dow Silicones withdrew from the RSP, many of the benefit categories and payment levels in Dow Silicones settlement program were drawn from the RSP. Based on the comparability in design and actual claim experience of both plans, management concluded that claim information from the RSP provides a reasonable basis to estimate future claim filing levels for the Settlement Facility.
In the fourththird quarter of 2016,2019, with the assistance of a third party consultant ("consultant"Consultant"), Dow Silicones updated its estimate of its Implant Liability estimate to $263$165 million, primarily reflecting a decrease in Class 7 costs (claimants who have breast implants made by certain other manufacturers using primarily Dow Silicones silicone gel),16 claims, a decrease resulting from the passage of time, decreased
claim filing activity and administrative costs compared with the previous estimate, and an increase in investment income resulting from insurance proceeds. Based on the consultant'sConsultant's updated estimate and Dow Silicones own review of claim filing activity, Dow Silicones determined that an adjustment to the Implant Liability was required. Accordingly, Dow Silicones decreased its Implant Liability in the fourththird quarter of 20162019 by $27$98 million, which was included in "Sundry income (expense) - net" in the consolidated statements of income. At December 31, 2018,income, and also decreased its corresponding Class 16 receivable in the third quarter of 2019, resulting in a charge of $13 million, included in “Sundry income (expense) - net” in the consolidated statements of income (both related to the Corporate segment). Dow Silicones' Implant Liability was $263$165 million at December 31, 2019 ($263 million at December 31, 2018), of which $111$20 million at December 31, 2019 ($111 million at December 31, 2018) was included in “Accrued and other current liabilities” and $152$145 million was included in "Other noncurrent obligations" in the consolidated balance sheets. Atat December 31, 2017, the Implant Liability was $2632019 ($152 million whichat December 31, 2018) was included in "Other noncurrent obligations" in the consolidated balance sheets.
Dow Silicones is not aware of circumstances that would change the factors used in estimating the Implant Liability and believes the recorded liability reflects the best estimate of the remaining funding obligations under the Plan; however, the estimate relies upon a number of significant assumptions, including: future claim filing levels in the Settlement Facility will be similar to those in the revised settlement program, which management uses to estimate future claim filing levels for the Settlement Facility; future acceptance rates, disease mix, and payment values will be materially consistent with historical experience; no material negative outcomes in future controversies or disputes over Plan interpretation will occur; and the Plan will not be modified. If actual outcomes related to any of these assumptions prove to be materially different, the future liability to fund the Plan may be materially different than the amount estimated. If Dow Silicones was ultimately required to fund the full liability up to the maximum capped value, the liability would be $2,114$2,257 million at December 31, 2018.2019.
Commercial Creditor Issues
The Plan provides that each of Dow Silicones commercial creditors (the “Commercial Creditors”) would receive in cash the sum of (a) an amount equal to the principal amount of their claims and (b) interest on such claims. The actual amount of interest that will ultimately be paid to these Commercial Creditors is uncertain due to pending litigation between Dow Silicones and the Commercial Creditors regarding the appropriate interest rates to be applied to outstanding obligations from the 1995 bankruptcy filing date through the Effective Date, as well as the presence of any recoverable fees, costs, and expenses. Upon the Plan becoming effective, Dow Silicones paid approximately $1,500 million to the Commercial Creditors, representing principal and an amount of interest that Dow Silicones considers undisputed.
In 2006, the U.S. Court of Appeals for the Sixth Circuit concluded that there is a general presumption that contractually specified default interest should be paid by a solvent debtor to unsecured creditors (the “Interest Rate Presumption”) and permitting the Commercial Creditors to recover fees, costs, and expenses where allowed by relevant loan agreements. The matter was remanded to the U.S. District Court for the Eastern District of Michigan ("District Court") for further proceedings, including rulings on the facts surrounding specific claims and consideration of any equitable factors that would preclude the application of the Interest Rate Presumption. On May 10, 2017, the District Court entered a stipulated order resolving pending discovery motions and established a discovery schedule for the Commercial Creditors matter. As a result, Dow Silicones and its third party consultants conducted further analysis of the Commercial Creditors claims and defenses. This analysis indicated the estimated remaining liability to the Commercial Creditors to be within a range of $77 million to $260 million. No single amount within the range appearsappeared to be a better estimate than any other amount within the range. Therefore, Dow Siliconesrecorded the minimum liability within the range, which resulted in a decrease to the Commercial Creditor liability of $33 million in the second quarter of 2017, which was included in "Sundry income (expense) - net" in the consolidated statements of income.income and related to Corporate. At December 31, 2018, the liability related to Dow Silicones' potential obligation to pay additional interest to theits Commercial Creditors in the Chapter 11 Proceeding was $82 million, ($78 million at December 31, 2017) and included in "Accrued and other current liabilities" in the consolidated balance sheets.
On August 19, 2019, Dow Silicones entered into a settlement agreement with the Commercial Creditors, obligating Dow Silicones to pay $172 million, inclusive of the Commercial Creditors' legal costs. The actual amountsettlement was approved by the District Court. As a result of interest that will bethe settlement agreement, in the third quarter of 2019, the Company recorded a pretax charge of $50 million, net of indemnifications of $37 million, included in "Sundry Income (expense) - net" in the consolidated statements of income and related to the Corporate segment. The settlement was paid to these creditors is uncertain and will ultimately be resolved through continued proceedingsthe Commercial Creditors in the District Court.fourth quarter of 2019. The litigation is now concluded.
Indemnifications
In connection with the June 1, 2016 ownership restructure109
Summary
The amounts recorded by Dow Silicones for the Chapter 11 related matters described above were based upon current, known facts, which management believes reflect reasonable and probable estimates of the liability. However, future events could cause the actual costs for Dow Silicones to be higher or lower than those projected or those recorded. Any such events could result in an increase or decrease in the recorded liability.
Other Litigation Matters
In addition to the specific matters described above, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to product liability, patent infringement, employment matters, governmental tax and regulation disputes, contract and commercial litigation, and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. DowThe Company has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies may provide coverage that could be utilized to minimize the financial impact, if any, of certain contingencies described above. It is the opinion of the Company’s management that the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, financial condition and cash flows of the Company.
Indemnifications with Corning
In connection with the June 1, 2016 ownership restructure of Dow Silicones, the Company is indemnified by Corning for at least 50 percent of future losses associated with certain pre-closing liabilities, including the Implant Liability, Commercial Creditors issues and certain environmental matters described in the preceding sections, subject to certain conditions and limits. The maximum amount of indemnified losses which may be recovered are subject to a cap that declines over time. Indemnified losses are capped at (1) $1 billion between May 31, 2018 and May 31, 2023, and (2) 0 recoveries are permitted after May 31, 2023. The Company had indemnification assets of $100 million at December 31, 2019 (0 at December 31, 2018), of which $37 million was included in "Other current assets" and $63 million was included in "Noncurrent receivables" in the consolidated balance sheets.
Gain Contingency - Dow v. Nova Chemicals Corporation Patent Infringement Matter
On December 9, 2010, Dow filed suit in the Federal Court in Ontario, Canada ("Federal Court") alleging that Nova Chemicals Corporation ("Nova") was infringing the Company's Canadian polyethylene patent 2,106,705 (the "'705 Patent"). Nova counterclaimed on the grounds of invalidity and non-infringement. In accordance with Canadian practice, the suit was bifurcated into a merits phase, followed by a damages phase. Following trial in the merits phase, in May 2014 the Federal Court ruled that the Company's '705 Patent was valid and infringed by Nova. Nova appealed to the Canadian Federal Court of Appeal, which affirmed the Federal Court decision in August 2016. Nova then sought leave to appeal its loss to the Supreme Court of Canada, which dismissed Nova’s petition in April 2017. As a result, Nova has exhausted all appeal rights on the merits, and it is undisputed that Nova owes Dowthe Company the profits it earned from its infringing sales as determined in the trial for the damages phase.
On April 19, 2017, the Federal Court issued a Public Judgment in the damages phase, which detailed its conclusions on how to calculate the profits to be awarded to Dow. Dowthe Company. The Company and Nova submitted their respective calculations of the damages to the Federal Court in May 2017. On June 29, 2017, the Federal Court issued a Confidential Supplemental Judgment, concluding that Nova must pay $645 million Canadian dollars (equivalent to $495 million U.S. dollars) to Dow,the Company, plus pre- and post-judgment interest, for which Dowthe Company received payment of $501 million from Nova on July 6, 2017. Although Nova is appealing portions of the damages judgment, certain portions of it are indisputable and will be owed to Dowthe Company regardless of the outcome of any further appeals by Nova. As a result of these actions and in accordance with ASC 450-30 "Gain Contingencies," the Company recorded a $160 million pretax gain in the second quarter of 2017, related to the Packaging & Specialty Plastics segment, of which $137 million was included in "Sundry income (expense) - net" and $23 million was included in "Selling, general and administrative expenses" in the consolidated statements of income. At December 31, 2018,2019, the Company had $341 million ($341 million at December 31, 2017)2018) included in "Other noncurrent obligations" related to the disputed portion of the damages judgment. The Company is confident of its chances of defending the entire judgment on appeal, particularly the trial court's determinations on important factual issues, which will be accorded deferential review on appeal.
Gain Contingency - Dow v. Nova Chemicals Corporation Ethylene Asset Matter
On September 18, 2019, the Court of the Queen’s Bench in Alberta, Canada, signed a judgment ordering Nova to pay the Company $1.43 billion Canadian dollars (equivalent to approximately $1.08 billion U.S. dollars) by October 11, 2019, for damages the Company incurred through 2012 related to the companies’ jointly-owned ethylene asset in Joffre, Alberta, Canada. The Court, which initially ruled in June 2018, found that Nova failed to operate the ethylene asset at full capacity for more than ten years, and furthermore, that Nova violated several contractual agreements related to the Company receiving its share of the asset’s ethylene production. These actions resulted in reduced productivity and sales for the Company. Nova has appealed the judgment, however, certain portions of it are not in dispute and are owed to the Company regardless of the outcome of Nova's appeal. As a result of these actions and in accordance with ASC 450-30 “Gain Contingencies,” the Company recorded a $186 million pretax gain in the third quarter of 2019, of which $170 million was included in "Sundry income (expense) - net" and $16 million was included in
"Selling, general and administrative expenses" in the consolidated statements of income and related to Packaging & Specialty Plastics. In October 2019, Nova paid $1.08 billion Canadian dollars (equivalent to approximately $0.8 billion U.S. dollars) directly to the Company, and remitted $347 million Canadian dollars to the Canada Revenue Agency ("CRA") for the tax account of one of the Company's subsidiaries. The Company has sought a refund of the entire amount remitted to the CRA. At December 31, 2019, $265 million was included in "Noncurrent receivables" in the Company's consolidated balance sheets related to the withholding tax and $893 million was included in "Other noncurrent obligations" in the Company's consolidated balance sheets related to the disputed portion of the damages judgment. Dow is confident of its chances of defending the entire judgment on appeal, particularly the trial court's determinations on important factual and discretionary issues, which will be accorded deferential review on appeal.
Purchase Commitments
The Company has outstanding purchase commitments and various commitments for take-or-pay or throughput agreements. The Company was not aware of any purchase commitments that were negotiated as part of a financing arrangement for the facilities that will provide the contracted goods or services or for the costs related to those goods or services at December 31, 20182019 and 2017.2018.
Guarantees
The following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for each type of guarantee:guarantees:
|
| | | | | | | | | | | | | | |
| Guarantees | Dec 31, 2019 | Dec 31, 2018 |
| In millions | Final Expiration | Maximum Future Payments | Recorded Liability | Final Expiration | Maximum Future Payments | Recorded Liability |
| Guarantees | 2023 | $ | 3,952 |
| $ | 10 |
| 2023 | $ | 4,273 |
| $ | 22 |
|
|
| | | | | | | | | | | | | | |
| Guarantees | Dec 31, 2018 | Dec 31, 2017 |
| In millions | Final Expiration | Maximum Future Payments | Recorded Liability | Final Expiration | Maximum Future Payments | Recorded Liability |
| Guarantees | 2023 | $ | 4,523 |
| $ | 25 |
| 2023 | $ | 4,774 |
| $ | 49 |
|
| Residual value guarantees | 2028 | 885 |
| 130 |
| 2027 | 889 |
| 135 |
|
| Total guarantees | | $ | 5,408 |
| $ | 155 |
| | $ | 5,663 |
| $ | 184 |
|
Guarantees
Guarantees arise during the ordinary course of business from relationships with customers, committed accounts receivable facilities and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others (via delivery of cash or other assets) if specified triggering events occur. With guarantees, such as commercial or financial contracts, non-performance by the guaranteed party triggers the obligation of the Company to make payments to the beneficiary of the guarantee. The majority of the Company’s guarantees relate to debt of nonconsolidated affiliates, which have expiration dates ranging from less than one year to less than
five years, and trade financing transactions in Latin America, which typically expire within one year of inception. four years. The Company’s current expectation is that future payment or performance related to the non-performance of others is considered remote.
The Company has entered into guarantee agreements (“Guarantees”) related to project financing for Sadara, a nonconsolidated affiliate.Sadara. The total of an Islamic bond and additional project financing (collectively “Total Project Financing”) obtained by Sadara is approximately $12.5 billion. Sadara had $11.7$10.8 billion of Total Project Financing outstanding at December 31, 20182019 ($12.411.7 billion at December 31, 2017)2018). The Company's guarantee of the Total Project Financing is in proportion to the Company's 35 percent ownership interest in Sadara, or up to approximately $4.2$3.9 billion when the project financing is fully drawn. Sadara successfully completed an extensive operational testing program in December 2018, however, the Guarantees will be released upon the satisfactory fulfillment of certain project completion conditions, which is expected by the middleend of 2019,the first quarter of 2020, and must occur no later than December 2020.
Residual Value Guarantees
The Company provides guarantees related to leased assets specifying the residual value that will be available to the lessor at lease termination through sale of the assets to the lessee or third parties.
Operating Leases
The Company routinely leases premises for use as sales and administrative offices, warehouses and tanks for product storage, motor vehicles, railcars, computers, office machines and equipment. In addition, the Company leases aircraft in the United States. The terms for these leased assets vary depending on the lease agreement. Some leases contain renewal provisions, purchase options and escalation clauses.
Rental expenses under leases, net of sublease rental income, were $771 million in 2018, $757 million in 2017 and $661 million in 2016. Future minimum payments under leases with remaining non-cancelable terms in excess of one year are as follows:
|
| | | |
| Minimum Lease Commitments at Dec 31, 2018 |
| In millions |
| 2019 | $ | 412 |
|
| 2020 | 369 |
|
| 2021 | 328 |
|
| 2022 | 297 |
|
| 2023 | 253 |
|
| 2024 and thereafter | 978 |
|
| Total | $ | 2,637 |
|
Asset Retirement Obligations
DowThe Company has 164109 manufacturing sites in 3531 countries. Most of these sites contain numerous individual manufacturing operations, particularly at the Company’s larger sites. Asset retirement obligations are recorded as incurred and reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. The retirement of assets may involve such efforts as remediation and treatment of asbestos, contractually required demolition, and other related activities, depending on the nature and location of the assets; and retirement obligations are typically realized only upon demolition of those facilities. In identifying asset retirement obligations, the Company considers identification of legally enforceable obligations, changes in existing law, estimates of potential settlement dates and the calculation of an appropriate discount rate to be used in calculating the fair value of the obligations. DowThe Company has a well-established global process to identify, approve and track the demolition of retired or to-be-retired facilities; and no assets are retired from service until this process has been followed. DowThe Company typically forecasts demolition projects based on the usefulness of the assets; environmental, health and safety concerns; and other similar considerations. Under this process, as demolition projects are identified and approved, reasonable estimates are determined for the time frames during which any related asset retirement obligations are expected to be settled. For those assets where a range of potential settlement dates may be reasonably estimated, obligations are recorded. DowThe Company routinely reviews all changes to items under consideration for demolition to determine if an adjustment to the value of the asset retirement obligation is required.
The Company has recognized asset retirement obligations for the following activities: demolition and remediation activities at manufacturing sites primarily in the United States, Canada, Brazil, Argentina, Columbia, China, Japan, United Arab Emirates, Australia and Europe; and capping activities at landfill sites in the United States, Canada and Brazil. The Company has also recognized conditional asset retirement obligations related to asbestos encapsulation as a result of planned demolition and remediation activities at manufacturing and administrative sites primarily in the United States, Canada, Argentina, Columbia, ChinaAustralia and Europe. The aggregate carrying amount of conditional asset retirement obligations recognized by the Company (included in the asset retirement obligations balance shown below) was $24$19 million at December 31, 20182019 ($2022 million at December 31, 2017)2018).
The following table shows changes in the aggregate carrying amount of the Company’s asset retirement obligations for the years ended December 31, 20182019 and 2017:2018:
|
| | | | | | |
| Asset Retirement Obligations | 2019 | 2018 |
| In millions |
| Balance at Jan 1 | $ | 109 |
| $ | 100 |
|
| Additional accruals | 10 |
| 9 |
|
| Liabilities settled | (7 | ) | (3 | ) |
| Accretion expense | 2 |
| 3 |
|
| Revisions in estimated cash flows | 3 |
| — |
|
| Other | (13 | ) | — |
|
| Balance at Dec 31 | $ | 104 |
| $ | 109 |
|
|
| | | | | | |
| Asset Retirement Obligations | 2018 | 2017 |
| In millions |
| Balance at Jan 1 | $ | 104 |
| $ | 110 |
|
| Additional accruals | 10 |
| 3 |
|
| Liabilities settled | (4 | ) | (9 | ) |
| Accretion expense | 3 |
| 5 |
|
| Revisions in estimated cash flows | — |
| (9 | ) |
| Other | 1 |
| 4 |
|
| Balance at Dec 31 | $ | 114 |
| $ | 104 |
|
The discount rate used to calculate the Company’s asset retirement obligations at December 31, 2018,2019, was 3.542.12 percent (2.04(3.54 percent at December 31, 2017)2018). These obligations are included in the consolidated balance sheets as "Accrued and other current liabilities" and "Other noncurrent obligations."
The Company has not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in its consolidated financial statements. Assets that have not been submitted/reviewed for potential demolition activities are considered to have continued usefulness and are generally still operating normally. Therefore, without a plan to demolish the assets or the expectation of a plan, such as shortening the useful life of assets for depreciation purposes in accordance with the accounting guidance related to property, plant and equipment, the Company is unable to reasonably forecast a time frame to use for present value calculations. As such, the Company has not recognized obligations for individual plants/buildings at its manufacturing sites where estimates of potential settlement dates cannot be reasonably made. In addition, the Company has not recognized conditional asset retirement obligations for the capping of its approximately 3736 underground storage wells and 128131 underground brine mining and other wells at Dow-ownedCompany-owned sites when there are no plans or expectations of plans to exit the sites. It is the opinion of the Company’s management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material impact on the Company’s consolidated financial statements based on current costs.
NOTE 18 - LEASES
Operating lease ROU assets are included in "Operating lease right-of-use assets" while finance lease ROU assets are included in "Net property" in the consolidated balance sheets. With respect to lease liabilities, operating lease liabilities are included in "Operating lease liabilities - current" and "Operating lease liabilities - noncurrent," and finance lease liabilities are included in "Long-term debt due within one year" and "Long-Term Debt" in the consolidated balance sheets.
Dow routinely leases sales and administrative offices, power plants, production facilities, warehouses and tanks for product storage, aircraft, motor vehicles, railcars, computers, office machines and equipment. Some leases contain renewal provisions, purchase options and escalation clauses and the terms for these leased assets vary depending on the lease agreement. These leased assets have remaining lease terms of up to 50 years. See Notes 1 and 2 for additional information on leases.
The components of lease cost for operating and finance leases for the year ended December 31, 2019 were as follows:
|
| | | |
| Lease Cost | Year Ended Dec 31, 2019 |
| In millions |
| Operating lease cost | $ | 532 |
|
| Finance lease cost | |
| Amortization of right-of-use assets - finance | $ | 39 |
|
| Interest on lease liabilities - finance | 25 |
|
| Total finance lease cost | $ | 64 |
|
| Short-term lease cost | $ | 204 |
|
| Variable lease cost | 198 |
|
| Sublease income | (4 | ) |
| Total lease cost | $ | 994 |
|
The following table provides supplemental cash flow information related to leases:
|
| | | |
| Other Lease Information | Year Ended Dec 31, 2019 |
| In millions |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows for operating leases | $ | 544 |
|
| Operating cash flows for finance leases | $ | 25 |
|
| Financing cash flows for finance leases | $ | 34 |
|
The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at December 31, 2019.
|
| | | | |
| Lease Position | Balance Sheet Classification | Dec 31, 2019 |
| In millions |
| Right-of-use assets obtained in exchange for lease obligations: | | |
Operating leases 1 | | $ | 2,476 |
|
| Finance leases | | $ | 89 |
|
| Assets | | |
| Operating lease assets | Operating lease right-of-use assets | $ | 2,072 |
|
| Finance lease assets | Property | 486 |
|
| Finance lease amortization | Accumulated depreciation | (167 | ) |
| Total lease assets | | $ | 2,391 |
|
| Liabilities | | |
| Current | | |
| Operating | Operating lease liabilities - current | $ | 421 |
|
| Finance | Long-term debt due within one year | 32 |
|
| Noncurrent | | |
| Operating | Operating lease liabilities - noncurrent | 1,739 |
|
| Finance | Long-Term Debt | 363 |
|
| Total lease liabilities | | $ | 2,555 |
|
| |
| 1. | Includes $2.3 billion related to the adoption of Topic 842. See Note 2 for additional information. |
|
| | |
| Lease Term and Discount Rate | Dec 31, 2019 |
| Weighted-average remaining lease term | |
| Operating leases | 8.0 years |
|
| Finance leases | 12.3 years |
|
| Weighted-average discount rate | |
| Operating leases | 4.09 | % |
| Finance leases | 6.28 | % |
The following table provides the maturities of lease liabilities at December 31, 2019:
|
| | | | | | |
| Maturities of Lease Liabilities at Dec 31, 2019 | Operating Leases | Finance Leases |
| In millions |
| 2020 | $ | 492 |
| $ | 60 |
|
| 2021 | 422 |
| 55 |
|
| 2022 | 355 |
| 50 |
|
| 2023 | 285 |
| 84 |
|
| 2024 | 219 |
| 29 |
|
| 2025 and thereafter | 803 |
| 310 |
|
| Total future undiscounted lease payments | $ | 2,576 |
| $ | 588 |
|
| Less imputed interest | 416 |
| 193 |
|
| Total present value of lease liabilities | $ | 2,160 |
| $ | 395 |
|
At December 31, 2019, Dow had additional leases of approximately $71 million, primarily for equipment, which had not yet commenced. These leases are expected to commence in 2020 and 2021, with lease terms of up to 20 years.
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 Dec 31, 2018 | |
| In millions | |
| 2019 | $ | 366 |
|
| 2020 | 329 |
|
| 2021 | 296 |
|
| 2022 | 269 |
|
| 2023 | 227 |
|
| 2024 and thereafter | 855 |
|
| Total | $ | 2,342 |
|
Dow provides guarantees related to certain leased assets, specifying the residual value that will be available to the lessor at lease termination through the sale of the assets to the lessee or third parties. The following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for residual value guarantees at December 31, 2019 and 2018. There was no recorded liability related to these residual value guarantees at December 31, 2019, as payment of such residual value guarantees was not determined to be probable. The lease agreements do not contain any material restrictive covenants.
|
| | | | | | | | | | | | | | |
| Lease Guarantees | Dec 31, 2019 | Dec 31, 2018 |
| In millions | Final Expiration | Maximum Future Payments | Recorded Liability | Final Expiration | Maximum Future Payments | Recorded Liability |
| Residual value guarantees | 2028 | $ | 792 |
| $ | — |
| 2028 | $ | 885 |
| $ | 130 |
|
NOTE 1719 – STOCKHOLDERS’ EQUITY
Merger with Historical DuPont
Effective with the Merger, each share of DowTDCC Common Stock (excluding any shares of DowTDCC Common Stock that were held in treasury, which were automatically canceled and retired for no consideration) was converted into the right to receive one1 fully paid and non-assessable share of DowDuPont Common Stock. As a result, in the third quarter of 2017, the Company recorded a reduction in "Treasury stock" of $935 million, a reduction in "Common stock" of $3,107 million and an increase in "Additional paid in capital" of $2,172 million in the consolidated balance sheets. The Company hasSee Note 3 for additional information.
Common Stock
Dow Inc.
Dow Inc. was incorporated in 2018 with 100 authorized and issued shares of common stock, issued and outstanding, par value $0.01 per share, owned solely by its parent company, DowDuPont. In the first quarter of 2019, in connection with the separation and distribution of DowDuPont’s materials science business, the number of authorized shares of common stock was increased to 5,000,000,000 shares, par value $0.01 per share, and Dow Inc.'s 100 shares of issued common stock were recapitalized into 748,771,240 shares of common stock. Dow Inc.'s common stock was solely owned by DowDuPont through March 31, 2019, and on April 1, 2019, Dow Inc. became an independent, publicly traded company. Dow Inc. common stock is listed on the NYSE under the symbol “DOW.” See NoteNotes 3 and 4 for additional information.
Cumulative Convertible Perpetual Preferred Stock, Series A
Equity securities in the form of Cumulative Convertible Perpetual Preferred Stock, Series A (“preferred series A”) were issued on April 1, 2009 to Berkshire Hathaway Inc. in the amount of $3 billion (3 million shares) and the Kuwait Investment Authority in the amount of $1 billion (1 million shares). Shareholders of preferred series A could convert all or any portion of their shares, at their option, at any time, into shares of the Company’s common stock at an initial conversion ratio of 24.2010 shares of common stock for each share of preferred series A. On or after the fifth anniversary of the issuance date, if the common stock price exceeded $53.72 per share for any 20 trading days in a consecutive 30-day window, the Company had the option, at any time, in whole or in part, to convert preferred series A into common stock at the then applicable conversion rate.
On December 15, 2016, the trading price of Dow's common stock closed at $58.35, marking the 20th trading day in the previous 30 trading days that the common stock closed above $53.72, triggering the right of the Company to exercise its conversion right. On December 16, 2016, the Company sent a Notice of Conversion at the Option of the Company (the "Notice") to all holders of its preferred series A. Pursuant to the Notice, on December 30, 2016 (the "Conversion Date") all 4 million outstanding shares of preferred series A (with a carrying value of $4,000 million) were converted into shares of common stock at a conversion ratio of 24.2010 shares of common stock for each share of preferred series A, resulting in the issuance of 96.8 million shares of common stock from treasury stock. The treasury stock issued was carried at an aggregate historical cost of $4,695 million, resulting in a reduction to "Additional paid-in capital" in the consolidated balance sheets of $695 million. From and after the Conversion Date, no shares of the preferred series A are issued or outstanding and all rights of the holders of the preferred series A have terminated. On January 6, 2017, the Company filed an amendment to the Company’s Restated Certificate of Incorporation by way of a certificate of elimination (the “Certificate of Elimination”) with the Secretary of State of the State of Delaware which had the effect of: (a) eliminating the previously designated 4 million shares of the preferred series A, none of which were outstanding at the time of the filing; (b) upon such elimination, causing such preferred series A to resume the status of authorized and unissued shares of preferred stock, par value $1.00 per share, of the Company, without designation as to series; and (c) eliminating from the Company’s Restated Certificate of Incorporation all references to, and all matters set forth in, the certificates of designations for the preferred series A.
The Company paid cumulative dividends on preferred series A at a rate of 8.5 percent per annum, or $85 million per quarter. The final dividend for the preferred series A was declared on December 15, 2016 and payable on the earlier of the Conversion Date (if applicable) or January 3, 2017, to shareholders of record at December 15, 2016. The dividend was paid in full on the Conversion Date.
Common Stock
Prior to the Merger, the Company issuedmay issue Dow Inc. common stock shares out of treasury stock or as new common stock shares for purchases under the Employee Stock Purchase Plan ("ESPP"), for options exercised and for the release of restricted stock units ("RSUs") (formerly termed deferred stock), performance stock units ("PSUs") (formerly termed performance deferred stock) and restricted stock. TheSubsequent to the separation from DowDuPont, the number of new Dow Inc. common stock shares issued to employees and non-employee directors priorwas approximately 2.5 million in 2019. Prior to the Merger, the number of new TDCC common stock shares issued to employees and non-employee directors was zero0 in 2017 (zero in 2016).2017. See Note 2022 for additional information on changes to Dowthe Company's equity awards in connection with the Merger.Merger and separation from DowDuPont.
TDCC
Effective with the Merger and through March 31, 2019, TDCC had 100 authorized and issued shares of common stock, par value $0.01 per share, owned solely by DowDuPont. Effective with the separation from DowDuPont, TDCC became a wholly owned subsidiary of Dow Inc., which now holds all 100 authorized and issued shares of common stock of TDCC. See Notes 3 and 4 for additional information.
Retained Earnings
Dow Inc.
There are no significant restrictions limiting the Company’sDow Inc.’s ability to pay dividends. Subsequent to the separation from DowDuPont, Dow Inc. declared dividends of $2.10 per share in 2019.
Undistributed earnings of nonconsolidated affiliates included in retained earnings were $852 million at December 31, 2019 and $1,856 million at December 31, 2018.
