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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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: 001-38196
DOWDUPONT INC.
(Exact name of registrant as specified in its charter)
Delaware | 81-1224539 |
State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) |
c/o The Dow Chemical Company | c/o E. I. du Pont de Nemours and Company | |
2211 H.H. Dow Way, Midland, MI 48674 | 974 Centre Road, Wilmington, DE 19805 | |
(989) 636-1000 | (302) 774-1000 | |
(Name, address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 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.
Large accelerated filer | þ | Accelerated filer | ¨ | ||||
Non-accelerated filer | ¨ | 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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes þ No
The registrant had 2,294,243,816 shares of common stock, $0.01 par value, outstanding at October 31, 2018.
DOWDUPONT INC.
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2018
TABLE OF CONTENTS
PAGE | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
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DowDuPont Inc. |
Throughout this Quarterly Report on Form 10-Q, except as otherwise noted by the context, the terms "Company" or "DowDuPont" used herein mean DowDuPont Inc. and its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
This communication contains “forward-looking statements” within the meaning of the 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. In this context, forward-looking statements often address expected future business and financial performance and financial condition, and often contain words such as “anticipate,” “believe,” “expect,” “intend,” “plan,” “see,” “seek,” “target,” “will,” “would,” and similar expressions and variations or negatives of these words.
On December 11, 2015, The Dow Chemical Company (“Dow”) and E. I. du Pont de Nemours and Company (“DuPont”) entered into an Agreement 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 and each of Dow and DuPont became subsidiaries of DowDuPont.
Forward-looking statements by their nature address matters that are, to varying degrees, uncertain, including the intended separation, subject to approval of DowDuPont's Board of Directors and customary closing conditions, of DowDuPont’s agriculture, materials science and specialty products businesses in one or more tax-efficient transactions on anticipated terms (the “Intended Business Separations”). 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-looking statements also involve risks and uncertainties, many of which are beyond DowDuPont’s control. Some of the important factors that could cause DowDuPont’s, Dow’s or DuPont’s actual results (including DowDuPont's agriculture business, materials science business or specialty products business as conducted by and through Dow and DuPont) to differ materially from those projected in any such forward-looking statements 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 DowDuPont (either directly or as conducted through 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 DowDuPont’s business (either directly or as conducted by and through Dow or DuPont), or financial performance and its ability to retain and hire key personnel; (v) uncertainty as to the long-term value of DowDuPont common stock; and (vi) 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 feedstocks and energy; balance of supply and demand and the impact of balance on 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, environmental matters and other commitments and contingencies; failure to appropriately manage process safety and product stewardship issues; global economic and capital market conditions, including the continued availability of capital and financing, as well as inflation, interest and currency exchange rates; changes in political conditions, including trade disputes and retaliatory actions; business or supply disruptions; security threats, such as acts of sabotage, terrorism or war, natural disasters and weather events and patterns which could result in a significant operational event for DowDuPont, adversely impact demand or production; ability to discover, develop and protect new technologies and to protect and enforce DowDuPont’s intellectual property rights; failure to effectively manage acquisitions, divestitures, alliances, joint ventures and other portfolio changes; unpredictability and severity of catastrophic events, including, but not limited to, acts of terrorism or outbreak of war or hostilities, as well as management’s response to any of the aforementioned factors. These risks are and will be more fully discussed in the current, quarterly and annual reports filed 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. and Corteva, Inc. While the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on DowDuPont’s, Dow’s, DuPont’s, Dow Holdings Inc.'s or Corteva, Inc.'s consolidated financial condition, results of operations, credit rating or liquidity. None of DowDuPont, Dow, DuPont, Dow Holdings Inc. or Corteva, Inc. assumes any obligation to publicly provide revisions or updates to any forward-looking statements whether as a result of new information, future developments or otherwise, should circumstances change, except as otherwise required by securities and other applicable laws.
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A detailed discussion of some of the significant risks and uncertainties which may cause results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (Part I, Item 1A) of the 2017 annual reports on Form 10-K of each of DowDuPont, Dow and DuPont and as set forth in the preliminary registration statements on Form 10, in each case as amended from time to time, of each of Dow Holdings Inc. and Corteva, Inc.
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PART I - FINANCIAL INFORMATION |
ITEM 1. FINANCIAL STATEMENTS
DowDuPont Inc.
Consolidated Statements of Income
Three Months Ended | Nine Months Ended | |||||||||||
In millions, except per share amounts (Unaudited) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 20,123 | $ | 15,354 | $ | 65,878 | $ | 42,418 | ||||
Cost of sales | 15,477 | 12,186 | 49,766 | 33,141 | ||||||||
Research and development expenses | 740 | 528 | 2,311 | 1,355 | ||||||||
Selling, general and administrative expenses | 1,496 | 1,001 | 5,143 | 2,480 | ||||||||
Amortization of intangibles | 462 | 244 | 1,424 | 556 | ||||||||
Restructuring and asset related charges - net | 290 | 179 | 741 | 166 | ||||||||
Integration and separation costs | 666 | 354 | 1,681 | 599 | ||||||||
Equity in earnings of nonconsolidated affiliates | 178 | 152 | 685 | 402 | ||||||||
Sundry income (expense) - net | 47 | 394 | 340 | 272 | ||||||||
Interest expense and amortization of debt discount | 362 | 283 | 1,072 | 728 | ||||||||
Income from continuing operations before income taxes | 855 | 1,125 | 4,765 | 4,067 | ||||||||
Provision for income taxes on continuing operations | 320 | 571 | 1,274 | 1,239 | ||||||||
Income from continuing operations, net of tax | 535 | 554 | 3,491 | 2,828 | ||||||||
Loss from discontinued operations, net of tax | — | (20 | ) | (5 | ) | (20 | ) | |||||
Net income | 535 | 534 | 3,486 | 2,808 | ||||||||
Net income attributable to noncontrolling interests | 38 | 20 | 117 | 85 | ||||||||
Net income available for DowDuPont Inc. common stockholders | $ | 497 | $ | 514 | $ | 3,369 | $ | 2,723 | ||||
Per common share data: | ||||||||||||
Earnings per common share from continuing operations - basic | $ | 0.22 | $ | 0.33 | $ | 1.45 | $ | 2.05 | ||||
Loss per common share from discontinued operations - basic | — | (0.01 | ) | — | (0.01 | ) | ||||||
Earnings per common share - basic | $ | 0.22 | $ | 0.32 | $ | 1.45 | $ | 2.04 | ||||
Earnings per common share from continuing operations - diluted | $ | 0.21 | $ | 0.33 | $ | 1.44 | $ | 2.02 | ||||
Loss per common share from discontinued operations - diluted | — | (0.01 | ) | — | (0.01 | ) | ||||||
Earnings per common share - diluted | $ | 0.21 | $ | 0.32 | $ | 1.44 | $ | 2.01 | ||||
Dividends declared per share of common stock | $ | — | $ | 0.46 | $ | 1.14 | $ | 1.38 | ||||
Weighted-average common shares outstanding - basic | 2,296.2 | 1,577.8 | 2,307.3 | 1,330.7 | ||||||||
Weighted-average common shares outstanding - diluted | 2,311.3 | 1,595.3 | 2,323.1 | 1,348.8 | ||||||||
Depreciation | $ | 940 | $ | 708 | $ | 2,833 | $ | 1,820 | ||||
Capital expenditures | $ | 972 | $ | 752 | $ | 2,558 | $ | 2,301 | ||||
See Notes to the Consolidated Financial Statements.
5
DowDuPont Inc.
Consolidated Statements of Comprehensive Income
Three Months Ended | Nine Months Ended | |||||||||||
In millions (Unaudited) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net income | $ | 535 | $ | 534 | $ | 3,486 | $ | 2,808 | ||||
Other comprehensive income (loss), net of tax | ||||||||||||
Unrealized gains (losses) on investments | 8 | (51 | ) | (31 | ) | (43 | ) | |||||
Cumulative translation adjustments | (174 | ) | (379 | ) | (1,234 | ) | 247 | |||||
Pension and other postretirement benefit plans | 127 | 105 | 384 | 308 | ||||||||
Derivative instruments | 205 | 32 | 324 | (57 | ) | |||||||
Total other comprehensive income (loss) | 166 | (293 | ) | (557 | ) | 455 | ||||||
Comprehensive income | 701 | 241 | 2,929 | 3,263 | ||||||||
Comprehensive income attributable to noncontrolling interests, net of tax | 33 | 26 | 73 | 119 | ||||||||
Comprehensive income attributable to DowDuPont Inc. | $ | 668 | $ | 215 | $ | 2,856 | $ | 3,144 | ||||
See Notes to the Consolidated Financial Statements.
6
DowDuPont Inc.
Consolidated Balance Sheets
In millions, except per share amounts (Unaudited) | Sep 30, 2018 | Dec 31, 2017 | ||||
Assets | ||||||
Current Assets | ||||||
Cash and cash equivalents (variable interest entities restricted - 2018: $133; 2017: $107) | $ | 6,939 | $ | 13,438 | ||
Marketable securities | 370 | 956 | ||||
Accounts and notes receivable: | ||||||
Trade (net of allowance for doubtful receivables - 2018: $168; 2017: $127) | 14,542 | 11,314 | ||||
Other | 5,006 | 5,579 | ||||
Inventories | 16,441 | 16,992 | ||||
Other current assets | 2,107 | 1,614 | ||||
Total current assets | 45,405 | 49,893 | ||||
Investments | ||||||
Investment in nonconsolidated affiliates | 5,234 | 5,336 | ||||
Other investments (investments carried at fair value - 2018: $1,874; 2017: $1,512) | 2,712 | 2,564 | ||||
Noncurrent receivables | 526 | 680 | ||||
Total investments | 8,472 | 8,580 | ||||
Property | ||||||
Property | 74,305 | 73,304 | ||||
Less accumulated depreciation | 39,077 | 37,057 | ||||
Net property (variable interest entities restricted - 2018: $769; 2017: $907) | 35,228 | 36,247 | ||||
Other Assets | ||||||
Goodwill | 59,362 | 59,527 | ||||
Other intangible assets (net of accumulated amortization - 2018: $6,915; 2017: $5,550) | 31,508 | 33,274 | ||||
Deferred income tax assets | 1,642 | 1,869 | ||||
Deferred charges and other assets | 2,836 | 2,774 | ||||
Total other assets | 95,348 | 97,444 | ||||
Total Assets | $ | 184,453 | $ | 192,164 | ||
Liabilities and Equity | ||||||
Current Liabilities | ||||||
Notes payable | $ | 4,757 | $ | 1,948 | ||
Long-term debt due within one year | 3,118 | 2,067 | ||||
Accounts payable: | ||||||
Trade | 8,631 | 9,134 | ||||
Other | 4,321 | 3,727 | ||||
Income taxes payable | 701 | 843 | ||||
Accrued and other current liabilities | 6,152 | 8,409 | ||||
Total current liabilities | 27,680 | 26,128 | ||||
Long-Term Debt (variable interest entities nonrecourse - 2018: $148; 2017: $249) | 27,293 | 30,056 | ||||
Other Noncurrent Liabilities | ||||||
Deferred income tax liabilities | 5,908 | 6,266 | ||||
Pension and other postretirement benefits - noncurrent | 15,288 | 18,581 | ||||
Asbestos-related liabilities - noncurrent | 1,164 | 1,237 | ||||
Other noncurrent obligations | 7,376 | 7,969 | ||||
Total other noncurrent liabilities | 29,736 | 34,053 | ||||
Stockholders' Equity | ||||||
Common stock (authorized 5,000,000,000 shares of $0.01 par value each; issued 2018: 2,351,801,548 shares; 2017: 2,341,455,518 shares) | 24 | 23 | ||||
Additional paid-in capital | 81,838 | 81,257 | ||||
Retained earnings | 30,933 | 29,211 | ||||
Accumulated other comprehensive loss | (10,566 | ) | (8,972 | ) | ||
Unearned ESOP shares | (139 | ) | (189 | ) | ||
Treasury stock at cost (2018: 57,760,794 shares; 2017: 14,123,049 shares) | (4,000 | ) | (1,000 | ) | ||
DowDuPont's stockholders' equity | 98,090 | 100,330 | ||||
Noncontrolling interests | 1,654 | 1,597 | ||||
Total equity | 99,744 | 101,927 | ||||
Total Liabilities and Equity | $ | 184,453 | $ | 192,164 | ||
See Notes to the Consolidated Financial Statements.
7
DowDuPont Inc.
Consolidated Statements of Cash Flows
Nine Months Ended | ||||||
In millions (Unaudited) | Sep 30, 2018 | Sep 30, 2017 | ||||
Operating Activities | ||||||
Net income | $ | 3,486 | $ | 2,808 | ||
Adjustments to reconcile net income to net cash used for operating activities: | ||||||
Depreciation and amortization | 4,450 | 2,518 | ||||
Provision (Credit) for deferred income tax | (111 | ) | 570 | |||
Earnings of nonconsolidated affiliates less than dividends received | 155 | 201 | ||||
Net periodic pension benefit cost | 85 | 306 | ||||
Pension contributions | (2,804 | ) | (463 | ) | ||
Net gain on sales of assets, businesses and investments | (65 | ) | (475 | ) | ||
Adjustment to gain on step acquisition of nonconsolidated affiliate | 47 | — | ||||
Restructuring and asset related charges - net | 741 | 166 | ||||
Amortization of Merger-related inventory step-up | 1,494 | 429 | ||||
Other net loss | 573 | 228 | ||||
Changes in assets and liabilities, net of effects of acquired and divested companies: | ||||||
Accounts and notes receivable | (3,765 | ) | (8,204 | ) | ||
Inventories | (1,139 | ) | (1,490 | ) | ||
Accounts payable | 350 | 1,627 | ||||
Other assets and liabilities, net | (3,867 | ) | (743 | ) | ||
Cash used for operating activities | (370 | ) | (2,522 | ) | ||
Investing Activities | ||||||
Capital expenditures | (2,558 | ) | (2,301 | ) | ||
Investment in gas field developments | (82 | ) | (98 | ) | ||
Purchases of previously leased assets | — | (2 | ) | |||
Proceeds from sales of property and businesses, net of cash divested | 104 | 522 | ||||
Acquisitions of property and businesses, net of cash acquired | (20 | ) | 3 | |||
Cash acquired in Merger transaction | — | 4,005 | ||||
Investments in and loans to nonconsolidated affiliates | (11 | ) | (694 | ) | ||
Distributions and loan repayments from nonconsolidated affiliates | 55 | 56 | ||||
Proceeds from sale of ownership interests in nonconsolidated affiliates | — | 64 | ||||
Purchases of investments | (2,536 | ) | (476 | ) | ||
Proceeds from sales and maturities of investments | 2,956 | 2,088 | ||||
Proceeds from interests in trade accounts receivable conduits | 657 | 6,989 | ||||
Other investing activities, net | (4 | ) | (2 | ) | ||
Cash provided by (used for) investing activities | (1,439 | ) | 10,154 | |||
Financing Activities | ||||||
Changes in short-term notes payable | 2,807 | 953 | ||||
Proceeds from issuance of long-term debt | 756 | — | ||||
Payments on long-term debt | (2,396 | ) | (591 | ) | ||
Purchases of treasury stock | (3,000 | ) | — | |||
Proceeds from issuance of company stock | 187 | 32 | ||||
Proceeds from sales of common stock | — | 423 | ||||
Employee taxes paid for share-based payment arrangements | (124 | ) | (89 | ) | ||
Contingent payment for acquisition of businesses | — | (31 | ) | |||
Distributions to noncontrolling interests | (83 | ) | (58 | ) | ||
Dividends paid to stockholders | (2,625 | ) | (1,947 | ) | ||
Other financing activities, net | (6 | ) | (2 | ) | ||
Cash used for financing activities | (4,484 | ) | (1,310 | ) | ||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (246 | ) | 254 | |||
Cash reclassified as held for sale | — | (37 | ) | |||
Summary | ||||||
Increase (Decrease) in cash, cash equivalents and restricted cash | (6,539 | ) | 6,539 | |||
Cash, cash equivalents and restricted cash at beginning of period | 14,015 | 6,624 | ||||
Cash, cash equivalents and restricted cash at end of period | $ | 7,476 | $ | 13,163 | ||
Less: Restricted cash and cash equivalents, included in "Other current assets" | 537 | 15 | ||||
Cash and cash equivalents at end of period | $ | 6,939 | $ | 13,148 | ||
See Notes to the Consolidated Financial Statements.
8
DowDuPont Inc.
Consolidated Statements of Equity
In millions, except per share amounts (Unaudited) | Common Stock | Add'l Paid in Capital | Retained Earnings | Accum Other Comp Loss | Unearned ESOP | Treasury Stock | Non-controlling Interests | Total Equity | ||||||||||||||||
2017 | ||||||||||||||||||||||||
Balance at Dec 31, 2016 | $ | 3,107 | $ | 4,262 | $ | 30,338 | $ | (9,822 | ) | $ | (239 | ) | $ | (1,659 | ) | $ | 1,242 | $ | 27,229 | |||||
Net income available for DowDuPont Inc. common stockholders | — | — | 2,723 | — | — | — | — | 2,723 | ||||||||||||||||
Other comprehensive income | — | — | — | 455 | — | — | — | 455 | ||||||||||||||||
Dividends ($1.38 per common share) | — | — | (1,673 | ) | — | — | — | — | (1,673 | ) | ||||||||||||||
Common stock issued/sold | — | 455 | — | — | — | 724 | — | 1,179 | ||||||||||||||||
Stock-based compensation and allocation of ESOP shares | — | (428 | ) | — | — | 47 | — | — | (381 | ) | ||||||||||||||
Impact of noncontrolling interests | — | — | — | — | — | — | 346 | 346 | ||||||||||||||||
Merger impact | (3,084 | ) | 76,829 | — | — | — | 935 | — | 74,680 | |||||||||||||||
Other | — | (2 | ) | (22 | ) | — | — | — | — | (24 | ) | |||||||||||||
Balance at Sep 30, 2017 | $ | 23 | $ | 81,116 | $ | 31,366 | $ | (9,367 | ) | $ | (192 | ) | $ | — | $ | 1,588 | $ | 104,534 | ||||||
2018 | ||||||||||||||||||||||||
Balance at Dec 31, 2017 | $ | 23 | $ | 81,257 | $ | 29,211 | $ | (8,972 | ) | $ | (189 | ) | $ | (1,000 | ) | $ | 1,597 | $ | 101,927 | |||||
Adoption of accounting standards (Note 1) | — | — | 996 | (1,037 | ) | — | — | — | (41 | ) | ||||||||||||||
Net income available for DowDuPont Inc. common stockholders | — | — | 3,369 | — | — | — | — | 3,369 | ||||||||||||||||
Other comprehensive loss | — | — | — | (557 | ) | — | — | — | (557 | ) | ||||||||||||||
Dividends ($1.14 per common share) | — | — | (2,625 | ) | — | — | — | — | (2,625 | ) | ||||||||||||||
Common stock issued/sold | 1 | 187 | — | — | — | — | — | 188 | ||||||||||||||||
Stock-based compensation and allocation of ESOP shares | — | 394 | — | — | 50 | — | — | 444 | ||||||||||||||||
Impact of noncontrolling interests | — | — | — | — | — | — | 57 | 57 | ||||||||||||||||
Treasury stock purchases | — | — | — | — | — | (3,000 | ) | — | (3,000 | ) | ||||||||||||||
Other | — | — | (18 | ) | — | — | — | — | (18 | ) | ||||||||||||||
Balance at Sep 30, 2018 | $ | 24 | $ | 81,838 | $ | 30,933 | $ | (10,566 | ) | $ | (139 | ) | $ | (4,000 | ) | $ | 1,654 | $ | 99,744 | |||||
See Notes to the Consolidated Financial Statements.
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
Effective August 31, 2017, pursuant to the merger of equals transactions contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017 ("Merger Agreement"), The Dow Chemical Company ("Dow") and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont" or the "Company") and, as a result, Dow and DuPont became subsidiaries of DowDuPont (the "Merger"). Prior to the Merger, DowDuPont did not conduct any business activities other than those required for its formation and matters contemplated by the Merger Agreement. Dow was determined to be the accounting acquirer in the Merger. As a result, the historical financial statements of Dow for periods prior to the Merger are considered to be the historical financial statements of DowDuPont.
The unaudited interim consolidated financial statements of DowDuPont and its subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. Results from interim periods should not be considered indicative of results for the full year. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Except as otherwise indicated by the context, the term "Dow" includes Dow and its consolidated subsidiaries, "DuPont" includes DuPont and its consolidated subsidiaries, "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.
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Changes to Prior Period Consolidated Financial Statements
In the first quarter of 2018, the Company adopted new accounting standards that required retrospective application. The Company updated the consolidated statements of income as a result of adopting Accounting Standards Update ("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 of cash flows were updated as a result of adopting ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" and ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." See Note 2 for additional information on the ASUs. In the third quarter of 2018, the U.S. Securities and Exchange Commission's ("SEC") Office of the Chief Accountant provided additional guidance related to ASU 2016-15 that indicated an entity must evaluate daily transaction activity to calculate the value of cash received from beneficial interests in conduits, resulting in additional updates to the consolidated statements of cash flows.
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 | Three Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2017 | ||||||||||
In millions | As Filed | Updated 1 | As Filed | Updated 1 | ||||||||
Cost of sales | $ | 12,170 | $ | 12,186 | $ | 33,130 | $ | 33,141 | ||||
Research and development expenses | $ | 522 | $ | 528 | $ | 1,343 | $ | 1,355 | ||||
Selling, general and administrative expenses | $ | 990 | $ | 1,001 | $ | 2,468 | $ | 2,480 | ||||
Sundry income (expense) - net | $ | 361 | $ | 394 | $ | 237 | $ | 272 | ||||
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 | Nine Months Ended Sep 30, 2017 | |||||
In millions | As Filed | Updated 1 | ||||
Operating Activities | ||||||
Proceeds from interests in trade accounts receivable conduits | $ | 939 | $ | — | ||
Accounts and notes receivable | $ | (2,154 | ) | $ | (8,204 | ) |
Other assets and liabilities, net | $ | (741 | ) | $ | (743 | ) |
Cash provided by (used for) operating activities | $ | 4,469 | $ | (2,522 | ) | |
Investing Activities | ||||||
Payment into escrow account | $ | (130 | ) | $ | — | |
Distribution from escrow account | $ | 130 | $ | — | ||
Acquisitions of property and businesses, net of cash acquired | $ | (28 | ) | $ | 3 | |
Proceeds from interests in trade accounts receivable conduits | $ | — | $ | 6,989 | ||
Cash provided by investing activities | $ | 3,134 | $ | 10,154 | ||
Financing Activities | ||||||
Contingent payment for acquisition of businesses | $ | — | $ | (31 | ) | |
Cash used for financing activities | $ | (1,279 | ) | $ | (1,310 | ) |
Summary | ||||||
Increase in cash, cash equivalents and restricted cash | $ | 6,541 | $ | 6,539 | ||
Cash, cash equivalents and restricted cash at beginning of period | $ | 6,607 | $ | 6,624 | ||
Cash, cash equivalents and restricted cash at end of period | $ | 13,148 | $ | 13,163 | ||
1. | Reflects the adoption of ASU 2016-15 and ASU 2016-18. See Note 2 for additional information. In connection with the review and implementation of ASU 2016-15, the Company also changed the prior year 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. |
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Opening Balance Sheet Impact of Accounting Standards Adoption
In the first quarter of 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" and the associated ASUs (collectively, "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 on these ASUs. The cumulative effect on the Company's January 1, 2018, consolidated balance sheet as a result 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 | |||||||||||||||
Accounts and notes receivable - Trade | $ | 11,314 | $ | 87 | $ | — | $ | — | $ | 11,401 | |||||
Accounts and notes receivable - Other | $ | 5,579 | $ | (8 | ) | $ | — | $ | — | $ | 5,571 | ||||
Inventories | $ | 16,992 | $ | (64 | ) | $ | — | $ | — | $ | 16,928 | ||||
Other current assets | $ | 1,614 | $ | 130 | $ | — | $ | 31 | $ | 1,775 | |||||
Total current assets | $ | 49,893 | $ | 145 | $ | — | $ | 31 | $ | 50,069 | |||||
Deferred income tax assets | $ | 1,869 | $ | 26 | $ | — | $ | 10 | $ | 1,905 | |||||
Deferred charges and other assets | $ | 2,774 | $ | 43 | $ | — | $ | — | $ | 2,817 | |||||
Total other assets | $ | 97,444 | $ | 69 | $ | — | $ | 10 | $ | 97,523 | |||||
Total Assets | $ | 192,164 | $ | 214 | $ | — | $ | 41 | $ | 192,419 | |||||
Liabilities | |||||||||||||||
Accounts payable - Trade | $ | 9,134 | $ | (3 | ) | $ | — | $ | — | $ | 9,131 | ||||
Accounts payable - Other | $ | 3,727 | $ | 10 | $ | — | $ | — | $ | 3,737 | |||||
Income taxes payable | $ | 843 | $ | (2 | ) | $ | — | $ | — | $ | 841 | ||||
Accrued and other current liabilities | $ | 8,409 | $ | 171 | $ | — | $ | — | $ | 8,580 | |||||
Total current liabilities | $ | 26,128 | $ | 176 | $ | — | $ | — | $ | 26,304 | |||||
Deferred income tax liabilities | $ | 6,266 | $ | 3 | $ | — | $ | — | $ | 6,269 | |||||
Other noncurrent obligations | $ | 7,969 | $ | 117 | $ | — | $ | — | $ | 8,086 | |||||
Total other noncurrent liabilities | $ | 34,053 | $ | 120 | $ | — | $ | — | $ | 34,173 | |||||
Stockholders' Equity | |||||||||||||||
Retained earnings | $ | 29,211 | $ | (82 | ) | $ | (20 | ) | $ | 41 | $ | 29,150 | |||
Accumulated other comprehensive loss | $ | (8,972 | ) | $ | — | $ | 20 | $ | — | $ | (8,952 | ) | |||
DowDuPont's stockholders' equity | $ | 100,330 | $ | (82 | ) | $ | — | $ | 41 | $ | 100,289 | ||||
Total equity | $ | 101,927 | $ | (82 | ) | $ | — | $ | 41 | $ | 101,886 | ||||
Total Liabilities and Equity | $ | 192,164 | $ | 214 | $ | — | $ | 41 | $ | 192,419 | |||||
The most significant changes as a result of adopting Topic 606 relate to the reclassification of the Company's return assets and refund liabilities in the Agriculture segment in the consolidated balance sheets. Under previous guidance, the Company accrued the amount of expected product returns as a reduction of "Accounts and notes receivable - Trade" with the value associated with the expected returns recorded in "Inventories" in the consolidated balance sheets. Under Topic 606, the Company now records the amount of expected product returns as refund liabilities, included in "Accrued and other current liabilities" and the products expected to be recovered as return assets, included in "Other current assets" in the consolidated balance sheets. The reclassifications of return assets and refund liabilities were $61 million and $119 million, respectively, at January 1, 2018. In addition, deferred revenue, included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets, increased as certain performance obligations, which were previously recognized over time and related to the licensing of certain rights to patents and technology, as well as other performance obligations, are now recognized at a point in time as none of the three criteria for 'over time' recognition under Topic 606 are met.
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." This standard was adopted on April 1, 2018, and resulted in a $1,057 million increase to 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 Tax Cuts and Jobs Act of 2017 ("The Act") on the Company's pension plans, derivative instruments, available-for-sale securities
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and cumulative translation adjustments. This reclassification is reflected in the "Adoption of accounting standards" line in the consolidated statements of equity. See Note 2 for additional information.