TDCC
Prior to the Merger, the CompanyTDCC declared dividends of $1.38 per share in 2017 ($1.84 per share in 2016).2017. Effective with the Merger, DowTDCC no longer hashad publicly traded common stock. Dow'sTDCC's common shares arewere owned solely by its parent company,DowDuPont, prior to the separation on April 1, 2019, and TDCC's Board of Directors determined whether or not there would be a dividend distribution to DowDuPont. AsEffective with the separation from DowDuPont on April 1, 2019, TDCC became a result, the Company’swholly owned subsidiary of Dow Inc. and TDCC's Board of Directors determines whether or not there will be a dividend distribution to DowDuPont.Dow Inc. See Note 2426 for additional information.information on dividends paid by TDCC to DowDuPont and Dow Inc.
Undistributed earningsSee Note 4 for information on the impact of nonconsolidated affiliates included in retained earnings were $1,760 million at December 31, 2018 and $1,731 million at December 31, 2017.the receipt of ECP, which was accounted for as a transfer between entities under common control.
Employee Stock Ownership Plan
The Dow Employee Stock Ownership Plan (the “ESOP”) is an integral part of The Dow Chemical Company Employees’ Savings Plan (the “Plan”). A significant majority of full-time employees in the United States are eligible to participate in the Plan. DowThe Company uses the ESOP to provide the Company’sits matching contribution in the form of stock to Plan participants. Prior to the Merger, contributions were in the form of DowTDCC Common Stock. Effective with the Merger, shares of Dow stockTDCC Common Stock held by the ESOP were converted into shares of DowDuPont Common Stock at a ratio of 1:1. Effective with the separation from DowDuPont, the DowDuPont Common Stock held by the ESOP received a Dow Inc. Common Stock share dividend at a ratio of 3:1, resulting
in the ESOP holding both DowDuPont and Dow Inc. shares. Subsequent to the separation from DowDuPont, the ESOP independent fiduciary sold the DowDuPont shares and purchased additional Dow Inc. shares with the proceeds.
In connection with the acquisition of Rohm and Haas on April 1, 2009, the Rohm and Haas Employee Stock Ownership Plan (the "Rohm and Haas ESOP") was merged into the Plan, and the Company assumed the $78 million balance of debt at 9.8 percent interest with final maturity in 2020 that was used to finance share purchases by the Rohm and Haas ESOP in 1990. The outstanding balance of the debt was $3 million at December 31, 2019 and $10 million at December 31, 2018 and $17 million at December 31, 2017.2018.
Dividends on unallocated shares held by the ESOP are used by the ESOP to make debt service payments and to purchase additional shares if dividends exceed the debt service payments. Dividends on allocated shares are used by the ESOP to make debt service payments to the extent needed; otherwise, they are paid to the Plan participants. Shares are released for allocation to participants based on the ratio of the current year’s debt service to the sum of the principal and interest payments over the life of the loan. The shares are allocated to Plan participants in accordance with the terms of the Plan.
Compensation expense for allocated shares is recorded at the fair value of the shares on the date of allocation. Compensation expense reflected in income from continuing operations for ESOP shares was $175$77 million in 2019, $144 million in 2018 $248and $200 million in 2017 and $192 million in 2016.2017. At December 31, 2018, 15.32019, 12.6 million shares out of a total 21.816.1 million shares held by the ESOP had been allocated to participants’ accounts; 1.5 million shares were released but unallocated;accounts and 5.03.5 million shares, at a fair value of $267$190 million, were considered unearned.
Treasury Stock
Dow Inc.
On April 1, 2019, Dow Inc.'s Board of Directors ratified the share repurchase program originally approved on March 15, 2019, authorizing up to $3 billion to be spent on the repurchase of the Company's common stock, with no expiration date. In 2019, Dow Inc. repurchased $500 million of Dow Inc. common stock. At December 31, 2019, $2.5 billion of the share repurchase program authorization remained available for repurchases.
TDCC
In 2013, theTDCC's Board of Directors approved a share buy-back program. As a result of subsequent authorizations approved by theTDCC's Board of Directors, the total authorized amount of the share repurchase program was $9.5 billion. Effective with the Merger, the share repurchase program was canceled. Over the duration of the program, a total of $8.1 billion was spent on the repurchase of DowTDCC Common Stock.
The Company historically issuedmay issue shares for purchases under the Employee Stock Purchase Plan,ESPP, for options exercised as well as for the release of deferred, performance deferredRSUs, PSUs and restricted stock out of treasury stock or as new common stock shares. The number of treasury shares issued to employees and non-employee directors under the Company’s stock-based compensation programs are summarized in the following table. See Note 2022 for additional information on changes to Dowthe Company equity awards in connection with the Merger.Merger and separation from DowDuPont.
|
| | | | | |
| Treasury Shares Issued Under Stock-Based Compensation Programs | | | |
| In thousands | 2018 | 2017 1 | 2016 |
| To employees and non-employee directors | N/A | 14,195 |
| 14,494 |
|
|
| | | | | |
| Treasury Shares Issued Under Stock-Based Compensation Programs | 2019 1 | 2018 | 2017 2 |
| To employees and non-employee directors | — |
| N/A | 14,194,282 |
|
| |
| 1. | Reflects Dow Inc. activity subsequent to the separation from DowDuPont. |
| |
| 2. | Reflects TDCC activity prior to the Merger. |
The following table provides a reconciliation of Dow Common StockInc. common stock activity prior to the Merger, for the years ended December 31, 20172019 and 2016:2018:
|
| | | | |
| Shares of Dow Common Stock | Issued | Held in Treasury |
| In thousands |
| Balance at Jan 1, 2016 | 1,242,795 |
| 125,853 |
|
Issued 1 | — |
| (14,494 | ) |
| Repurchased | — |
| 17,107 |
|
| Preferred stock converted to common stock | — |
| (96,804 | ) |
| Balance at Dec 31, 2016 | 1,242,795 |
| 31,662 |
|
Issued 1 | — |
| (14,195 | ) |
Converted to DowDuPont shares or canceled on Aug 31, 2017 2 | (1,242,795 | ) | (17,467 | ) |
| Balance at Aug 31, 2017 | — |
| — |
|
|
| | | | |
| Shares of Dow Inc. Common Stock | Issued | Held in Treasury |
| |
| Balance at Jan 1, 2018 | — |
| — |
|
Issued 1 | 100 |
| — |
|
| Balance at Jan 1, 2019 | 100 |
| — |
|
| Impact of recapitalization | 748,771,140 |
| — |
|
Issued 2 | 2,457,404 |
| — |
|
| Repurchased | — |
| 9,729,834 |
|
| Balance at Dec 31, 2019 | 751,228,644 |
| 9,729,834 |
|
| |
| 1. | Dow Inc. was incorporated in 2018 with 100 authorized and issued shares of common stock, par value $0.01 per share. |
| |
| 2. | Shares issued to employees and non-employee directors under the Company's equity compensation plans. |
| |
2. | Each share of Dow Common Stock issued and outstanding immediately prior to the Merger was converted into one share of DowDuPont Common Stock; treasury shares were canceled as a result of the Merger. |
Accumulated Other Comprehensive Loss
The following table summarizes the changes and after-tax balances ofin each component of AOCL for the years ended December 31, 2019, 2018 and 2017 and 2016:were as follows:
|
| | | | | | | | | |
| Accumulated Other Comprehensive Loss | 2019 | 2018 | 2017 |
| In millions |
| Unrealized Gains (Losses) on Investments | | | |
Beginning balance 1 | $ | (51 | ) | $ | 17 |
| $ | 43 |
|
| Unrealized gains (losses) on investments | 178 |
| (93 | ) | 38 |
|
| Less: Tax (expense) benefit | (38 | ) | 19 |
| (13 | ) |
| Net unrealized gains (losses) on investments | 140 |
| (74 | ) | 25 |
|
(Gains) losses reclassified from AOCL to net income 2 | (33 | ) | 9 |
| (110 | ) |
Less: Tax expense (benefit) 3 | 8 |
| (2 | ) | 39 |
|
| Net (gains) losses reclassified from AOCL to net income | (25 | ) | 7 |
| (71 | ) |
| Other comprehensive income (loss), net of tax | 115 |
| (67 | ) | (46 | ) |
Reclassification of stranded tax effects 4 | — |
| (1 | ) | — |
|
| Ending balance | $ | 64 |
| $ | (51 | ) | $ | (3 | ) |
| Cumulative Translation Adjustment | | | |
| Beginning balance | $ | (1,813 | ) | $ | (1,481 | ) | $ | (2,381 | ) |
| Gains (losses) on foreign currency translation | 59 |
| (215 | ) | 1,006 |
|
| Less: Tax (expense) benefit | (2 | ) | (6 | ) | (98 | ) |
| Net gains (losses) on foreign currency translation | 57 |
| (221 | ) | 908 |
|
(Gains) losses reclassified from AOCL to net income 5 | (89 | ) | (4 | ) | (8 | ) |
| Other comprehensive income (loss), net of tax | (32 | ) | (225 | ) | 900 |
|
Impact of common control transaction 6 | 710 |
| — |
| — |
|
Reclassification of stranded tax effects 4 | — |
| (107 | ) | — |
|
| Ending balance | $ | (1,135 | ) | $ | (1,813 | ) | $ | (1,481 | ) |
| Pension and Other Postretirement Benefits | | | |
| Beginning balance | $ | (7,965 | ) | $ | (6,998 | ) | $ | (7,389 | ) |
| Gains (losses) arising during the period | (1,699 | ) | (625 | ) | (3 | ) |
| Less: Tax (expense) benefit | 413 |
| 130 |
| (20 | ) |
| Net gains (losses) arising during the period | (1,286 | ) | (495 | ) | (23 | ) |
Amortization and recognition of net loss and prior service credits 7 | 504 |
| 594 |
| 607 |
|
Less: Tax expense (benefit) 3 | (117 | ) | (139 | ) | (193 | ) |
| Net loss and prior service credits reclassified from AOCL to net income | 387 |
| 455 |
| 414 |
|
| Other comprehensive income (loss), net of tax | (899 | ) | (40 | ) | 391 |
|
Impact of common control transaction 6 | 83 |
| — |
| — |
|
Reclassification of stranded tax effects 4 | — |
| (927 | ) | — |
|
| Ending balance | $ | (8,781 | ) | $ | (7,965 | ) | $ | (6,998 | ) |
| Derivative Instruments | | | |
| Beginning balance | $ | (56 | ) | $ | (109 | ) | $ | (95 | ) |
| Gains (losses) on derivative instruments | (470 | ) | 6 |
| 2 |
|
| Less: Tax (expense) benefit | 101 |
| (2 | ) | (1 | ) |
| Net gains (losses) on derivative instruments | (369 | ) | 4 |
| 1 |
|
(Gains) losses reclassified from AOCL to net income 8 | 44 |
| 89 |
| (13 | ) |
Less: Tax expense (benefit) 3 | (13 | ) | (18 | ) | (2 | ) |
| Net (gains) losses reclassified from AOCL to net income | 31 |
| 71 |
| (15 | ) |
| Other comprehensive income (loss), net of tax | (338 | ) | 75 |
| (14 | ) |
Reclassification of stranded tax effects 4 | — |
| (22 | ) | — |
|
| Ending balance | $ | (394 | ) | $ | (56 | ) | $ | (109 | ) |
| Total AOCL ending balance | $ | (10,246 | ) | $ | (9,885 | ) | $ | (8,591 | ) |
|
| | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Loss | Unrealized Gains (Losses) on Investments | Cumulative Translation Adj | Pension and Other Postretire Benefits | Derivative Instruments | Total Accum Other Comp Loss |
| In millions |
| 2016 | | | | | |
| Balance at Jan 1, 2016 | $ | 47 |
| $ | (1,737 | ) | $ | (6,769 | ) | $ | (208 | ) | $ | (8,667 | ) |
| Other comprehensive income (loss) before reclassifications | 32 |
| (644 | ) | (1,354 | ) | 84 |
| (1,882 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | (36 | ) | — |
| 734 |
| 29 |
| 727 |
|
| Net other comprehensive income (loss) | $ | (4 | ) | $ | (644 | ) | $ | (620 | ) | $ | 113 |
| $ | (1,155 | ) |
| Balance at Dec 31, 2016 | $ | 43 |
| $ | (2,381 | ) | $ | (7,389 | ) | $ | (95 | ) | $ | (9,822 | ) |
| 2017 | | | | | |
| Other comprehensive income (loss) before reclassifications | 25 |
| 908 |
| (23 | ) | 1 |
| 911 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | (71 | ) | (8 | ) | 414 |
| (15 | ) | 320 |
|
| Net other comprehensive income (loss) | $ | (46 | ) | $ | 900 |
| $ | 391 |
| $ | (14 | ) | $ | 1,231 |
|
| Balance at Dec 31, 2017 | $ | (3 | ) | $ | (1,481 | ) | $ | (6,998 | ) | $ | (109 | ) | $ | (8,591 | ) |
| 2018 | | | | | |
Balance at Jan 1, 2018 1 | $ | 17 |
| $ | (1,481 | ) | $ | (6,998 | ) | $ | (109 | ) | $ | (8,571 | ) |
| Other comprehensive income (loss) before reclassifications | (74 | ) | (221 | ) | (495 | ) | 4 |
| (786 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | 7 |
| (4 | ) | 455 |
| 71 |
| 529 |
|
| Net other comprehensive income (loss) | $ | (67 | ) | $ | (225 | ) | $ | (40 | ) | $ | 75 |
| $ | (257 | ) |
Reclassification of stranded tax effects 2 | $ | (1 | ) | $ | (107 | ) | $ | (927 | ) | $ | (22 | ) | $ | (1,057 | ) |
| Balance at Dec 31, 2018 | $ | (51 | ) | $ | (1,813 | ) | $ | (7,965 | ) | $ | (56 | ) | $ | (9,885 | ) |
| |
| 1. | The beginning balance of "Unrealized gains (losses) on investments" for 2018 was increased by $20 million to reflect the impact of adoption of ASU 2016-01. See Notes 1 and 2 for additional information. |
| |
| 2. | Amounts reclassifiedReclassified to retained earnings as a result of the adoption of ASU 2018-02. See Notes 1 and 2 for additional information. |
The tax effects on the net activity related to each component of other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016 were as follows:
|
| | | | | | | | | |
Tax Benefit (Expense) 1 | 2018 | 2017 | 2016 |
| In millions |
| Unrealized gains (losses) on investments | $ | 17 |
| $ | 26 |
| $ | (2 | ) |
| Cumulative translation adjustments | (6 | ) | (98 | ) | (171 | ) |
| Pension and other postretirement benefit plans | (9 | ) | (213 | ) | 438 |
|
| Derivative instruments | (20 | ) | (3 | ) | (32 | ) |
Tax benefit (expense) from income taxes related to other comprehensive income (loss) items | $ | (18 | ) | $ | (288 | ) | $ | 233 |
|
| |
1. | Prior year amounts have been updated to conform with the current year presentation. |
A summary of the reclassifications out of AOCL for the years ended December 31, 2018, 2017 and 2016 is provided as follows:
|
| | | | | | | | | | | |
| | Reclassifications Out of Accumulated Other Comprehensive Loss In millions | 2018 | 2017 | 2016 | Consolidated Statements of Income Classification |
| |
| | Unrealized (gains) losses on investments | $ | 9 |
| $ | (110 | ) | $ | (56 | ) | See (1) below |
| | Tax (benefit) expense | (2 | ) | 39 |
| 20 |
| See (2) below |
| | After tax | $ | 7 |
| $ | (71 | ) | $ | (36 | ) | |
| | Cumulative translation adjustments | $ | (4 | ) | $ | (8 | ) | $ | — |
| See (3) below |
| | Pension and other postretirement benefit plans | $ | 594 |
| $ | 607 |
| $ | 913 |
| See (4) below |
| | Tax benefit | (139 | ) | (193 | ) | (179 | ) | See (2) below |
| | After tax | $ | 455 |
| $ | 414 |
| $ | 734 |
| |
| | Derivative instruments | $ | 89 |
| $ | (13 | ) | $ | 34 |
| See (5) below |
| | Tax benefit | (18 | ) | (2 | ) | (5 | ) | See (2) below |
| | After tax | $ | 71 |
| $ | (15 | ) | $ | 29 |
| |
| | Total reclassifications for the period, after tax | $ | 529 |
| $ | 320 |
| $ | 727 |
| |
| |
1. | "Net"Net sales" and "Sundry income (expense) - net." |
| |
2.3. | "ProvisionReclassified to "Provision for income taxes." |
| |
3.4. | "SundryAmounts reclassified to "Retained earnings" as a result of the adoption of ASU 2018-02. |
| |
| 5. | Reclassified to "Sundry income (expense) - net." |
| |
4.6. | These AOCL components are included in the computation of net periodic benefit costReclassified to "Retained earnings" as a result of the Company's defined benefit pension and other postretirement benefit plans.separation from DowDuPont on April 1, 2019. See Note 19 for additional information. In the year ended December 31, 2016, $360 million was included in “Sundry income (expense) - net” (zero impact to "Provision for income taxes") related to the Dow Silicones ownership restructure. See Note 54 for additional information. |
| |
5. | "Cost of sales," "Sundry income (expense) - net" and "Interest expense and amortization of debt discount." |
7. These AOCL components are included in the computation of net periodic benefit cost of the Company's defined benefit pension and other postretirement benefit plans. See Note 21 for additional information.
8. Reclassified to "Cost of sales," "Sundry income (expense) - net" and "Interest expense and amortization of debt discount."
NOTE 1820 – NONCONTROLLING INTERESTS
Ownership interests in the Company's subsidiaries held by parties other than the Company are presented separately from the Company's equity in the consolidated balance sheets as "Noncontrolling interests." The amount of consolidated net income attributable to the Company and the noncontrolling interests are both presented on the face of the consolidated statements of income.
The following table summarizes the activity for equity attributable to noncontrolling interests for the years ended December 31, 2019, 2018 2017 and 2016:2017:
|
| | | | | | | | | |
| Noncontrolling Interests | | | |
| In millions | 2019 | 2018 | 2017 |
| Balance at Jan 1 | $ | 1,138 |
| $ | 1,186 |
| $ | 1,242 |
|
| Net income attributable to noncontrolling interests - continuing operations | 74 |
| 102 |
| 102 |
|
| Net income attributable to noncontrolling interests - discontinued operations | 13 |
| 32 |
| 28 |
|
Distributions to noncontrolling interests 1 | (77 | ) | (145 | ) | (109 | ) |
Impact of common control transaction 2 | (353 | ) | — |
| — |
|
Purchase of noncontrolling interests 3 | (254 | ) | — |
| — |
|
Deconsolidation of noncontrolling interests 4 | — |
| — |
| (119 | ) |
| Cumulative translation adjustments | 12 |
| (39 | ) | 41 |
|
| Other | — |
| 2 |
| 1 |
|
| Balance at Dec 31 | $ | 553 |
| $ | 1,138 |
| $ | 1,186 |
|
|
| | | | | | | | | |
| Noncontrolling Interests | | | |
| In millions | 2018 | 2017 | 2016 1 |
| Balance at Jan 1 | $ | 1,186 |
| $ | 1,242 |
| $ | 809 |
|
| Net income attributable to noncontrolling interests | 134 |
| 129 |
| 86 |
|
Distributions to noncontrolling interests 2 | (145 | ) | (109 | ) | (123 | ) |
Acquisition of noncontrolling interests 3 | — |
| — |
| 473 |
|
Deconsolidation of noncontrolling interests 4 | — |
| (119 | ) | — |
|
| Cumulative translation adjustments | (39 | ) | 41 |
| (4 | ) |
| Other | 2 |
| 2 |
| 1 |
|
| Balance at Dec 31 | $ | 1,138 |
| $ | 1,186 |
| $ | 1,242 |
|
| |
| 1. | The 2016 activity presented in the table excludes a $202 million cash payment for the purchase of a noncontrolling interest, as the noncontrolling interest was classified as "Accrued and other current liabilities" in the consolidated balance sheets. |
| |
2. | Distributions to noncontrolling interests isare net of $27$7 million in 2019 ($27 million in 2018 ($20and $20 million in 2017 and $53 million in 2016)2017) in dividends paid to a joint venture, which were reclassified to "Equity in earnings of nonconsolidated affiliates" in the consolidated statements of income. Also includes amounts attributable to discontinued operations of $7 million in 2019 ($37 million in 2018 and $28 million in 2017) |
| |
| 2. | Related to the separation from DowDuPont. See Note 4 for additional information. |
| |
| 3. | AssumedRelates to the acquisition of full ownership in the ownership restructure of Dow Silicones.a propylene oxide manufacturing joint venture, which occurred on October 1, 2019. See Note 525 for additional information. As a result of this arrangement, the carrying value of the noncontrolling interest was removed, and “Additional paid-in capital” was adjusted by $38 million. |
| |
| 4. | On June 30, 2017, the Company sold its ownership interest in the SKC Haas Display Films group of companies. See Note 13 for additional information. |
NOTE 1921 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Dow and DuPont did not merge theirAs a result of the Company’s separation from DowDuPont, the number of significant defined benefit pension plans andadministered by the Company decreased from 45 plans to 35 plans, with approximately $270 million of net unfunded pension liabilities transferred to DowDupont. Plans administered by other subsidiaries of DowDuPont that were transferred to the Company were not significant. There were no changes in the number of significant other postretirement benefit plans administered by the Company as a result of the Merger.separation. Existing Company plans that were significantly impacted by the transfer of active plan participants to DowDuPont were remeasured, resulting in curtailment gains and losses and recognition of special termination benefits.
Defined Benefit Pension Plans
The Company has both funded and unfunded defined benefit pension plans that cover employees in the United States and a number of other countries. The U.S. qualified plan covering the parent company is the largest plan. Benefits for employees hired before January 1, 2008, are based on length of service and the employee’s three highest consecutive years of compensation. Employees hired after January 1, 2008, earn benefits that are based on a set percentage of annual pay, plus interest.
The Company's funding policy is to contribute to the plans when pension laws and/or economics either require or encourage funding. In 2018,2019, the Company contributed $1,656$261 million to its continuing operations pension plans which included a $1,100($266 million, discretionary contributionincluding contributions to its principal U.S. pension plan in the third quarterplans of 2018.discontinued operations). Total contributions in 20182019 also included contributions to fund benefit payments for the Company's non-qualified pension plans. The Company expects to contribute approximately $240$250 million to its pension plans in 2019.2020.
The provisions of a U.S. non-qualified pension plan require the payment of plan obligations to certain participants upon a change in control of the Company, which occurred at the time of the Merger. Certain participants could elect to receive a lump-sum payment or direct the Company to purchase an annuity on their behalf using the after-tax proceeds of the lump sum. In the fourth quarter of 2017, the Company paid $940 million to plan participants and $230 million to an insurance company for the purchase of annuities, which were included in "Pension contributions" in the consolidated statements of cash flows. The Company also paid $205 million for income and payroll taxes for participants electing the annuity option, of which $201 million was included in "Cost of sales" and $4 million was included in "Selling, general and administrative expenses" in the consolidated statements of income.income and related to the Corporate segment. The Company recorded a settlement charge of $687 million associated with the payout in the fourth quarter of 2017, which was included in "Sundry income (expense) - net" in the consolidated statements of income.income and related to the Corporate segment.
The weighted-average assumptions used to determine pension plan obligations and net periodic benefit costs for all plans are summarized in the table below:
| | | Weighted-Average Assumptions for All Pension Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended |
| | 2018 | 2017 | 2018 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | 2017 |
| Discount rate | 3.69 | % | 3.17 | % | 3.17 | % | 3.52 | % | 3.85 | % | 2.81 | % | 3.69 | % | 3.50 | % | 3.17 | % | 3.52 | % |
| Interest crediting rate for applicable benefits | 3.72 | % | 3.61 | % | 3.61 | % | 3.45 | % | 4.81 | % | 3.51 | % | 3.72 | % | 3.72 | % | 3.61 | % | 3.45 | % |
| Rate of compensation increase | 3.84 | % | 3.88 | % | 3.88 | % | 3.90 | % | 4.04 | % | 3.92 | % | 3.84 | % | 3.92 | % | 3.88 | % | 3.90 | % |
| Expected return on plan assets | — |
| — |
| 7.11 | % | 7.16 | % | 7.22 | % | — |
| — |
| 7.11 | % | 7.11 | % | 7.16 | % |
The weighted-average assumptions used to determine pension plan obligations and net periodic benefit costs for U.S. plans are summarized in the table below:
|
| | | | | | | | | | |
| Weighted-Average Assumptions for U.S. Pension Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended |
| | 2019 | 2018 | 2019 | 2018 | 2017 |
| Discount rate | 3.41 | % | 4.39 | % | 4.15 | % | 3.66 | % | 4.11 | % |
| Interest crediting rate for applicable benefits | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % |
| Rate of compensation increase | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % |
| Expected return on plan assets | — |
| — |
| 7.92 | % | 7.92 | % | 7.91 | % |
|
| | | | | | | | | | |
| Weighted-Average Assumptions for U.S. Pension Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended |
| | 2018 | 2017 | 2018 | 2017 | 2016 |
| Discount rate | 4.39 | % | 3.66 | % | 3.66 | % | 4.11 | % | 4.40 | % |
| Interest crediting rate for applicable benefits | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % |
| Rate of compensation increase | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | 4.50 | % |
| Expected return on plan assets | — |
| — |
| 7.92 | % | 7.91 | % | 7.77 | % |
Other Postretirement Benefit Plans
The Company provides certain health care and life insurance benefits to retired employees and survivors. The Company’s plans outside of the United States are not significant; therefore, this discussion relates to the U.S. plans only. The plans provide health care benefits, including hospital, physicians’ services, drug and major medical expense coverage, and life insurance benefits. In general, for employees hired before January 1, 1993, the plans provide benefits supplemental to Medicare when retirees are eligible for these benefits. The Company and the retiree share the cost of these benefits, with the Company portion increasing as the retiree has increased years of credited service, although there is a cap on the Company portion. The Company has the ability to change these benefits at any time. Employees hired after January 1, 2008, are not covered under the plans.
The Company funds most of the cost of these health care and life insurance benefits as incurred. In 2018, Dow2019, the Company did not make any contributions to its other postretirement benefit plan trusts. The trusts did not hold assets at December 31, 2018.2019. The Company does not expect to contribute assets to its other postretirement benefit plan trusts in 2019.2020.
The weighted-average assumptions used to determine other postretirement benefit plan obligations and net periodic benefit costs for the U.S. plans are provided below:
|
| | | | | | | | | | |
| Weighted-Average Assumptions for U.S. Other Postretirement Benefits Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended |
| | 2019 | 2018 | 2019 | 2018 | 2017 |
| Discount rate | 3.19 | % | 4.24 | % | 4.01 | % | 3.51 | % | 3.83 | % |
| Health care cost trend rate assumed for next year | 6.25 | % | 6.50 | % | 6.50 | % | 6.75 | % | 7.00 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate health care cost trend rate) | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % |
| Year that the rate reaches the ultimate health care cost trend rate | 2025 | 2025 | 2025 | 2025 | 2025 |
|
| | | | | | | | | | |
| Weighted-Average Assumptions for U.S. Other Postretirement Benefits Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended |
| | 2018 | 2017 | 2018 | 2017 | 2016 |
| Discount rate | 4.24 | % | 3.51 | % | 3.51 | % | 3.83 | % | 3.96 | % |
| Health care cost trend rate assumed for next year | 6.50 | % | 6.75 | % | 6.75 | % | 7.00 | % | 7.25 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate health care cost trend rate) | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % |
| Year that the rate reaches the ultimate health care cost trend rate | 2025 |
| 2025 |
| 2025 |
| 2025 |
| 2025 |
|
Assumptions
The Company determines the expected long-term rate of return on plan assets by performing a detailed analysis of key economic and market factors driving historical returns for each asset class and formulating a projected return based on factors in the current environment. Factors considered include, but are not limited to, inflation, real economic growth, interest rate yield, interest rate spreads and other valuation measures and market metrics. The expected long-term rate of return for each asset class is then weighted based on the strategic asset allocation approved by the governing body for each plan. The Company’s historical experience with the pension fund asset performance is also considered.
The Company uses the spot rate approach to determine the discount rate utilized to measure the service cost and interest cost components of net periodic pension and other postretirement benefit costs for the U.S. and other selected countries. Under the spot rate approach, the Company calculates service costs and interest costs by applying individual spot rates from the Willis Towers Watson RATE:Link yield curve (based on high-quality corporate bond yields) for each selected country to the separate expected cash flow components of service cost and interest cost. Service cost and interest cost for all other plans are determined on the basis of the single equivalent discount rates derived in determining those plan obligations.
The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are based on the yield on high-quality corporate fixed income investments at the measurement date. Future expected actuarially determined cash flows for Dow’sthe Company’s U.S. plans are individually discounted at the spot rates under the Willis Towers Watson U.S. RATE:Link 60-90 corporate yield curve (based on 60th to 90th percentile high-quality corporate bond yields) to arrive at the plan’s obligations as of the measurement date.
The Company utilizes a modified version of the Society of Actuaries’ mortality tables released in 2014 and a modified version of the generational mortality improvement scale released in 2018 for purposes of measuring the U.S. pension and other postretirement obligations, based on an evaluation of the mortality experience of the Company’s pension plans.