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 effects 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 Sep 30, 2018 | Adjustments | Balance at Sep 30, 2018 Excluding Adoption of Topic 606 | ||||||
In millions | |||||||||
Assets | |||||||||
Accounts and notes receivable - Trade | $ | 14,542 | $ | (51 | ) | $ | 14,491 | ||
Accounts and notes receivable - Other | $ | 5,006 | $ | 29 | $ | 5,035 | |||
Inventories | $ | 16,441 | $ | 12 | $ | 16,453 | |||
Other current assets | $ | 2,107 | $ | (77 | ) | $ | 2,030 | ||
Total current assets | $ | 45,405 | $ | (87 | ) | $ | 45,318 | ||
Deferred income tax assets | $ | 1,642 | $ | (30 | ) | $ | 1,612 | ||
Deferred charges and other assets | $ | 2,836 | $ | (43 | ) | $ | 2,793 | ||
Total other assets | $ | 95,348 | $ | (73 | ) | $ | 95,275 | ||
Total Assets | $ | 184,453 | $ | (160 | ) | $ | 184,293 | ||
Liabilities | |||||||||
Accounts payable - Other | $ | 4,321 | $ | (10 | ) | $ | 4,311 | ||
Income taxes payable | $ | 701 | $ | 2 | $ | 703 | |||
Accrued and other current liabilities | $ | 6,152 | $ | (57 | ) | $ | 6,095 | ||
Total current liabilities | $ | 27,680 | $ | (65 | ) | $ | 27,615 | ||
Deferred income tax liabilities | $ | 5,908 | $ | (8 | ) | $ | 5,900 | ||
Other noncurrent obligations | $ | 7,376 | $ | (134 | ) | $ | 7,242 | ||
Total other noncurrent liabilities | $ | 29,736 | $ | (142 | ) | $ | 29,594 | ||
Stockholders' Equity | |||||||||
Retained earnings | $ | 30,933 | $ | 47 | $ | 30,980 | |||
DowDuPont's stockholders' equity | $ | 98,090 | $ | 47 | $ | 98,137 | |||
Total equity | $ | 99,744 | $ | 47 | $ | 99,791 | |||
Total Liabilities and Equity | $ | 184,453 | $ | (160 | ) | $ | 184,293 | ||
Significant Accounting Policy Updates
The Company's significant accounting policy for revenue was updated as a result of the adoption of Topic 606:
Revenue
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 4 for additional information on revenue recognition.
Revenue related to Dow's insurance operations includes third-party insurance premiums, which are earned over the terms of the related insurance policies and reinsurance contracts.
As a result of the adoption of ASU 2018-02, the Company's significant accounting policy for income taxes was updated to indicate the Company uses the portfolio approach for releasing income tax effects from accumulated other comprehensive loss.
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NOTE 2 - RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
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 Accounting Standards Codification ("ASC") 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 for which 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 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 Financial Accounting Standards Board ("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 18 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 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.
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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 Notes 1 and 6 for additional information.
In the first quarter of 2018, the Company adopted ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance requires an entity to evaluate if substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively the "set") is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs, as defined by the ASU. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied prospectively. The Company will apply the new guidance to all applicable transactions after the adoption date.
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 September 30, 2018
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," and associated ASUs for 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 with lease terms of more than twelve months, 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 require 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 current U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, using a modified retrospective approach, and early adoption is permitted. The Company has a cross-functional team in place to evaluate and implement the new guidance. The team continues to review existing lease arrangements and has engaged third parties to assist with the collection of lease data. The Company will elect the optional transition method that allows for a cumulative effect adjustment in the period of adoption, and prior periods will not be restated. The impact of applying other practical expedients and accounting policy elections has been evaluated and the Company is in the process of documenting the related decisions. The Company is currently implementing third-party software solutions in connection with the adoption of the ASU; however, these systems are still being modified to comply with the new guidance. 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 facilitate the Company's ability to meet the new accounting and disclosure requirements upon
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adoption in the first quarter of 2019. The Company is working to quantify the impact and anticipates that the adoption of the new standard will result in a material increase in lease-related assets and liabilities in the consolidated balance sheets. The impact to the Company's consolidated statements of income and consolidated statements of cash flows is not expected to be material.
In August 2018, the 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 ASC 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 is currently evaluating the impact of adopting this guidance.
In August 2018, the FASB issued 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 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. The Company is currently evaluating the impact of adopting this guidance.
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 ASC 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 is currently evaluating the impact of adopting this guidance.
NOTE 3 - BUSINESS COMBINATIONS
Merger of Equals of Dow and DuPont
At the effective time of the Merger, each share of common stock, par value $2.50 per share, of Dow ("Dow Common Stock") (excluding any shares of Dow Common Stock that were held in treasury immediately prior to the effective time of the Merger, which were automatically canceled and retired for no consideration) was converted into the right to receive one fully paid and non-assessable share of common stock, par value $0.01 per share, of DowDuPont ("DowDuPont Common Stock"). Upon completion of the Merger, (i) each share of common stock, par value $0.30 per share, of DuPont (“DuPont Common Stock”) (excluding any shares of DuPont Common Stock that were held in treasury immediately prior to the effective time of the Merger, which were automatically canceled and retired for no consideration) was converted into the right to receive 1.2820 fully paid and non-assessable shares of DowDuPont Common Stock, in addition to cash in lieu of any fractional shares of DowDuPont Common Stock, and (ii) each share of DuPont Preferred Stock $4.50 Series and DuPont Preferred Stock $3.50 Series (collectively, the “DuPont Preferred Stock”) issued and outstanding immediately prior to the effective time of the Merger remains issued and outstanding and was unaffected by the Merger.
As provided in the Merger Agreement, at the effective time of the Merger, Dow stock options and other equity awards were generally automatically converted into stock options and equity awards with respect to DowDuPont Common Stock and DuPont stock options and other equity awards, after giving effect to the exchange ratio, were converted into stock options and equity awards with respect to DowDuPont Common Stock, and otherwise generally on the same terms and conditions under the applicable plans and award agreements immediately prior to the effective time of the Merger.
DowDuPont intends to pursue, subject to certain customary conditions, including, among others, the effectiveness of registration statements filed with the 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").
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Allocation of Purchase Price
Based on an evaluation of the provisions of ASC 805, "Business Combinations" ("ASC 805"), Dow was determined to be the accounting acquirer in the Merger. DowDuPont has applied the acquisition method of accounting with respect to the assets and liabilities of DuPont, which have been measured at fair value as of the date of the Merger.
DuPont's assets and liabilities were measured at estimated fair values at August 31, 2017, primarily using Level 3 inputs. Estimates of fair value represent management's best estimate and require a complex series of judgments about future events and uncertainties. Third-party valuation specialists were engaged to assist in the valuation of these assets and liabilities.
The total fair value of consideration transferred for the Merger was $74,680 million. Total consideration is comprised of the equity value of the DowDuPont shares at August 31, 2017, that were issued in exchange for DuPont shares, the cash value for fractional shares, and the portion of DuPont's share awards and share options earned at August 31, 2017. The following table summarizes the fair value of consideration exchanged as a result of the Merger:
Merger Consideration | |||
In millions (except exchange ratio) | |||
DuPont Common Stock outstanding at Aug 31, 2017 | 868.3 | ||
DuPont exchange ratio | 1.2820 | ||
DowDuPont Common Stock issued in exchange for DuPont Common Stock | 1,113.2 | ||
Fair value of DowDuPont Common Stock issued 1 | $ | 74,195 | |
Fair value of DowDuPont equity awards issued in exchange for outstanding DuPont equity awards 2 | 485 | ||
Total consideration | $ | 74,680 | |
1. | Amount was determined based on the price per share of Dow Common Stock of $66.65 on August 31, 2017. |
2. | Represents the fair value of replacement awards issued for DuPont's equity awards outstanding immediately before the Merger and attributable to the service periods prior to the Merger. The previous DuPont equity awards were converted into the right to receive 1.2820 shares of DowDuPont Common Stock. |
The acquisition method of accounting requires, among other things, that identifiable assets acquired and liabilities assumed be recognized on the balance sheet at their respective fair value as of the acquisition date. In determining the fair value, DowDuPont utilized various forms of the income, cost and market approaches depending on the asset or liability being fair valued. The estimation of fair value required significant judgments related to future net cash flows (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), discount rates reflecting the risk inherent in each cash flow stream, competitive trends, market comparables and other factors. Inputs were generally determined by taking into account historical data, supplemented by current and anticipated market conditions, and growth rates.
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The table below presents the final fair value that was allocated to DuPont's assets and liabilities based upon fair values as determined by DowDuPont. The valuation process to determine the fair values is complete. For the nine months ended September 30, 2018, DowDuPont made measurement period adjustments to reflect facts and circumstances in existence as of the effective time of the Merger. These adjustments primarily included a $392 million increase in goodwill, a $257 million decrease in property, and a $150 million decrease in indefinite-lived trademarks, tradenames and customer-related assets.
DuPont Assets Acquired and Liabilities Assumed on Aug 31, 2017 | Final fair value | ||
In millions | |||
Fair Value of Assets Acquired | |||
Cash and cash equivalents | $ | 4,005 | |
Marketable securities | 2,849 | ||
Accounts and notes receivable - Trade | 6,199 | ||
Accounts and notes receivable - Other | 1,635 | ||
Inventories | 8,805 | ||
Other current assets | 420 | ||
Assets held for sale | 3,732 | ||
Investment in nonconsolidated affiliates | 1,596 | ||
Other investments | 50 | ||
Noncurrent receivables | 84 | ||
Property | 11,684 | ||
Goodwill | 45,497 | ||
Other intangible assets | 27,071 | ||
Deferred income tax assets | 279 | ||
Deferred charges and other assets | 1,932 | ||
Total Assets | $ | 115,838 | |
Fair Value of Liabilities Assumed | |||
Notes payable | $ | 4,046 | |
Long-term debt due within one year | 1,273 | ||
Accounts payable - Trade | 2,346 | ||
Accounts payable - Other | 952 | ||
Income taxes payable | 261 | ||
Accrued and other current liabilities | 3,517 | ||
Liabilities held for sale | 125 | ||
Long-term debt | 9,878 | ||
Deferred income tax liabilities | 8,259 | ||
Pension and other postretirement benefits - noncurrent | 8,056 | ||
Other noncurrent obligations | 1,967 | ||
Total Liabilities | $ | 40,680 | |
Noncontrolling interests | 478 | ||
Net Assets (Consideration for the Merger) | $ | 74,680 | |
The following table provides "Net sales" and "Loss from continuing operations before income taxes" of DuPont included in the Company's results for the period September 1 through September 30, 2017. Included in the results from DuPont was $40 million of "Restructuring and asset related charges - net" (see Note 5 for additional information), $360 million that was recognized in "Cost of sales" as inventory was sold related to the fair value step-up of inventories and $71 million of "Integration and separation costs."
DuPont Results of Operations | Sep 1 - | ||
In millions | Sep 30, 2017 | ||
Net sales | $ | 1,734 | |
Loss from continuing operations before income taxes | $ | (303 | ) |
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As a condition of the European Commission ("EC"), Chinese Ministry of Commerce, Brazilian Administrative Council for Economic Defense and the U.S. Department of Justice ("DOJ") approval of the Merger, Dow and DuPont were required to divest the following:
Dow 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, Dow announced it would divest its global ethylene acrylic acid copolymers and ionomers business ("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.
In the third quarter of 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 and related to the Packaging & Specialty Plastics segment.
Dow Merger Remedy - Divestiture of a Portion of Dow AgroSciences' Corn Seed Business
On July 11, 2017, as a condition of regulatory approval of the Merger, Dow announced it entered into a definitive agreement with CITIC Agri Fund to sell a select portion of Dow AgroSciences' corn seed business in Brazil, part of the Agriculture segment, for a purchase price of $1.1 billion. The agreement included the sale of 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. The sale closed in the fourth quarter of 2017.
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 were not reported as discontinued operations.
DuPont Merger Remedy - Divested Ag Business
DuPont was required to sell certain assets related to its Crop Protection business and research and development ("R&D") organization, specifically DuPont’s Cereal Broadleaf Herbicides and Chewing Insecticides portfolios, including RYNAXYPYR®, CYAZYPYR®, and Indoxacarb as well as the crop protection R&D pipeline and organization, excluding seed treatment, nematicides, and late-stage R&D programs. On March 31, 2017, DuPont entered into a definitive agreement (the "FMC Transaction Agreement") with FMC Corporation ("FMC"). Under the FMC Transaction Agreement, FMC acquired the Crop Protection business and R&D assets that DuPont was required to divest in order to obtain EC approval of the Merger as described above (the "Divested Ag Business"), and DuPont agreed to acquire certain assets relating to FMC’s Health and Nutrition segment, excluding its Omega-3 products, (the "H&N Business") (collectively, the "FMC Transactions"). Earnings of the Divested Ag Business are included in “Loss from discontinued operations, net of tax" in periods subsequent to the Merger.
The results of operations of DuPont's Divested Ag Business are presented as discontinued operations as summarized below, representing activity subsequent to the Merger:
Results of Operations of DuPont's Divested Ag Business | Three and Nine Months Ended Sep 30, 2017 1 | ||
In millions | |||
Net sales | $ | 116 | |
Cost of sales | 110 | ||
Research and development expenses | 9 | ||
Selling, general and administrative expenses 2 | 29 | ||
Loss from discontinued operations before income taxes | $ | (32 | ) |
Benefit from income taxes | (12 | ) | |
Loss from discontinued operations, net of tax | $ | (20 | ) |
1. | The Divested Ag Business was disposed of on November 1, 2017. |
2. | Includes $8 million of transaction costs associated with the disposal of the Divested Ag Business. |
Unaudited Supplemental Pro Forma Information
The DowDuPont unaudited pro forma results presented below were prepared pursuant to the requirements of ASC 805, "Business Combinations" and give effect to the Merger as if it had been consummated on January 1, 2016. The pro forma results have been prepared for comparative purposes only and do not necessarily represent what the revenue or results of operations would have
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been had the Merger been completed on January 1, 2016. In addition, these results are not intended to be a projection of future operating results and do not reflect synergies that might be achieved by DowDuPont from the Merger.