Summarized information on the Company's pension and other postretirement benefit plans is as follows:
| | | Change in Projected Benefit Obligations, Plan Assets and Funded Status of All Significant Plans | Defined Benefit Pension Plans | Other Postretirement Benefits | Defined Benefit Pension Plans | Other Postretirement Benefit Plans |
| In millions | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 |
| Change in projected benefit obligations: | | | | |
| Benefit obligations at beginning of year | $ | 31,851 |
| $ | 30,280 |
| $ | 1,567 |
| $ | 1,835 |
| $ | 29,600 |
| $ | 31,851 |
| $ | 1,478 |
| $ | 1,567 |
|
| Impact of plans transferred to DowDuPont at separation | | (331 | ) | — |
| — |
| — |
|
| Service cost | 520 |
| 506 |
| 12 |
| 14 |
| 396 |
| 520 |
| 8 |
| 12 |
|
| Interest cost | 886 |
| 883 |
| 45 |
| 54 |
| 921 |
| 886 |
| 49 |
| 45 |
|
| Plan participants' contributions | 19 |
| 14 |
| — |
| — |
| 12 |
| 19 |
| — |
| — |
|
| Actuarial changes in assumptions and experience | (1,754 | ) | 1,804 |
| (13 | ) | (198 | ) | 3,904 |
| (1,754 | ) | 148 |
| (13 | ) |
| Benefits paid | (1,476 | ) | (1,440 | ) | (123 | ) | (151 | ) | (1,684 | ) | (1,476 | ) | (148 | ) | (123 | ) |
| Plan amendments | 17 |
| 14 |
| — |
| — |
| — |
| 17 |
| — |
| — |
|
Acquisitions/divestitures/other 1 | (45 | ) | 50 |
| — |
| — |
| (37 | ) | (45 | ) | — |
| — |
|
| Effect of foreign exchange rates | (418 | ) | 932 |
| (10 | ) | 13 |
| 14 |
| (418 | ) | 3 |
| (10 | ) |
Termination benefits/curtailment cost/settlements 2 | — |
| (1,192 | ) | — |
| — |
| |
| Termination benefits/curtailments/settlements | | (174 | ) | — |
| (3 | ) | — |
|
| Benefit obligations at end of year | $ | 29,600 |
| $ | 31,851 |
| $ | 1,478 |
| $ | 1,567 |
| $ | 32,621 |
| $ | 29,600 |
| $ | 1,535 |
| $ | 1,478 |
|
| | | |
| Change in plan assets: | | | | | | | | |
| Fair value of plan assets at beginning of year | $ | 23,401 |
| $ | 21,208 |
| $ | — |
| $ | — |
| $ | 22,544 |
| $ | 23,401 |
| $ | — |
| $ | — |
|
| Impact of plans transferred to DowDuPont at separation | | (61 | ) | — |
| — |
| — |
|
| Actual return on plan assets | (742 | ) | 2,500 |
| — |
| — |
| 3,790 |
| (742 | ) | — |
| — |
|
| Employer contributions | 1,656 |
| 1,676 |
| — |
| — |
| 266 |
| 1,656 |
| — |
| — |
|
| Plan participants' contributions | 19 |
| 14 |
| — |
| — |
| 12 |
| 19 |
| — |
| — |
|
| Benefits paid | (1,476 | ) | (1,440 | ) | — |
| — |
| (1,684 | ) | (1,476 | ) | — |
| — |
|
Acquisitions/divestitures/other 3 | — |
| (15 | ) | — |
| — |
| |
| Effect of foreign exchange rates | (314 | ) | 646 |
| — |
| — |
| 41 |
| (314 | ) | — |
| — |
|
Settlements 4 | — |
| (1,188 | ) | — |
| — |
| |
| Fair value of plan assets at end of year | $ | 22,544 |
| $ | 23,401 |
| $ | — |
| $ | — |
| $ | 24,908 |
| $ | 22,544 |
| $ | — |
| $ | — |
|
| | | |
| Funded status: |
|
|
|
|
| U.S. plans with plan assets | $ | (4,066 | ) | $ | (5,363 | ) | $ | — |
| $ | — |
| $ | (4,768 | ) | $ | (4,066 | ) | $ | — |
| $ | — |
|
| Non-U.S. plans with plan assets | (2,263 | ) | (2,333 | ) | — |
| — |
| (2,207 | ) | (2,041 | ) | — |
| — |
|
| All other plans | (727 | ) | (754 | ) | (1,478 | ) | (1,567 | ) | (738 | ) | (695 | ) | (1,535 | ) | (1,478 | ) |
| Plans of discontinued operations | | — |
| (254 | ) | — |
| — |
|
| Funded status at end of year | $ | (7,056 | ) | $ | (8,450 | ) | $ | (1,478 | ) | $ | (1,567 | ) | $ | (7,713 | ) | $ | (7,056 | ) | $ | (1,535 | ) | $ | (1,478 | ) |
| | | |
| Amounts recognized in the consolidated balance sheets at Dec 31: | | | | |
| Deferred charges and other assets | $ | 491 |
| $ | 548 |
| $ | — |
| $ | — |
| $ | 623 |
| $ | 491 |
| $ | — |
| $ | — |
|
| Accrued and other current liabilities | (52 | ) | (48 | ) | (131 | ) | (125 | ) | (49 | ) | (50 | ) | (128 | ) | (131 | ) |
| Pension and other postretirement benefits - noncurrent | (7,495 | ) | (8,950 | ) | (1,347 | ) | (1,442 | ) | (8,287 | ) | (7,227 | ) | (1,407 | ) | (1,347 | ) |
| Liabilities of discontinued operations - current | | — |
| (270 | ) | — |
| — |
|
| Net amount recognized | $ | (7,056 | ) | $ | (8,450 | ) | $ | (1,478 | ) | $ | (1,567 | ) | $ | (7,713 | ) | $ | (7,056 | ) | $ | (1,535 | ) | $ | (1,478 | ) |
| | | |
| Pretax amounts recognized in accumulated other comprehensive loss at Dec 31: | | | | |
| Net loss (gain) | $ | 10,841 |
| $ | 10,899 |
| $ | (315 | ) | $ | (326 | ) | $ | 11,761 |
| $ | 10,841 |
| $ | (147 | ) | $ | (315 | ) |
| Prior service credit | (224 | ) | (265 | ) | — |
| — |
| (177 | ) | (224 | ) | — |
| — |
|
| Pretax balance in accumulated other comprehensive loss at end of year | $ | 10,617 |
| $ | 10,634 |
| $ | (315 | ) | $ | (326 | ) | $ | 11,584 |
| $ | 10,617 |
| $ | (147 | ) | $ | (315 | ) |
| |
| 1. | The 2019 impact includes the divestiture of a business with pension benefit obligations of $53 million.The 2018 impact includes the divestiture of a business with pension benefit obligations of $37 million. The 2017 impact includes the reclassification of a China pension liability of $69 million from "Other noncurrent obligations" to "Pension and other postretirement benefits - noncurrent" and the divestiture of a South Korean company with pension benefit obligations of $25 million. |
| |
2. | The 2017 impact includes the settlement of certain plan obligations for a U.S. non-qualified pension plan of $1,170 million required due to a change in control provision. The 2017 impact also includes the conversion of a South Korean pension plan of $22 million to a defined contribution plan. |
| |
3. | The 2017 impact relates to the divestiture of a South Korean company. |
| |
4. | The 2017 impact includes payments made of $1,170 million to settle certain plan obligations of a U.S. non-qualified pension plan required due to a change in control provision. The 2017 impact also includes payments made of $18 million to convert a South Korean pension plan to a defined contribution plan. |
A significant component of the overall increase in the Company's benefit obligation for the year ended December 31, 2019 was due to the change in weighted-average discount rates, which decreased from 3.69 percent at December 31, 2018 to 2.81 percent at December 31, 2019. A significant component of the overall decrease in the Company's benefit obligation for the year ended December 31, 2018 was due to the weighted-average change in weighted-average discount rates, which increased from 3.17 percent at December 31, 2017 to 3.69 percent at December 31, 2018. A significant component of the overall increase in the Company's benefit obligation for the year ended December 31, 2017 was also due to the weighted-average change in discount rates, which decreased from 3.52 percent at December 31, 2016 to 3.17 percent at December 31, 2017.
The accumulated benefit obligation for all significant pension plans was $28.3$31.4 billion and $30.4$28.3 billion at December 31, 20182019 and 2017,2018, respectively.
|
| | | | | | |
| Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at Dec 31 | 2019 | 2018 |
| In millions |
| Accumulated benefit obligations | $ | 26,959 |
| $ | 25,392 |
|
| Fair value of plan assets | $ | 19,571 |
| $ | 18,902 |
|
|
| | | | | | |
| Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at Dec 31 | 2018 | 2017 |
| In millions |
| Accumulated benefit obligations | $ | 25,392 |
| $ | 27,248 |
|
| Fair value of plan assets | $ | 18,902 |
| $ | 19,515 |
|
|
| | | | | | |
| Pension Plans with Projected Benefit Obligations in Excess of Plan Assets at Dec 31 | 2019 | 2018 |
| In millions |
| Projected benefit obligations | $ | 28,013 |
| $ | 26,599 |
|
| Fair value of plan assets | $ | 19,677 |
| $ | 19,051 |
|
|
| | | | | | |
| Pension Plans with Projected Benefit Obligations in Excess of Plan Assets at Dec 31 | 2018 | 2017 |
| In millions |
| Projected benefit obligations | $ | 26,599 |
| $ | 28,576 |
|
| Fair value of plan assets | $ | 19,051 |
| $ | 19,578 |
|
|
| | | | | | | | | | | | | | | | | | |
| Net Periodic Benefit Costs for All Significant Plans for the Year Ended Dec 31 | Defined Benefit Pension Plans | Other Postretirement Benefit Plans |
| In millions | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 |
| Net Periodic Benefit Costs: | | | | | | |
| Service cost | $ | 396 |
| $ | 520 |
| $ | 506 |
| $ | 8 |
| $ | 12 |
| $ | 14 |
|
| Interest cost | 921 |
| 886 |
| 883 |
| 49 |
| 45 |
| 54 |
|
| Expected return on plan assets | (1,679 | ) | (1,644 | ) | (1,548 | ) | — |
| — |
| — |
|
| Amortization of prior service credit | (20 | ) | (24 | ) | (25 | ) | — |
| — |
| — |
|
| Amortization of unrecognized (gain) loss | 574 |
| 642 |
| 638 |
| (20 | ) | (24 | ) | (6 | ) |
Curtailment/settlement/other 1 | (27 | ) | — |
| 683 |
| (3 | ) | — |
| — |
|
| Net periodic benefit costs | $ | 165 |
| $ | 380 |
| $ | 1,137 |
| $ | 34 |
| $ | 33 |
| $ | 62 |
|
| Less: discontinued operations | 21 |
| 101 |
| 105 |
| — |
| 3 |
| 3 |
|
| Net periodic benefit costs - continuing operations | $ | 144 |
| $ | 279 |
| $ | 1,032 |
| $ | 34 |
| $ | 30 |
| $ | 59 |
|
| Changes in plan assets and benefit obligations recognized in other comprehensive (income) loss: | | | | | | |
| Net (gain) loss | $ | 1,606 |
| $ | 584 |
| $ | 845 |
| $ | 145 |
| $ | (13 | ) | $ | (199 | ) |
| Prior service cost | — |
| 17 |
| 14 |
| — |
| — |
| — |
|
| Amortization of prior service credit | 20 |
| 24 |
| 25 |
| — |
| — |
| — |
|
| Amortization of unrecognized gain (loss) | (574 | ) | (642 | ) | (638 | ) | 20 |
| 24 |
| 6 |
|
Common control transaction 2 | (112 | ) | — |
| — |
| — |
| — |
| — |
|
Curtailment and settlement (gain) loss 1 | 27 |
| — |
| (687 | ) | 3 |
| — |
| — |
|
| Total recognized in other comprehensive (income) loss | $ | 967 |
| $ | (17 | ) | $ | (441 | ) | $ | 168 |
| $ | 11 |
| $ | (193 | ) |
| Total recognized in net periodic benefit cost and other comprehensive (income) loss | $ | 1,132 |
| $ | 363 |
| $ | 696 |
| $ | 202 |
| $ | 44 |
| $ | (131 | ) |
|
| | | | | | | | | | | | | | | | | | |
| Net Periodic Benefit Costs for All Significant Plans for the Year Ended Dec 31 | Defined Benefit Pension Plans | Other Postretirement Benefits |
| In millions | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 |
| Net Periodic Benefit Costs: | | | | | | |
| Service cost | $ | 520 |
| $ | 506 |
| $ | 463 |
| $ | 12 |
| $ | 14 |
| $ | 13 |
|
| Interest cost | 886 |
| 883 |
| 846 |
| 45 |
| 54 |
| 52 |
|
| Expected return on plan assets | (1,644 | ) | (1,548 | ) | (1,447 | ) | — |
| — |
| — |
|
| Amortization of prior service credit | (24 | ) | (25 | ) | (24 | ) | — |
| — |
| (3 | ) |
| Amortization of unrecognized (gain) loss | 642 |
| 638 |
| 587 |
| (24 | ) | (6 | ) | (7 | ) |
Curtailment/settlement/other 1 | — |
| 683 |
| (36 | ) | — |
| — |
| — |
|
| Net periodic benefit costs | $ | 380 |
| $ | 1,137 |
| $ | 389 |
| $ | 33 |
| $ | 62 |
| $ | 55 |
|
| Changes in plan assets and benefit obligations recognized in other comprehensive (income) loss: | | | | | | |
| Net (gain) loss | $ | 584 |
| $ | 845 |
| $ | 1,954 |
| $ | (13 | ) | $ | (199 | ) | $ | 14 |
|
| Prior service cost | 17 |
| 14 |
| — |
| — |
| — |
| — |
|
| Amortization of prior service credit | 24 |
| 25 |
| 24 |
| — |
| — |
| 3 |
|
| Amortization of unrecognized gain (loss) | (642 | ) | (638 | ) | (587 | ) | 24 |
| 6 |
| 7 |
|
Settlement loss 2 | — |
| (687 | ) | — |
| — |
| — |
| — |
|
| Total recognized in other comprehensive (income) loss | $ | (17 | ) | $ | (441 | ) | $ | 1,391 |
| $ | 11 |
| $ | (193 | ) | $ | 24 |
|
| Total recognized in net periodic benefit cost and other comprehensive (income) loss | $ | 363 |
| $ | 696 |
| $ | 1,780 |
| $ | 44 |
| $ | (131 | ) | $ | 79 |
|
| |
| 1. | The 20172019 impact relates to plan curtailments and associated special termination benefits resulting from the settlement of a U.S. non-qualifiedreduction in plan triggered by a change in control provision. The 2016 impact relatesparticipation due to the curtailmentseparation of benefits for certain participants of a Dow Silicones plan in the U.S. |
| |
2. | Company from DowDuPont. The 2017 impact relates to the settlement of a U.S. non-qualified plan triggered by a change in control provision. |
| |
| 2. | The 2019 impact is the result of the separation of the Company from DowDuPont. |
On January 1, 2018, the Company adopted ASU 2017-07, which impacted the presentation of the components of net periodic benefit cost in the consolidated statements of income. Net periodic benefit cost, other than the service cost component, is now included in "Sundry income (expense) - net" in the consolidated statements of income. See Notes 1, 2 andNote 8 for additional information.
Estimated Future Benefit Payments
The estimated future benefit payments of continuing operations, reflecting expected future service, as appropriate, are presented in the following table:
|
| | | | | | |
| Estimated Future Benefit Payments at Dec 31, 2019 | Defined Benefit Pension Plans | Other Postretirement Benefit Plans |
| In millions |
| 2020 | $ | 1,561 |
| $ | 129 |
|
| 2021 | 1,571 |
| 124 |
|
| 2022 | 1,603 |
| 121 |
|
| 2023 | 1,636 |
| 118 |
|
| 2024 | 1,646 |
| 114 |
|
| 2025-2029 | 8,523 |
| 496 |
|
| Total | $ | 16,540 |
| $ | 1,102 |
|
|
| | | | | | |
| Estimated Future Benefit Payments at Dec 31, 2018 | Defined Benefit Pension Plans | Other Postretirement Benefits |
| In millions |
| 2019 | $ | 1,549 |
| $ | 133 |
|
| 2020 | 1,559 |
| 129 |
|
| 2021 | 1,585 |
| 129 |
|
| 2022 | 1,624 |
| 125 |
|
| 2023 | 1,663 |
| 120 |
|
| 2024-2028 | 8,641 |
| 519 |
|
| Total | $ | 16,621 |
| $ | 1,155 |
|
Plan Assets
Plan assets consist primarily of equity and fixed income securities of U.S. and foreign issuers, and include alternative investments such as real estate, private market securities and absolute return strategies. At December 31, 2019, plan assets totaled $24.9 billion and included no directly held common stock of Dow Inc. At December 31, 2018, plan assets totaled $22.5 billion and included no directly held DowDuPont common stock of DowDuPont. At December 31, 2017, plan assets totaled $23.4 billion and included no directly held common stock of DowDuPont.stock.
The Company's investment strategy for the plan assets is to manage the assets in relation to the liability in order to pay retirement benefits to plan participants over the life of the plans. This is accomplished by identifying and managing the exposure to various market risks, diversifying investments across various asset classes and earning an acceptable long-term rate of return consistent with an acceptable amount of risk, while considering the liquidity needs of the plans.
The plans are permitted to use derivative instruments for investment purposes, as well as for hedging the underlying asset and liability exposure and rebalancing the asset allocation. The plans use value-at-risk, stress testing, scenario analysis and Monte Carlo simulations to monitor and manage both the risk within the portfolios and the surplus risk of the plans.
Equity securities primarily include investments in large- and small-cap companies located in both developed and emerging markets around the world. Fixed income securities include investment and non-investment grade corporate bonds of companies diversified across industries, U.S. treasuries, non-U.S. developed market securities, U.S. agency mortgage-backed securities, emerging market securities and fixed income related funds. Alternative investments primarily include investments in real estate, private equity limited partnerships and absolute return strategies. Other significant investment types include various insurance contracts and interest rate, equity, commodity and foreign exchange derivative investments and hedges.
The Company mitigates the credit risk of investments by establishing guidelines with investment managers that limit investment in any single issue or issuer to an amount that is not material to the portfolio being managed. These guidelines are monitored for compliance both by the Company and external managers. Credit risk related to derivative activity is mitigated by utilizing multiple counterparties, collateral support agreements and centralized clearing, where appropriate.
The Northern Trust Collective Government Short Term Investment money market fund is utilized as the sweep vehicle for the U.S. plans, which from time to time can represent a significant investment. For one U.S. plan, approximately 3534 percent of the liability is covered by a participating group annuity issued by Prudential Insurance Company.
The weighted-average target allocation for plan assets of the Company's pension plans is summarized as follows:
|
| | |
Target Allocation for Plan Assets at Dec 31, 20182019 | Target Allocation |
| Asset Category |
| Equity securities | 3635 | % |
| Fixed income securities | 3536 |
|
| Alternative investments | 28 |
|
| Other investments | 1 |
|
| Total | 100 | % |
Fair value calculations may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
For pension plan assets classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For pension plan assets classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance and quality checks. For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources. For other pension plan assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.
For pension plan assets classified as Level 3 measurements, total fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity for the investment.
Certain pension plan assets are held in funds where fair value is based on an estimated net asset value per share (or its equivalent) as of the most recently available fund financial statements which are received on a monthly or quarterly basis. These valuations are reviewed for reasonableness based on applicable sector, benchmark and company performance. Adjustments to valuations are made where appropriate to arrive at an estimated net asset value per share at the measurement date. These funds are not classified within the fair value hierarchy.
The following table summarizes the bases used to measure the Company’s pension plan assets at fair value for the years endedDecember 31, 20182019 and 2017:2018:
| | | Basis of Fair Value Measurements | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2019 | Dec 31, 2018 |
| In millions | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 |
| Cash and cash equivalents | $ | 877 |
| $ | 818 |
| $ | 59 |
| $ | — |
| $ | 772 |
| $ | 671 |
| $ | 101 |
| $ | — |
| $ | 754 |
| $ | 675 |
| $ | 79 |
| $ | — |
| $ | 877 |
| $ | 818 |
| $ | 59 |
| $ | — |
|
| Equity securities: | | | | | | |
U.S. equity securities 1 | $ | 3,493 |
| $ | 3,251 |
| $ | 241 |
| $ | 1 |
| $ | 3,755 |
| $ | 3,416 |
| $ | 339 |
| $ | — |
| $ | 3,844 |
| $ | 3,752 |
| $ | 91 |
| $ | 1 |
| $ | 3,493 |
| $ | 3,251 |
| $ | 241 |
| $ | 1 |
|
| Non - U.S. equity securities | 4,242 |
| 3,497 |
| 707 |
| 38 |
| 5,551 |
| 4,533 |
| 978 |
| 40 |
| 4,646 |
| 3,819 |
| 801 |
| 26 |
| 4,242 |
| 3,497 |
| 707 |
| 38 |
|
| Total equity securities | $ | 7,735 |
| $ | 6,748 |
| $ | 948 |
| $ | 39 |
| $ | 9,306 |
| $ | 7,949 |
| $ | 1,317 |
| $ | 40 |
| $ | 8,490 |
| $ | 7,571 |
| $ | 892 |
| $ | 27 |
| $ | 7,735 |
| $ | 6,748 |
| $ | 948 |
| $ | 39 |
|
| Fixed income securities: | | |
| Debt - government-issued | $ | 4,751 |
| $ | 285 |
| $ | 4,466 |
| $ | — |
| $ | 4,596 |
| $ | 158 |
| $ | 4,437 |
| $ | 1 |
| $ | 4,992 |
| $ | 197 |
| $ | 4,795 |
| $ | — |
| $ | 4,751 |
| $ | 285 |
| $ | 4,466 |
| $ | — |
|
| Debt - corporate-issued | 2,929 |
| 411 |
| 2,518 |
| — |
| 3,300 |
| 351 |
| 2,935 |
| 14 |
| 3,697 |
| 607 |
| 3,089 |
| 1 |
| 2,929 |
| 411 |
| 2,518 |
| — |
|
| Debt - asset-backed | 90 |
| — |
| 89 |
| 1 |
| 101 |
| — |
| 100 |
| 1 |
| 70 |
| — |
| 69 |
| 1 |
| 90 |
| — |
| 89 |
| 1 |
|
| Total fixed income securities | $ | 7,770 |
| $ | 696 |
| $ | 7,073 |
| $ | 1 |
| $ | 7,997 |
| $ | 509 |
| $ | 7,472 |
| $ | 16 |
| $ | 8,759 |
| $ | 804 |
| $ | 7,953 |
| $ | 2 |
| $ | 7,770 |
| $ | 696 |
| $ | 7,073 |
| $ | 1 |
|
Alternative investments: 2 | | |
| Alternative investments: | | |
| Private market securities | $ | 1 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 11 |
| $ | — |
| $ | — |
| $ | 11 |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 1 |
|
| Real estate | 19 |
| 19 |
| — |
| — |
| 21 |
| 21 |
| — |
| — |
| 25 |
| 25 |
| — |
| — |
| 19 |
| 19 |
| — |
| — |
|
| Derivatives - asset position | 451 |
| 17 |
| 434 |
| — |
| 261 |
| 2 |
| 259 |
| — |
| 574 |
| 2 |
| 572 |
| — |
| 451 |
| 17 |
| 434 |
| — |
|
| Derivatives - liability position | (506 | ) | (19 | ) | (487 | ) | — |
| (305 | ) | (2 | ) | (303 | ) | — |
| (513 | ) | (2 | ) | (511 | ) | — |
| (506 | ) | (19 | ) | (487 | ) | — |
|
| Total alternative investments | $ | (35 | ) | $ | 17 |
| $ | (53 | ) | $ | 1 |
| $ | (23 | ) | $ | 21 |
| $ | (44 | ) | $ | — |
| $ | 97 |
| $ | 25 |
| $ | 61 |
| $ | 11 |
| $ | (35 | ) | $ | 17 |
| $ | (53 | ) | $ | 1 |
|
Other investments 2 | $ | 380 |
| $ | 47 |
| $ | 333 |
| $ | — |
| $ | 273 |
| $ | 37 |
| $ | 236 |
| $ | — |
| |
| Other investments | | $ | 411 |
| $ | 28 |
| $ | 383 |
| $ | — |
| $ | 380 |
| $ | 47 |
| $ | 333 |
| $ | — |
|
| Subtotal | $ | 16,727 |
| $ | 8,326 |
| $ | 8,360 |
| $ | 41 |
| $ | 18,325 |
| $ | 9,187 |
| $ | 9,082 |
| $ | 56 |
| $ | 18,511 |
| $ | 9,103 |
| $ | 9,368 |
| $ | 40 |
| $ | 16,727 |
| $ | 8,326 |
| $ | 8,360 |
| $ | 41 |
|
Investments measured at net asset value: 2 | | | | | | | | | |
| Investments measured at net asset value: | | | | | | | | | |
| Hedge funds | $ | 1,637 |
| | | | $ | 1,595 |
| | | | $ | 1,595 |
| | | | $ | 1,637 |
| | | |
| Private market securities | 2,196 |
| | | | 1,390 |
| | | | 2,794 |
| | | | 2,196 |
| | | |
| Real estate | 2,080 |
| | | | 2,200 |
| | | | 2,110 |
| | | | 2,080 |
| | | |
| Total investments measured at net asset value | $ | 5,913 |
| | | | $ | 5,185 |
| | | | $ | 6,499 |
| | | | $ | 5,913 |
| | | |
| Items to reconcile to fair value of plan assets: | | | | | | | | | | | | | | | | |
Pension trust receivables 3 | $ | 29 |
| |
| |
| |
| $ | 27 |
| |
| |
| |
| |
Pension trust payables 4 | (125 | ) | |
| |
| |
| (136 | ) | |
| |
| |
| |
Pension trust receivables 2 | | $ | 70 |
| |
| |
| |
| $ | 29 |
| |
| |
| |
|
Pension trust payables 3 | | (172 | ) | |
| |
| |
| (125 | ) | |
| |
| |
|
| Total | $ | 22,544 |
| |
| |
| |
| $ | 23,401 |
| |
| |
| |
| $ | 24,908 |
| |
| |
| |
| $ | 22,544 |
| |
| |
| |
|
| |
| 1. | No Dow Inc. common stock was directly held at December 31, 2019. No DowDuPont common stock was directly held at December 31, 2018 or December 31, 2017.2018. |
| |
| 2. | The Company reviewed its fair value technique and elected to present assets valued at net asset value per share as a practical expedient outside of the fair value hierarchy. The assets are presented as "Investments measured at net asset value." Prior period amounts were updated to conform with the current year presentation. |
| |
3. | Primarily receivables for investment securities sold. |
| |
4.3. | Primarily payables for investment securities purchased. |
The following table summarizes the changes in the fair value of Level 3 pension plan assets for the years ended December 31, 20182019 and 2017:2018:
|
| | | | | | | | | | | | | | | |
| Fair Value Measurement of Level 3 Pension Plan Assets | Equity Securities | Fixed Income Securities | Alternative Investments | Other Investments | Total |
| In millions |
| Balance at Jan 1, 2018 | $ | 40 |
| $ | 16 |
| $ | — |
| $ | — |
| $ | 56 |
|
| Actual return on assets: | | | | |
|
| Relating to assets sold during 2018 | — |
| 4 |
| (1 | ) | 1 |
| 4 |
|
| Relating to assets held at Dec 31, 2018 | (3 | ) | (4 | ) | — |
| — |
| (7 | ) |
| Purchases, sales and settlements, net | 2 |
| (15 | ) | 2 |
| (1 | ) | (12 | ) |
| Balance at Dec 31, 2018 | $ | 39 |
| $ | 1 |
| $ | 1 |
| $ | — |
| $ | 41 |
|
| Actual return on assets: | | | | | |
| Relating to assets sold during 2019 | (2 | ) | — |
| — |
| — |
| (2 | ) |
| Relating to assets held at Dec 31, 2019 | 1 |
| — |
| (14 | ) | — |
| (13 | ) |
| Purchases, sales and settlements, net | (11 | ) | 1 |
| 24 |
| — |
| 14 |
|
| Balance at Dec 31, 2019 | $ | 27 |
| $ | 2 |
| $ | 11 |
| $ | — |
| $ | 40 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurement of Level 3 Pension Plan Assets | Equity Securities | Fixed Income Securities | Alternative Investments | Other Investments | Total |
| In millions |
| Balance at Jan 1, 2017, as previously reported | $ | 33 |
| $ | 17 |
| $ | 4,117 |
| $ | 95 |
| $ | 4,262 |
|
Reclassification of investments measured at net asset value 1 | — |
| — |
| (4,061 | ) | (95 | ) | (4,156 | ) |
| Balance at Jan 1, 2017, as restated | $ | 33 |
| $ | 17 |
| $ | 56 |
| $ | — |
| $ | 106 |
|
| Actual return on assets: | | | | |
|
| Relating to assets sold during 2017 | (1 | ) | — |
| 5 |
| — |
| 4 |
|
| Relating to assets held at Dec 31, 2017 | 5 |
| 1 |
| (1 | ) | — |
| 5 |
|
| Purchases, sales and settlements, net | 3 |
| (2 | ) | (60 | ) | — |
| (59 | ) |
| Balance at Dec 31, 2017 | $ | 40 |
| $ | 16 |
| $ | — |
| $ | — |
| $ | 56 |
|
| Actual return on assets: | | | | | |
| Relating to assets sold during 2018 | — |
| 4 |
| (1 | ) | 1 |
| 4 |
|
| Relating to assets held at Dec 31, 2018 | (3 | ) | (4 | ) | — |
| — |
| (7 | ) |
| Purchases, sales and settlements, net | 2 |
| (15 | ) | 2 |
| (1 | ) | (12 | ) |
| Balance at Dec 31, 2018 | $ | 39 |
| $ | 1 |
| $ | 1 |
| $ | — |
| $ | 41 |
|
| |
1. | The Company reviewed its fair value technique and elected to present assets valued at net asset value per share as a practical expedient outside of the fair value hierarchy, including those classified as Level 3 pension plan assets. The assets are presented as "Investments measured at net asset value." |
Defined Contribution Plans
U.S. employees may participate in defined contribution plans (Employee Savings Plans or 401(k) plans) by contributing a portion of their compensation, which is partially matched by the Company. Defined contribution plans also cover employees in some subsidiaries in other countries, including Australia, Brazil, Canada, Italy, Spain and the United Kingdom. Expense of continuing operations recognized for all defined contribution plans was $242$163 million in 2019, $186 million in 2018 $367and $286 million in 2017 and $283 million in 2016.2017.