The pro forma results include adjustments for the preliminary purchase accounting impact (including, but not limited to, depreciation and amortization associated with the acquired tangible and intangible assets, amortization of the fair value adjustment to investment in nonconsolidated affiliates, and reduction of interest expense related to the fair value adjustment to long-term debt, along with the related tax impacts), the alignment of accounting policies, and the elimination of transactions between Dow and DuPont. The fair value estimates reflected in the unaudited pro forma information are based on those used in the Current Report on Form 8‑K/A filed with the SEC on October 26, 2017, and subsequent measurement period adjustments are not reflected. Other adjustments are reflected in the pro forma results as follows:
• | For the nine months ended September 30, 2017, Dow and DuPont collectively incurred $66 million after tax ($94 million pretax) of costs to prepare for and close the Merger. These Merger costs have been reflected within the results of operations in the pro forma results presented below as if they were incurred on January 1, 2016. The costs incurred related to integration and preparation for the Intended Business Separations are reflected in the pro forma results in the period in which they were incurred. |
• | The Company incurred an after tax charge of $253 million ($302 million pretax) in the third quarter of 2017 related to the fair value step-up of inventories acquired and sold, excluding the acquired inventory related to DuPont's Seed business. The 2017 pro forma results were adjusted to exclude this charge. |
• | To align with seasonality, charges related to the fair value step-up of acquired inventory related to DuPont’s Seed business are reflected in the pro forma results based on actual quantity of units sold during those periods as if the fair value step-up of inventories had occurred on January 1, 2016. Accordingly, $35 million after tax ($50 million pretax) and $273 million after tax ($393 million pretax) of charges for the three and nine months ended September 30, 2017 are reflected in the pro forma results. |
• | The 2017 pro forma results were adjusted to exclude a $170 million after tax charge incurred in September 2017 related to the impact of change in tax attributes. |
The unaudited pro forma results for all periods exclude the results of operations of the DuPont Divested Ag Business as this divestiture is reflected as discontinued operations. The Dow global EAA Business, through August 31, 2017, and a portion of Dow Agrosciences’ corn seed business divestitures are included in the results from continuing operations in the unaudited pro forma results presented below, for all periods presented, as these divestitures do not qualify for discontinued operations.
DowDuPont Pro Forma Results of Operations | Three Months Ended | Nine Months Ended | ||||
Sep 30, 2017 | Sep 30, 2017 | |||||
In millions | ||||||
Net sales | $ | 18,319 | $ | 59,620 | ||
Income from continuing operations, net of tax | $ | 762 | $ | 4,351 | ||
Earnings per common share from continuing operations - basic | $ | 0.31 | $ | 1.82 | ||
Earnings per common share from continuing operations - diluted | $ | 0.31 | $ | 1.80 | ||
Integration and Separation Costs
Integration and separation costs have been and are expected to be significant in the future. The Company incurred "Integration and separation costs," reflected in "Income from continuing operations before income taxes" in the consolidated statements of income, of $666 million and $1,681 million for the three and nine months ended September 30, 2018, respectively, and $354 million and $599 million for the three and nine months ended September 30, 2017, respectively. These costs to date primarily consisted of financial advisory, information technology, legal, accounting, consulting, and other professional advisory fees associated with the preparation and execution of activities related to the Merger, post-merger integration and separation, and the ownership restructure of Dow Silicones. While the Company assumed that a certain level of expenses would be incurred, there are many factors that could affect the total amount or the timing of these expenses, and many of the expenses that will be incurred are, by their nature, difficult to estimate.
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H&N Business
On November 1, 2017, DuPont completed the FMC Transactions through the acquisition of the H&N Business and the divestiture of the Divested Ag Business. The acquisition is being integrated into the Nutrition & Biosciences segment to enhance the Company’s position as a leading provider of sustainable, bio-based food ingredients and allow for expanded capabilities in the pharma excipients space. DuPont accounted for the acquisition in accordance with ASC 805, which requires the assets acquired and liabilities assumed to be recognized on the balance sheet at their fair values as of the acquisition date. The preliminary fair value allocated to the assets acquired and liabilities assumed for the H&N Business at November 1, 2017 was $1,970 million. The valuation process is currently in the process of being finalized as DuPont has reached the end of the measurement period on November 1, 2018. There are no material updates to the preliminary purchase accounting and purchase price allocation. For additional information regarding the acquisition of the H&N Business, see Note 3 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
NOTE 4 - REVENUE
Revenue Recognition
The majority of the Company's revenue is derived from product sales. In the three and nine months ended September 30, 2018, 99 percent of the Company's sales related to product sales (98 percent in the three and nine months ended September 30, 2017). The remaining sales were primarily related to Dow's insurance operations and licensing of patents and technologies. As of January 1, 2018, the Company accounts for revenue in accordance with Topic 606, 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, distributors and farmers. 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.
Revenue from product sales is 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, with the exception of the Agriculture segment, where payment terms are generally less than one year after invoicing. The Company has 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. 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 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 revenue. The Company has 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 rights of return 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 rights of return is limited primarily to the Agriculture segment. 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.
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.
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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 to which 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’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 September 30, 2018, the Company had remaining performance obligations related to material rights granted to customers for contract renewal options of $103 million and unfulfilled performance obligations for the licensing of technology of $227 million. The Company expects revenue to be recognized for the remaining performance obligations over the next one to six 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 and royalty payments that are deferred and recognized over the life of the contract, with remaining contract terms that range up to 22 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.
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Disaggregation of Revenue
The Company disaggregates its revenue from contracts with customers by segment and business or major product line and geographic region, as the Company believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash flows. See details in the tables below:
Net Trade Revenue by Segment and Business or Major Product Line 1 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 | ||||
In millions | ||||||
Crop Protection | $ | 1,366 | $ | 4,714 | ||
Seed | 580 | 6,770 | ||||
Agriculture | $ | 1,946 | $ | 11,484 | ||
Coatings & Performance Monomers | $ | 1,029 | $ | 3,054 | ||
Consumer Solutions | 1,447 | 4,325 | ||||
Performance Materials & Coatings | $ | 2,476 | $ | 7,379 | ||
Industrial Solutions | $ | 1,211 | $ | 3,562 | ||
Polyurethanes & CAV | 2,607 | 7,849 | ||||
Other | 3 | 10 | ||||
Industrial Intermediates & Infrastructure | $ | 3,821 | $ | 11,421 | ||
Hydrocarbons & Energy | $ | 1,983 | $ | 5,636 | ||
Packaging and Specialty Plastics | 4,136 | 12,592 | ||||
Packaging & Specialty Plastics | $ | 6,119 | $ | 18,228 | ||
Advanced Printing | $ | 129 | $ | 387 | ||
Display & Other Technologies | 88 | 230 | ||||
Interconnect Solutions | 313 | 892 | ||||
Photovoltaic & Advanced Materials | 255 | 826 | ||||
Semiconductor Technologies | 410 | 1,216 | ||||
Electronics & Imaging | $ | 1,195 | $ | 3,551 | ||
Industrial Biosciences | $ | 533 | $ | 1,635 | ||
Nutrition & Health | 1,145 | 3,538 | ||||
Nutrition & Biosciences | $ | 1,678 | $ | 5,173 | ||
Engineering Polymers | $ | 699 | $ | 2,066 | ||
Performance Resins | 450 | 1,287 | ||||
Performance Solutions | 259 | 948 | ||||
Transportation & Advanced Polymers | $ | 1,408 | $ | 4,301 | ||
Aramids | $ | 399 | $ | 1,190 | ||
Construction | 433 | 1,253 | ||||
TYVEK® Enterprise | 298 | 906 | ||||
Water Solutions | 272 | 763 | ||||
Safety & Construction | $ | 1,402 | $ | 4,112 | ||
Corporate | $ | 78 | $ | 229 | ||
Total | $ | 20,123 | $ | 65,878 | ||
1. | Beginning in the third quarter of 2018, DowDuPont realigned certain global businesses and product lines in preparation for the Intended Business Separations. These changes have been retrospectively reflected in the results presented. See Note 21 for additional information. |
Net Trade Revenue by Geographic Region | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 | ||||
In millions | ||||||
U.S. & Canada | $ | 6,838 | $ | 25,199 | ||
EMEA 1 | 5,687 | 18,900 | ||||
Asia Pacific | 5,096 | 15,284 | ||||
Latin America | 2,502 | 6,495 | ||||
Total | $ | 20,123 | $ | 65,878 | ||
1. | Europe, Middle East and Africa. |
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Contract Balances
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 in the Agriculture segment for contracts with customers where the Company receives advance payments for product to be delivered in future periods. "Contract liabilities - noncurrent" includes advance payment for product 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 classifies deferred revenue as current (12 months or less) or noncurrent based on the timing of when the Company expects to recognize revenue.
Revenue recognized in the first nine months of 2018 from amounts included in contract liabilities at the beginning of the period was approximately $2.1 billion. The decrease in deferred revenue from December 31, 2017 to September 30, 2018 was primarily due to the timing of seed deliveries to customers for the growing season in U.S. & Canada in the Agriculture segment. In the first nine months of 2018, the amount of contract assets reclassified to receivables as a result of the right to the transaction consideration becoming unconditional was insignificant. The Company did not recognize any asset impairment charges related to contract assets during the period.
Contract Balances | Sep 30, 2018 | Topic 606 Adjustments Jan 1, 2018 | Dec 31, 2017 | ||||||
In millions | |||||||||
Accounts and notes receivable - Trade | $ | 14,542 | $ | 87 | $ | 11,314 | |||
Contract assets - current 1 | $ | 82 | $ | 58 | $ | — | |||
Contract assets - noncurrent 2 | $ | 47 | $ | 43 | $ | — | |||
Contract liabilities - current 3 | $ | 499 | $ | 52 | $ | 2,131 | |||
Contract liabilities - noncurrent 4 | $ | 1,449 | $ | 117 | $ | 1,413 | |||
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 - RESTRUCTURING AND ASSET RELATED CHARGES - NET
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont approved post-merger restructuring actions under the DowDuPont Cost Synergy Program (the “Synergy Program”), adopted by the DowDuPont Board of Directors. The plan is designed to integrate and optimize the organization following the Merger and in preparation for the Intended Business Separations. Based on all actions approved to date under the Synergy Program, the Company expects to record total pretax restructuring charges of approximately $2 billion, comprised of approximately $875 million to $975 million of severance and related benefit costs; $400 million to $615 million of asset write-downs and write-offs; and $400 million to $450 million of costs associated with exit and disposal activities.
As a result of these actions, the Company recorded pretax restructuring charges of $179 million for the three and nine months ended September 30, 2017, comprised of severance and related benefit costs. For the three months ended September 30, 2018, the Company recorded pretax restructuring charges of $162 million, consisting of severance and related benefit costs of $67 million, asset write-downs and write-offs of $86 million and costs associated with exit and disposal activities of $9 million. For the nine months ended September 30, 2018, the Company recorded pretax restructuring charges of $604 million, consisting of severance and related benefit costs of $361 million, asset write-downs and write-offs of $167 million and costs associated with exit and disposal activities of $76 million. The impact of these charges is shown as "Restructuring and asset related charges - net" in the consolidated statements of income. The Company expects to record additional restructuring charges in 2018 and 2019 and expects the Synergy Program to be completed by the end of 2019.
The Company recorded pretax restructuring charges of $1,478 million inception-to-date under the Synergy Program, consisting of severance and related benefit costs of $871 million, asset write-downs and write-offs of $457 million and costs associated with exit and disposal activities of $150 million.
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The following table summarizes the activities related to the Synergy Program. At September 30, 2018, $507 million was included in "Accrued and other current liabilities" ($377 million at December 31, 2017) and $81 million was included in "Other noncurrent obligations" ($133 million at December 31, 2017) in the consolidated balance sheets.
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 | $ | 510 | $ | 290 | $ | 74 | $ | 874 | ||||
Charges against the reserve | — | (290 | ) | — | (290 | ) | ||||||
Non-cash compensation | (7 | ) | — | — | (7 | ) | ||||||
Cash payments | (64 | ) | — | (3 | ) | (67 | ) | |||||
Reserve balance at Dec 31, 2017 | $ | 439 | $ | — | $ | 71 | $ | 510 | ||||
2018 restructuring charges 1 | 361 | 167 | 76 | 604 | ||||||||
Charges against the reserve | — | (167 | ) | — | (167 | ) | ||||||
Cash payments | (289 | ) | — | (68 | ) | (357 | ) | |||||
Net translation adjustment | (2 | ) | — | — | (2 | ) | ||||||
Reserve balance at Sep 30, 2018 | $ | 509 | $ | — | $ | 79 | $ | 588 | ||||
Restructuring charges recorded for severance and related benefit costs were related to Corporate. The Company recorded restructuring charges for asset write-downs and write-offs for the three months ended September 30, 2018, of $86 million, related to Agriculture ($80 million), Packaging & Specialty Plastics ($4 million) and Safety & Construction ($2 million). The Company recorded restructuring charges for asset write-downs and write-offs for the nine months ended September 30, 2018, of $167 million, related to Agriculture ($138 million), Safety & Construction ($5 million), Packaging & Specialty Plastics ($4 million), Electronics & Imaging ($2 million) and Corporate ($18 million). The restructuring charges for asset write-downs and write-offs aligned with Agriculture for the three and nine months ended September 30, 2018, related primarily to the consolidation or shutdown of manufacturing, R&D and other non-manufacturing facilities and the write-down of inventory.
The Company recorded restructuring charges of $9 million for costs associated with exit and disposal activities for the three months ended September 30, 2018 related to Agriculture ($8 million) and Corporate ($1 million). The Company recorded restructuring charges of $76 million for costs associated with exit and disposal activities for the nine months ended September 30, 2018 related to Agriculture (charge of $45 million), Industrial Intermediates & Infrastructure (charge of $11 million), Packaging & Specialty Plastics (charge of $3 million), Transportation & Advanced Polymers (benefit of $1 million), Safety & Construction (charge of $16 million) and Corporate (charge of $2 million).
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; 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.
Restructuring Plans Initiated Prior to Merger
Dow 2016 Restructuring Plan
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.
Asset Impairments
During the three months ended September 30, 2018, the Company recognized an $85 million pretax impairment charge in “Restructuring and asset related charges - net” in the consolidated statements of income related to certain in-process research and development (“IPR&D") assets within the Agriculture segment.
In addition, based on updated projections for the Company’s equity method investments in joint ventures in China related to the Agriculture segment, management determined the fair value of the equity method investments is below the carrying value and has no expectation the fair value will recover due to the continuing unfavorable regulatory environment, including lack of intellectual property protection, uncertain product registration timing and limited freedom to operate. As a result, management concluded the impairment is other than temporary and recorded an impairment charge of $41 million in “Restructuring and asset related charges - net” in the consolidated statements of income. See Notes 10 and 19 for additional information.