NOTE 2022 – STOCK-BASED COMPENSATION
The Company grants stock-based compensation to employees and non-employee directors in the form of stock incentive plans, which include stock options, restricted stock units ("RSUs") (formerly termed deferred stock)RSUs and restricted stock. The Company also provides stock-based compensation in the form of performance stock units ("PSUs") (formerly termed performance deferred stock) andPSUs. The Company previously provided the Employee Stock Purchase Plan (“ESPP”), which grantsgranted eligible employees the right to purchase shares of the Company's common stock at a discounted price.
In connection with the Merger, on August 31, 2017 ("Conversion Date"), all outstanding DowTDCC stock options and RSU awards were converted into stock options and RSU awards with respect to DowDuPont common stock. The stock options and RSU awards havehad the same terms and conditions under the applicable plans and award agreements prior to the Merger. All outstanding and nonvested PSU awards were converted into RSU awards with respect to DowDuPont common stock at the greater of the applicable performance target or the actual performance as of the effective time of the Merger. Changes in the fair value of liability instruments are recognized as compensation expense each quarter. DowTDCC and Historical DuPont did not merge their stock-based compensation plans as a result of the Merger. The DowTDCC and Historical DuPont stock-based compensation plans were assumed by DowDuPont and continuecontinued in place with the ability to grant and issue DowDuPont common stock.stock until separation.
In connection with the separation on April 1, 2019, outstanding stock options, RSU and PSU awards were converted to Dow Inc. denominated awards under the “Employer Method,” or DowDuPont denominated awards under the “Shareholder Method,” and adjusted to maintain the intrinsic value of those awards before and after the date of the separation. In connection with the Corteva separation transaction on June 3, 2019, the outstanding DowDuPont denominated stock options, RSU and PSU awards were converted to Corteva and DuPont denominated awards and adjusted to maintain the intrinsic value of those awards before and after the date of the Corteva separation. The awards have the same terms and conditions under the applicable plans and award agreements prior to the separation transactions.
The conversions of stock awards resulted in 0 incremental compensation expense. Approximately 5,000 employees were impacted by the conversion on April 1, 2019 in connection with Dow Inc.'s separation from DowDuPont. Approximately 4,000 employees were impacted by the conversion on June 3, 2019 in connection with the Corteva separation transaction.
The total stock-based compensation expense included in continuing operations in the consolidated statements of income was $224$158 million, $359$188 million and $261$310 million in 2019, 2018 2017 and 2016,2017, respectively. The income tax benefits related to stock-based compensation arrangements were $50$36 million, $133$42 million and $97$115 million in 2019, 2018 and 2017, respectively. Amounts disclosed throughout the remainder of this footnote are inclusive of activity attributable to both continuing operations and 2016, respectively.discontinued operations, as the impact of discontinued operations is not significant.
Accounting for Stock-Based Compensation
The Company grants stock-based compensation awards that vest over a specified period or upon employees meeting certain performance and/or retirement eligibility criteria. The fair value of equity instruments issued to employees is measured on the grant date. The fair value of liability instruments (granted to executive employees subject to stock ownership requirements, that provide the recipient the option to elect to receive a cash payment equal to the value of the stock award on the date of delivery) is measured at the end of each quarter. The fair value of equity and liability instruments is expensed over the vesting period or, in the case of retirement, from the grant date to the date on which retirement eligibility provisions have been met and additional service is no longer required. The Company estimates expected forfeitures.
The Company historically used a lattice-based option valuation model to estimate the fair value of stock options and used a Monte Carlo simulation for the market portion of PSU awards. Effective with the first quarter of 2018 grant, the Company began using the Black-Scholes option valuation model to estimate the fair value of stock options. This valuation methodology was adopted as a result of the Merger to align valuation methodologies with Historical DuPont and better align with industry practice. The Company used the Black-Scholes option valuation model for subscriptions to purchase shares under the ESPP. The weighted-average assumptions used to calculate total stock-based compensation are included in the following table:
|
| | | | | | |
| Weighted-Average Assumptions | 2019 | 2018 | 2017 |
| Dividend yield | 5.10 | % | 2.13 | % | 3.01 | % |
| Expected volatility | 26.10 | % | 23.34 | % | 23.71 | % |
| Risk-free interest rate | 2.43 | % | 2.83 | % | 1.28 | % |
| Expected life of stock options granted during period (years) | 6.1 |
| 6.2 |
| 7.5 |
|
| Life of Employee Stock Purchase Plan (months) | 0 |
| 0 |
| 3 |
|
|
| | | | | | |
| Weighted-Average Assumptions | 2018 | 2017 | 2016 |
| Dividend yield | 2.13 | % | 3.01 | % | 4.13 | % |
| Expected volatility | 23.34 | % | 23.71 | % | 31.60 | % |
| Risk-free interest rate | 2.83 | % | 1.28 | % | 1.12 | % |
| Expected life of stock options granted during period (years) | 6.2 |
| 7.5 |
| 7.8 |
|
| Life of Employee Stock Purchase Plan (months) | — |
| 3 |
| 4 |
|
The dividend yield assumption was equal to the dividend yield on the grant date, which reflected the most recent DowDuPontCompany's quarterly dividend paymentpayments of $0.38$0.70 per share in 2019 on Dow Inc. Common Stock ($0.38 per share in 2018 ($0.46on DowDuPont Common Stock and $0.46 per share in 2017 and 2016 on DowTDCC Common Stock). The expected volatility assumptions for the 2016 and 2017 stock options and ESPP were based on an equal weighting of the historical daily volatility for the contractual term of the awards and current implied volatility from exchange-traded options. The expected volatility assumptions for the 2018 and 2019 stock options were based on an equal weighting of the historical daily volatility for the expected term of the awards and current implied volatility from exchange-traded options. The expected volatility assumption for the market portion of the 20162017 and 20172019 PSU awards were based on historical daily volatility for the term of the award. The risk-free interest rate was based on the weighted-average of U.S. Treasury strip rates over the contractual term of the 2016 and 2017 options. The risk-free interest rate was based on the U.S. Treasury strip rates over the expected life of the 2018 and 2019 options. The expected life of stock options granted was based on an analysis of historical exercise patterns.
Stock Incentive Plan
The Company has historically granted equity awards under various plans (the "Prior Plans"). On February 9, 2012, the Board authorized The Dow Chemical Company 2012 Stock Incentive Plan (the "2012 Plan"), which was approved by stockholders at the Company'sTDCC's annual meeting on May 10, 2012 ("Original2012 Plan Effective Date") and became effective on that date. On February 13, 2014, the Board adopted The Dow Chemical Company Amended and Restated 2012 Stock Incentive Plan (the "2012 Restated Plan"). The 2012 Restated Plan was approved by stockholders at the Company'sTDCC's annual meeting on May 15, 2014, and became effective on that date. The Prior Plans were superseded by the 2012 Plan and the 2012 Restated Plan (collectively, the "2012 Plan"). Under the 2012 Plan, the Company may grant options, RSUs, PSUs, restricted stock, stock appreciation rights and stock units to employees and non-employee directors until the tenth anniversary of the 2012 Plan Effective Date, subject to an aggregate limit and annual individual limits. The terms of the grants are fixed at the grant date. TDCC's stock-based compensation programs were assumed by DowDuPont and continued in place with the ability to grant and issue DowDuPont common stock until separation.
On April 1, 2019 ("Original Effective Date"), in connection with the separation, the Company adopted the 2019 Stock Incentive Plan (the "2019 Plan"). Under the 2019 Plan, the Company may grant stock options, RSUs, PSUs, stock appreciation rights and stock units to employees and non-employee directors until the tenth anniversary of the Original Effective Date, subject to an aggregate limit and annual individual limits. The terms of the grants are fixed at the grant date. Dow's stock-based compensation programs were assumed by DowDuPont and continue in place with the ability to grant and issue DowDuPont common stock. At December 31, 2018,2019, there were approximately 1925 million shares of DowDuPont common stock available for grant under the 20122019 Plan.
Stock Options
The Company grants stock options to certain employees, subject to certain annual and individual limits, with terms of the grants fixed at the grant date. The exercise price of each stock option equals the market price of the common stock on the grant date. Options vest from one to three years and have a maximum term of 10ten years.
The following table summarizes stock option activity for 2018:2019:
| | | Stock Options | 2018 | 2019 |
| Shares in thousands | Shares | Exercise Price 1 | Shares | Exercise Price 1 |
| Outstanding at Jan 1, 2018 | 26,628 |
| $ | 38.30 |
| |
| Outstanding at Jan 1, 2019 | | 28,846 |
| $ | 46.70 |
|
| Granted | 6,571 |
| $ | 71.43 |
| 1,588 |
| $ | 54.89 |
|
| Exercised | (4,074 | ) | $ | 30.65 |
| (3,196 | ) | $ | 30.02 |
|
| Forfeited/Expired | (279 | ) | $ | 61.47 |
| (239 | ) | $ | 60.77 |
|
| Outstanding at Dec 31, 2018 | 28,846 |
| $ | 46.70 |
| |
Conversion impact 2 | | (5,734 | ) | $ | 59.62 |
|
| Outstanding at Dec 31, 2019 | | 21,265 |
| $ | 45.96 |
|
| Remaining contractual life in years |
|
| 5.46 |
|
|
| 4.62 |
|
| Aggregate intrinsic value in millions | $ | 327 |
|
|
| $ | 237 |
|
|
|
| Exercisable at Dec 31, 2018 | 21,813 |
| $ | 39.99 |
| |
| Exercisable at Dec 31, 2019 | | 18,248 |
| $ | 43.34 |
|
| Remaining contractual life in years |
|
| 4.40 |
|
|
| 3.99 |
|
| Aggregate intrinsic value in millions | $ | 322 |
|
|
| $ | 237 |
|
|
|
1. Weighted-average per share.
2. Awards converted at April 1 and June 3 separations.
|
| | | | | | | | | |
| Additional Information about Stock Options | | | |
| In millions, except per share amounts | 2019 | 2018 | 2017 |
| Weighted-average fair value per share of options granted | $ | 7.99 |
| $ | 15.38 |
| $ | 14.44 |
|
| Total compensation expense for stock option plans | $ | 23 |
| $ | 68 |
| $ | 37 |
|
| Related tax benefit | $ | 5 |
| $ | 15 |
| $ | 14 |
|
| Total amount of cash received from the exercise of options | $ | 93 |
| $ | 112 |
| $ | 310 |
|
Total intrinsic value of options exercised 1 | $ | 77 |
| $ | 160 |
| $ | 286 |
|
| Related tax benefit | $ | 17 |
| $ | 36 |
| $ | 106 |
|
|
| | | | | | | | | |
| Additional Information about Stock Options | | | |
| In millions, except per share amounts | 2018 | 2017 | 2016 |
| Weighted-average fair value per share of options granted | $ | 15.38 |
| $ | 14.44 |
| $ | 10.95 |
|
| Total compensation expense for stock option plans | $ | 68 |
| $ | 37 |
| $ | 32 |
|
| Related tax benefit | $ | 15 |
| $ | 14 |
| $ | 12 |
|
| Total amount of cash received from the exercise of options | $ | 112 |
| $ | 310 |
| $ | 312 |
|
Total intrinsic value of options exercised 1 | $ | 160 |
| $ | 286 |
| $ | 153 |
|
| Related tax benefit | $ | 36 |
| $ | 106 |
| $ | 57 |
|
1. Difference between the market price at exercise and the price paid by the employee to exercise the options.
Total unrecognized compensation cost related to unvested stock option awards of $36$18 million at December 31, 2018,2019, is expected to be recognized over a weighted-average period of 1.911.37 years.
Restricted Stock Units
The Company grants restricted stock unitsRSUs to certain employees.employees and non-employee directors. The grants vest after a designated period of time, generally one to five years.three years for employees and two years for non-employee directors. The following table shows changes in nonvested RSUs:
| | | RSU Awards | 2018 | 2019 |
| Shares in thousands | Shares | Grant Date Fair Value 1 | Shares | Grant Date Fair Value 1 |
| Nonvested at Jan 1, 2018 | 13,346 |
| $ | 50.71 |
| |
| Nonvested at Jan 1, 2019 | | 9,735 |
| $ | 57.41 |
|
| Granted | 2,022 |
| $ | 71.46 |
| 1,821 |
| $ | 54.78 |
|
| Vested | (5,409 | ) | $ | 46.04 |
| (7,045 | ) | $ | 53.22 |
|
| Canceled | (224 | ) | $ | 59.40 |
| (156 | ) | $ | 60.84 |
|
| Nonvested at Dec 31, 2018 | 9,735 |
| $ | 57.41 |
| |
Conversion impact 2 | | (1,901 | ) | $ | 65.87 |
|
| Nonvested at Dec 31, 2019 | | 2,454 |
| $ | 59.98 |
|
1. Weighted-average per share.
2. Awards converted at April 1 and June 3 separations.
|
| | | | | | | | | |
| Additional Information about RSUs | | | |
| In millions, except per share amounts | 2018 | 2017 | 2016 |
| Weighted-average fair value per share of RSUs granted | $ | 71.46 |
| $ | 61.29 |
| $ | 46.25 |
|
| Total fair value of RSUs vested | $ | 382 |
| $ | 179 |
| $ | 166 |
|
| Related tax benefit | $ | 86 |
| $ | 66 |
| $ | 61 |
|
| Total compensation expense for RSU awards | $ | 144 |
| $ | 178 |
| $ | 97 |
|
| Related tax benefit | $ | 32 |
| $ | 66 |
| $ | 36 |
|
|
| | | | | | | | | |
| Additional Information about RSUs | | | |
| In millions, except per share amounts | 2019 | 2018 | 2017 |
| Weighted-average fair value per share of RSUs granted | $ | 54.78 |
| $ | 71.46 |
| $ | 61.29 |
|
Total fair value of RSUs vested 1 | $ | 375 |
| $ | 382 |
| $ | 179 |
|
| Related tax benefit | $ | 84 |
| $ | 86 |
| $ | 66 |
|
| Total compensation expense for RSU awards | $ | 110 |
| $ | 144 |
| $ | 178 |
|
| Related tax benefit | $ | 25 |
| $ | 32 |
| $ | 66 |
|
| |
| 1. | Includes the fair value of shares vested in prior years and delivered in the reporting year. |
In 2018,2019, the Company paid $45$17 million in cash, equal to the value of the stock award on the date of delivery, to certain executive employees to settle approximately 625,000341,000 RSUs (there were(625,000 RSUs settled in cash for $45 million in 2018 and no RSUs settled in cash in 2017 and 2016)2017). Total unrecognized compensation cost related to RSU awards of $126$80 million at December 31, 2018,2019 is expected to be recognized over a weighted-average period of 1.681.83 years. At December 31, 2018,2019, approximately 18,0002.2 million RSUs with a grant date weighted-average fair value per share of $35.12$60.79 had previously vested, but were not issued. These shares are scheduled to be issued to employees within six months to three years or upon retirement.
Total incremental pretax compensation expense resulting from the conversion of PSU awards into RSU awards was $25 million ($20 million was recognized in the second half of 2017 and $5 million to bewas recognized over the remaining service period). Approximately 5,000 employees were impacted by the conversion.
Performance Stock Units
The Company grants performance stock unitsPSUs to certain employees. The grants vest when the Company attains specified performance targets, such as return on capital and relative total shareholder return, over a predetermined period, generally one to three years. In November 2017, the Company granted PSUs to senior leadership measured on the realization of cost savings in connection with cost synergy commitments, as well as the Company’s ability to complete the Intended Business Separations.business separations. Performance and payouts are determined independently for each metric. Compensation expense related to PSU awards is recognized over the lesser of the service or performance period. Changes in the fair value of liability instruments are recognized as compensation expense each quarter.
The following table shows the PSU awards granted:
|
| | | | | | |
| PSU Awards | Target Shares Granted 1 | Grant Date Fair Value 2 |
| Shares in thousands |
| Year | Performance Period |
| 2019 | Apr 1, 2019 – Dec 31, 2021 | 1,173 |
| $ | 57.58 |
|
| 2017 | Sep 1, 2017 – Aug 31, 2019 | 232 |
| $ | 71.16 |
|
2017 3 | Jan 1, 2017 – Dec 31, 2019 | 1,728 |
| $ | 81.99 |
|
|
| | | | | | |
| PSU Awards | Target Shares Granted 1 | Grant Date Fair Value 2 |
| Shares in thousands |
| Year | Performance Period |
| 2017 | Sep 1, 2017 – Aug 31, 2019 | 232 |
| $ | 71.16 |
|
2017 3 | Jan 1, 2017 – Dec 31, 2019 | 1,728 |
| $ | 81.99 |
|
2016 3 | Jan 1, 2016 – Dec 31, 2018 | 2,283 |
| $ | 52.68 |
|
| |
| 1. | At the end of the performance period, the actual number of shares issued can range from zero0 to 200%200 percent of target shares granted. |
| |
| 2. | Weighted-average per share. |
| |
3. | 3. Converted to RSUs as a result of the Merger. |
There was no activity
The following table shows changes in nonvested PSUs in 2018. At January 1, 2018 and December 31, 2018, there were 232,000 target shares of nonvested PSUs outstanding with a grant date fair value of $71.16.PSUs:
|
| | | | | | | | | |
| Additional Information about PSUs | | | |
| In millions, except share amounts | 2018 | 2017 | 2016 |
Total fair value of PSUs vested and delivered 1 | $ | — |
| $ | 202 |
| $ | 103 |
|
| Related tax benefit | $ | — |
| $ | 75 |
| $ | 38 |
|
| Total compensation expense for PSU awards | $ | 12 |
| $ | 106 |
| $ | 125 |
|
| Related tax benefit | $ | 3 |
| $ | 39 |
| $ | 46 |
|
Shares of PSUs settled in cash (in thousands) 2 | — |
| 616 |
| 861 |
|
Total cash paid to settle PSUs 3 | $ | — |
| $ | 38 |
| $ | 40 |
|
|
| | | | | |
| PSUs | 2019 |
| Shares in thousands | Shares | Grant Date Fair Value 1 |
| Nonvested at Jan 1, 2019 | 232 |
| $ | 71.16 |
|
| Granted | 1,173 |
| $ | 57.58 |
|
| Vested | (232 | ) | $ | 71.16 |
|
| Canceled | (52 | ) | $ | 57.58 |
|
| Nonvested at Dec 31, 2019 | 1,121 |
| $ | 57.58 |
|
1. Weighted-average per share.
|
| | | | | | | | | |
| Additional Information about PSUs | | | |
| In millions, except share amounts | 2019 | 2018 | 2017 |
Total fair value of PSUs vested and delivered 1 | $ | 18 |
| $ | — |
| $ | 202 |
|
| Related tax benefit | $ | 4 |
| $ | — |
| $ | 75 |
|
| Total compensation expense for PSU awards | $ | 25 |
| $ | 12 |
| $ | 106 |
|
| Related tax benefit | $ | 6 |
| $ | 3 |
| $ | 39 |
|
Shares of PSUs settled in cash (in thousands) 2 | 162 |
| — |
| 616 |
|
Total cash paid to settle PSUs 3 | $ | 13 |
| $ | — |
| $ | 38 |
|
| |
| 1. | Includes the fair value of shares vested in prior years and delivered in the reporting year. |
| |
| 2. | PSU awards vested in prior years and delivered in the reporting year. |
| |
| 3. | Cash paid to certain executive employees for PSU awards vested in prior periods and delivered in the reporting year, equal to the value of the stock award on the date of delivery. |
Total unrecognized compensation cost related to PSU awards of $8$12 million at December 31, 2018,2019, is expected to be recognized over a weighted-average period of 0.671.86 years.
Restricted Stock
Under the 2012 Plan, the Company may grantgranted shares (including options, stock appreciation rights, stock units and restricted stock) to non-employee directors over the 10-year duration of the program, subject to the plan's aggregate limit as well as annual individual limits. The restricted stock issued under this plan cannot be sold, assigned, pledged or otherwise transferred by the non-employee director, until retirement or termination of service to the Company. The following table shows the restricted stock issued under this plan:
|
| | | | | |
| Restricted Stock | Shares Issued (in thousands) | Weighted-Average Fair Value |
| Year |
| 2019 | N/A |
| N/A |
|
| 2018 | 36 |
| $ | 62.82 |
|
| 2017 | 33 |
| $ | 62.04 |
|
|
| | | | | |
| Restricted Stock | Shares Issued (in thousands) | Weighted-Average Fair Value |
| Year |
| 2018 | 36 |
| $ | 62.82 |
|
| 2017 | 33 |
| $ | 62.04 |
|
| 2016 | 32 |
| $ | 50.55 |
|
Employee Stock Purchase Plan
On February 9, 2012, the Board authorized The Dow Chemical Company 2012 Employee Stock Purchase Plan (the "2012 ESPP") which was approved by stockholders at the Company’sTDCC’s annual meeting on May 10, 2012. When offered, most employees are eligible to purchase shares of common stock of the CompanyTDCC valued at up to 10 percent of their annual base salary. The value is determined using the plan price multiplied by the number of shares subscribed to by the employee. The plan price of the stock is set at an amount equal to at least 85 percent of the fair market value (closing price) of the common stock on a date during the fourth quarter of the year prior to the offering, or the average fair market value (closing price) of the common stock over a period during the fourth quarter of the year prior to the offering, in each case, specified by the Executive Vice President ofChief Human Resources.Resources Officer. The most recent offering of the 2012 ESPP closed on July 15, 2017. The ESPP was not offered in 2018 and 2019 and no current offerings remain outstanding.
| | | Additional Information about Employee Stock Purchase Plan | | |
| In millions, except per share amounts | 2018 | 2017 | 2016 | 2017 |
| Weighted-average fair value per share of purchase rights granted | $ | — |
| $ | 10.70 |
| $ | 3.40 |
| $ | 10.70 |
|
| Total compensation expense for ESPP | $ | — |
| $ | 38 |
| $ | 7 |
| $ | 38 |
|
| Related tax benefit | $ | — |
| $ | 14 |
| $ | 3 |
| $ | 14 |
|
| Total amount of cash received from the exercise of purchase rights | $ | — |
| $ | 179 |
| $ | 86 |
| $ | 179 |
|
Total intrinsic value of purchase rights exercised 1 | $ | — |
| $ | 48 |
| $ | 23 |
| $ | 48 |
|
| Related tax benefit | $ | — |
| $ | 18 |
| $ | 9 |
| $ | 18 |
|
| |
| 1. | Difference between the market price at exercise and the price paid by the employee to exercise the purchase rights. |
NOTE 2123 – FINANCIAL INSTRUMENTS
The following table summarizes the fair value of financial instruments at December 31, 20182019 and 2017:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value of Financial Instruments at Dec 31 1 | 2019 | 2018 |
| In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value |
| Cash equivalents: | | | | | | | | |
Held to maturity securities 2 | $ | 220 |
| $ | — |
| $ | — |
| $ | 220 |
| $ | 410 |
| $ | — |
| $ | — |
| $ | 410 |
|
| Money market funds | 408 |
| — |
| — |
| 408 |
| 156 |
| — |
| — |
| 156 |
|
| Total cash equivalents | $ | 628 |
| $ | — |
| $ | — |
| $ | 628 |
| $ | 566 |
| $ | — |
| $ | — |
| $ | 566 |
|
| Marketable securities | $ | 21 |
| $ | — |
| $ | — |
| $ | 21 |
| $ | 100 |
| $ | — |
| $ | — |
| $ | 100 |
|
| Other investments: | | | | | | | | |
| Debt securities: | | | | | | | | |
Government debt 3 | $ | 533 |
| $ | 33 |
| $ | (11 | ) | $ | 555 |
| $ | 714 |
| $ | 9 |
| $ | (23 | ) | $ | 700 |
|
| Corporate bonds | 944 |
| 80 |
| (10 | ) | 1,014 |
| 1,026 |
| 20 |
| (63 | ) | 983 |
|
| Total debt securities | $ | 1,477 |
| $ | 113 |
| $ | (21 | ) | $ | 1,569 |
| $ | 1,740 |
| $ | 29 |
| $ | (86 | ) | $ | 1,683 |
|
Equity securities 4 | 10 |
| 6 |
| (1 | ) | 15 |
| 16 |
| 1 |
| (1 | ) | 16 |
|
| Total other investments | $ | 1,487 |
| $ | 119 |
| $ | (22 | ) | $ | 1,584 |
| $ | 1,756 |
| $ | 30 |
| $ | (87 | ) | $ | 1,699 |
|
| Total cash equivalents, marketable securities and other investments | $ | 2,136 |
| $ | 119 |
| $ | (22 | ) | $ | 2,233 |
| $ | 2,422 |
| $ | 30 |
| $ | (87 | ) | $ | 2,365 |
|
Long-term debt including debt due within one year 5 | $ | (16,410 | ) | $ | 7 |
| $ | (2,258 | ) | $ | (18,661 | ) | $ | (19,591 | ) | $ | 351 |
| $ | (972 | ) | $ | (20,212 | ) |
| Derivatives relating to: | | | | | | | | |
Interest rates 6 | $ | — |
| $ | 8 |
| $ | (283 | ) | $ | (275 | ) | $ | — |
| $ | — |
| $ | (64 | ) | $ | (64 | ) |
| Foreign currency | — |
| 101 |
| (21 | ) | 80 |
| — |
| 120 |
| (43 | ) | 77 |
|
Commodities 6 | — |
| 59 |
| (115 | ) | (56 | ) | — |
| 91 |
| (178 | ) | (87 | ) |
| Total derivatives | $ | — |
| $ | 168 |
| $ | (419 | ) | $ | (251 | ) | $ | — |
| $ | 211 |
| $ | (285 | ) | $ | (74 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Financial Instruments at Dec 31 | 2018 | 2017 |
| In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value |
Cash equivalents 1 | $ | 566 |
| $ | — |
| $ | — |
| $ | 566 |
| $ | 2,280 |
| $ | — |
| $ | — |
| $ | 2,280 |
|
| Marketable securities | $ | 100 |
| $ | — |
| $ | — |
| $ | 100 |
| $ | 4 |
| $ | — |
| $ | — |
| $ | 4 |
|
| Other investments: | | | | | | | | |
| Debt securities: | | | | | | | | |
Government debt 2 | $ | 714 |
| $ | 9 |
| $ | (23 | ) | $ | 700 |
| $ | 637 |
| $ | 13 |
| $ | (11 | ) | $ | 639 |
|
| Corporate bonds | 1,026 |
| 20 |
| (63 | ) | 983 |
| 704 |
| 32 |
| (3 | ) | 733 |
|
| Total debt securities | $ | 1,740 |
| $ | 29 |
| $ | (86 | ) | $ | 1,683 |
| $ | 1,341 |
| $ | 45 |
| $ | (14 | ) | $ | 1,372 |
|
Equity securities 3 | 16 |
| 1 |
| (1 | ) | 16 |
| 164 |
| 2 |
| (26 | ) | 140 |
|
| Total other investments | $ | 1,756 |
| $ | 30 |
| $ | (87 | ) | $ | 1,699 |
| $ | 1,505 |
| $ | 47 |
| $ | (40 | ) | $ | 1,512 |
|
| Total cash equivalents, marketable securities and other investments | $ | 2,422 |
| $ | 30 |
| $ | (87 | ) | $ | 2,365 |
| $ | 3,789 |
| $ | 47 |
| $ | (40 | ) | $ | 3,796 |
|
Long-term debt including debt due within one year 4 | $ | (19,594 | ) | $ | 351 |
| $ | (971 | ) | $ | (20,214 | ) | $ | (20,517 | ) | $ | 6 |
| $ | (2,104 | ) | $ | (22,615 | ) |
| Derivatives relating to: | | | | | | | | |
| Interest rates | $ | — |
| $ | — |
| $ | (64 | ) | $ | (64 | ) | $ | — |
| $ | — |
| $ | (4 | ) | $ | (4 | ) |
| Foreign currency | — |
| 120 |
| (43 | ) | 77 |
| — |
| 22 |
| (112 | ) | (90 | ) |
Commodities 5 | — |
| 91 |
| (178 | ) | (87 | ) | — |
| 130 |
| (256 | ) | (126 | ) |
| Total derivatives | $ | — |
| $ | 211 |
| $ | (285 | ) | $ | (74 | ) | $ | — |
| $ | 152 |
| $ | (372 | ) | $ | (220 | ) |
| |
| 1. | Prior period amounts were updated to conform with the current year presentation. |
| |
| 2. | The Company had held-to-maturity securities (primarily treasury bills and time deposits) classified as cash equivalents. |
| |
| 3. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations. |
| |
3.4. | Equity securities with a readily determinable fair value. Presented in accordance with ASU 2016-01. See Notes 1 and 2 for additional information. |
| |
4.5. | Cost includes fair value hedge adjustmentsadjustment gains of $1 million at December 31, 2019 and losses of $18 million at December 31, 2018 and $19on $3,490 million of debt at December 31, 2017 on2019 and $2,290 million of debt at December 31, 2018 and $2,390 million of debt at December 31, 2017.2018. |
| |
5.6. | Presented net of cash collateral where master netting arrangements allow. |
Cost approximates fair value for all other financial instruments.