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NOTE 6 - SUPPLEMENTARY INFORMATION
The Company uses "Sundry income (expense) – net" to record 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. For the three months ended September 30, 2018, "Sundry income (expense) - net" was income of $47 million (income of $394 million for the three months ended September 30, 2017). For the nine months ended September 30, 2018, "Sundry income (expense) - net" was income of $340 million (income of $272 million for the nine months ended September 30, 2017).
The following table provides the most significant transactions recorded in "Sundry income (expense) - net" for the three and nine months ended September 30, 2018 and 2017:
Sundry Income (Expense) - Net | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Non-operating pension and other postretirement benefit plan net credit 1 | $ | 109 | $ | 34 | $ | 332 | $ | 36 | ||||
Interest income | $ | 38 | $ | 39 | $ | 144 | $ | 86 | ||||
Gain (loss) on sales of other assets and investments 2 | $ | (3 | ) | $ | 11 | $ | 66 | $ | 148 | |||
Adjustments related to Dow Silicones ownership restructure | $ | (6 | ) | $ | — | $ | (47 | ) | $ | — | ||
Foreign exchange gains (losses), net 3 | $ | (103 | ) | $ | 72 | $ | (308 | ) | $ | 16 | ||
Gain on divestiture of Dow's EAA Business 4 | $ | — | $ | 227 | $ | — | $ | 227 | ||||
Gain related to Nova patent infringement award 5 | $ | — | $ | — | $ | — | $ | 137 | ||||
Loss related to Dow's Bayer CropScience arbitration matter 5 | $ | — | $ | — | $ | — | $ | (469 | ) | |||
1. | Presented in accordance with newly implemented ASU 2017-07. See Notes 1 and 2 for additional information. |
2. | Includes a $20 million gain in the first quarter of 2018 related to Dow's sale of its equity interest in MEGlobal. |
3. | Includes a $50 million foreign exchange loss in the first quarter of 2018 related to adjustments to DuPont's foreign currency exchange contracts as a result of U.S. tax reform. |
4. | See Note 3 for additional information. |
5. | See Note 13 for additional information. |
Accounts and Notes Receivable - Trade
“Accounts and notes receivable - Trade” in the consolidated balance sheets was $14,542 million at September 30, 2018 and $11,314 million at December 31, 2017. Notes receivable, which is a component of “Accounts and notes receivable - Trade," was $1,735 million at September 30, 2018 and $309 million at December 31, 2017. The increase was primarily due to normal seasonality in the sales and cash collections cycle in the Agriculture segment. No other components of “Accounts and notes receivable - Trade” were more than 10 percent of the total of “Accounts and notes receivable - Trade."
Accrued and Other Current Liabilities
"Accrued and other current liabilities" in the consolidated balance sheets were $6,152 million at September 30, 2018 and $8,409 million at December 31, 2017. Accrued payroll, which is a component of "Accrued and other current liabilities," was $1,563 million at September 30, 2018 and $1,931 million at December 31, 2017. No other components of "Accrued and other current liabilities" were more than 5 percent of total current liabilities.
Cash, Cash Equivalents and Restricted Cash
The Company is required to set aside funds for various activities that arise in the normal course of business including, but not limited to, insurance contracts, legal matters and other agreements. These funds typically have legal restrictions associated with them and are deposited in an escrow account or held in a separately identifiable account by the Company. At September 30, 2018, the Company had restricted cash of $537 million ($577 million at December 31, 2017).
DuPont entered into a trust agreement in 2013 (as amended and restated in 2017), establishing and requiring DuPont to fund a trust (the "Trust") for cash obligations under certain non-qualified benefit and deferred compensation plans upon a change in control event as defined in the Trust agreement. Under the Trust agreement, the consummation of the Merger was a change in control event. At September 30, 2018, $506 million of the restricted cash balance was related to the Trust ($558 million at December 31, 2017).
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NOTE 7 - INCOME TAXES
On December 22, 2017, The Act was enacted. The Act reduces the U.S. federal corporate income tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of foreign subsidiaries that were previously tax deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves towards a territorial system. At September 30, 2018, the Company has not completed its accounting for the tax effects of The Act; however, as described below, the Company has 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 may be refined upon obtaining, preparing, or analyzing additional information during the measurement period and such changes could be material. During the measurement period, provisional amounts may also be adjusted for the effects, if any, of interpretative guidance issued by U.S. regulatory and standard-setting bodies.
• | 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. However, the Company is still analyzing certain aspects of The Act and refining its calculations. In the three and nine months ended September 30, 2018, benefits of $127 million and $103 million, respectively, were recorded to “Provision for income taxes on continuing operations" in the consolidated statements of income to adjust the provisional amount related to the remeasurement of the Company's deferred tax balance, resulting in a net benefit of $2,769 million since the enactment of The Act. Of the benefit recorded in the three months ended September 30, 2018, $154 million relates to Dow's and DuPont's discretionary pension contributions in 2018, which were deducted on 2017 tax returns. |
• | The Act requires a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits (“E&P”), which results in a one-time transition tax. The Company has not yet completed its calculation of the total post-1986 foreign E&P for its foreign subsidiaries as E&P will not be finalized until the fourth quarter of 2018, after the federal income tax return is filed. The Company recorded a charge of $11 million for the three and nine months ended September 30, 2018 to "Provision for income taxes on continuing operations." To date, the Company has recorded a cumulative provisional charge of $1,591 million with respect to the one-time transition tax. |
• | In the nine months ended September 30, 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 the inventory was a $54 million charge to "Provision for income taxes on continuing operations." |
• | 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 is evaluating the policy election on whether the additional liability will be recorded in the period in which it is incurred or recognized for the basis differences that would be expected to reverse in future years. |
During the three months ended September 30, 2018, it was determined that a full valuation allowance against the net deferred tax asset position of a DuPont legal entity in Brazil was required. This determination was based on a change in judgment about the realizability of the deferred tax asset due to revised cash flow projections reflecting expected declines in the sales and profitability associated with the Agriculture segment. As a result, the Company recognized a tax charge of $75 million in the three and nine months ended September 30, 2018.
During the three and nine months ended September 30, 2018, the Company recognized a tax charge of $27 million associated with the reduction of a tax benefit recorded in 2017 due to DuPont's decision to deduct its third quarter 2018 principal U.S. pension plan discretionary contribution on its 2017 consolidated U.S. tax return.
During the three and nine months ended September 30, 2018, the Company recognized a tax charge of $26 million related to an internal entity restructuring associated with the Intended Business Separations.
During 2018, the Company has and expects to continue repatriating certain funds from its foreign subsidiaries that are not needed to finance local operations or separation activities. During the three and nine months ended September 30, 2018, the Company recorded a tax charge of $61 million associated with these repatriation activities to "Provision for income taxes on continuing operations."
As a result of the Merger and subsequent change in ownership, certain net operating loss carryforwards available for Dow's consolidated German tax group were derecognized. In addition, the sale of stock between two Dow 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. As a result, in the third quarter of 2017, the Company decreased “Deferred
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income tax assets” in the consolidated balance sheets and recorded a charge to “Provision for income taxes on continuing operations” of $267 million.
Each year the Company files hundreds of tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. The ultimate resolution of such uncertainties is not expected to have a material impact on the Company's results of operations.
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NOTE 8 - EARNINGS PER SHARE CALCULATIONS
The following tables provide earnings per share calculations for the three and nine months ended September 30, 2018 and 2017:
Net Income for Earnings Per Share Calculations - Basic | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Income from continuing operations, net of tax | $ | 535 | $ | 554 | $ | 3,491 | $ | 2,828 | ||||
Net income attributable to noncontrolling interests | (38 | ) | (20 | ) | (117 | ) | (85 | ) | ||||
Net income attributable to participating securities 1 | (2 | ) | (3 | ) | (15 | ) | (13 | ) | ||||
Income from continuing operations attributable to common stockholders | $ | 495 | $ | 531 | $ | 3,359 | $ | 2,730 | ||||
Loss from discontinued operations, net of tax | — | (20 | ) | (5 | ) | (20 | ) | |||||
Net income attributable to common stockholders | $ | 495 | $ | 511 | $ | 3,354 | $ | 2,710 | ||||
Earnings Per Share Calculations - Basic | Three Months Ended | Nine Months Ended | ||||||||||
Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | |||||||||
Dollars per share | ||||||||||||
Income from continuing operations attributable to common stockholders | $ | 0.22 | $ | 0.33 | $ | 1.45 | $ | 2.05 | ||||
Loss from discontinued operations, net of tax | — | (0.01 | ) | — | (0.01 | ) | ||||||
Net income attributable to common stockholders | $ | 0.22 | $ | 0.32 | $ | 1.45 | $ | 2.04 | ||||
Net Income for Earnings Per Share Calculations - Diluted | Three Months Ended | Nine Months Ended | ||||||||||
Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | |||||||||
In millions | ||||||||||||
Income from continuing operations, net of tax | $ | 535 | $ | 554 | $ | 3,491 | $ | 2,828 | ||||
Net income attributable to noncontrolling interests | (38 | ) | (20 | ) | (117 | ) | (85 | ) | ||||
Net income attributable to participating securities 1 | (2 | ) | (3 | ) | (15 | ) | (13 | ) | ||||
Income from continuing operations attributable to common stockholders | $ | 495 | $ | 531 | $ | 3,359 | $ | 2,730 | ||||
Loss from discontinued operations, net of tax | — | (20 | ) | (5 | ) | (20 | ) | |||||
Net income attributable to common stockholders | $ | 495 | $ | 511 | $ | 3,354 | $ | 2,710 | ||||
Earnings Per Share Calculations - Diluted | Three Months Ended | Nine Months Ended | ||||||||||
Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | |||||||||
Dollars per share | ||||||||||||
Income from continuing operations attributable to common stockholders | $ | 0.21 | $ | 0.33 | $ | 1.44 | $ | 2.02 | ||||
Loss from discontinued operations, net of tax | — | (0.01 | ) | — | (0.01 | ) | ||||||
Net income attributable to common stockholders | $ | 0.21 | $ | 0.32 | $ | 1.44 | $ | 2.01 | ||||
Share Count Information | Three Months Ended | Nine Months Ended | ||||||
Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | |||||
Shares in millions | ||||||||
Weighted-average common shares - basic 2 | 2,296.2 | 1,577.8 | 2,307.3 | 1,330.7 | ||||
Plus dilutive effect of equity compensation plans 2 | 15.1 | 17.5 | 15.8 | 18.1 | ||||
Weighted-average common shares - diluted 2 | 2,311.3 | 1,595.3 | 2,323.1 | 1,348.8 | ||||
Stock options and restricted stock units excluded from EPS calculations 3 | 9.6 | 2.2 | 8.2 | 1.8 | ||||
1. | Dow restricted stock units (formerly termed deferred stock) are considered participating securities due to Dow's practice of paying dividend equivalents on unvested shares. |
2. | As a result of the Merger, the share amounts for the three and nine months ended September 30, 2017, reflect a weighted averaging effect of Dow shares outstanding prior to August 31, 2017 and DowDuPont shares outstanding on and after August 31, 2017. |
3. | 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. |
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NOTE 9 - INVENTORIES
The following table provides a breakdown of inventories:
Inventories | Sep 30, 2018 | Dec 31, 2017 | ||||
In millions | ||||||
Finished goods | $ | 9,535 | $ | 9,701 | ||
Work in process | 4,194 | 4,512 | ||||
Raw materials | 1,560 | 1,267 | ||||
Supplies | 1,198 | 1,296 | ||||
Total | $ | 16,487 | $ | 16,776 | ||
Adjustment of inventories to a LIFO basis | (46 | ) | 216 | |||
Total inventories | $ | 16,441 | $ | 16,992 | ||
NOTE 10 - GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reflects the carrying amounts of goodwill by reportable segment:
Goodwill | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Total | ||||||||||||||||||
In millions | |||||||||||||||||||||||||||
Net goodwill at Dec 31, 2017 1 | $ | 14,873 | $ | 3,689 | $ | 1,101 | $ | 5,044 | $ | 8,175 | $ | 13,180 | $ | 6,870 | $ | 6,595 | $ | 59,527 | |||||||||
Measurement period adjustments - Merger | 94 | — | — | 82 | 57 | (201 | ) | 162 | 198 | 392 | |||||||||||||||||
Measurement period adjustments - H&N Business | — | — | — | — | — | (2 | ) | — | — | (2 | ) | ||||||||||||||||
Foreign currency impact | (262 | ) | (37 | ) | (3 | ) | (11 | ) | (27 | ) | (153 | ) | (36 | ) | (26 | ) | (555 | ) | |||||||||
Net goodwill at Sep 30, 2018 | $ | 14,705 | $ | 3,652 | $ | 1,098 | $ | 5,115 | $ | 8,205 | $ | 12,824 | $ | 6,996 | $ | 6,767 | $ | 59,362 | |||||||||
1. | Updated for changes in reportable segments effective in the third quarter of 2018. Refer to Note 21 for additional information. |
Other Intangible Assets
The following table provides information regarding the Company's other intangible assets:
Other Intangible Assets | Sep 30, 2018 | Dec 31, 2017 | ||||||||||||||||
In millions | Gross Carrying Amount | Accum Amort | Net | Gross Carrying Amount | Accum Amort | Net | ||||||||||||
Intangible assets with finite lives: | ||||||||||||||||||
Developed technology | $ | 7,758 | $ | (2,371 | ) | $ | 5,387 | $ | 7,627 | $ | (1,834 | ) | $ | 5,793 | ||||
Software | 1,495 | (853 | ) | 642 | 1,420 | (780 | ) | 640 | ||||||||||
Trademarks/tradenames | 1,766 | (698 | ) | 1,068 | 1,814 | (596 | ) | 1,218 | ||||||||||
Customer-related | 14,298 | (2,693 | ) | 11,605 | 14,537 | (2,151 | ) | 12,386 | ||||||||||
Microbial cell factories | 394 | (19 | ) | 375 | 397 | (6 | ) | 391 | ||||||||||
Favorable supply contracts | 475 | (88 | ) | 387 | 495 | (17 | ) | 478 | ||||||||||
Other 1 | 619 | (193 | ) | 426 | 703 | (166 | ) | 537 | ||||||||||
Total other intangible assets with finite lives | $ | 26,805 | $ | (6,915 | ) | $ | 19,890 | $ | 26,993 | $ | (5,550 | ) | $ | 21,443 | ||||
Intangible assets with indefinite lives: | ||||||||||||||||||
IPR&D 2 | 595 | — | 595 | 710 | — | 710 | ||||||||||||
Germplasm 3 | 6,265 | — | 6,265 | 6,265 | — | 6,265 | ||||||||||||
Trademarks/tradenames | 4,758 | — | 4,758 | 4,856 | — | 4,856 | ||||||||||||
Total other intangible assets | $ | 38,423 | $ | (6,915 | ) | $ | 31,508 | $ | 38,824 | $ | (5,550 | ) | $ | 33,274 | ||||
1. | Primarily consists of sales and grower networks, marketing and manufacturing alliances and noncompetition agreements. |
2. | Refer to discussion of interim impairment test on the following page. |
3. | Germplasm is the pool of genetic source material and body of knowledge gained from the development and delivery stage of plant breeding. The Company recognized germplasm as an intangible asset upon the Merger. This intangible asset is expected to contribute to cash flows beyond the foreseeable future and there are no legal, regulatory, contractual or other factors which limit its useful life. |
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During the three months ended September 30, 2018, the Company determined that the fair value of certain IPR&D assets in the Agriculture segment had declined as a result of delays in timing of commercialization and increases to expected research and development costs. The Company performed an analysis of the fair value using the relief from royalty method (a form of the income approach) using Level 3 inputs within the fair value hierarchy. The key assumptions used in the calculation included projected revenue, royalty rates and discount rates. These key assumptions involve management judgment and estimates relating to future operating performance and economic conditions that may differ from actual cash flows. As a result, the Company recorded a pretax, non-cash intangible asset impairment charge of $85 million, which is reflected in “Restructuring and asset related charges - net,” in the consolidated statements of income for the three and nine months ended September 30, 2018, all of which related to the Agriculture segment.