Cash Equivalents
At December 31, 2018, the Company had $410 million ($1,771 million at December 31, 2017) of held-to-maturity securities (primarily treasury bills and time deposits) classified as cash equivalents, as these securities had maturities of three months or less at the time of purchase. The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At December 31, 2018, the Company had investments in money market funds of $156 million classified as cash equivalents ($509 million at December 31, 2017).
Marketable Securities
At December 31, 2018, the Company had $100 million ($4 million at December 31, 2017) of debt securities with maturities of less than one year at the time of purchase.
Debt Securities
The Company’s investments in debt securities are primarily classified as available-for-sale. The following table provides the investing results from available-for-sale securities for the years ended December 31, 2019, 2018 2017 and 2016.2017.
|
| | | | | | | | | |
| Investing Results | | | |
| In millions | 2019 | 2018 | 2017 |
| Proceeds from sales of available-for-sale securities | $ | 1,138 |
| $ | 1,053 |
| $ | 245 |
|
| Gross realized gains | $ | 51 |
| $ | 21 |
| $ | 5 |
|
| Gross realized losses | $ | 18 |
| $ | 30 |
| $ | — |
|
|
| | | | | | | | | |
Investing Results 1 | | | |
| In millions | 2018 | 2017 | 2016 |
| Proceeds from sales of available-for-sale securities | $ | 1,053 |
| $ | 245 |
| $ | 396 |
|
| Gross realized gains | $ | 21 |
| $ | 5 |
| $ | 15 |
|
| Gross realized losses | $ | 30 |
| $ | — |
| $ | 1 |
|
| |
1. | Prior period amounts were updated to conform with the current year presentation as a result of the adoption of ASU 2016-01. |
The following table summarizes the contractual maturities of the Company’s investments in debt securities:
|
| | | | | | |
Contractual Maturities of Debt Securities at Dec 31, 2019 1 | Amortized Cost | Fair Value |
| In millions |
| Within one year | $ | 36 |
| $ | 39 |
|
| One to five years | 391 |
| 406 |
|
| Six to ten years | 534 |
| 554 |
|
| After ten years | 516 |
| 570 |
|
| Total | $ | 1,477 |
| $ | 1,569 |
|
|
| | | | | | |
Contractual Maturities of Debt Securities at Dec 31, 2018 1 | Amortized Cost | Fair Value |
| In millions |
| Within one year | $ | 124 |
| $ | 124 |
|
| One to five years | 455 |
| 444 |
|
| Six to ten years | 717 |
| 683 |
|
| After ten years | 444 |
| 432 |
|
| Total | $ | 1,740 |
| $ | 1,683 |
|
1. Includes marketable securities with maturities of less than one year.
Portfolio managers regularly review the Company’s holdings to determine if any investments in debt securities are other-than-temporarily impaired. The analysis includes reviewing the amount of the impairment, as well as the length of time it has been impaired.
The credit rating of the issuer, current credit rating trends, the trends of the issuer’s overall sector, the ability of the issuer to pay expected cash flows and the length of time the security has been in a loss position are considered in determining whether unrealized losses represent an other-than-temporary impairment. The Company did not have any credit-related losses in 2019, 2018 2017 or 2016.2017.
The following tables providetable provides the fair value and gross unrealized losses of the Company’s investments in debt securities that were deemed to be temporarily impaired at December 31, 20182019 and 2017,2018, aggregated by investment category:
|
| | | | | | | | | | | | | | | | | | |
Temporarily Impaired Debt Securities at Dec 31 | Less than 12 months | 12 months or more | Total |
Fair Value | Unrealized Losses | Fair
Value | Unrealized
Losses | Fair Value | Unrealized Losses |
| In millions |
| 2019 | | | | | | |
Government debt 1 | $ | 55 |
| $ | (3 | ) | $ | 23 |
| $ | (8 | ) | $ | 78 |
| $ | (11 | ) |
| Corporate bonds | 79 |
| (3 | ) | 52 |
| (7 | ) | 131 |
| (10 | ) |
| Total temporarily impaired debt securities | $ | 134 |
| $ | (6 | ) | $ | 75 |
| $ | (15 | ) | $ | 209 |
| $ | (21 | ) |
| 2018 | | | | | | |
Government debt 1 | $ | 287 |
| $ | (17 | ) | $ | 187 |
| $ | (6 | ) | $ | 474 |
| $ | (23 | ) |
| Corporate bonds | 724 |
| (58 | ) | 64 |
| (5 | ) | 788 |
| (63 | ) |
| Total temporarily impaired debt securities | $ | 1,011 |
| $ | (75 | ) | $ | 251 |
| $ | (11 | ) | $ | 1,262 |
| $ | (86 | ) |
|
| | | | | | | | | | | | | | | | | | |
Temporarily Impaired Debt Securities at Dec 31, 2018 | Less than 12 months | 12 months or more | Total |
Fair Value | Unrealized Losses | Fair
Value | Unrealized
Losses | Fair Value | Unrealized Losses |
| In millions |
Government debt 1 | $ | 287 |
| $ | (17 | ) | $ | 187 |
| $ | (6 | ) | $ | 474 |
| $ | (23 | ) |
| Corporate bonds | 724 |
| (58 | ) | 64 |
| (5 | ) | 788 |
| (63 | ) |
| Total temporarily impaired debt securities | $ | 1,011 |
| $ | (75 | ) | $ | 251 |
| $ | (11 | ) | $ | 1,262 |
| $ | (86 | ) |
| |
| 1. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities' obligations. |
|
| | | | | | | | | | | | | | | | | | |
Temporarily Impaired Debt Securities at Dec 31, 2017 | Less than 12 months | 12 months or more | Total |
Fair Value | Unrealized Losses | Fair
Value | Unrealized
Losses | Fair Value | Unrealized Losses |
| In millions |
Government debt 1 | $ | 295 |
| $ | (4 | ) | $ | 151 |
| $ | (7 | ) | $ | 446 |
| $ | (11 | ) |
| Corporate bonds | 163 |
| (2 | ) | 19 |
| (1 | ) | 182 |
| (3 | ) |
| Total temporarily impaired debt securities | $ | 458 |
| $ | (6 | ) | $ | 170 |
| $ | (8 | ) | $ | 628 |
| $ | (14 | ) |
| |
1. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities' obligations. |
Equity Securities
The Company’s investments in equity securities with a readily determinable fair value totaled $16$15 million at December 31, 20182019 ($14016 million at December 31, 2017)2018). The net unrealized gains recognized in earnings on readily determinable equity securities totaled $5 million for the year ended December 31, 2019 ($7 million for the year ended December 31, 2018). The aggregate carrying value of the Company’sCompany's investments in equity securities where fair value is not readily determinable totaled $206$189 million at December 31, 2018,2019 ($204 million at December 31, 2018), reflecting the carrying value of the investments. There were no material adjustments to the carrying value of the not readily determinable investments for impairment or observable price changes for the year ended December 31, 2018. The net unrealized gain recognized in earnings on equity securities totaled $7 million for the year ended December 31, 2018.2019.
Repurchase and Reverse Repurchase Agreement Transactions
The Company enters into repurchase and reverse repurchase agreements. These transactions are accounted for as collateralized borrowings and lending transactions bearing a specified rate of interest and are short-term in nature with original maturities of 30 days or less. The underlying collateral is typically treasury bills with longer maturities than the repurchase agreement. The impact of these transactions is not material to the Company’s results. There were no repurchase or reverse repurchase agreements outstanding at December 31, 20182019 and 2017.2018.
Risk Management
Dow’sThe Company’s business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies that enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as hedges per the accounting guidance related to derivatives and
hedging activities, where appropriate. A secondary objective is to add value by creating additional non-specific exposure within established limits and policies; derivatives used for this purpose are not designated as hedges. The potential impact of creating such additional exposures is not material to the Company’s results. Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value.
The Company’s risk management program for interest rate, foreign currency and commodity risks is based on fundamental, mathematical and technical models that take into account the implicit cost of hedging. Risks created by derivative instruments and the mark-to-market valuations of positions are strictly monitored at all times, using value-at-risk and stress tests. Counterparty credit risk arising from these contracts is not significant because the Company minimizes counterparty concentration, deals primarily with major financial institutions of solid credit quality, and the majority of its hedging transactions mature in less than three months. In addition, the Company minimizes concentrations of credit risk through its global orientation by transacting with large, internationally diversified financial counterparties. It is the Company’s policy to not have credit risk-related contingent features in its derivative instruments. No significant concentration of counterparty credit risk existed at December 31, 2018.2019. The Company does not anticipate losses from credit risk, and the net cash requirements arising from counterparty risk associated with risk management activities are not expected to be material in 2019.2020.
The Company revises its strategies as market conditions dictate and management reviews its overall financial strategies and the impacts from using derivatives in its risk management program with the Company’s senior leadership who also reviews these strategies with the DowDuPontDow Inc. Board and/or relevant committees thereof.
The notional amounts of the Company's derivative instruments presented on a net basis at December 31, 20182019 and 2017,2018, were as follows:
| | | Notional Amounts - Net | Dec 31, 2018 | Dec 31, 2017 1 | Dec 31, 2019 | Dec 31, 2018 |
| In millions |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate swaps | $ | 2,049 |
| $ | 185 |
| |
| Interest rate contracts | | $ | 922 |
| $ | 2,049 |
|
| Foreign currency contracts | $ | 4,457 |
| $ | 4,343 |
| $ | 6,253 |
| $ | 4,457 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Interest rate swaps | $ | 5 |
| $ | — |
| |
| Interest rate contracts | | $ | 145 |
| $ | 5 |
|
| Foreign currency contracts | $ | 19,285 |
| $ | 12,041 |
| $ | 5,567 |
| $ | 19,285 |
|
| |
1. | Prior period amounts were previously presented on a gross basis and have been updated to conform with the current year net presentation. |
The notional amounts of the Company's commodity derivatives at December 31, 20182019 and 2017,2018, were as follows:
|
| | | | | |
| Commodity Notionals - Net | Dec 31, 2019 | Dec 31, 2018 | Notional Volume Unit |
| |
| Derivatives designated as hedging instruments: | | | |
| Hydrocarbon derivatives | 6.1 |
| 39.9 |
| million barrels of oil equivalent |
| Derivatives not designated as hedging instruments: | | | |
| Hydrocarbon derivatives | 0.1 |
| 1.2 |
| million barrels of oil equivalent |
| Power derivatives | 87.5 |
| 73.9 |
| thousands of megawatt hours |
|
| | | | | |
| Commodity Notionals - Net | Dec 31, 2018 | Dec 31, 2017 1 | Notional Volume Unit |
| |
| Derivatives designated as hedging instruments: | | | |
| Hydrocarbon derivatives | 39.9 |
| 71.3 |
| million barrels of oil equivalent |
| Seed derivatives | — |
| 3.9 |
| million bushels |
| Derivatives not designated as hedging instruments: | | | |
| Hydrocarbon derivatives | 1.2 |
| 4.1 |
| million barrels of oil equivalent |
| Power derivatives | 73.9 |
| — |
| thousands of megawatt hours |
|
| |
| Maturity Dates of Derivatives Designated as Hedges | Year |
|
| Interest rate contracts | 2021 |
Foreign currency contracts 1 | 2020 |
| Commodity contracts | 2022 |
| |
| 1. | Prior period amounts were previously presented onThe Company had foreign currency contracts primarily through 2020 with a gross basis and have been updated to conform withnominal impact into the current year net presentation.first quarter of 2021. |
Interest Rate Risk Management
The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. To achieve this objective, the Company hedges using interest rate swaps, “swaptions,” and exchange-traded instruments. At December 31, 2018, the Company had open interest rate swaps with maturity dates that extend through 2022.
Foreign Currency Risk Management
The global nature of Dow'sthe Company's business requires active participation in the foreign exchange markets. The Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company's foreign currency risk management is to optimize the U.S. dollar value of net assets and cash flows. To achieve this objective, the Company hedges on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps and nonderivative instruments in foreign currencies. Exposures primarily relate to assets, liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to operating activities. At December 31, 2018, the Company had foreign currency contracts with various expiration dates, through 2019.
Commodity Risk Management
The Company has exposure to the prices of commodities in its procurement of certain raw materials. The primary purpose of commodity hedging activities is to manage the price volatility associated with these forecasted inventory purchases. At December 31, 2018, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements have various expiration dates through 2022.
Derivatives Not Designated in Hedging Relationships
Foreign Currency Contracts
The Company also uses foreign exchange forward contracts, options and cross-currency swaps that are not designated as hedging instruments primarily to manage foreign currency exposure.
Commodity Contracts
The Company utilizes futures, options and swap instruments that are effective as economic hedges of commodity price exposures, but do not meet hedge accounting criteria for derivatives and hedging, to reduce exposure to commodity price fluctuations on purchases of raw materials and inventory.
Interest Rate Contracts
The Company uses swap instruments that are not designated as hedging instruments to manage the interest rate exposures. DowThe Company uses interest rate swaps, "swaptions," and exchange-traded instruments to accomplish this objective.
Accounting for Derivative Instruments and Hedging Activities
Cash Flow Hedges
For derivatives that are designated and qualify as cash flow hedging instruments, the gain or loss on the derivative is recorded in AOCL; it is reclassified to income in the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCL fluctuate based on changes in the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCL and net income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market conditions during any period.
The net gain from interest rate hedges included in AOCL at December 31, 2018 was $23 million after tax (net loss of $3 million after tax at December 31, 2017). These contracts have maturity dates that extend through 2022.
The Company had open foreign currency contracts designated as cash flow hedges of the currency risk associated with forecasted transactions not extending beyond 2019. The portion of the mark-to-market effects of the foreign currency contracts is recorded in AOCL; it is reclassified to income in the same period or periods that the underlying item affects income. The net gain from the foreign currency hedges included in AOCL at December 31, 2018 was $15 million after tax (net loss of $19 million after tax at December 31, 2017).
Commodity swaps, futures and option contracts with maturities of not more than 6048 months are utilized and designated as cash flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until December 2022. The designated portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCL; it is reclassified to income in the same period or periods that the underlying commodity purchase affects income. The net loss from commodity hedges included in AOCL at December 31, 2018 was $87 million after tax (net loss of $73 million after tax at December 31, 2017).
Fair Value Hedges
For interest rate swap instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedgedhedge item attributable to the hedged risk are recognized in current period income and reflected as “Interest expense and amortization of debt discount” in the consolidated statements of income. The short-cut method is used whenincome, except for amounts excluded from the criteriaassessment of effectiveness that are met. At December 31, 2018 and 2017, the Company had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations.recognized in earnings through an amortization approach.
Net Foreign Investment Hedges
For derivative instrumentsThe Company designates derivatives that are designated and qualify as effective net foreign investment hedges, the designated portionresults of which are presented in the gain or loss oneffect of derivative instruments table. In addition, the derivative is included in “Cumulative translation adjustments” in AOCL.Company utilizes non-derivative instruments as net foreign investment hedges. The Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $182$184 million at December 31, 20182019 ($177182 million at December 31, 2017)2018). The results
Amounts to be Reclassified within the Next Twelve Months
The net after-tax amounts to be reclassified from AOCL to income within the next 12 months are a $45 million loss for commodity contracts, a $13 million gain for foreign currency contracts and a $1 million gain for interest rate contracts.
The following tables provide the fair value and gross balance sheet classification of derivative instruments at December 31, 20182019 and 2017:2018:
|
| | | | | | | | | | |
| Fair Value of Derivative Instruments | Dec 31, 2019 |
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheets |
| Asset derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate contracts | Other current assets | $ | 21 |
| $ | (13 | ) | $ | 8 |
|
| Foreign currency contracts | Other current assets | 105 |
| (36 | ) | 69 |
|
| Commodity contracts | Other current assets | 44 |
| (25 | ) | 19 |
|
| Commodity contracts | Deferred charges and other assets | 28 |
| (3 | ) | 25 |
|
| Total | | $ | 198 |
| $ | (77 | ) | $ | 121 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Interest rate contracts | Other current assets | $ | 14 |
| $ | (14 | ) | $ | — |
|
| Interest rate contracts | Deferred charges and other assets | — |
| — |
| — |
|
| Foreign currency contracts | Other current assets | 44 |
| (12 | ) | 32 |
|
| Commodity contracts | Other current assets | 18 |
| (3 | ) | 15 |
|
| Commodity contracts | Deferred charges and other assets | — |
| — |
| — |
|
| Total | | $ | 76 |
| $ | (29 | ) | $ | 47 |
|
| Total asset derivatives | | $ | 274 |
| $ | (106 | ) | $ | 168 |
|
| | | | | |
| Liability derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate contracts | Accrued and other current liabilities | $ | 23 |
| $ | (13 | ) | $ | 10 |
|
| Interest rate contracts | Other noncurrent obligations | 1 |
| — |
| 1 |
|
| Foreign currency contracts | Accrued and other current liabilities | 46 |
| (36 | ) | 10 |
|
| Commodity contracts | Accrued and other current liabilities | 95 |
| (29 | ) | 66 |
|
| Commodity contracts | Other noncurrent obligations | 38 |
| (4 | ) | 34 |
|
| Total | | $ | 203 |
| $ | (82 | ) | $ | 121 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Interest rate contracts | Accrued and other current liabilities | $ | 136 |
| $ | (14 | ) | $ | 122 |
|
| Interest rate contracts | Other noncurrent obligations | 150 |
| — |
| 150 |
|
| Foreign currency contracts | Accrued and other current liabilities | 23 |
| (12 | ) | 11 |
|
| Commodity contracts | Accrued and other current liabilities | 17 |
| (3 | ) | 14 |
|
| Commodity contracts | Other noncurrent obligations | 1 |
| — |
| 1 |
|
| Total | | $ | 327 |
| $ | (29 | ) | $ | 298 |
|
| Total liability derivatives | | $ | 530 |
| $ | (111 | ) | $ | 419 |
|
|
| | | | | | | | | | |
| Fair Value of Derivative Instruments | Dec 31, 2018 |
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheets |
| Asset derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 98 |
| $ | (42 | ) | $ | 56 |
|
| Commodity contracts | Other current assets | 47 |
| (13 | ) | 34 |
|
| Commodity contracts | Deferred charges and other assets | 18 |
| (3 | ) | 15 |
|
| Total | | $ | 163 |
| $ | (58 | ) | $ | 105 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 128 |
| $ | (64 | ) | $ | 64 |
|
| Commodity contracts | Other current assets | 41 |
| (1 | ) | 40 |
|
| Commodity contracts | Deferred charges and other assets | 4 |
| (2 | ) | 2 |
|
| Total | | $ | 173 |
| $ | (67 | ) | $ | 106 |
|
| Total asset derivatives | | $ | 336 |
| $ | (125 | ) | $ | 211 |
|
| | | | | |
| Liability derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate swaps | Other noncurrent obligations | $ | 64 |
| $ | — |
| $ | 64 |
|
| Foreign currency contracts | Accrued and other current liabilities | 46 |
| (42 | ) | 4 |
|
| Commodity contracts | Accrued and other current liabilities | 111 |
| (18 | ) | 93 |
|
| Commodity contracts | Other noncurrent obligations | 86 |
| (9 | ) | 77 |
|
| Total | | $ | 307 |
| $ | (69 | ) | $ | 238 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Accrued and other current liabilities | $ | 103 |
| $ | (64 | ) | $ | 39 |
|
| Commodity contracts | Accrued and other current liabilities | 7 |
| (4 | ) | 3 |
|
| Commodity contracts | Other noncurrent obligations | 8 |
| (3 | ) | 5 |
|
| Total | | $ | 118 |
| $ | (71 | ) | $ | 47 |
|
| Total liability derivatives | | $ | 425 |
| $ | (140 | ) | $ | 285 |
|
| |
| 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 Dowthe Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
|
| | | | | | | | | | |
| Fair Value of Derivative Instruments | Dec 31, 2018 |
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheets |
| Asset derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 98 |
| $ | (42 | ) | $ | 56 |
|
| Commodity contracts | Other current assets | 47 |
| (13 | ) | 34 |
|
| Commodity contracts | Deferred charges and other assets | 18 |
| (3 | ) | 15 |
|
| Total | | $ | 163 |
| $ | (58 | ) | $ | 105 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 128 |
| $ | (64 | ) | $ | 64 |
|
| Commodity contracts | Other current assets | 41 |
| (1 | ) | 40 |
|
| Commodity contracts | Deferred charges and other assets | 4 |
| (2 | ) | 2 |
|
| Total | | $ | 173 |
| $ | (67 | ) | $ | 106 |
|
| Total asset derivatives | | $ | 336 |
| $ | (125 | ) | $ | 211 |
|
| | | | | |
| Liability derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate contracts | Other noncurrent obligations | $ | 64 |
| $ | — |
| $ | 64 |
|
| Foreign currency contracts | Accrued and other current liabilities | 46 |
| (42 | ) | 4 |
|
| Commodity contracts | Accrued and other current liabilities | 111 |
| (18 | ) | 93 |
|
| Commodity contracts | Other noncurrent obligations | 86 |
| (9 | ) | 77 |
|
| Total | | $ | 307 |
| $ | (69 | ) | $ | 238 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Accrued and other current liabilities | $ | 103 |
| $ | (64 | ) | $ | 39 |
|
| Commodity contracts | Accrued and other current liabilities | 7 |
| (4 | ) | 3 |
|
| Commodity contracts | Other noncurrent obligations | 8 |
| (3 | ) | 5 |
|
| Total | | $ | 118 |
| $ | (71 | ) | $ | 47 |
|
| Total liability derivatives | | $ | 425 |
| $ | (140 | ) | $ | 285 |
|
|
| | | | | | | | | | |
| Fair Value of Derivative Instruments | Dec 31, 2017 |
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheets |
| Asset derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 51 |
| $ | (46 | ) | $ | 5 |
|
| Commodity contracts | Other current assets | 20 |
| (4 | ) | 16 |
|
| Commodity contracts | Deferred charges and other assets | 70 |
| (5 | ) | 65 |
|
| Total | | $ | 141 |
| $ | (55 | ) | $ | 86 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 75 |
| $ | (58 | ) | $ | 17 |
|
| Commodity contracts | Other current assets | 50 |
| (5 | ) | 45 |
|
| Commodity contracts | Deferred charges and other assets | 7 |
| (3 | ) | 4 |
|
| Total | | $ | 132 |
| $ | (66 | ) | $ | 66 |
|
| Total asset derivatives | | $ | 273 |
| $ | (121 | ) | $ | 152 |
|
| | | | | |
| Liability derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate swaps | Other noncurrent obligations | $ | 4 |
| $ | — |
| $ | 4 |
|
| Foreign currency contracts | Accrued and other current liabilities | 109 |
| (46 | ) | 63 |
|
| Commodity contracts | Accrued and other current liabilities | 96 |
| (15 | ) | 81 |
|
| Commodity contracts | Other noncurrent obligations | 143 |
| (12 | ) | 131 |
|
| Total | | $ | 352 |
| $ | (73 | ) | $ | 279 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Accrued and other current liabilities | $ | 107 |
| $ | (58 | ) | $ | 49 |
|
| Commodity contracts | Accrued and other current liabilities | 45 |
| (6 | ) | 39 |
|
| Commodity contracts | Other noncurrent obligations | 8 |
| (3 | ) | 5 |
|
| Total | | $ | 160 |
| $ | (67 | ) | $ | 93 |
|
| Total liability derivatives | | $ | 512 |
| $ | (140 | ) | $ | 372 |
|
| |
| 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 Dowthe Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are netted with corresponding assets or liabilities, when applicable. The Company posted cash collateral of $26$5 million at December 31, 20182019 ($2126 million at December 31, 2017)2018). Counterparties posted cash collateral of $34$3 million with the Company at December 31, 2018 (zero2019 ($34 million at December 31, 2017)2018).
| | | Effect of Derivative Instruments | Amount of gain (loss) recognized in OCI 1 | Amount of gain (loss) recognized in income 2 | | Amount of gain (loss) recognized in OCI 1 | Amount of gain (loss) recognized in income 2 | |
| In millions | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | Income Statement Classification | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | Income Statement Classification |
| Derivatives designated as hedging instruments: | | | | | | |
| Fair value hedges: | | | | | | |
| Interest rate swaps | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (2 | ) | $ | — |
| Interest expense and amortization of debt discount 3 | |
| Interest rate contracts | | $ | — |
| $ | — |
| $ | — |
| $ | 17 |
| $ | — |
| $ | (2 | ) | Interest expense and amortization of debt discount 3 |
Excluded components 4 | | (3 | ) | — |
| — |
| — |
| — |
| — |
| |
| Cash flow hedges: | | | | | | |
| Interest rate swaps | 26 |
| 2 |
| 2 |
| (3 | ) | 4 |
| 6 |
| Interest expense and amortization of debt discount | |
| Interest rate contracts | | (316 | ) | 26 |
| 2 |
| 1 |
| (3 | ) | 4 |
| Interest expense and amortization of debt discount |
| Foreign currency contracts | 19 |
| (30 | ) | 8 |
| (18 | ) | 7 |
| (5 | ) | Cost of sales | 16 |
| 19 |
| (30 | ) | 28 |
| (18 | ) | 7 |
| Cost of sales |
| Foreign currency contracts | (3 | ) | (5 | ) | 25 |
| — |
| (17 | ) | (13 | ) | Sundry income (expense) - net | 10 |
| (3 | ) | (5 | ) | 8 |
| — |
| (17 | ) | Sundry income (expense) - net |
| Commodity contracts | (45 | ) | 35 |
| 55 |
| (69 | ) | 7 |
| (28 | ) | Cost of sales | (6 | ) | (46 | ) | 37 |
| (81 | ) | (69 | ) | 10 |
| Cost of sales |
| Net investment hedges: | | | | | | |
| Foreign currency contracts | 116 |
| (73 | ) | 5 |
| — |
| — |
| — |
| | (52 | ) | 116 |
| (73 | ) | — |
| — |
| — |
| |
Excluded components 4 | | 162 |
| — |
| — |
| 99 |
| — |
| — |
| Sundry income (expense) - net |
| Total derivatives designated as hedging instruments | $ | 113 |
| $ | (71 | ) | $ | 95 |
| $ | (90 | ) | $ | (1 | ) | $ | (40 | ) | | $ | (189 | ) | $ | 112 |
| $ | (69 | ) | $ | 72 |
| $ | (90 | ) | $ | 2 |
| |
| Derivatives not designated as hedging instruments: | | | | | | |
| Interest rate contracts | | $ | — |
| $ | — |
| $ | — |
| $ | (4 | ) | $ | — |
| $ | — |
| Interest expense and amortization of debt discount |
| Foreign currency contracts | $ | — |
| $ | — |
| $ | — |
| $ | 101 |
| $ | (289 | ) | $ | (180 | ) | Sundry income (expense) - net | — |
| — |
| — |
| 45 |
| 101 |
| (289 | ) | Sundry income (expense) - net |
| Commodity contracts | — |
| — |
| — |
| (12 | ) | (9 | ) | 6 |
| Cost of sales | — |
| — |
| — |
| (28 | ) | (12 | ) | (9 | ) | Cost of sales |
| Total derivatives not designated as hedging instruments | $ | — |
| $ | — |
| $ | — |
| $ | 89 |
| $ | (298 | ) | $ | (174 | ) | | $ | — |
| $ | — |
| $ | — |
| $ | 13 |
| $ | 89 |
| $ | (298 | ) | |
| Total derivatives | $ | 113 |
| $ | (71 | ) | $ | 95 |
| $ | (1 | ) | $ | (299 | ) | $ | (214 | ) | | $ | (189 | ) | $ | 112 |
| $ | (69 | ) | $ | 85 |
| $ | (1 | ) | $ | (296 | ) | |
| |
| 1. | OCI is defined as other comprehensive income (loss). |
| |
| 3. | Gain (loss) recognized in income of derivatives is offset by gain (loss) recognized in income of the hedged item. |
| |
| 4. | The excluded components are related to the time value of the derivatives designated as hedges. |
The following table provides the net after-tax amounts to be reclassified from AOCL to income within the next 12 months:
108 |
| | | |
| Expected Reclassifications from AOCL within the next 12 months | Dec 31,
2019 |
| |
| Cash flow hedges | |
| Interest rate contracts | $ | 2 |
|
| Commodity contracts | $ | (23 | ) |
| Foreign currency contracts | $ | 5 |
|
| Net investment hedges | |
| Excluded components | $ | 26 |
|
NOTE 2224 – FAIR VALUE MEASUREMENTS
Fair Value Measurements on a Recurring Basis
The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | |
Basis of Fair Value Measurements on a Recurring Basis 1 | Dec 31, 2019 | Dec 31, 2018 |
| In millions | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total |
| Assets at fair value: | | | | | | |
| Cash equivalents | | | | | | |
Held to maturity securities 2 | $ | — |
| $ | 220 |
| $ | 220 |
| $ | — |
| $ | 410 |
| $ | 410 |
|
| Money market funds | — |
| 408 |
| 408 |
| — |
| 156 |
| 156 |
|
| Marketable securities | — |
| 21 |
| 21 |
| — |
| 100 |
| 100 |
|
Equity securities 3 | 15 |
| — |
| 15 |
| 16 |
| — |
| 16 |
|
Debt securities: 3 | | | |
|
| |
Government debt 4 | — |
| 555 |
| 555 |
| — |
| 700 |
| 700 |
|
| Corporate bonds | 22 |
| 992 |
| 1,014 |
| — |
| 983 |
| 983 |
|
Derivatives relating to: 5 | | | |
|
| |
| Interest rates | — |
| 35 |
| 35 |
| — |
| — |
| — |
|
| Foreign currency | — |
| 149 |
| 149 |
| — |
| 226 |
| 226 |
|
| Commodities | 23 |
| 67 |
| 90 |
| 17 |
| 93 |
| 110 |
|
| Total assets at fair value | $ | 60 |
| $ | 2,447 |
| $ | 2,507 |
| $ | 33 |
| $ | 2,668 |
| $ | 2,701 |
|
| Liabilities at fair value: | | | | | | |
Long-term debt including debt due within one year 6 | $ | — |
| $ | 18,661 |
| $ | 18,661 |
| $ | — |
| $ | 20,212 |
| $ | 20,212 |
|
Derivatives relating to: 5 | | | | | | |
| Interest rates | — |
| 310 |
| 310 |
| — |
| 64 |
| 64 |
|
| Foreign currency | — |
| 69 |
| 69 |
| — |
| 149 |
| 149 |
|
| Commodities | 14 |
| 137 |
| 151 |
| 23 |
| 189 |
| 212 |
|
| Total liabilities at fair value | $ | 14 |
| $ | 19,177 |
| $ | 19,191 |
| $ | 23 |
| $ | 20,614 |
| $ | 20,637 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Basis of Fair Value Measurements on a Recurring Basis | Dec 31, 2018 | Dec 31, 2017 |
| In millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total |
| Assets at fair value: | | | | | | | | |
Cash equivalents 1 | $ | — |
| $ | 566 |
| $ | — |
| $ | 566 |
| $ | — |
| $ | 2,280 |
| $ | — |
| $ | 2,280 |
|
| Marketable securities | — |
| 100 |
| — |
| 100 |
| — |
| 4 |
| — |
| 4 |
|
Interests in trade accounts receivable conduits 2 | — |
| — |
| — |
| — |
| — |
| — |
| 677 |
| 677 |
|
Equity securities 3 | 16 |
| — |
| — |
| 16 |
| 88 |
| 52 |
| — |
| 140 |
|
Debt securities: 3 | | | | |
|
|
| |
Government debt 4 | — |
| 700 |
| — |
| 700 |
| — |
| 639 |
| — |
| 639 |
|
| Corporate bonds | — |
| 983 |
| — |
| 983 |
| — |
| 733 |
| — |
| 733 |
|
Derivatives relating to: 5 | | | | |
|
|
| |
| Foreign currency | — |
| 226 |
| — |
| 226 |
| — |
| 126 |
| — |
| 126 |
|
| Commodities | 17 |
| 93 |
| — |
| 110 |
| 47 |
| 100 |
| — |
| 147 |
|
| Total assets at fair value | $ | 33 |
| $ | 2,668 |
| $ | — |
| $ | 2,701 |
| $ | 135 |
| $ | 3,934 |
| $ | 677 |
| $ | 4,746 |
|
| Liabilities at fair value: | | | | | | | | |
Long-term debt including debt due within one year 6 | $ | — |
| $ | 20,214 |
| $ | — |
| $ | 20,214 |
| $ | — |
| $ | 22,615 |
| $ | — |
| $ | 22,615 |
|
Derivatives relating to: 5 | | | | | | | | |
| Interest rates | — |
| 64 |
| — |
| 64 |
| — |
| 4 |
| — |
| 4 |
|
| Foreign currency | — |
| 149 |
| — |
| 149 |
| — |
| 216 |
| — |
| 216 |
|
| Commodities | 23 |
| 189 |
| — |
| 212 |
| 31 |
| 261 |
| — |
| 292 |
|
| Total liabilities at fair value | $ | 23 |
| $ | 20,616 |
| $ | — |
| $ | 20,639 |
| $ | 31 |
| $ | 23,096 |
| $ | — |
| $ | 23,127 |
|
| |
| 1. | TreasuryPrior period amounts were updated to conform with the current year presentation. |
| |
| 2. | The Company had held-to-maturity securities (primary treasury bills and time deposits,deposits) classified as cash equivalents. |
| |
| 3. | The Company’s investments in debt securities, which are primarily available-for-sale, and money market fundsequity securities are included in "Cash and cash equivalents"“Other investments” in the consolidated balance sheetssheets. |
| |
| 4. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and held at amortized cost, which approximatesother municipalities’ obligations. |
| |
| 5. | See Note 23 for the classification of derivatives in the consolidated balance sheets. |
| |
| 6. | See Note 23 for information on fair value.value measurements of long-term debt. |
2. Included in "Accounts and notes receivable – Other" in the consolidated balance sheets. See Note 14 for additional information on transfers of financial assets.