The following table provides information regarding amortization expense related to other intangible assets:
Amortization Expense | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Other intangible assets, excluding software | $ | 462 | $ | 244 | $ | 1,424 | $ | 556 | ||||
Software, included in "Cost of sales" | $ | 25 | $ | 21 | $ | 73 | $ | 61 | ||||
Total estimated amortization expense for 2018 and the five succeeding fiscal years is as follows:
Estimated Amortization Expense | |||
In millions | |||
2018 | $ | 1,978 | |
2019 | $ | 1,899 | |
2020 | $ | 1,857 | |
2021 | $ | 1,815 | |
2022 | $ | 1,742 | |
2023 | $ | 1,708 | |
NOTE 11 - TRANSFERS OF FINANCIAL ASSETS
Dow 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 are comprised of cash and interests in specified assets of the conduits (the receivables sold by Dow) that entitle Dow to the residual cash flows of such specified assets in the conduits after the commercial paper has been repaid. Neither the conduits nor the investors in those entities have recourse to other assets of Dow in the event of nonpayment by the debtors.
In the fourth quarter of 2017, Dow 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 12 for additional information on the secured borrowing arrangements.
The following table summarizes the carrying value of interests held, which represents Dow'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 | Sep 30, 2018 | Dec 31, 2017 | ||||
In millions | ||||||
Carrying value of interests held | $ | — | $ | 677 | ||
Percentage of anticipated credit losses | — | % | 2.64 | % | ||
Impact to carrying value - 10% adverse change | $ | — | $ | — | ||
Impact to carrying value - 20% adverse change | $ | — | $ | 1 | ||
Credit losses, net of any recoveries, on receivables sold were insignificant for the three and nine months ended September 30, 2018 and 2017.
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Following is an analysis of certain cash flows between Dow and the conduits:
Cash Proceeds | Three Months Ended | Nine Months Ended | |||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | |||||||||
Collections reinvested in revolving receivables | $ | — | $ | 6,295 | $ | — | $ | 18,027 | |||||
Interests in conduits 1 | $ | 1 | $ | 2,157 | $ | 657 | $ | 6,989 | |||||
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. |
Following is additional information related to the sale of receivables under these facilities:
Trade Accounts Receivable Sold | Sep 30, 2018 | Dec 31, 2017 | ||||
In millions | ||||||
Delinquencies on sold receivables still outstanding | $ | — | $ | 82 | ||
Trade accounts receivable outstanding and derecognized | $ | — | $ | 612 | ||
NOTE 12 - NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
A summary of Dow and DuPont's notes payable, long-term debt and available credit facilities can be found in Note 15 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. If applicable, updates have been included in the respective section below.
2018 Activity
In the first nine months of 2018, Dow redeemed $333 million of 5.7 percent notes at maturity and an aggregate principal amount of $86 million of International Notes ("InterNotes") at maturity. In addition, approximately $75 million of long-term debt was repaid by consolidated variable interest entities. Dow 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 the redemptions, Dow recognized a pretax loss of $7 million on the early extinguishment of debt, included in “Sundry income (expense) - net” in the consolidated statements of income.
In July 2018, DuPont fully repaid $1,250 million of 6.0 percent coupon bonds at maturity.
2017 Activity
In the first nine months of 2017, Dow redeemed $436 million of 6.0 percent notes at maturity and an aggregate principal amount of $31 million of InterNotes at maturity. In addition, approximately $60 million of long-term debt was repaid by consolidated variable interest entities.
Dow Committed Credit Facilities
On May 27, 2018, Dow renewed a $200 million Bilateral Revolving Credit Facility agreement, which has a maturity date in May 2020 and provides for interest at floating rates, as defined in the agreement. On July 20, 2018, Dow renewed a $200 million Bilateral Revolving Credit Facility agreement, which has a maturity date in July 2020 and provides for interest at floating rates, as defined in the agreement. On August 4, 2018, Dow renewed a $100 million Bilateral Revolving Credit Facility agreement, which has a maturity date in August 2020 and provides for interest at floating rates, as defined in the agreement.
On October 30, 2018, Dow terminated and replaced its $5.0 billion Five Year Competitive Advance and Revolving Credit Facility Agreement under substantially similar terms and conditions, which has a maturity date in October 2023. In addition, Dow amended a $100 million Bilateral Revolving Credit Facility agreement, which has a maturity date in October 2019 and provides for interest at floating rates, as defined in the agreement.
Dow Term Loan Facility
In connection with the Dow Silicones ownership restructure on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness under a certain third party credit agreement ("Dow Term Loan Facility"). Dow subsequently guaranteed the obligations of Dow Silicones under the Dow Term Loan Facility and, as a result, the covenants and events of default applicable to the Dow Term Loan Facility are substantially similar to the covenants and events of default set forth in Dow's Five Year Competitive Advance and
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Revolving Credit Facility. In the second quarter of 2018, Dow Silicones exercised a 19-month extension option making amounts borrowed under the Dow Term Loan Facility repayable on December 30, 2019. In addition, Dow Silicones amended the Dow Term Loan Facility to include an additional 2-year extension option, at Dow Silicones' election, upon satisfaction of certain customary conditions precedent.
Secured Borrowing
In September 2018, Dow 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, Dow will use select trade accounts receivable to collateralize the credit facility with certain lenders. At September 30, 2018, the facility had not been drawn upon.
At September 30, 2018, Dow had total committed credit facilities of $11.7 billion and available credit facilities of $7.2 billion.
In October 2018, Dow 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, Dow will use select trade accounts receivable to collateralize the credit facility with certain lenders.
DuPont Term Loan and Revolving Credit Facilities
In March 2016, DuPont entered into a credit agreement that provides for a three-year, senior unsecured term loan facility in the aggregate principal amount of $4.5 billion (as may be amended, from time to time, the "Term Loan Facility") under which DuPont may make up to seven term loan borrowings and amounts repaid or prepaid are not available for subsequent borrowings. The proceeds from the borrowings under the Term Loan Facility will be used for DuPont's general corporate purposes including debt repayment, working capital and funding a portion of the Company's costs and expenses. The Term Loan Facility was amended in 2018 to extend the maturity date to June 2020, at which time all outstanding borrowings, including accrued but unpaid interest, become immediately due and payable, and to extend the date on which the commitment to lend terminates to June 2019. At September 30, 2018, DuPont had made four term loan borrowings in an aggregate principal amount of $2.0 billion and had unused commitments of $2.5 billion under the Term Loan Facility. In 2018, DuPont also amended its $3.0 billion revolving credit facility to extend the maturity date to June 2020.
DuPont Repurchase Facility
In February 2018, DuPont entered into a new committed receivable repurchase facility of up to $1,300 million (the "2018 Repurchase Facility") which expires in December 2018. Under the 2018 Repurchase Facility, DuPont may sell a portfolio of available and eligible outstanding customer notes receivables within the Agriculture segment to participating institutions and simultaneously agree to repurchase at a future date. The 2018 Repurchase Facility is considered a secured borrowing with the customer notes receivable inclusive of those that are sold and repurchased, equal to 105 percent of the outstanding amounts borrowed utilized as collateral. Borrowings under the 2018 Repurchase Facility have an interest rate of LIBOR plus 0.75 percent.
At September 30, 2018, $1,366 million of notes receivable, recorded in "Accounts and notes receivable - Trade," were pledged as collateral against outstanding borrowings under the 2018 Repurchase Facility of $1,300 million, recorded in "Notes payable" on the consolidated balance sheets.
Debt Covenants and Default Provisions
There were no material changes to the debt covenants and default provisions related to Dow and DuPont's outstanding long-term debt and primary, private credit agreements for the nine months ended September 30, 2018.
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
Asbestos-Related Matters of Union Carbide Corporation
A summary of Asbestos-Related Matters of Union Carbide Corporation can be found in Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
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
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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
Since 2003, Union Carbide has engaged Ankura Consulting Group, LLC ("Ankura"), a third party actuarial specialist, to review Union Carbide's historical asbestos-related claim and resolution activity in order to assist Union Carbide's management in estimating the asbestos-related liability. Each year, Ankura has reviewed the claim and resolution activity to determine the appropriateness of updating the most recent Ankura study.
Based on the December 2017 Ankura review, and Union Carbide's own review of the data, Union Carbide's total asbestos-related liability through the terminal year of 2049, including asbestos-related defense and processing costs, was $1,369 million at December 31, 2017, and included in “Accrued and other current liabilities” and “Asbestos-related liabilities - noncurrent” in the consolidated balance sheets.
Each quarter, Union Carbide reviews claims filed, settled and dismissed, as well as average settlement and resolution costs by disease category. Union Carbide also considers additional quantitative and qualitative factors such as the nature of pending claims, trial experience of Union Carbide and other asbestos defendants, current spending for defense and processing costs, significant appellate rulings and legislative developments, trends in the tort system, and their respective effects on expected future resolution costs. Union Carbide's management considers all these factors in conjunction with the most recent Ankura study and determines whether a change in the estimate is warranted. Based on Union Carbide's review of 2018 activity, it was determined that no adjustment to the accrual was required at September 30, 2018.
Union Carbide's asbestos related liability for pending and future claims and defense and processing costs was $1,290 million at September 30, 2018. Approximately 16 percent of the recorded liability related to pending claims and approximately 84 percent related to future claims.
Summary
The Company's management believes the amounts recorded by Union Carbide for the asbestos-related liability (including defense and processing 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 and 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.
Bayer CropScience v. Dow AgroSciences ICC Arbitration
A summary of the Bayer CropScience v. Dow AgroSciences ICC Arbitration can be found in Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
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 Dow, and other subsidiaries of Dow (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.
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,
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(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 March 1, 2017, the U.S. Court of Appeals for the Federal Circuit affirmed the arbitral award. As a result of this action, in the first quarter of 2017, DAS 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 and related to the Agriculture segment. On May 26, 2017, DAS 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.
Rocky Flats Matter
A summary of the Rocky Flats Matter can be found in Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
Dow 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") but operated by Dow and Rockwell. The plaintiffs tried their case as a public liability action under the Price Anderson Act ("PAA"). Dow and Rockwell litigated this matter in the U.S. District Court for the District of Colorado, the U.S. Tenth Circuit Court of Appeals and then filed a petition for writ of certiorari in the United States Supreme Court. 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. 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, Dow 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, Dow 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
A summary of the Dow Silicones Chapter 11 Related Matters can be found in Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
Introduction
In 1995, Dow Silicones, then a 50:50 joint venture between Dow 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.
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”). 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 September 30, 2018, 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 $122 million.
Dow Silicones' liability for breast implant and other product liability claims ("Implant Liability") was $263 million at September 30, 2018 ($263 million at December 31, 2017), which 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
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those in a prior 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 $2,081 million at September 30, 2018.
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.
On May 10, 2017, the U.S. District Court for the Eastern District of Michigan 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 Commercial Creditors to be within a range of $77 million to $260 million. No single amount within the range appeared to be a better estimate than any other amount within the range. Therefore, Dow Silicones recorded 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. At September 30, 2018, the liability related to Dow Silicones' potential obligation to its Commercial Creditors in the Chapter 11 Proceeding was $81 million and is included in "Accrued and other current liabilities" in the consolidated balance sheets ($78 million at December 31, 2017). The actual amount of interest that will be paid to these creditors is uncertain and will ultimately be resolved through continued proceedings in the District Court.
Indemnifications
In connection with the June 1, 2016 ownership restructure of Dow Silicones, Dow is indemnified by Corning for 50 percent of future losses associated with certain pre-closing liabilities, including the Implant Liability and Commercial Creditors matters described above, 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. No indemnification assets were recorded at September 30, 2018 or December 31, 2017.
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.
Separation of DuPont's Performance Chemicals Segment
On July 1, 2015, DuPont completed the separation of its Performance Chemicals segment through the spin-off of all of the issued and outstanding stock of The Chemours Company (the "Chemours Separation"). In connection with the Chemours Separation, DuPont and The Chemours Company (“Chemours”) entered into a Separation agreement (the "Chemours Separation Agreement"). Pursuant to the Chemours Separation Agreement and the amendment to the Chemours Separation Agreement, Chemours indemnifies DuPont against certain litigation, environmental, workers' compensation and other liabilities that arose prior to the Chemours Separation. The term of this indemnification is generally indefinite and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments. In connection with the recognition of liabilities related to these matters, DuPont records an indemnification asset when recovery is deemed probable. At September 30, 2018, the indemnification assets were $95 million included in "Accounts and notes receivable - Other" and $313 million included in "Noncurrent receivables" along with the corresponding liabilities of $95 million recorded in "Accrued and other current liabilities" and $313 million included in "Other noncurrent obligations" in the consolidated balance sheets.