3. The Company’s investments in debt securities, which are primarily available-for-sale, and equity securities are included in “Other investments” in the consolidated balance sheets.
4. U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
5. See Note 21 for the classification of derivatives in the consolidated balance sheets.
6. See Note 21 for information on fair value measurements of long-term debt.
For assets and liabilities classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For assets and liabilities classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability, or by using observable market data points of similar, more liquid securities to imply the price. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance and quality checks.
For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.
For all other assets and liabilities for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models. See Note 2123 for further information on the types of instruments used by the Company for risk management.
There were no0 transfers between Levels 1 and 2 in the years ended December 31, 20182019 and 2017.2018.
For assets classified as Level 3 measurements, the fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity. The fair value of the Company’s interests held in trade accounts receivable conduits is determined by calculating the expected amount of cash to be received using the key input of anticipated credit losses in the portfolio of receivables sold that have not yet been collected. Given the short-term nature of the underlying receivables, discount rate and prepayments are not factors in determining the fair value of the interests. See Note 1415 for further information on assets classified as Level 3 measurements.
For equity securities calculated at net asset value per share (or its equivalent), the Company had $120$117 million in private market securities and $18 million in real estate at December 31, 2019 ($120 million in private market securities and $29 million in real estate at December 31, 2018.2018). There are no redemption restrictions and the underfunded commitments on these investments were $89$76 million at December 31, 2018.2019 ($89 million at December 31, 2018).
The following table summarizes the changes in fair value measurements using Level 3 inputs for the yearsyear ended December 31, 2018 and 2017:2018:
|
| | | |
Fair Value Measurements Using Level 3 Inputs for Interests Held in Trade Accounts Receivable Conduits 1 | 2018 |
| In millions |
| Balance at Jan 1 | $ | 677 |
|
Gain (loss) included in earnings 2 | 3 |
|
Settlements 3 | (680 | ) |
| Balance at Dec 31 | $ | — |
|
|
| | | | | | |
Fair Value Measurements Using Level 3 Inputs for Interests Held in Trade Accounts Receivable Conduits 1 | 2018 | 2017 |
| In millions |
| Balance at Jan 1 | $ | 677 |
| $ | 1,237 |
|
Gain (loss) included in earnings 2 | 3 |
| (8 | ) |
Purchases 3 | — |
| 8,910 |
|
Settlements 3, 4 | (680 | ) | (9,462 | ) |
| Balance at Dec 31 | $ | — |
| $ | 677 |
|
| |
| 1. | Included in "Accounts and notes receivable – Other" in the consolidated balance sheets. See Note 15 for additional information. |
| |
| 2. | Included in "Selling, general and administrative expenses" in the consolidated statements of income. |
| |
| 3. | Presented in accordance with ASU 2016-15. See Notes 1 and 2 for additional information. In connection with the review and implementation of ASU 2016-15, the Company also changed the prior year value of “Purchases” and "Settlements" due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits, including additional guidance from the SEC's Office of the Chief Accountant issued in the third quarter of 2018 that indicated an entity must evaluate daily transaction activity to calculate the value of cash received from beneficial interests in conduits. |
| |
4. | Includes noncash transactions of $23 million for the year ended December 31, 2018. |
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 in the consolidated balance sheets in 2019, 2018 2017 and 2016:2017:
|
| | | | | | |
| Basis of Fair Value Measurements on a Nonrecurring Basis at Dec 31 | (Level 3) | Total Losses |
| In millions |
| 2019 | | |
| Assets at fair value: | | |
| Long-lived assets, other assets and equity method investments | $ | 162 |
| $ | (2,031 | ) |
| Goodwill | $ | — |
| $ | (1,039 | ) |
| 2018 | | |
| Assets at fair value: | | |
| Long-lived assets and other assets | $ | — |
| $ | (67 | ) |
| 2017 | | |
| Assets at fair value: | | |
| Long-lived assets, intangible assets, other assets and equity method investments | $ | 61 |
| $ | (955 | ) |
| Goodwill | $ | — |
| $ | (1,491 | ) |
2019 Fair Value Measurements on a Nonrecurring Basis
As part of the Synergy Program, the Company has or will shut down and write-off several small manufacturing facilities, non-manufacturing assets and certain corporate facilities around the world. In 2019, manufacturing facilities associated with this plan were written down to zero. In addition, impairments of leased, non-manufacturing facilities, which were classified as Level 3 measurements, resulted in a write-down of right-of-use assets to a fair value of $152 million using unobservable inputs. The impairment charges related to the Synergy Program, totaling $143 million, were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Industrial Intermediates & Infrastructure ($2 million), Performance Materials & Coatings ($28 million) and Corporate ($113 million).
In 2019, the Company recognized an additional pretax impairment charge of $44 million related to capital additions made to Santa Vitoria, which was impaired in 2017. The assets were written down to zero in 2019. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Packaging & Specialty Plastics.
|
| | | | | | | | | |
| Basis of Fair Value Measurements on a Nonrecurring Basis at Dec 31 | (Level 1) | (Level 3) | Total Losses |
| In millions |
| 2018 | | | |
| Assets at fair value: | | | |
| Long-lived assets and other assets | $ | — |
| $ | 17 |
| $ | (261 | ) |
| 2017 | | | |
| Assets at fair value: | | | |
| Long-lived assets, intangible assets, other assets and equity method investments | $ | — |
| $ | 61 |
| $ | (1,226 | ) |
| Goodwill | $ | — |
| $ | — |
| $ | (1,491 | ) |
| 2016 | | | |
| Assets at fair value: | | | |
| Long-lived assets, other assets and equity method investments | $ | 46 |
| $ | — |
| $ | (296 | ) |
In 2019, the Company recognized impairment charges of $14 million related to non-manufacturing assets. The assets, classified as Level 3 measurements, were valued at $10 million using unobservable inputs. The impairment charges were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Performance Materials & Coatings ($9 million) and Corporate ($5 million).
In 2019, the Company recognized an impairment charge of $75 million resulting from the planned divestiture of its acetone derivatives business to ALTIVIA Ketones & Additives, LLC. The transaction closed on November 1, 2019 and included the Company's acetone derivatives related inventory and production assets, located in Institute, West Virginia, in addition to the site infrastructure, land and utilities. The assets, classified as Level 3 measurements and valued using unobservable inputs, were written down to zero in 2019, except for inventory, which was sold at the lower of cost or market. The impairment charge was included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Packaging & Specialty Plastics ($24 million) and Corporate ($51 million).
In the fourth quarter of 2019, the Company performed its annual goodwill impairment testing utilizing a discounted cash flow methodology as its valuation technique. As a result, the Company determined the fair value of the C&PM reporting unit was lower than its carrying amount and recorded an impairment charge of $1,039 million, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Performance Materials & Coatings. See Note 14 for additional information on the impairment charge.
In the fourth quarter of 2019, the Company concluded that its equity method investment in Sadara, classified as a Level 3 measurement and valued using unobservable inputs, was other-than-temporarily impaired and written down to zero. Additionally, the Company reserved certain accounts and notes receivable and accrued interest balances due to uncertainty on the timing of collection. As a result, the Company recorded a $1,755 million charge related to Sadara. The charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Packaging & Specialty Plastics ($370 million), Industrial Intermediates & Infrastructure ($1,168 million) and Corporate ($217 million). See Note 13 for additional information.
2018 Fair Value Measurements on a Nonrecurring Basis
The Company has or will shut down a number of manufacturing R&D,and other non-manufacturing facilities and corporate facilities around the world as part of its restructuring programs. In 2018, the write-down of inventory,manufacturing facilities and related assets and corporate facilities and all but one manufacturing facility and related assets,associated with these programs were written down to zero. The remaining manufacturing facility, which was classified as a Level 3 measurement, was written down to a fair value of $17 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets, which included a third party appraisal. The impairment charges related to the restructuring programs, totaling $227$33 million, were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note income and related to Packaging & Specialty Plastics ($10 million), Performance Materials & Coatings ($7 for additional information on the Company's restructuring activities.million) and Corporate ($16 million).
In 2018, the Company recognized an additional pretax impairment charge of $34 million related primarily to capital additions made to the biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, thatwhich was impaired in 2017. The assets were written down to zero0 in 2018. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income. See Note 7 for additional information onincome and related to the Company's restructuring activities.Packaging & Specialty Plastics segment.
2017 Fair Value Measurements on a Nonrecurring Basis
The Company has or will shut down a number of manufacturing, R&D and corporate facilities around the world as part of the Synergy Program. The manufacturing facilities and related assets (including intangible assets), corporate facilities and data centers associated with this plan were written down to zero0 in the fourth quarter of 2017. The impairment charges related to the Synergy Program, totaling $287$87 million, were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income.income and related to Packaging & Specialty Plastics ($33 million), Industrial Intermediates & Infrastructure ($12 million), Performance Materials & Coatings ($9 million) and Corporate ($33 million). See Note 7 for additional information on the Company's restructuring activities.
In the fourth quarter of 2017, the Company recognized a $622 million pretax impairment charge related to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil.Vitoria. The Company determined it would not pursue an expansion of the facility’s ethanol mill into downstream derivative products, primarily as a result of cheaper ethane-based production as well as the Company’s new assets coming online on the U.S. Gulf Coast which can be used to meet growing market demands in Brazil. As a result of this decision, cash flow analysis indicated the carrying amount of the impacted assets was not recoverable and the assets were written down to zero0 in the fourth quarter of 2017. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.income and related to the Packaging & Specialty Plastics segment. See Notes 7 and 2325 for additional information.
The Company also recognized other pretax impairment charges of $317$246 million in the fourth quarter of 2017, including charges related to manufacturing assets of $230$159 million, an equity method investment of $81 million and other assets of $6 million. The assets, classified as Level 3 measurements, were valued at $61 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets, which included projected cash flows. The impairment charges were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income.income and related to Packaging & Specialty Plastics ($83 million), Industrial Intermediates & Infrastructure ($5 million), Performance Materials & Coatings ($58 million) and Corporate ($100 million). See NotesNote 7 and 23 for additional information.
In the fourth quarter of 2017, the Company performed its annual goodwill impairment testing utilizing a discounted cash flow methodology as its valuation technique. As a result, the Company determined the fair value of the Coatings & Performance MonomersC&PM reporting unit was lower than its carrying amount and recorded an impairment charge of $1,491 million, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.income and related to Performance Materials & Coatings. See Note 1314 for additional information on the impairment charge.
2016 Fair Value Measurements on a Nonrecurring Basis
As part of the 2016 restructuring plan, the Company shut down a number of manufacturing and corporate facilities. The manufacturing facilities and related assets, corporate facilities and data centers associated with this plan were written down to zero in the second quarter of 2016. The Company also rationalized its aircraft fleet in the second quarter of 2016. Certain aircraft, classified as a Level 3 measurement, were considered held for sale and written down to fair value, using unobservable inputs, including assumptions a market participant would use to measure the fair value of the aircraft. The aircraft were subsequently sold in the second half of 2016. The impairment charges related to the 2016 restructuring plan, totaling $153 million, were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note 7 for additional information on the Company's restructuring activities.
The Company recognized an impairment charge of $143 million in the fourth quarter of 2016, related to its equity interest in AFSI. This investment, classified as a Level 1 measurement, was written down to $46 million using quoted prices in an active market. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Notes 7 and 12 for additional information.
NOTE 2325 – VARIABLE INTEREST ENTITIES
Consolidated Variable Interest Entities ("VIEs")
The Company holds a variable interest in the following joint ventures or entities for which it is the primary beneficiary.beneficiary:
Asia Pacific joint ventures
The Company has variable interests in threetwo joint ventures that own and operate manufacturing and logistics facilities, which produce chemicals and provide services in Asia Pacific. The Company's variable interests in these joint ventures relate to arrangements between the joint ventures and the Company, involving the majority of the output on take-or-pay terms with pricing ensuring a guaranteed return to the joint ventures.
Polishing materials joint venture
The Company has variable interestswas a 50 percent indirect owner in a propylene oxide ("PO") manufacturing joint venture that manufactures products in Japan for the semiconductor industry. EachAsia Pacific. The Company had a variable interest in this joint venture partner holds several equivalent variable interests, with the exception of a royalty agreement held exclusivelyrelating to arrangements between the joint venture and the Company. In addition,Company involving the entire outputmajority of the output on take-or-pay terms, with pricing ensuring a guaranteed return to the joint venture. On April 30, 2019, the Company executed an agreement to acquire full ownership in the PO manufacturing joint venture. The transaction closed on October 1, 2019, for a cash purchase price of $331 million. Approximately half of the purchase price was attributed to the Company’s proportionate equity interest in the entity that owned the PO manufacturing joint venture, which is soldaccounted for under the equity method of accounting, and was classified as "Investments in and loans to nonconsolidated affiliates" in the Company for resale to third-party customers.consolidated statements of cash flows. The remaining $166 million was classified as "Purchases of noncontrolling interests" in the consolidated statements of cash flows.
Ethylene storage joint venture
The Company has variable interests in a joint venture that provides ethylene storage in Alberta, Canada. The Company's variable interests relate to arrangements involving a majority of the joint venture's storage capacity on take-or-pay terms with pricing ensuring a guaranteed return to the joint venture; and favorably priced leases provided to the joint venture. The Company provides the joint venture with operation and maintenance services and utilities.
Ethanol production and cogenerationCogeneration in Brazil
The Company held a variable interest in a joint venture located in Brazil that produces ethanol from sugarcane. In August 2015, the partner exercised an equity option which required Dow to purchase their equity interest. On March 31, 2016, the partner's equity investment transferred to the Company. On July 11, 2016, the Company paid $202 million to the former partner, which was classified as "Purchases of noncontrolling interests" in the consolidated statements of cash flows. This former joint venture is now 100 percent owned by the Company. The Company continues to holdholds variable interests in a cogeneration facility in Brazil related entity that owns a cogeneration facility.to the production of ethanol from sugarcane. The Company's variable interests are the result of a tolling arrangement where it provides fuel to the entity and purchases a majority of the cogeneration facility’s output on terms that ensure a return to the entity’s equity holders.
Assets and Liabilities of Consolidated VIEs
The Company's consolidated financial statements include the assets, liabilities and results of operations of VIEs for which the Company is the primary beneficiary. The other equity holders’ interests are reflected in "Net income attributable to noncontrolling interests" in the consolidated statements of income and "Noncontrolling interests" in the consolidated balance sheets.
The following table summarizes the carrying amounts of these entities’ assets and liabilities included in the Company’s consolidated balance sheets at December 31, 20182019 and 2017:2018:
|
| | | | | | |
| Assets and Liabilities of Consolidated VIEs at Dec 31 | | |
| In millions | 2019 | 2018 |
| Cash and cash equivalents | $ | 37 |
| $ | 71 |
|
| Other current assets | 51 |
| 101 |
|
| Net property | 330 |
| 683 |
|
| Other noncurrent assets | 18 |
| 14 |
|
Total assets 1 | $ | 436 |
| $ | 869 |
|
| Current liabilities | $ | 141 |
| $ | 307 |
|
| Long-term debt | 34 |
| 75 |
|
| Other noncurrent obligations | 21 |
| 14 |
|
Total liabilities 2 | $ | 196 |
| $ | 396 |
|
|
| | | | | | |
| Assets and Liabilities of Consolidated VIEs at Dec 31 | | |
| In millions | 2018 | 2017 |
| Cash and cash equivalents | $ | 82 |
| $ | 107 |
|
| Other current assets | 114 |
| 131 |
|
| Net property | 734 |
| 907 |
|
| Other noncurrent assets | 45 |
| 50 |
|
Total assets 1 | $ | 975 |
| $ | 1,195 |
|
| Current liabilities | $ | 334 |
| $ | 303 |
|
| Long-term debt | 75 |
| 249 |
|
| Other noncurrent obligations | 31 |
| 41 |
|
Total liabilities 2 | $ | 440 |
| $ | 593 |
|
| |
| 1. | All assets were restricted at December 31, 20182019 and 2017.2018. |
| |
| 2. | All liabilities were nonrecourse at December 31, 20182019 and 2017.2018. |
In addition, the Company holds a variable interest in an entity created to monetize accounts receivable of select European entities. Dow is the primary beneficiary of this entity as a result of holding subordinated notes while maintaining servicing responsibilities for the accounts receivable. The carrying amounts of assets and liabilities included in the Company’s consolidated balance sheets pertaining to this entity were current assets of zero (zero restricted) at December 31, 2018 ($671 million, zero restricted, at
December 31, 2017) and current liabilities of zero (zero nonrecourse) at December 31, 2018 (less than $1 million, zero nonrecourse, at December 31, 2017).
Amounts presented in the consolidated balance sheets and the table above as restricted assets or nonrecourse obligations relating to consolidated VIEs at December 31, 20182019 and 20172018 are adjusted for intercompany eliminations and parental guarantees.
Nonconsolidated VIEs
The Company holds a variable interest in the following entities for which Dow is not the primary beneficiary.
Polysilicon joint venture
As a result of the Dow Silicones ownership restructure, the Company holds variable interests in Hemlock Semiconductor L.L.C. The variable interests relate to an equity interest held by the Company and arrangements between the Company and the joint venture to provide services. The Company is not the primary beneficiary, as it does not direct the activities that most significantly impact the economic performance of this entity; therefore, the entity is accounted for under the equity method of accounting. At December 31, 2018, the Company had a negative investment basis of $495 million in this joint venture (negative $752 million at December 31, 2017), classified as "Other noncurrent obligations" in the consolidated balance sheets. The Company's maximum exposure to loss was zero at December 31, 2018 (zero at December 31, 2017). See Note 12 for additional information on this joint venture.beneficiary:
Silicon joint ventures
Also as a result of the Dow Silicones ownership restructure, theThe Company holds minority voting interests in certain joint ventures that produce silicon inputs for the Company. These joint ventures operate under supply agreements that sell inventory to the equity owners using pricing mechanisms that guarantee a return, therefore shielding the joint ventures from the obligation to absorb expected losses. As a result of the pricing mechanisms of these agreements, these entities are determined to be VIEs. The Company is not the primary beneficiary, as it does not hold the power to direct the activities that most significantly impact the economic performance of these entities; therefore, the entities are accounted for under the equity method of accounting. The Company's maximum exposure to loss as a result of its involvement with these variable interest entities is determined to be the carrying value of the investment in these entities. At December 31, 2018,2019, the Company's investment in these joint ventures was $100 million ($103100 million at December 31, 2017)2018), classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets, representing the Company's maximum exposure to loss.
AFSIAgroFresh Solutions Inc.
The Company holdsheld a variable interest in AFSI,AgroFresh Solutions Inc. ("AFSI"), a company that produces and sells proprietary technologies for the horticultural market. The variable interest in AFSI relatesrelated to a tax receivable agreement that entitles Dowentitled the Company to additional consideration in the form of tax savings, which iswas contingent on the operations and earnings of AFSI. The Company iswas not the primary beneficiary, as Dowit is a minority shareholder in AFSI and AFSI is governed by a board of directors, the composition of which is mandated by AFSI's corporate governance requirements that a majority of the directors be independent.
On April 4, 2017, In December 2019, the Company entered into a stock purchaseand AFSI settled the tax receivable agreement to purchase up to 5,070,358 shares of AFSI's common stock, which represented approximately 10 percent of AFSI's common stock outstanding at signing ofand the agreement, subject to certain terms and conditions. On November 19, 2018, the stock purchase agreement concluded. The Company's investment inreceivable with AFSI was $480 at December 31, 2019 ($8 million at December 31, 2018, ($51 million at December 31, 2017), classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets. In the fourth quarter of 2016, as a result of a decline in the market value of AFSI, the Company recognized a $143 million pretax impairment charge related to its equity interest in AFSI, recorded in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income (see Notes 12 and 22 for further information).
At December 31, 2018, the Company's receivable with AFSI related to the tax receivable agreement was $8 million ($4 million at December 31, 2017), classified as "Accounts and notes receivable - Other" in the consolidated balance sheets. The Company's maximum exposure to loss was $56 million at December 31, 2018 ($55 million at December 31, 2017)sheets).
Crude acrylic acid joint venture
The Company heldcontinues to be a variableminority shareholder, but does not have a controlling financial interest in a joint venture that manufactured crude acrylic acid in the United States and Germany on behalf of the Company and the other joint venture partner. The variable interest related to a cost-plus arrangement between the joint venture and each joint venture partner. The Company was not the primary beneficiary, as a majority of the joint venture’s output was committed to the other joint venture partner; therefore, the entity was accounted for under the equity method of accounting.AFSI.
In the fourth quarter of 2017, the joint venture was dissolved by mutual agreement with return of the originally contributed assets to the partners. The carrying value of the Company's investment prior to the dissolution was $168 million, which was also determined to be fair value, therefore, no gain or loss was recognized as a result of the transaction. The fair value of assets recognized included $47 million of cash, $67 million of other assets and $48 million of goodwill (net of $6 million settlement of an affiliate's pre-existing obligation).
NOTE 2426 – RELATED PARTY TRANSACTIONS
Effective with the separation from DowDuPont on April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. and reported transactions with Dow Inc. as related party transactions. From the Merger Dow reportsdate through March 31, 2019, TDCC reported transactions with DowDuPont and Historical DuPont and its affiliates as related party transactions.
DowDuPontTDCC
The CompanyTDCC has committed to fund a portion of DowDuPont's share repurchases,Dow Inc.'s dividends paid to common stockholders, share repurchases and certain governance expenses. Funding is accomplished through intercompany loans. TDCC's Board reviews and determines a dividend distribution to Dow Inc. to settle the intercompany loans. In the fourth quarter of 2019, TDCC declared and paid a dividend of $201 million to Dow Inc. At December 31, 2019, TDCC's intercompany loan balance with Dow Inc. was insignificant.
DowDuPont
Pursuant to the Merger Agreement, TDCC committed to fund a portion of DowDuPont's dividends paid to common stockholders and certain governance expenses. In addition, share repurchases by DowDuPont were partially funded by TDCC through 2018. Funding was accomplished through intercompany loans. On a quarterly basis, the Company'sTDCC's Board reviewsreviewed and determinesdetermined a dividend distribution to DowDuPont to settle the intercompany loans. The dividend distribution considersconsidered the level of the Company’sTDCC’s earnings and cash flows and the outstanding intercompany loan balances. In 2018, the Company2019, TDCC declared and paid dividends to DowDuPont of $3,711$535 million ($1,0563,711 million in 2017)2018). At December 31, 2018, the Company'sTDCC's outstanding intercompany loan balance was insignificant (insignificant at December 31, 2017). In addition, at December 31, 2018, Dow had a receivable related to a tax sharing agreement with DowDuPont of $89 million ($354 million at December 31, 2017), included in "Accounts and notes receivable - Other" in the consolidated balance sheets.insignificant.
Historical DuPont and its Affiliates
Dow sellsPrior to the separation from DowDuPont, TDCC sold to and procuresprocured from Historical DuPont and its affiliates certain feedstocks, energy and raw materials that arewere consumed in each company's manufacturing process. In addition, Dow and DuPont have tolling arrangements and recognize product sales for agriculture products. The following table presents amounts due to or due from Historical DuPont and its affiliates at December 31, 2018:
| | | Balances Due To or Due From DuPont and its Affiliates | Dec 31, 2018 | Dec 31, 2017 | |
| Balances Due To or Due From Historical DuPont and its Affiliates | Dec 31, 2018 |
| In millions | Dec 31, 2018 | Dec 31, 2017 |
| Accounts and notes receivable - Other | $ | 89 |
|
| Accounts payable - Other | $ | 201 |
| $ | 12 |
| $ | 19 |
|
The following table presents revenue earned and expenses incurred related to transactions with Historical DuPont and its affiliates:affiliates, prior to the separation from DowDuPont:
|
| | | | | | |
| Sales to Historical DuPont and its Affiliates | 2019 | 2018 |
| In millions |
| Net sales | $ | 12 |
| $ | 55 |
|
| Cost of sales | $ | 9 |
| $ | 42 |
|
|
| | | |
| Sales to DuPont and its Affiliates | 2018 |
| In millions |
| Net sales | $ | 320 |
|
| Cost of sales | $ | 219 |
|
The Company also transferred certain feedstocks and energy to DuPont at cost which totaled $343 million in 2018 and was reflected in "Cost of sales" in the consolidated statements of income.
Purchases from Historical DuPont and its affiliates were $261 million in 2018 (insignificantinsignificant for the period September 1, 2017 through December 31, 2017).2019 and 2018.
NOTE 2527 – BUSINESSSEGMENTS AND GEOGRAPHIC REGIONS
Effective with the Merger, Dow’s business activities are components of its parent company’s business operations. Dow’s business activities, including the assessment of performance and allocation of resources, ultimately are reviewed and managed by DowDuPont. Information used by the chief operating decision maker of Dow relates to the Company in its entirety. Accordingly, there are no separate reportable business segments for the Company under ASC Topic 280 “Segment Reporting” and the Company’s business results are reported in this Form 10-K as a single operating segment. See Note 3 for additional information on the Merger.
Beginning in the third quarter of 2018, Dow realigned the following joint ventures, product lines and principal product groups in preparation for the Intended Business Separations:
Realignment of the HSC Group joint ventures (DC HSC Holdings LLC and Hemlock Semiconductor L.L.C.) from the Consumer Solutions principal product group to the Electronics & Imaging principal product group.
Realignment of certain cellulosics product lines from the Nutrition & Health principal product group to the Consumer Solutions principal product group.
Certain roofing products were realigned from the Safety & Construction principal product group to Corporate.
Realignment of the previously divested Epoxy and Chlorinated Organics principal product groups to Corporate.
The Construction Chemicals principal product group was combined with the Polyurethanes & CAV principal product group.
Certain product lines associated with the oil and gas industry were realigned from the Industrial Solutions principal product group to the Polyurethanes & CAV principal product group.
These reporting changes were retrospectively applied to all periods presented.
Principal Product Groups
Dow combines science and technology to develop innovative solutions that are essential to human progress. Dow has one of the strongest and broadest toolkitstechnology sets in the industry with robust technology, asset integration, focused innovation and global scale to achieve profitable growth and competitive capabilities that enable it to address complex global issues.become the most innovative, customer centric, inclusive and sustainable materials science company. Dow’s market-driven, industry-leading portfolio of advancedperformance materials, industrial intermediates and plastics deliverbusinesses delivers a broad range of differentiated technology-basedscience-based products and solutions tofor our customers in 175 countries in high-growth marketssegments, such as packaging, infrastructure and consumer care. Dow operates 109 manufacturing sites in 31 countries and employs approximately 36,500 people.
Effective with the Merger, TDCC's business activities were components of DowDuPont's business operations and were reported as a single operating segment. Following the separation from DowDuPont, the Company changed the manner in which its business activities were managed. The Company's productsportfolio now includes six global businesses which are manufacturedorganized into the following operating segments: Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure and Performance Materials & Coatings. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. The Company did not aggregate any operating segments when determining its reportable segments.
Following the separation from DowDuPont, the Company changed its practice of transferring ethylene to its downstream derivative businesses at 164 sites in 35 countries acrosscost to transferring ethylene at market prices. The Company also changed certain of its Corporate segment allocation practices including costs previously assigned to AgCo and SpecCo, which are now allocated to the globe. In 2018, operating segments. These changes have been consistently applied to all periods presented.
Dow had annual sales of approximately $60 billion. Thereported geographic information for the following isregions: U.S. & Canada, Asia Pacific, Latin America, and EMEAI. As a descriptionresult of the Company’s principal product groups:separation from DowDuPont, the Company changed the geographic alignment for the country of India to be reflected in EMEAI (previously reported in Asia Pacific).
Principal Product Groups AlignedDow’s measure of profit/loss for segment reporting purposes is pro forma Operating EBIT as this is the manner in which the Company's chief operating decision maker ("CODM") assesses performance and allocates resources. The Company defines pro forma Operating EBIT as earnings (i.e., "Income from continuing operations before income taxes") before interest, plus pro forma adjustments, excluding the impact of significant items. Pro forma Operating EBIT by segment includes all operating items relating
to the businesses; items that principally apply to Dow as a whole are assigned to Corporate. Pro forma Operating EBIT has been reflected retrospectively for all periods presented, and reconciliations are provided at the end of this footnote. The Company also presents pro forma net sales in this footnote as it is included in management's measure of segment performance and is regularly reviewed by the CODM. Pro forma net sales includes the impact of ECP from January 1, 2017 through August 31, 2017, as well as the impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont.
Corporate Profile
Dow conducts its worldwide operations through global businesses which are reflected in the following reportable segments:
Packaging & Specialty Plastics
Packaging & Specialty Plastics consists of two highly integrated global businesses: Hydrocarbons & Energy and Packaging and Specialty Plastics. The segment employs the industry’s broadest polyolefin product portfolio, supported by the Company’s proprietary catalyst and manufacturing process technologies, to work at the customer’s design table throughout the value chain to deliver more reliable and durable, higher performing, and more sustainable plastics to customers in food and specialty packaging; industrial and consumer packaging; health and hygiene; caps, closures and pipe applications; consumer durables; automotive; and infrastructure. This segment includes the results of The Kuwait Styrene Company K.S.C.C. and The SCG-Dow Group, as well as a portion of the results of EQUATE, The Kuwait Olefins Company K.S.C.C. ("TKOC"), Map Ta Phut and Sadara, all joint ventures of the Company.
Industrial Intermediates & Infrastructure
Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & Construction Chemicals - that develop important intermediate chemicals that are essential to manufacturing processes, as well as downstream, customized materials and formulations that use advanced development technologies. These businesses primarily produce and market ethylene oxide and propylene oxide derivatives that are aligned to market segments as diverse as appliances, coatings, infrastructure and oil and gas. The global scale and reach of these businesses, world-class technology and R&D capabilities and materials science expertise enable the Company to be a premier solutions provider offering customers value-add sustainable solutions to enhance comfort, energy efficiency, product effectiveness and durability across a wide range of home comfort and appliances, building and construction, adhesives and lubricant applications, among others. This segment includes a portion of the Company's share of the results of EQUATE, TKOC, Map Ta Phut and Sadara.
Performance Materials Science Business& Coatings
Performance Materials & Coatings & Performance Monomers
includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers makes critical ingredients and additives that help advanceConsumer Solutions. These businesses primarily utilize the performanceCompany's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of paintsthe architectural and coatings. The product grouping offers innovative and sustainable products to accelerate paint and coatings performance across diverse market segments, including architectural paints and coatings, as well as industrial coatings, applications used in maintenance and protective industries, wood, metal packaging, traffic markings, thermal paper and leather. These products enhance coatings by improving hiding and coverage characteristics, enhancing durability against nature and the elements, reducing volatile organic compounds (“VOC”) content, reducing maintenance and improving ease of application. Coatings & Performance Monomers also manufactures critical building blocks based on acrylics needed for the production of coatings, textiles, and home care and personal care products.
Consumer Solutions
Consumer Solutions uses innovative, versatile silicone-basedend-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to provide ingredients and solutions to customers in high performance building, consumer goods, elastomeric applications and the pressure sensitive adhesives industry that help them meet modern consumer preferences in attributes such as texture, feel, scent, durability and consistency; provides a wide array of silicone-based products and solutions that enable Dow’s customers to increase the appeal of their products, extend shelf life, improve performance of products under a wider range of conditions and provide a more sustainable offering; provides standalone silicone materials that are used as intermediates in a wide range of applications including adhesion promoters, coupling agents, crosslinking agents, dispersing agents and surface modifiers; and collaborates closely with global and regional brand ownerscombine chemistry platforms to deliver innovative solutions for creating new and unrivaled consumer benefits and experiences in cleaning, laundry, skin and hair care applications, among others.differentiated offerings to customers.
Hydrocarbons & Energy
Hydrocarbons & Energy is the largest global producer of ethylene, an internal feedstock, and a leading producer of propylene and aromatics products that are used to manufacture materials that consumers use every day. It also produces and procures the power and feedstocks used by the Company's manufacturing sites.
Industrial Solutions
Industrial Solutions is the world’s largest producer of purified ethylene oxide. It provides a broad portfolio of solutions that address world needs by enabling and improving the manufacture of consumer and industrial goods and services, including products and innovations that minimize friction and heat in mechanical processes, manage the oil and water interface, deliver ingredients for maximum effectiveness, facilitate dissolvability, enable product identification and provide the foundational building blocks for the development of chemical technologies. Industrial Solutions supports manufacturers associated with a large variety of end-markets, notably better crop protection offerings in agriculture, coatings, detergents and cleaners, solvents for electronics processing, inks and textiles.
Packaging and Specialty Plastics
Packaging and Specialty Plastics serves growing, high-value sectors using world-class technology, broad existing product lines and a rich product pipeline that creates competitive advantages for the entire packaging value chain. Dow is also a leader in polyolefin elastomers and ethylene propylene diene monomer ("EPDM") rubber serving automotive, consumer, wire and cable and construction markets. Market growth is expected to be driven by major shifts in population demographics; improving socioeconomic status in emerging geographies; consumer and brand owner demand for increased functionality; global efforts to reduce food waste; growth in telecommunications networks; global development of electrical transmission and distribution infrastructure; and renewable energy applications.
Polyurethanes & CAV
Polyurethanes & Chlor-Alkali & Vinyl ("CAV") is the world’s largest producer of propylene oxide, propylene glycol and polyether polyols, and a leading producer of aromatic isocyanates and fully formulated polyurethane systems for rigid, semi-rigid and flexible foams, and coatings, adhesives, sealants, elastomers and composites that serve energy efficiency, consumer comfort, industrial and enhanced mobility market sectors. Polyurethanes & CAV provides cost advantaged chlorine and caustic soda supply and markets caustic soda, a valuable co-product of the chlor-alkali manufacturing process, and ethylene dichloride and vinyl chloride monomer. The product grouping also provides cellulose ethers, redispersible latex powders, silicones and acrylic emulsions used as key building blocks for differentiated building and construction materials across many market segments and applications ranging from roofing and flooring to gypsum-, cement-, concrete- or dispersion-based building materials.
Corporate
Corporate includes certain enterprise and governance activities (including insurance operations, environmental operations, etc.); non-business aligned joint ventures; gains and losses on sales of financial assets; non-business aligned litigation expenses; and discontinued or non-aligned businesses; and foreign exchange gains (losses).businesses.
Principal Product Groups Aligned with the Agriculture Business
Crop Protection
Crop Protection serves the global production agriculture industry with crop protection products for field crops such as wheat, corn, soybean and rice, and specialty crops such as trees, fruits and vegetables. Principal crop protection products are weed control, disease control and insect control offerings for foliar or soil application or as a seed treatment.
Seed
Seed provides seed/plant biotechnology products and technologies to improve the productivity and profitability of its customers. Seed develops, produces and markets canola, cereals, corn, cotton, rice, soybean and sunflower seeds.
Principal Product Groups Aligned with the Specialty Products Business
Electronics & Imaging
Electronics & Imaging is a leading global supplier of differentiated materials and systems for a broad range of consumer electronics including mobile devices, television monitors, personal computers and electronics used in a variety of industries. Dow offers a broad portfolio of semiconductor and advanced packaging materials including chemical mechanical planarization ("CMP") pads and slurries, photoresists and advanced coatings for lithography, metallization solutions for back-end-of-line advanced chip packaging, and silicones for light emitting diode ("LED") packaging and semiconductor applications. This product line also includes innovative metallization processes for metal finishing, decorative and industrial applications and cutting-edge materials for the manufacturing of rigid and flexible displays for liquid crystal displays and quantum dot applications.
Industrial Biosciences
Industrial Biosciences is an innovator that works with customers to improve the performance, productivity and sustainability of their products and processes through advanced microbial control technologies such as advanced diagnostics and biosensors, ozone delivery technology and biological microbial control.
Nutrition & Health
Nutrition & Health uses cellulosics and other technologies to improve the functionality and delivery of food and the safety and performance of pharmaceutical products.
Safety & Construction
Safety & Construction unites market-driven science with the strength of highly regarded brands such as STYROFOAM™ brand insulation products, GREAT STUFF™ insulating foam sealants and adhesives, and DOW FILMTEC™ reverse osmosis and nanofiltration elements to deliver products to a broad array of markets including industrial, building and construction, consumer and water processing. Safety & Construction is a leader in the construction space, delivering insulation, air sealing and weatherization systems to improve energy efficiency, reduce energy costs and provide more sustainable buildings. Safety & Construction is also a leading provider of purification and separation technologies including reverse osmosis membranes and ion exchange resins to help customers with a broad array of separation and purification needs such as reusing waste water streams and making more potable drinking water.
Transportation & Advanced Polymers
Transportation & Advanced Polymers provides high-performance adhesives, lubricants and fluids to engineers and designers in the transportation, electronics and consumer end-markets. Key products include MOLYKOTE® lubricants, DOW CORNING® silicone solutions for healthcare, MULTIBASE™ TPSiV™ silicones for thermoplastics and BETASEAL™, BETAMATE™ and BETAFORCE™ structural and elastic adhesives.
The following table provides sales to external customers by principal product group:
|
| | | | | | | | | |
| Sales to External Customers by Principal Product Group | | | |
| In millions | 2018 | 2017 | 2016 |
| Coatings & Performance Monomers | $ | 3,987 |
| $ | 3,761 |
| $ | 3,362 |
|
| Consumer Solutions | 5,660 |
| 5,067 |
| 3,077 |
|
| Crop Protection | 4,666 |
| 4,553 |
| 4,628 |
|
| Electronics & Imaging | 2,630 |
| 2,615 |
| 2,307 |
|
| Hydrocarbons & Energy | 7,401 |
| 6,831 |
| 5,088 |
|
| Industrial Biosciences | 500 |
| 484 |
| 419 |
|
| Industrial Solutions | 4,736 |
| 4,083 |
| 3,675 |
|
| Nutrition & Health | 598 |
| 563 |
| 529 |
|
| Packaging and Specialty Plastics | 15,239 |
| 14,110 |
| 13,316 |
|
| Polyurethanes & CAV | 10,368 |
| 8,548 |
| 7,143 |
|
| Safety & Construction | 1,983 |
| 1,932 |
| 1,877 |
|
| Seed | 1,003 |
| 1,393 |
| 1,545 |
|
| Transportation & Advanced Polymers | 1,202 |
| 1,167 |
| 897 |
|
| Corporate | 285 |
| 383 |
| 281 |
|
| Other | 20 |
| 18 |
| 14 |
|
| Total | $ | 60,278 |
| $ | 55,508 |
| $ | 48,158 |
|
Sales are attributed to geographic regionsregion based on customer location; long-lived assets are attributed to geographic regionsregion based on asset location. The United States is home to 52
|
| | | | | | | | | | | | |
| Geographic Region Information | United States | EMEAI | Rest of World | Total |
| In millions |
| 2019 | | | | |
| Sales to external customers | $ | 14,437 |
| $ | 14,612 |
| $ | 13,902 |
| $ | 42,951 |
|
| Long-lived assets | $ | 14,571 |
| $ | 2,649 |
| $ | 3,776 |
| $ | 20,996 |
|
| 2018 |
|
|
| |
| Sales to external customers | $ | 16,613 |
| $ | 17,406 |
| $ | 15,585 |
| $ | 49,604 |
|
| Long-lived assets | $ | 14,750 |
| $ | 2,657 |
| $ | 4,011 |
| $ | 21,418 |
|
| 2017 | | | | |
| Sales to external customers | $ | 15,316 |
| $ | 15,226 |
| $ | 13,188 |
| $ | 43,730 |
|
| Long-lived assets | $ | 14,771 |
| $ | 2,547 |
| $ | 4,266 |
| $ | 21,584 |
|
|
| | | | | | | | | | | | |
| Geographic Region Information | United States | EMEA 1 | Rest of World | Total |
| In millions |
| 2018 | | | | |
| Sales to external customers | $ | 20,008 |
| $ | 18,148 |
| $ | 22,122 |
| $ | 60,278 |
|
| Long-lived assets | $ | 15,782 |
| $ | 2,921 |
| $ | 4,959 |
| $ | 23,662 |
|
| 2017 |
|
|
| |
| Sales to external customers | $ | 19,166 |
| $ | 16,393 |
| $ | 19,949 |
| $ | 55,508 |
|
Long-lived assets | $ | 15,715 |
| $ | 2,999 |
| $ | 5,098 |
| $ | 23,812 |
|
| 2016 | | | | |
| Sales to external customers | $ | 16,681 |
| $ | 13,633 |
| $ | 17,844 |
| $ | 48,158 |
|
| Long-lived assets | $ | 14,812 |
| $ | 2,708 |
| $ | 5,966 |
| $ | 23,486 |
|
|
| | | | | | | | | | | | | | | |
| Segment Information | Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Materials & Coatings | Corp. | Total |
| In millions |
| 2019 | | | | | |
| Net sales | $ | 20,245 |
| $ | 13,440 |
| $ | 8,923 |
| $ | 343 |
| $ | 42,951 |
|
| Pro forma net sales | 20,245 |
| 13,449 |
| 8,961 |
| 343 |
| 42,998 |
|
Restructuring, goodwill impairment and asset related charges - net 1 | 439 |
| 1,175 |
| 1,076 |
| 529 |
| 3,219 |
|
| Equity in earnings (losses) of nonconsolidated affiliates | 162 |
| (241 | ) | 5 |
| (20 | ) | (94 | ) |
Pro forma Operating EBIT 2 | 2,904 |
| 845 |
| 918 |
| (315 | ) | 4,352 |
|
| Depreciation and amortization | 1,435 |
| 594 |
| 877 |
| 32 |
| 2,938 |
|
| Total assets | 29,522 |
| 11,753 |
| 14,059 |
| 5,190 |
| 60,524 |
|
| Investments in nonconsolidated affiliates | 675 |
| 568 |
| 101 |
| 60 |
| 1,404 |
|
| Capital expenditures | 1,039 |
| 452 |
| 470 |
| — |
| 1,961 |
|
| 2018 | | | | | |
| Net sales | $ | 24,195 |
| $ | 15,447 |
| $ | 9,677 |
| $ | 285 |
| $ | 49,604 |
|
| Pro forma net sales | 24,237 |
| 15,465 |
| 9,865 |
| 285 |
| 49,852 |
|
Restructuring, goodwill impairment and asset related charges - net 1 | 46 |
| 11 |
| 21 |
| 143 |
| 221 |
|
| Equity in earnings (losses) of nonconsolidated affiliates | 287 |
| 284 |
| 4 |
| (20 | ) | 555 |
|
Pro forma Operating EBIT 2 | 3,593 |
| 1,767 |
| 1,246 |
| (370 | ) | 6,236 |
|
| Depreciation and amortization | 1,385 |
| 607 |
| 888 |
| 29 |
| 2,909 |
|
Total assets 3 | 30,279 |
| 14,092 |
| 16,050 |
| 3,378 |
| 63,799 |
|
| Investments in nonconsolidated affiliates | 1,278 |
| 1,850 |
| 99 |
| 93 |
| 3,320 |
|
| Capital expenditures | 1,231 |
| 433 |
| 427 |
| — |
| 2,091 |
|
| 2017 | | | | | |
| Net sales | $ | 21,504 |
| $ | 12,951 |
| $ | 8,892 |
| $ | 383 |
| $ | 43,730 |
|
| Pro forma net sales | 22,546 |
| 12,951 |
| 8,892 |
| 383 |
| 44,772 |
|
Restructuring, goodwill impairment and asset related charges - net 1 | 716 |
| 17 |
| 1,578 |
| 428 |
| 2,739 |
|
| Equity in earnings (losses) of nonconsolidated affiliates | 190 |
| 172 |
| 40 |
| (8 | ) | 394 |
|
Pro forma Operating EBIT 2 | 3,712 |
| 1,470 |
| 817 |
| (422 | ) | 5,577 |
|
| Depreciation and amortization | 1,055 |
| 572 |
| 885 |
| 34 |
| 2,546 |
|
Total assets 3 | 30,633 |
| 14,115 |
| 17,483 |
| 4,342 |
| 66,573 |
|
| Investments in nonconsolidated affiliates | 1,184 |
| 1,700 |
| 103 |
| 120 |
| 3,107 |
|
| Capital expenditures | 2,034 |
| 310 |
| 463 |
| — |
| 2,807 |
|
| |
| 1. | Europe, Middle EastSee Note 7 for information regarding the Company's restructuring programs, goodwill impairment and Africa.other asset related charges. |
| |
| 2. | Pro forma Operating EBIT for TDCC in 2019 is substantially the same as that of Dow Inc. (same for 2018 and 2017) and therefore is not disclosed separately in the table above. A reconciliation of "Income (loss) from continuing operations, net of tax" to pro forma Operating EBIT is provided on the following page. |
| |
| 3. | Excludes assets of discontinued operations of $19,900 million and $19,279 million for 2018 and 2017, respectively. |
117 |
| | | | | | | | | |
| Reconciliation of "Income (loss) from continuing operations, net of tax" to Pro Forma Operating EBIT | 2019 | 2018 | 2017 |
| In millions |
| Income (loss) from continuing operations, net of tax | $ | (1,717 | ) | $ | 2,940 |
| $ | (1,287 | ) |
| + Provision for income taxes on continuing operations | 470 |
| 809 |
| 1,524 |
|
| Income (loss) from continuing operations before income taxes | $ | (1,247 | ) | $ | 3,749 |
| $ | 237 |
|
| - Interest income | 81 |
| 82 |
| 66 |
|
| + Interest expense and amortization of debt discount | 933 |
| 1,063 |
| 914 |
|
+ Pro forma adjustments 1 | 65 |
| 180 |
| 1,120 |
|
| - Significant items | (4,682 | ) | (1,326 | ) | (3,372 | ) |
| Pro forma Operating EBIT | $ | 4,352 |
| $ | 6,236 |
| $ | 5,577 |
|
| |
| 1. | Pro forma adjustments include: (1) the margin impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont (included for 2019 and 2018 only), (2) the inclusion of ECP for the period of January 1, 2017 through August 31, 2017, (3) the removal of the amortization of ECP's inventory step-up recognized in connection with the Merger (4) the elimination of the impact of events directly attributable to the Merger, internal reorganization and business realignment, separation, distribution and other related transactions (e.g., one-time transaction costs) and (5) the elimination of the effect of a consummated divestiture agreed to with certain regulatory agencies as a condition of approval for the Merger. |
The following tables summarize the pretax impact of significant items by segment that are excluded from pro forma Operating EBIT:
|
| | | | | | | | | | | | | | | |
| Significant Items by Segment for 2019 | Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Materials & Coatings | Corp. | Total |
| In millions |
Indemnification and other transaction related costs 1 | $ | — |
| $ | — |
| $ | — |
| $ | (144 | ) | $ | (144 | ) |
Integration and separation costs 2 | — |
| — |
| — |
| (1,013 | ) | (1,013 | ) |
Restructuring, goodwill impairment and asset related charges - net 3 | (439 | ) | (1,175 | ) | (1,076 | ) | (529 | ) | (3,219 | ) |
Loss on divestitures 4 | — |
| (5 | ) | — |
| (44 | ) | (49 | ) |
Loss on early extinguishment of debt 5 | — |
| — |
| — |
| (102 | ) | (102 | ) |
Environmental charges 6 | (5 | ) | (8 | ) | (50 | ) | (336 | ) | (399 | ) |
Warranty accrual adjustment of exited business 7 | — |
| — |
| — |
| 39 |
| 39 |
|
Litigation related charges, awards and adjustments 8 | 170 |
| — |
| — |
| 35 |
| 205 |
|
| Total | $ | (274 | ) | $ | (1,188 | ) | $ | (1,126 | ) | $ | (2,094 | ) | $ | (4,682 | ) |
| |
| 1. | Includes charges primarily associated with agreements entered into with DuPont and Corteva as part of the separation and distribution which, among other matters, provides for cross-indemnities and allocations of obligations and liabilities for periods prior to, at and after the completion of the separation. |
| |
| 2. | Costs related to post-Merger integration and business separation activities. Excludes one-time transaction costs directly attributable to the Merger. |
| |
| 3. | Includes Board approved restructuring plans and asset-related charges (see Note 7 for additional information); a charge related to Sadara (see Note 13 for additional information) and an impairment charge related to goodwill associated with the Coatings & Performance Monomers reporting unit (see Note 14 for additional information). |
| |
| 4. | Includes post-closing adjustments on previous divestitures. |
| |
| 5. | The Company retired outstanding long-term debt resulting in a loss on early extinguishment. See Note 16 for additional information. |
| |
| 6. | Related to environmental remediation, primarily resulting from the culmination of long-standing negotiations with regulators and/or agencies and review of additional costs to manage ongoing remediation activities resulting from Dow’s separation from DowDuPont and related agreements with Corteva and DuPont. See Note 17 for additional information. |
| |
| 7. | Includes an adjustment to the warranty accrual of an exited business. |
| |
| 8. | Includes a gain associated with a legal settlement with Nova, as well as a gain related to an adjustment of the Dow Silicones breast implant liability and a charge related to the settlement of the Dow Silicones commercial creditor matters. See Note 17 for additional information. |
|
| | | | | | | | | | | | | | | |
| Significant Items by Segment for 2018 | Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Materials & Coatings | Corp. | Total |
| In millions |
Impact of Dow Silicones ownership restructure 1 | $ | — |
| $ | — |
| $ | (20 | ) | $ | — |
| $ | (20 | ) |
Integration and separation costs 2 | — |
| — |
| — |
| (1,074 | ) | (1,074 | ) |
Restructuring, goodwill impairment and asset related charges - net 3 | (46 | ) | (11 | ) | (21 | ) | (120 | ) | (198 | ) |
Gain on divestiture 4 | — |
| 20 |
| — |
| — |
| 20 |
|
Transaction costs and productivity actions 5 | — |
| — |
| — |
| (54 | ) | (54 | ) |
| Total | $ | (46 | ) | $ | 9 |
| $ | (41 | ) | $ | (1,248 | ) | $ | (1,326 | ) |
| |
| 1. | Includes a loss related to a post-closing adjustment related to the Dow Silicones ownership restructure. |
| |
| 2. | Costs related to post-Merger integration and separation and distribution activities, and costs related to the Dow Silicones ownership restructure. |
| |
| 3. | Includes Board approved restructuring plans and asset-related charges, which include other asset impairments. See Note 7 for additional information. |
| |
| 4. | Includes a gain related to the Company's sale of its equity interest in MEGlobal. |
| |
| 5. | The Company retired outstanding notes payable resulting in a loss on early extinguishment. See Note 16 for additional information. |
|
| | | | | | | | | | | | | | | |
Significant Items by Segment for 2017
| Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Materials & Coatings | Corp. | Total |
| In millions |
Litigation related charges, awards and adjustments 1 | $ | 137 |
| $ | — |
| $ | — |
| $ | — |
| $ | 137 |
|
Integration and separation costs 2 | — |
| — |
| — |
| (716 | ) | (716 | ) |
Restructuring, goodwill impairment and asset related charges - net 3 | (716 | ) | (17 | ) | (1,578 | ) | (431 | ) | (2,742 | ) |
Gain on divestiture 4 | — |
| — |
| — |
| 7 |
| 7 |
|
Transaction costs and productivity actions 5 | — |
| — |
| — |
| (58 | ) | (58 | ) |
| Total | $ | (579 | ) | $ | (17 | ) | $ | (1,578 | ) | $ | (1,198 | ) | $ | (3,372 | ) |
| |
| 1. | Includes a gain associated with a patent infringement matter with Nova. See Note 17 for additional information. |
| |
| 2. | Costs related to post-Merger integration, separation and distribution activities, and costs related to the Dow Silicones ownership restructure. |
| |
| 3. | Includes Board approved restructuring plans, goodwill impairment and asset-related charges, which includes other asset impairments. See Note 7 for additional information. |
| |
| 4. | Includes post-closing adjustments related to the split-off of the Company's chlorine value chain. |
| |
| 5. | Includes implementation costs associated with the Company's restructuring programs and other productivity actions. |
NOTE 2628 - SELECTED QUARTERLY FINANCIAL DATA
|
| | | | | | | | | | | | | | | |
| 2019 | | | | | |
| In millions, except per share amounts (Unaudited) | 1st 1 | 2nd | 3rd | 4th | Year |
| Dow Inc. | | | | | |
| Net sales | $ | 10,969 |
| $ | 11,014 |
| $ | 10,764 |
| $ | 10,204 |
| $ | 42,951 |
|
| Cost of sales | $ | 9,142 |
| $ | 9,420 |
| $ | 9,377 |
| $ | 8,718 |
| $ | 36,657 |
|
| Gross margin | $ | 1,827 |
| $ | 1,594 |
| $ | 1,387 |
| $ | 1,486 |
| $ | 6,294 |
|
Restructuring, goodwill impairment and asset related charges - net 2 | $ | 156 |
| $ | 65 |
| $ | 147 |
| $ | 2,851 |
| $ | 3,219 |
|
Integration and separation costs 3 | $ | 452 |
| $ | 348 |
| $ | 164 |
| $ | 99 |
| $ | 1,063 |
|
| Income (loss) from continuing operations, net of tax | $ | 156 |
| $ | 90 |
| $ | 347 |
| $ | (2,310 | ) | $ | (1,717 | ) |
| Income from discontinued operations net of tax | $ | 445 |
| $ | — |
| $ | — |
| $ | — |
| $ | 445 |
|
Net income (loss) 4 | $ | 601 |
| $ | 90 |
| $ | 347 |
| $ | (2,310 | ) | $ | (1,272 | ) |
| Net income (loss) attributable to Dow Inc. | $ | 556 |
| $ | 75 |
| $ | 333 |
| $ | (2,323 | ) | $ | (1,359 | ) |
Earnings (loss) per common share from continuing operations - basic 5 | $ | 0.16 |
| $ | 0.10 |
| $ | 0.45 |
| $ | (3.14 | ) | $ | (2.42 | ) |
Earnings (loss) per common share from continuing operations - diluted 5 | $ | 0.16 |
| $ | 0.10 |
| $ | 0.45 |
| $ | (3.14 | ) | $ | (2.42 | ) |