PFOA Matters
DuPont used PFOA (collectively, perfluorooctanoic acids and its salts, including the ammonium salt), as a processing aid to manufacture some fluoropolymer resins at various sites around the world including its Washington Works' plant in West Virginia. Pursuant to the Chemours Separation Agreement discussed above, DuPont is indemnified by Chemours for the PFOA matters discussed below and has recorded a total indemnification asset of $20 million.
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U.S. Environmental Protection Agency (“EPA") and New Jersey Department of Environmental Protection (“NJDEP”)
DuPont is obligated under agreements with the EPA, including a 2009 consent decree to which Chemours was added in 2017, and has made voluntary commitments to the NJDEP. These obligations and voluntary commitments include surveying, sampling and testing drinking water in and around certain DuPont sites and offering treatment or an alternative supply of drinking water if tests indicate the presence of PFOA in drinking water at or greater than the national health advisory level established from time to time by the EPA. At September 30, 2018, DuPont had an accrual of $20 million related to these obligations and voluntary commitments. DuPont recorded an indemnification asset corresponding to the accrual balance at September 30, 2018.
Leach v. DuPont
In August 2001, a class action, captioned Leach v. DuPont, was filed in West Virginia state court alleging that residents living near the Washington Works facility had suffered, or may suffer, deleterious health effects from exposure to PFOA in drinking water. A settlement was reached in 2004 that binds approximately 80,000 residents, (the "Leach Settlement"). In addition to paying $23 million to plaintiff’s attorneys for fees and expenses and $70 million to fund a community health project, DuPont is obligated to fund up to $235 million for a medical monitoring program for eligible class members and to pay administrative costs and fees associated with the program. Since the establishment in 2012 of an escrow account to fund medical monitoring as required by the settlement agreement, approximately $2 million has been contributed to the account and approximately $1 million has been disbursed from the account. DuPont also must continue to provide water treatment designed to reduce the level of PFOA in water to six area water districts, including the Little Hocking Water Association, and private well users. While it is probable that DuPont will incur liabilities related to funding the medical monitoring program and providing water treatment, DuPont does not expect any such liabilities to be material.
Under the Leach Settlement, DuPont funded a series of health studies which were completed in October 2012 by an independent science panel of experts (the "C8 Science Panel"). The C8 Science Panel found probable links, as defined in the Leach Settlement, between exposure to PFOA and pregnancy-induced hypertension, including preeclampsia; kidney cancer; testicular cancer; thyroid disease; ulcerative colitis; and diagnosed high cholesterol.
Leach class members may pursue personal injury claims against DuPont only for the six human diseases for which the C8 Science Panel determined a probable link exists. Following the Leach Settlement, approximately 3,550 lawsuits alleging personal injury claims were filed in various federal and state courts in Ohio and West Virginia. These lawsuits were consolidated in multi-district litigation ("MDL") in the U.S. District Court for the Southern District of Ohio ("S.D. Ohio").
MDL Settlement
In the first quarter of 2017, the MDL was settled for $671 million in cash (the "MDL Settlement"), half of which was paid by Chemours and half paid by DuPont. At December 31, 2017, all payments under the settlement agreement were made by both companies. DuPont’s payment was not subject to indemnification or reimbursement by Chemours. In exchange for that payment, DuPont and Chemours are receiving releases of all claims by the settling plaintiffs. The MDL Settlement was entered into solely by way of compromise and settlement and is not in any way an admission of liability or fault by DuPont or Chemours. All of the MDL plaintiffs participated and resolved their claims within the MDL Settlement.
Post MDL Settlement PFOA Personal Injury Claims
The MDL Settlement did not resolve claims of plaintiffs who did not have claims in the MDL or whose claims are based on diseases first diagnosed after February 11, 2017. At September 30, 2018, about 35 lawsuits alleging personal injury, including kidney and testicular cancer, from exposure to PFOA in drinking water had been filed against DuPont in West Virginia and Ohio. Nearly all these cases are pending in the existing MDL in S.D. Ohio. The court has ordered the parties to identify 4 cases each and prepare them for trial to begin in October 2019. A case that has not been transferred to the MDL is scheduled for trial in state court in Wood County, West Virginia in April 2019.
In addition, three lawsuits are pending in federal court in New York on behalf of five individuals who are residents of Hoosick Falls, New York. The plaintiffs claim personal injuries, including kidney cancer, thyroid disease and ulcerative colitis, from alleged exposure to PFOA discharged into the air and water from nearby manufacturing facilities owned and operated by defendant third parties. Plaintiffs claim that PFOA used at the facilities was purchased from or manufactured by DuPont and co-defendant, 3M Company.
Water Utility and Related Actions
Actions filed by local water utilities pending in Alabama state and New Jersey federal court allege contamination from PFOA, and in the case of the Alabama action, perfluorinated chemicals and compounds, including PFOA (“PFCs”), used in co-defendant manufacturers’ operations. In February 2018, the State of Ohio filed an action in Ohio state court alleging natural resource damages
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from historical PFOA emissions from the Washington Works site. The plaintiffs in these actions seek monetary damages, remediation and other costs / damages.
While it is reasonably possible that DuPont could incur liabilities related to the post MDL Settlement PFOA personal injury claims and the water utility and related actions described above, any such liabilities are not expected to be material. Chemours is defending and indemnifying DuPont in these matters in accordance with the amendment to the Chemours Separation Agreement discussed below.
Amendment to Chemours Separation Agreement
Concurrent with the MDL Settlement, DuPont and Chemours amended the Chemours Separation Agreement to provide for a limited sharing of potential future PFOA liabilities (i.e., indemnifiable losses, as defined in the Chemours Separation Agreement) for a period of five years beginning July 6, 2017. During that five-year period, Chemours will annually pay future PFOA liabilities up to $25 million and, if such amount is exceeded, DuPont would pay any excess amount up to the next $25 million (which payment will not be subject to indemnification by Chemours), with Chemours annually bearing any further excess liabilities. After the five-year period, this limited sharing agreement will expire, and Chemours’ indemnification obligations under the Chemours Separation Agreement will continue unchanged. There have been no charges incurred by DuPont under this arrangement through September 30, 2018. Chemours has also agreed that it will not contest its liability to DuPont under the Chemours Separation Agreement for PFOA liabilities on the basis of ostensible defenses generally applicable to the indemnification provisions under the Chemours Separation Agreement, including defenses relating to punitive damages, fines or penalties or attorneys’ fees, and waives any such defenses with respect to PFOA liabilities. Chemours has, however, retained defenses as to whether any particular PFOA claim is within the scope of the indemnification provisions of the Chemours Separation Agreement.
It is possible that new lawsuits could be filed against DuPont related to PFOA that may not be within the scope of the MDL Settlement. Any such new litigation would be subject to indemnification by Chemours under the Chemours Separation Agreement, as amended.
DuPont Matters: Fayetteville Works Facility, North Carolina
Prior to the Separation of Chemours, DuPont introduced GenX as a polymerization processing aid and a replacement for PFOA at the Fayetteville Works facility. The facility is now owned and operated by Chemours which continues to manufacture and use GenX. Chemours is responding to ongoing inquiries and investigations from federal, state and local investigators, regulators and other governmental authorities as well as inquiries from the media and local community stakeholders. These inquiries and investigations involve the discharge of GenX and certain similar compounds from the Chemours’ facility at Fayetteville Works into the Cape Fear River in Bladen County, North Carolina.
In August 2017, the U.S. Attorney’s Office for the Eastern District of North Carolina served DuPont with a grand jury subpoena for testimony and the production of documents related to alleged discharges of GenX from the Fayetteville Works facility into the Cape Fear River. DuPont has been served with additional subpoenas relating to the same issue and in the second quarter of 2018, received a subpoena expanding the scope to any PFCs discharged from the Fayetteville Works facility into the Cape Fear River. It is possible that these ongoing inquiries and investigations, including the grand jury subpoena, could result in penalties or sanctions, or that additional litigation will be instituted against Chemours and/or DuPont.
At September 30, 2018, several actions are pending in federal court against Chemours and DuPont. These actions have been consolidated into a single purported class action, on behalf of putative classes of property owners and residents in areas near or who draw drinking water from the Cape Fear River. These actions relate to the alleged discharge of certain PFCs into the river from the operations and wastewater treatment at the Fayetteville Works facility and seek various relief including medical monitoring, property damages and injunctive relief. Separate actions filed by the various North Carolina water authorities including Cape Fear Public Utility Authority and Brunswick County, North Carolina, have been consolidated into one action for purposes of litigation and seek actual and punitive damages as well as injunctive relief. In addition, an action remains pending in North Carolina state court on behalf of about 100 plaintiffs who own property near the Fayetteville Works facility. The plaintiffs seek damages for nuisance allegedly caused by releases of certain PFCs from the site.
While it is reasonably possible that DuPont could incur liabilities related to the actions described above, any such liabilities are not expected to be material.
DuPont has an indemnification claim against Chemours with respect to current and future inquiries and claims, including lawsuits, related to the foregoing. At September 30, 2018, Chemours, with reservations, is defending and indemnifying DuPont in the pending civil actions.
Other Litigation Matters
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In addition to the specific matters described above, Dow and DuPont are parties to a number of other claims and lawsuits arising out of the normal course of business with respect to product liability, patent infringement, governmental regulation, 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. Dow and DuPont have active risk management programs 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.
Gain Contingency - Dow v. Nova Chemicals Corporation Patent Infringement Matter
A summary of the Dow v. Nova Chemicals Corporation Patent Infringement Matter can be found in Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
On December 9, 2010, Dow filed suit in the Federal Court in Ontario, Canada ("Federal Court") alleging that Nova Chemicals Corporation ("Nova") was infringing Dow's Canadian polyethylene patent 2,106,705. Nova counterclaimed on the grounds of invalidity and non-infringement. 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, plus pre- and post-judgment interest, for which Dow 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 Dow 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," Dow 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 September 30, 2018, Dow had $341 million ($341 million at December 31, 2017) included in "Other noncurrent obligations" 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 issues, which will be accorded deferential review on appeal.
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. At September 30, 2018, the Company had accrued obligations of $1,243 million for probable environmental remediation and restoration costs, including $194 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 two 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. At December 31, 2017, the Company had accrued obligations of $1,311 million for probable environmental remediation and restoration costs, including $219 million for the remediation of Superfund sites.
Pursuant to the Chemours Separation Agreement, DuPont is indemnified by Chemours for certain environmental matters, included in the liability of $1,243 million, that have an estimated liability of $228 million at September 30, 2018, and a potential exposure that ranges up to approximately $395 million above the current accrual. As such, DuPont has recorded an indemnification asset of $228 million corresponding to its accrual balance related to these matters at September 30, 2018, including $39 million related to Superfund sites.
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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 | Sep 30, 2018 | Dec 31, 2017 | |||||||||||||
In millions | Final Expiration | Maximum Future Payments | Recorded Liability | Final Expiration | Maximum Future Payments | Recorded Liability | |||||||||
Dow guarantees | 2023 | $ | 4,594 | $ | 35 | 2023 | $ | 4,774 | $ | 49 | |||||
Dow residual value guarantees | 2027 | 895 | 130 | 2027 | 889 | 135 | |||||||||
Total Dow guarantees | $ | 5,489 | $ | 165 | $ | 5,663 | $ | 184 | |||||||
DuPont guarantees | 2022 | $ | 241 | $ | — | 2022 | $ | 260 | $ | — | |||||
DuPont residual value guarantees | 2029 | 41 | — | 2029 | 37 | — | |||||||||
Total DuPont guarantees | $ | 282 | $ | — | $ | 297 | $ | — | |||||||
Total guarantees | $ | 5,771 | $ | 165 | $ | 5,960 | $ | 184 | |||||||
Guarantees
Dow and DuPont (the "Subsidiaries") have entered into guarantee agreements arising in the ordinary course of business from relationships with customers and nonconsolidated affiliates when the Subsidiaries undertake 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 Subsidiaries to make payments to the beneficiary of the guarantee. The majority of these 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. The Subsidiaries current expectation is that future payment or performance related to the non-performance of others is considered remote.
Dow has entered into guarantee agreements ("Guarantees") related to project financing for Sadara Chemical Company ("Sadara"), a nonconsolidated affiliate. The total of an Islamic bond and additional project financing (collectively “Total Project Financing”) obtained by Sadara is approximately $12.5 billion. Sadara had $12.1 billion of Total Project Financing outstanding at September 30, 2018 ($12.4 billion at December 31, 2017). Dow's guarantee of the Total Project Financing is in proportion to Dow's 35 percent ownership interest in Sadara, or up to approximately $4.4 billion when the project financing is fully drawn. The Guarantees will be released upon completion of construction of the Sadara complex and satisfactory fulfillment of certain other conditions, including passage of an extensive operational testing program, which is expected by the middle of 2019, and must occur no later than December 2020.
Residual Value Guarantees
The Subsidiaries provide 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.