Dividends declared per share of common stock 6 | N/A |
| $ | 0.70 |
| $ | 0.70 |
| $ | 0.70 |
| $ | 2.10 |
|
| Market price range of common stock: | | | | | |
High 6 | N/A |
| $ | 59.71 |
| $ | 52.79 |
| $ | 55.99 |
| $ | 59.71 |
|
Low 6 | N/A |
| $ | 46.76 |
| $ | 40.71 |
| $ | 43.85 |
| $ | 40.71 |
|
| TDCC | | | | | |
| Net sales | $ | 10,969 |
| $ | 11,014 |
| $ | 10,764 |
| $ | 10,204 |
| $ | 42,951 |
|
| Cost of sales | $ | 9,142 |
| $ | 9,419 |
| $ | 9,377 |
| $ | 8,719 |
| $ | 36,657 |
|
| Gross margin | $ | 1,827 |
| $ | 1,595 |
| $ | 1,387 |
| $ | 1,485 |
| $ | 6,294 |
|
Restructuring, goodwill impairment and asset related charges - net 2 | $ | 156 |
| $ | 65 |
| $ | 147 |
| $ | 2,851 |
| $ | 3,219 |
|
| Integration and separation costs | $ | 452 |
| $ | 324 |
| $ | 164 |
| $ | 99 |
| $ | 1,039 |
|
| Income (loss) from continuing operations, net of tax | $ | 156 |
| $ | 217 |
| $ | 324 |
| $ | (2,292 | ) | $ | (1,595 | ) |
| Income from discontinued operations net of tax | $ | 445 |
| $ | — |
| $ | — |
| $ | — |
| $ | 445 |
|
Net income (loss) 3 | $ | 601 |
| $ | 217 |
| $ | 324 |
| $ | (2,292 | ) | $ | (1,150 | ) |
| Net income (loss) attributable to The Dow Chemical Company | $ | 556 |
| $ | 202 |
| $ | 310 |
| $ | (2,305 | ) | $ | (1,237 | ) |
|
| | | | | | | | | | | | | | | |
| 2018 | | | | | |
| In millions, except per share amounts (Unaudited) | 1st | 2nd | 3rd | 4th | Year |
| Net sales | $ | 14,899 |
| $ | 15,793 |
| $ | 14,976 |
| $ | 14,610 |
| $ | 60,278 |
|
| Cost of sales | $ | 11,552 |
| $ | 12,400 |
| $ | 11,933 |
| $ | 11,820 |
| $ | 47,705 |
|
| Gross margin | $ | 3,347 |
| $ | 3,393 |
| $ | 3,043 |
| $ | 2,790 |
| $ | 12,573 |
|
Restructuring, goodwill impairment and asset related charges - net 1 | $ | 165 |
| $ | 98 |
| $ | 108 |
| $ | 249 |
| $ | 620 |
|
| Integration and separation costs | $ | 202 |
| $ | 231 |
| $ | 278 |
| $ | 333 |
| $ | 1,044 |
|
Net income 2 | $ | 1,377 |
| $ | 1,310 |
| $ | 1,036 |
| $ | 910 |
| $ | 4,633 |
|
| Net income attributable to The Dow Chemical Company | $ | 1,342 |
| $ | 1,279 |
| $ | 1,000 |
| $ | 878 |
| $ | 4,499 |
|
| |
| 1. | See Note 7The amounts presented for additional information. |
| |
2. | Includes tax adjustments related to The Act, enacted on December 22, 2017. See Note 9 for additional information. |
|
| | | | | | | | | | | | | | | |
| 2017 | | | | | |
| In millions, except per share amounts (Unaudited) | 1st | 2nd | 3rd | 4th | Year |
| Net sales | $ | 13,230 |
| $ | 13,834 |
| $ | 13,633 |
| $ | 14,811 |
| $ | 55,508 |
|
Cost of sales 1 | $ | 10,194 |
| $ | 10,761 |
| $ | 10,663 |
| $ | 11,994 |
| $ | 43,612 |
|
Gross margin 1 | $ | 3,036 |
| $ | 3,073 |
| $ | 2,970 |
| $ | 2,817 |
| $ | 11,896 |
|
Restructuring, goodwill impairment and asset related charges - net 2 | $ | (1 | ) | $ | (12 | ) | $ | 139 |
| $ | 2,974 |
| $ | 3,100 |
|
| Integration and separation costs | $ | 109 |
| $ | 136 |
| $ | 283 |
| $ | 258 |
| $ | 786 |
|
Net income (loss) 3 | $ | 915 |
| $ | 1,359 |
| $ | 805 |
| $ | (2,484 | ) | $ | 595 |
|
| Net income (loss) attributable to The Dow Chemical Company | $ | 888 |
| $ | 1,321 |
| $ | 783 |
| $ | (2,526 | ) | $ | 466 |
|
Earnings per common share - basic 4 | $ | 0.74 |
| $ | 1.08 |
| N/A |
| N/A |
| N/A |
|
Earnings per common share - diluted 4 | $ | 0.72 |
| $ | 1.07 |
| N/A |
| N/A |
| N/A |
|
Dividends declared per share of common stock 4, 5 | $ | 0.46 |
| $ | 0.46 |
| $ | 0.46 |
| N/A |
| $ | 1.38 |
|
Market price range of common stock: 4, 6 | | | | | |
| High | $ | 65.00 |
| $ | 65.26 |
| N/A |
| N/A |
| N/A |
|
| Low | $ | 57.09 |
| $ | 60.20 |
| N/A |
| N/A |
| N/A |
|
| |
1. | Previously reported amountsthe first quarter of 2019 have been updated from the amounts reported in the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2019, to reflect the impacteffects of adoption of ASU 2017-07.the separation from DowDuPont. See reconciliation on the following page. |
| |
| 2. | See Note 7 for additional information. |
| |
| 3. | See Note 4 for additional information. |
| |
| 4. | See Notes 6, 8,4, 9, 16 and 1917 for additional information on additional items materially impacting "Net income (loss)." The fourth quarter of 2017 included:2019 included a gain related to the effects of Swiss tax reform and a loss on the early extinguishment of debt. The third quarter of 2019 included a charge related to environmental remediation, a charge related to the settlement of the Dow Silicones commercial creditor matters, a gain related to an adjustment to the Dow Silicones breast implant liability and a gain associated with a legal settlement with Nova. The second quarter of 2019 included charges associated with agreements entered into with DuPont and Corteva as part of the separation from DowDuPont. |
| |
| 5. | Earnings per common share amounts relate only to Dow Inc. as TDCC common shares are not publicly traded and are all owned by Dow Inc. Due to quarterly changes in the share count and the allocation of income to participating securities, the sum of the four quarters does not equal the earnings per share amount calculated for the year. |
| |
| 6. | Dow Inc.'s common stock was solely owned by DowDuPont through March 31, 2019, and on April 1, 2019, Dow Inc. became an independent, publicly traded company. |
|
| | | | | | | | | | | | | | | |
| 2018 | | | | | |
| In millions, except per share amounts (Unaudited) | 1st | 2nd | 3rd | 4th | Year |
| Net sales | $ | 12,237 |
| $ | 12,789 |
| $ | 12,634 |
| $ | 11,944 |
| $ | 49,604 |
|
| Cost of sales | $ | 9,980 |
| $ | 10,540 |
| $ | 10,456 |
| $ | 10,098 |
| $ | 41,074 |
|
| Gross margin | $ | 2,257 |
| $ | 2,249 |
| $ | 2,178 |
| $ | 1,846 |
| $ | 8,530 |
|
Restructuring, goodwill impairment and asset related charges - net 1 | $ | 87 |
| $ | 40 |
| $ | 48 |
| $ | 46 |
| $ | 221 |
|
Integration and separation costs 2 | $ | 224 |
| $ | 262 |
| $ | 313 |
| $ | 380 |
| $ | 1,179 |
|
| Income from continuing operations, net of tax | $ | 925 |
| $ | 810 |
| $ | 714 |
| $ | 491 |
| $ | 2,940 |
|
| Income from discontinued operations, net of tax | $ | 514 |
| $ | 554 |
| $ | 335 |
| $ | 432 |
| $ | 1,835 |
|
Net income 3 | $ | 1,439 |
| $ | 1,364 |
| $ | 1,049 |
| $ | 923 |
| $ | 4,775 |
|
| Net income attributable to Dow Inc. and The Dow Chemical Company | $ | 1,404 |
| $ | 1,333 |
| $ | 1,013 |
| $ | 891 |
| $ | 4,641 |
|
Earnings per common share from continuing operations - basic 4 | $ | 1.21 |
| $ | 1.05 |
| $ | 0.91 |
| $ | 0.63 |
| $ | 3.80 |
|
Earnings per common share from continuing operations - diluted 4 | $ | 1.21 |
| $ | 1.05 |
| $ | 0.91 |
| $ | 0.63 |
| $ | 3.80 |
|
| |
| 1. | See Note 7 for additional information. |
| |
| 2. | See Note 4 for additional information. |
| |
| 3. | Includes tax adjustments related to The Act, enacted on December 22, 2017; a gain related to the DAS Divested Ag Business; and, a charge related to payment of plan obligations to certain participants of a U.S. non-qualified pension plan. The third quarter of 2017 included a gain related to the sale of the Company's EAA Business. The second quarter of 2017 included a gain related to the Nova patent infringement award. The first quarter of 2017 included a loss related to the Bayer CropScience arbitration matter.2017. See Note 9 for additional information. |
| |
| 4. | Effective with the Merger,Earnings per common share amounts relate only to Dow Inc. as TDCC common shares are not publicly traded and are all issued and outstanding shares of the Company's common stock are owned solely by its parent, DowDuPontDow Inc. |
| |
5. | Dow declared its last dividend on common stock in July 2017. |
| |
6. | Composite price as reported by the New York Stock Exchange. |
Effective with the separation from DowDuPont, the Company's consolidated financial results reflect the distribution of AgCo and SpecCo as discontinued operations, as well as the receipt of ECP as a common control transaction from the closing of the Merger on August 31, 2017. The following table provides the reconciliation of the amounts reported in the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2019, to the amounts presented for the first quarter of 2019 on the previous page. See Note 4 for additional information on the separation from DowDuPont.
|
| | | | | | | | | | | | |
| Reconciliation - First Quarter 2019 | As Filed | Distribution of AgCo and SpecCo | Receipt of ECP | Updated |
| In millions (Unaudited) |
| Net sales | $ | 13,582 |
| $ | (2,954 | ) | $ | 341 |
| $ | 10,969 |
|
| Cost of sales | $ | 10,707 |
| $ | (1,805 | ) | $ | 240 |
| $ | 9,142 |
|
| Gross margin | $ | 2,875 |
| $ | (1,149 | ) | $ | 101 |
| $ | 1,827 |
|
| Restructuring, goodwill impairment and asset related charges - net | $ | 232 |
| $ | (78 | ) | $ | 2 |
| $ | 156 |
|
| Integration and separation costs | $ | 408 |
| $ | — |
| $ | 44 |
| $ | 452 |
|
| Income from continuing operations, net of tax | $ | 586 |
| $ | (445 | ) | $ | 15 |
| $ | 156 |
|
| Income from discontinued operations, net of tax | $ | — |
| $ | 445 |
| $ | — |
| $ | 445 |
|
| Net income | $ | 586 |
| $ | — |
| $ | 15 |
| $ | 601 |
|
| Net income available for common stockholders | $ | 541 |
| $ | — |
| $ | 15 |
| $ | 556 |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, theDow Inc. and The Dow Chemical Company (the "Companies") carried out an evaluation, under the supervision and with the participation of the Company’sCompanies' Disclosure Committee and the Company’sCompanies' management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’sCompanies' disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’sCompanies' disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company'sCompanies' internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company'sCompanies' internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’sCompanies' internal control framework and processes are designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of the Company’sCompanies' consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.
The Company’sCompanies' internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;Companies;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the CompanyCompanies are being made only in accordance with authorizations of management and Directors of the Company;Companies; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’sCompanies' assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, any system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.
Management assessed the effectiveness of the Company’sCompanies' internal control over financial reporting and concluded that, as of December 31, 2018,2019, such internal control is effective. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013).
The Company’sCompanies' independent auditors, Deloitte & Touche LLP, with direct access to the Company’sCompanies' Board of Directors through the Dow Audit Subcommittee of the DowDuPont Audit Committee of Dow Inc., have audited the consolidated financial statements prepared by the Company.Companies. Their reportreports on the consolidated financial statements isare included in Part II, Item 8. Financial Statements and Supplementary Data. Deloitte & Touche LLP’s report reports on the Company’sCompanies' internal control over financial reporting isare referenced therein and included herein.
February 11, 20197, 2020
|
| | |
| /s/ JIM FITTERLING | | /s/ HOWARD UNGERLEIDER |
| Jim Fitterling | | Howard Ungerleider |
Director and Chief Executive Officer | | Director, President and Chief Financial Officer |
| | | |
| | | |
| /s/ RONALD C. EDMONDS | | |
| Ronald C. Edmonds | | |
| Controller and Vice President of Controllers and Tax | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Dow Chemical CompanyInc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Dow Chemical CompanyInc. and subsidiaries (the “Company”) as of December 31, 2018,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018,2019, of the Company and the financial statement schedule listed in the Index at Item 15(a)2 and our report dated February 11, 2019,7, 2020, expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding a) a change in accounting policy in the fourth quarter of 2016 from expensing asbestos-related defense and processing costs as incurred to the accrual of asbestos-related defense and processing costs when probable of occurring and estimable and b) in the first quarter of 2018, a change in its method of accounting for revenue due to the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts with Customers., in the first quarter of 2018 and b) a change in the method of accounting for leases due to the adoption of ASC Topic 842, Leases, in the first quarter of 2019.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
|
/S/ DELOITTE & TOUCHE LLP |
| Deloitte & Touche LLP |
| Midland, Michigan |
February 11, 20197, 2020 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and the Board of Directors of The Dow Chemical Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Dow Chemical Company and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and the financial statement schedule listed in the Index at Item 15(a)2 and our report dated February 7, 2020, expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding a) a change in the method of accounting for revenue due to the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts with Customers, in the first quarter of 2018 and b) a change in the method of accounting for leases due to the adoption of ASC Topic 842, Leases, in the first quarter of 2019.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
|
/S/ DELOITTE & TOUCHE LLP |
| Deloitte & Touche LLP |
| Midland, Michigan |
| February 7, 2020 |
ITEM 9B. OTHER INFORMATION
None.
|
|
| Dow Inc. and Subsidiaries |
| The Dow Chemical Company and Subsidiaries |
| PART III |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
OmittedInformation relating to Directors, certain executive officers and certain corporate governance matters (including identification of Audit Committee members and financial expert(s)) is contained in the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders of Dow Inc. and is incorporated herein by reference. See also the information regarding executive officers of the registrant set forth in Part I, Item 1. Business under the caption "Executive Officers of the Registrant" in reliance on General Instruction G to Form 10-K.
This information is omitted for The Dow Chemical Company pursuant to General Instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
OmittedInformation relating to executive compensation and the Company's equity compensation plans is contained in the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders of Dow Inc. and is incorporated herein by reference.
This information is omitted for The Dow Chemical Company pursuant to General Instruction I of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
OmittedInformation with respect to beneficial ownership of Dow Inc. common stock by each Director and all Directors and executive officers of the Company as a group is contained in the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders of Dow Inc. and is incorporated herein by reference.
Information relating to any person who beneficially owns in excess of 5 percent of the total outstanding shares of Dow Inc. common stock is contained in the definitive Proxy Statement for the 2020 Annual Meeting of the Stockholders of Dow Inc. and is incorporated herein by reference.
Information with respect to compensation plans under which equity securities are authorized for issuance is contained in the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders of Dow Inc. and is incorporated herein by reference.
This information is omitted for The Dow Chemical Company pursuant to General Instruction I of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
OmittedReportable relationships and related transactions, if any, as well as information relating to director independence are contained in the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders of Dow Inc. and are incorporated herein by reference.
This information is omitted for The Dow Chemical Company pursuant to General Instruction I of Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Independent Registered Public Accountants
Information with respect to fees and services related to the Company's independent auditors, Deloitte & Touche LLP, and Touche LLP (“Deloitte”) has issued its reports, includedthe disclosure of the Audit Committee's pre-approval policies and procedures are contained in the Company’s Annual Report on Form 10-K, on the audited Consolidated Financial Statements of the Company and internal control over financial reportingdefinitive Proxy Statement for the period January 1 through December 31, 2018. The Dow Audit Subcommittee appointed Deloitte to be the independent auditor for the Company and its consolidated subsidiaries for 2018, which was ratified by holders2020 Annual Meeting of Stockholders of Dow Common Stock on July 1, 2018. Following the closingInc. and are incorporated herein by reference.
The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the Company’s independent registered public accounting firm.
The Dow Audit SubcommitteeInc. carefully considers the qualifications and competence of candidates for the independent registered public accounting firm. In accordance with its pre-approval policies and procedures, the Dow Audit SubcommitteeCommittee pre-approved all professional services rendered by and associated fees paid to Deloitte, for the Company,Companies, for the years ended December 31, 20182019 and 2017.2018. Professional services were performed by Deloitte, its member firms of Deloitte Touche Tohmatsu Limited, and their respective affiliates (“Deloitte Entities”). Total fees paid to the Deloitte Entities are shown by category in the following table:
| | | Type of Fees | | | | |
| In thousands | 2018 | 2017 | 2019 | 2018 |
Audit Fees 1 | $ | 26,199 |
| $ | 25,792 |
| $ | 25,142 |
| $ | 26,199 |
|
Audit-Related Fees 2 | 6,976 |
| 8,062 |
| 4,438 |
| 6,976 |
|
Tax Fees 3 | 600 |
| 1,729 |
| 2,780 |
| 600 |
|
| Total | $ | 33,775 |
| $ | 35,583 |
| $ | 32,360 |
| $ | 33,775 |
|
| |
| 1. | The aggregate fees billed for the integrated audit of the Company's annual financial statements and internal control over financial reporting, the reviews of the financial statements in quarterly reports on Form 10-Q, comfort letters, consents, statutory audits, and other regulatory filings. For 2019, the fees include $850,000 associated with supporting the DuPont de Nemours, Inc. SEC filings for the period prior to the separation from DowDuPont Inc. |
| |
| 2. | The aggregate fees billed primarily for audits of carve-out financial statements, assessment of controls relating to outsourced services, audits and reviews supporting divestiture activities, and agreed-upon procedures engagements. |
| |
| 3. | The aggregate fees billed primarily for corporate tax consulting services, the preparation of expatriate employees' tax returns and relatedtax compliance services. |
|
|
| Dow Inc. and Subsidiaries |
| The Dow Chemical Company and Subsidiaries |
| PART IV |
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| |
| (a) | The following documents are filed as part of this report: |
| |
| (1) | The Company’s 20182019 Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are included in Part II, Item 8. Financial Statements and Supplementary Data. |
| |
| (2) | Financial Statement Schedules – The following Financial Statement Schedule should be read in conjunction with the Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm included in Part II, Item 8. Financial Statements and Supplementary Data: |
|
| |
| Schedule II | Valuation and Qualifying Accounts |
Schedules other than the one listed above are omitted due to the absence of conditions under which they are required or because the information called for is included in the Consolidated Financial Statements or the Notes to the Consolidated Financial Statements.
| |
| (3) | The following exhibits are filed with or incorporated by reference into this Annual Report on Form 10-K: |
|
| |
| Exhibit No. | Description of Exhibit |
| |
2.1.12.2.1 | First Amendment, effective June 1, 2012, to the Shareholders' Agreement, dated as of October 8, 2011, between Performance Chemicals Holding Company, Dow Saudi Arabia Holding B.V., Saudi Arabian Oil Company, Dow Europe Holding B.V. and The Dow Chemical Company incorporated(incorporated by reference to Exhibit 99.1 to The Dow Chemical CompanyCompany's Current Report on Form 8-K filed with the SEC on February 14, 2013.2013). |
| |
2.3 | Agreement and Plan of Merger, dated as of December 11, 2015, among The Dow Chemical Company, E. I. du Pont de Nemours and Company, Diamond Merger Sub, Inc., Orion Merger Sub, Inc. and Diamond-Orion HoldCo Inc., incorporated by reference to Exhibit 2.1 to The Dow Chemical Company Current Report on Form 8-K filed December 11, 2015. |
| |
2.3.1 | Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 2017, among The Dow Chemical Company, E. I. du Pont de Nemours and Company, Diamond Merger Sub, Inc., Orion Merger Sub, Inc. and DowDuPont Inc. f/k/a Diamond-Orion HoldCo Inc., incorporated by reference to Exhibit 2.1 to The Dow Chemical Company Current Report on Form 8-K filed March 31, 2017. |
| |
| 4.4 | Dow Inc. agrees to provide the SEC, on request, copies of all other such indentures and instruments that define the rights of holders of long-term debt of Dow Inc. and its consolidated subsidiaries, including The Dow Chemical Company, and its consolidated subsidiaries, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. |
| |
| 101.INS | The instance document does not appear in the Interactive Data File because its XBRL Instance Document.tags are embedded within the Inline XBRL document. |
| |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. |
| |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| |
| 104 | Cover Page Interactive Data File. The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
*Filed herewith
A copy of any exhibit can be obtained via the Internet through the Dow SEC FilingsInvestor Relations section of the DowDuPontCompany's website (www.dow-dupont.com/www.dow.com/investors), or the Company will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Controller and Vice President of Controllers and Tax of the Company at the address of the Company’s principal executive offices. The referenced website and its content are not deemed incorporated by reference into this report.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
|
| | |
| | Dow Inc. and Subsidiaries | |
| The Dow Chemical Company and Subsidiaries | Schedule II |
| | Valuation and Qualifying Accounts | Schedule II |
| | | (In millions) For the years ended Dec 31, | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 |
| Accounts Receivable - Allowance for Doubtful Receivables | | | | |
| Balance at beginning of year | $ | 117 |
| $ | 110 |
| $ | 94 |
| $ | 42 |
| $ | 59 |
| $ | 51 |
|
| Additions charged to expenses | 23 |
| 33 |
| 31 |
| |
Additions charged to other accounts 1 | 4 |
| 3 |
| — |
| |
Deductions from reserves 2 | (38 | ) | (29 | ) | (15 | ) | |
Additions charged to expenses 1 | | 24 |
| 10 |
| 23 |
|
Additions charged to other accounts 2 | | — |
| 4 |
| 2 |
|
Deductions from reserves 3 | | (21 | ) | (31 | ) | (17 | ) |
| Balance at end of year | $ | 106 |
| $ | 117 |
| $ | 110 |
| $ | 45 |
| $ | 42 |
| $ | 59 |
|
| Inventory - Obsolescence Reserve | | |
| Balance at beginning of year | $ | 115 |
| $ | 123 |
| $ | 152 |
| $ | 23 |
| $ | 18 |
| $ | 34 |
|
| Additions charged to expenses | 87 |
| 40 |
| 29 |
| 19 |
| 7 |
| 5 |
|
Deductions from reserves 3 | (55 | ) | (48 | ) | (58 | ) | |
Deductions from reserves 4 | | (7 | ) | (2 | ) | (21 | ) |
| Balance at end of year | $ | 147 |
| $ | 115 |
| $ | 123 |
| $ | 35 |
| $ | 23 |
| $ | 18 |
|
| Reserves for Other Investments and Noncurrent Receivables | | |
| Balance at beginning of year | $ | 437 |
| $ | 358 |
| $ | 494 |
| $ | 460 |
| $ | 430 |
| $ | 350 |
|
Additions charged to expenses 4 | 44 |
| 83 |
| 153 |
| |
Deductions from reserves 5 | (16 | ) | (4 | ) | (289 | ) | |
Additions charged to expenses 1 | | 1,758 |
| 44 |
| 83 |
|
| Deductions from reserves | | (3 | ) | (14 | ) | (3 | ) |
| Balance at end of year | $ | 465 |
| $ | 437 |
| $ | 358 |
| $ | 2,215 |
| $ | 460 |
| $ | 430 |
|
| Deferred Tax Assets - Valuation Allowance | | |
| Balance at beginning of year | $ | 1,371 |
| $ | 1,061 |
| $ | 1,000 |
| $ | 1,225 |
| $ | 1,255 |
| $ | 936 |
|
| Additions charged to expenses | 161 |
| 370 |
| 155 |
| 140 |
| 152 |
| 369 |
|
| Deductions from reserves | (212 | ) | (60 | ) | (94 | ) | (103 | ) | (182 | ) | (50 | ) |
| Balance at end of year | $ | 1,320 |
| $ | 1,371 |
| $ | 1,061 |
| $ | 1,262 |
| $ | 1,225 |
| $ | 1,255 |
|
| |
| 1. | In 2019, additions charged to expenses for "Accounts Receivable - Allowance for Doubtful Receivables" included $2 million and additions charged to expenses for "Reserves for Other Investments and Noncurrent Receivables" included $1,753 million related to the Company's investment in Sadara Chemical Company. See Note 13 to the Consolidated Financial Statements for additional information. |
| |
| 2. | Additions to allowance for doubtful accounts charged to other accounts were classified as "Accounts and notes receivable - Other" in the consolidated balance sheets. These reserves relate to the Company's sale of trade accounts receivable. Anticipated credit losses in the portfolio of receivables sold were used to fair value the Company's interests held in trade accounts receivable conduits. See Notes 1415 and 2224 to the Consolidated Financial Statements for furtheradditional information. |
| |
2.3. | Deductions includeincluded write-offs, recoveries, currency translation adjustmentadjustments and other miscellaneous items. |
| |
3.4. | Deductions includeincluded disposals and currency translation adjustments. |
| |
4. | In 2016, additions to reserves for "Other investments and noncurrent receivables" charged to costs and expenses include $143 million related to the Company's investment in AgroFresh Solutions, Inc. See Note 7 to the Consolidated Financial Statements for further information. |
| |
5. | In 2016, deductions from reserves for "Other investments and noncurrent receivables" include $237 million related to the Dow Silicones ownership restructure. See Note 5 to the Consolidated Financial Statements for further information on the Dow Silicones ownership restructure. |
|
| | | | |
| | | Dow Inc. and Subsidiaries The Dow Chemical Company and Subsidiaries | | |
| | | Signatures | | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
| DOW INC. |
| THE DOW CHEMICAL COMPANY |
| | |
By | /s/ RONALD C. EDMONDS |
| Ronald C. Edmonds, Controller and Vice President of Controllers and Tax |
Date | February 11, 20197, 2020 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | |
| | |
| /s/ SAMUEL R. ALLEN | | /s/ JEFF M. FETTIG |
| Samuel R. Allen, Director, Dow Inc. | | Jeff M. Fettig, Non-Executive Chairman, Dow Inc. |
| February 7, 2020 | | February 7, 2020 |
| | | |
| /s/ AJAY BANGA | | /s/ JIM FITTERLING |
| Ajay Banga, Director, Dow Inc. | | Jim Fitterling, Director and Chief Executive Officer, Dow Inc. and TDCC |
| February 7, 2020 | | February 7, 2020 |
| | |
By/s/ JACQUELINE K. BARTON | | /s/ JACQUELINE C. HINMAN |
| Jacqueline K. Barton, Director, Dow Inc. | | Jacqueline C. Hinman, Director, Dow Inc. |
| February 7, 2020 | | February 7, 2020 |
| | |
| /s/ JAMES A. BELL | | /s/ RUTH G. SHAW |
| James A. Bell, Director, Dow Inc. | | Ruth G. Shaw, Director, Dow Inc. |
| February 7, 2020 | | February 7, 2020 |
| | |
| /s/ WESLEY G. BUSH | | /s/ HOWARD UNGERLEIDER |
| Wesley G. Bush, Director, Dow Inc. | | Howard Ungerleider, President and Chief Financial Officer, Dow Inc. and TDCC; Director, TDCC |
| February 7, 2020 | | February 7, 2020 |
| | |
| /s/ RICHARD K. DAVIS | | /s/ DANIEL W. YOHANNES |
| Richard K. Davis, Director, Dow Inc. | | Daniel W. Yohannes, Director, Dow Inc. |
| February 7, 2020 | | February 7, 2020 |
| | |
| /s/ RONALD C. EDMONDS | | By | /s/ HOWARD UNGERLEIDER |
| Ronald C. Edmonds, Controller and Vice President of Controllers and Tax | | | Howard Ungerleider, Director, President and Chief Financial Officer |
Date | February 11, 2019 | | Date | February 11, 2019 |
| | | | |
By | /s/ JIM FITTERLING | | | |
| Jim Fitterling, Director and Chief Executive Officer | | | |
Date | February 11, 2019 | 7, 2020 | | |
|
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Dow Inc. and Subsidiaries The Dow Chemical Company and Subsidiaries |
| Trademark Listing |
The following trademarks or service marks of The Dow Chemical Company and certain affiliated companies of Dow appear in this report: ACOUSTICRYL, ACRYSOL, AFFINITY, BETAFORCE, BETAMATE, BETASEAL,AQUASET, AVANSE, CARBOWAX, DOW, DOW CORNING,DOWSIL, ECOFAST, ELITE, FILMTEC, GREAT STUFF, MOLYKOTE, MULTIBASE,ENGAGE, EVOLV3D, EVOQUE, FORMASHIELD, IMAGIN3D, MAINCOTE, NORDEL, STYROFOAM, TPSiVOPULUX, PRIMAL, RENUVA, RHOPLEX, SENTRY, SILASTIC, SYL-OFF, TAMOL, TERGITOL, TRITON, UCAR, UCARTHERM, UCON, VERSENE, VORARAD, WALOCEL
The following trademarks or service marksregistered trademark of Dow AgroSciences LLC and certain affiliated companies of Dow AgroSciences LLC appearDisability:IN appears in this report: DOW SEMENTES, ENLIST, MORGANDisability Equality Index®
The following registered trademark of Incapital Holdings appears in this report: InterNotes®
The following registered service mark of American Chemistry Council in the United States appears in this report: RESPONSIBLE CARE
Responsible Care®
The following trademarks of E.I. du Pont de Nemours and Company or an affiliated company of DuPont appear in this report: GREAT STUFF™, SMART DISPENSER™
® ™Trademark of The Dow Chemical Company (“Dow”("TDCC") or an affiliated company, of Dowexcept as otherwise specified.