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NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the activity related to each component of accumulated other comprehensive loss ("AOCL") for the nine months ended September 30, 2018 and 2017:
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 | |||||||||||||||
Balance at Jan 1, 2017 | $ | 43 | $ | (2,381 | ) | $ | (7,389 | ) | $ | (95 | ) | $ | (9,822 | ) | |
Other comprehensive income (loss) before reclassifications | 50 | 255 | — | (52 | ) | 253 | |||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | (93 | ) | (8 | ) | 308 | (5 | ) | 202 | |||||||
Net other comprehensive income (loss) | $ | (43 | ) | $ | 247 | $ | 308 | $ | (57 | ) | $ | 455 | |||
Balance at Sep 30, 2017 | $ | — | $ | (2,134 | ) | $ | (7,081 | ) | $ | (152 | ) | $ | (9,367 | ) | |
Balance at Jan 1, 2018 1 | $ | 17 | $ | (1,935 | ) | $ | (6,923 | ) | $ | (111 | ) | $ | (8,952 | ) | |
Other comprehensive income (loss) before reclassifications | (36 | ) | (1,232 | ) | 14 | 268 | (986 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income (loss) | 5 | (2 | ) | 370 | 56 | 429 | |||||||||
Net other comprehensive income (loss) | $ | (31 | ) | $ | (1,234 | ) | $ | 384 | $ | 324 | $ | (557 | ) | ||
Reclassification of stranded tax effects 2 | $ | (1 | ) | $ | (107 | ) | $ | (927 | ) | $ | (22 | ) | $ | (1,057 | ) |
Balance at Sep 30, 2018 | $ | (15 | ) | $ | (3,276 | ) | $ | (7,466 | ) | $ | 191 | $ | (10,566 | ) | |
1. | The beginning balance of "Unrealized gains (losses) on investments" was increased by $20 million to reflect the impact of the adoption of ASU 2016-01. See Notes 1 and 2 for additional information. |
2. | Amounts reclassified 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 three and nine months ended September 30, 2018 and 2017 were as follows:
Tax Benefit (Expense) 1 | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Unrealized gains (losses) on investments | $ | (2 | ) | $ | 28 | $ | 7 | $ | 24 | |||
Cumulative translation adjustments | (4 | ) | (23 | ) | (24 | ) | (49 | ) | ||||
Pension and other postretirement benefit plans | (34 | ) | (48 | ) | (98 | ) | (143 | ) | ||||
Derivative instruments | (48 | ) | (19 | ) | (56 | ) | 2 | |||||
Tax expense from income taxes related to other comprehensive income items | $ | (88 | ) | $ | (62 | ) | $ | (171 | ) | $ | (166 | ) |
1. | Prior period amounts were updated to conform with the current year presentation. |
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A summary of the reclassifications out of AOCL for the three and nine months ended September 30, 2018 and 2017 is provided as follows:
Reclassifications Out of Accumulated Other Comprehensive Loss | Three Months Ended | Nine Months Ended | Consolidated Statements of Income Classification | ||||||||||
Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||||
In millions | |||||||||||||
Unrealized (gains) losses on investments | $ | 4 | $ | (96 | ) | $ | 7 | $ | (143 | ) | See (1) below | ||
Tax expense (benefit) | (1 | ) | 33 | (2 | ) | 50 | See (2) below | ||||||
After tax | $ | 3 | $ | (63 | ) | $ | 5 | $ | (93 | ) | |||
Cumulative translation adjustments | $ | — | $ | (2 | ) | $ | (2 | ) | $ | (8 | ) | See (3) below | |
Pension and other postretirement benefit plans | $ | 155 | $ | 153 | $ | 465 | $ | 451 | See (4) below | ||||
Tax benefit | (33 | ) | (48 | ) | (95 | ) | (143 | ) | See (2) below | ||||
After tax | $ | 122 | $ | 105 | $ | 370 | $ | 308 | |||||
Derivative Instruments | $ | 17 | $ | 14 | $ | 69 | $ | (1 | ) | See (5) below | |||
Tax benefit | (5 | ) | (3 | ) | (13 | ) | (4 | ) | See (2) below | ||||
After tax | $ | 12 | $ | 11 | $ | 56 | $ | (5 | ) | ||||
Total reclassifications for the period, after tax | $ | 137 | $ | 51 | $ | 429 | $ | 202 | |||||
1. | "Net sales" and "Sundry income (expense) - net." |
2. | "Provision for income taxes on continuing operations." |
3. | "Sundry income (expense) - net." |
4. | 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 16 for additional information. |
5. | "Cost of sales," "Sundry income (expense) - net" and "Interest expense and amortization of debt discount." |
NOTE 15 - 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 three and nine months ended September 30, 2018 and 2017:
Noncontrolling Interests | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Balance at beginning of period | $ | 1,620 | $ | 1,168 | $ | 1,597 | $ | 1,242 | ||||
Net income attributable to noncontrolling interests | 38 | 20 | 117 | 85 | ||||||||
Distributions to noncontrolling interests 1 | (4 | ) | (7 | ) | (77 | ) | (55 | ) | ||||
Noncontrolling interests from Merger 2 | 5 | 401 | 61 | 401 | ||||||||
Deconsolidation of noncontrolling interests 3 | — | — | — | (119 | ) | |||||||
Cumulative translation adjustments | (5 | ) | 5 | (45 | ) | 33 | ||||||
Other | — | 1 | 1 | 1 | ||||||||
Balance at end of period | $ | 1,654 | $ | 1,588 | $ | 1,654 | $ | 1,588 | ||||
1. | Net of dividends paid to a joint venture, which were reclassified to "Equity in earnings of nonconsolidated affiliates" in the consolidated statements of income, totaled zero for the three months ended September 30, 2018 (zero for the three months ended September 30, 2017) and $6 million for the nine months ended September 30, 2018 ($3 million for the nine months ended September 30, 2017). |
2. | Relates to Merger and subsequent measurement period adjustments. See Note 3 for additional information. |
3. | On June 30, 2017, Dow sold its ownership interest in SKC Haas Display Films group of companies. |
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NOTE 16 - PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
A summary of Dow and DuPont's pension plans and other postretirement benefits can be found in Note 19 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Dow and DuPont did not merge their defined benefit pension and other postretirement benefit plans as a result of the Merger. The following table provides the components of net periodic benefit cost for Dow and DuPont's significant plans:
Net Periodic Benefit Cost for All Significant Plans | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Defined Benefit Pension Plans: | ||||||||||||
Service cost | $ | 163 | $ | 139 | $ | 495 | $ | 390 | ||||
Interest cost | 402 | 283 | 1,216 | 722 | ||||||||
Expected return on plan assets | (700 | ) | (490 | ) | (2,114 | ) | (1,258 | ) | ||||
Amortization of prior service credit | (6 | ) | (6 | ) | (18 | ) | (18 | ) | ||||
Amortization of net loss | 168 | 161 | 508 | 476 | ||||||||
Curtailment/settlement 1 | 2 | — | (2 | ) | (6 | ) | ||||||
Net periodic benefit cost | $ | 29 | $ | 87 | $ | 85 | $ | 306 | ||||
Other Postretirement Benefits: | ||||||||||||
Service cost | $ | 6 | $ | 4 | $ | 16 | $ | 10 | ||||
Interest cost | 31 | 20 | 96 | 47 | ||||||||
Amortization of net gain | (6 | ) | (2 | ) | (18 | ) | (5 | ) | ||||
Net periodic benefit cost | $ | 31 | $ | 22 | $ | 94 | $ | 52 | ||||
1. The 2018 impact relates to the curtailment and settlement of pension plans in the U.S. and Australia. The 2017 impact relates to the curtailment and settlement of a pension plan in Korea.
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, was retrospectively reclassified to "Sundry income (expense) - net" in the consolidated statements of income. See Notes 1 and 2 for additional information.
Dow and DuPont's funding policies are to contribute to defined benefit pension plans in the U.S. and a number of other countries based on pension funding laws and local country requirements. Contributions exceeding funding requirements may be and have been made at Dow and DuPont's discretion.
In the third quarter of 2018, Dow made a $1,100 million discretionary contribution to its principal U.S. pension plan and increased its total 2018 estimated pension contributions to approximately $1,600 million, of which $1,538 million had been contributed through September 30, 2018.
In the third quarter of 2018, DuPont made a $1,100 million discretionary contribution to its principal U.S. pension plan and increased its total 2018 estimated pension contributions to approximately $1,300 million, of which $1,266 million had been contributed through September 30, 2018.
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NOTE 17 - STOCK-BASED COMPENSATION
A summary of Dow and DuPont's stock-based compensation plans can be found in Note 20 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Dow and DuPont did not merge their equity incentive 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.
Dow Stock Incentive Plan
Dow grants stock-based compensation to employees and non-employee directors under The Dow Chemical Company Amended and Restated 2012 Stock Incentive Plan (the "2012 Plan"). Effective with the Merger, on August 31, 2017, all outstanding Dow stock options and deferred stock awards were converted into stock options and deferred stock awards with respect to DowDuPont Common Stock. The stock options and deferred stock awards have the same terms and conditions under the applicable plans and award agreements prior to the Merger. Most of Dow's stock-based compensation awards are granted in the first quarter of each year. There was minimal grant activity following the first quarter of 2018.
In the first quarter of 2018, Dow granted the following stock-based compensation awards to employees under the 2012 Plan:
• | 6.3 million stock options with a weighted-average exercise price of $71.85 per share and a weighted-average fair value of $15.46 per share; and |
• | 1.9 million restricted stock units ("RSUs") (formerly termed deferred stock) with a weighted-average fair value of $71.83 per share. |
Effective with the first quarter 2018 grant, Dow 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 DuPont and better align with industry practice.
DuPont Equity Incentive Plan
DuPont grants stock-based compensation to certain employees, directors, and consultants through grants of stock options, time-vested RSUs, and performance-based restricted stock units (“PSUs”) under the DuPont Equity Incentive Plan ("DuPont EIP"). The previous DuPont equity awards were converted into the right to receive 1.2820 shares of DowDuPont Common Stock. The awards have the same terms and conditions as were applicable to such equity awards immediately prior to the Merger closing date. Most of these awards have been granted annually in the first quarter of each calendar year. There was minimal grant activity following the first quarter of 2018.
In the first quarter of 2018, DuPont granted the following stock-based compensation awards under the DuPont EIP:
• | 3.3 million stock options with a weighted-average exercise price of $71.85 per share and a weighted-average fair value of $15.46 per share; and |
• | 0.8 million RSUs with a weighted-average fair value of $71.75 per share. |
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NOTE 18 - FINANCIAL INSTRUMENTS
A summary of the Company's financial instruments, risk management policies, derivative instruments and hedging activities can be found in Note 21 of the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. If applicable, updates have been included in the respective section below.
The following table summarizes the fair value of financial instruments at September 30, 2018 and December 31, 2017:
Fair Value of Financial Instruments | Sep 30, 2018 | Dec 31, 2017 | ||||||||||||||||||||||
In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value | ||||||||||||||||
Cash equivalents 1 | $ | 2,913 | $ | — | $ | — | $ | 2,913 | $ | 6,927 | $ | — | $ | — | $ | 6,927 | ||||||||
Restricted cash equivalents 1, 2 | $ | 506 | $ | — | $ | — | $ | 506 | $ | 558 | $ | — | $ | — | $ | 558 | ||||||||
Marketable securities: | ||||||||||||||||||||||||
Available-for-sale 3 | $ | 105 | $ | 1 | $ | — | $ | 106 | $ | 4 | $ | — | $ | — | $ | 4 | ||||||||
Held-to-maturity 1, 4 | 264 | — | — | 264 | 952 | — | — | 952 | ||||||||||||||||
Total marketable securities | $ | 369 | $ | 1 | $ | — | $ | 370 | $ | 956 | $ | — | $ | — | $ | 956 | ||||||||
Other investments: | ||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
Government debt 5 | $ | 704 | $ | 8 | $ | (24 | ) | $ | 688 | $ | 637 | $ | 13 | $ | (11 | ) | $ | 639 | ||||||
Corporate bonds | 1,008 | 30 | (27 | ) | 1,011 | 704 | 32 | (3 | ) | 733 | ||||||||||||||
Total debt securities | $ | 1,712 | $ | 38 | $ | (51 | ) | $ | 1,699 | $ | 1,341 | $ | 45 | $ | (14 | ) | $ | 1,372 | ||||||
Equity securities 6 | $ | 167 | $ | 22 | $ | (14 | ) | $ | 175 | $ | 164 | $ | 2 | $ | (26 | ) | $ | 140 | ||||||
Total other investments | $ | 1,879 | $ | 60 | $ | (65 | ) | $ | 1,874 | $ | 1,505 | $ | 47 | $ | (40 | ) | $ | 1,512 | ||||||
Total cash and restricted cash equivalents, marketable securities and other investments | $ | 5,667 | $ | 61 | $ | (65 | ) | $ | 5,663 | $ | 9,946 | $ | 47 | $ | (40 | ) | $ | 9,953 | ||||||
Long-term debt including debt due within one year 7 | $ | (30,411 | ) | $ | 502 | $ | (1,254 | ) | $ | (31,163 | ) | $ | (32,123 | ) | $ | 69 | $ | (2,121 | ) | $ | (34,175 | ) | ||
Derivatives relating to: | ||||||||||||||||||||||||
Interest rates | $ | — | $ | 41 | $ | (2 | ) | $ | 39 | $ | — | $ | — | $ | (4 | ) | $ | (4 | ) | |||||
Foreign currency | — | 207 | (68 | ) | 139 | — | 31 | (159 | ) | (128 | ) | |||||||||||||
Commodities 8 | — | 275 | (193 | ) | 82 | — | 130 | (256 | ) | (126 | ) | |||||||||||||
Total derivatives | $ | — | $ | 523 | $ | (263 | ) | $ | 260 | $ | — | $ | 161 | $ | (419 | ) | $ | (258 | ) | |||||
1. | Prior period amounts were updated to conform with the current year presentation. |
2. | Classified as "Other current assets" in the consolidated balance sheets. |
3. | Available-for-sale securities with maturities of less than one year at the time of purchase. |
4. | Held-to-maturity securities with maturities of more than three months to less than one year at the time of purchase. |
5. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations. |
6. | Equity securities with a readily determinable fair value. Presented in accordance with ASU 2016-01. See Notes 1 and 2 for additional information. |
7. | Cost includes fair value adjustments of $394 million at September 30, 2018 and $492 million at December 31, 2017, related to the accounting for the Merger. Cost also includes fair value hedge adjustments of $18 million at September 30, 2018 and $19 million at December 31, 2017 on $2,990 million of debt. |
8. | Presented net of cash collateral. |
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 nine months ended September 30, 2018 and 2017:
Investing Results 1 | Nine Months Ended | |||||
In millions | Sep 30, 2018 | Sep 30, 2017 | ||||
Proceeds from sales of available-for-sale securities | $ | 880 | $ | 181 | ||
Gross realized gains | $ | 19 | $ | 4 | ||
Gross realized losses | $ | (26 | ) | $ | — | |
1. Prior year amounts were updated to conform with the current year presentation as a result of the adoption of ASU 2016-01.
For the nine months ended September 30, 2018, $1,930 million of marketable securities matured.
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Equity Securities
The Company's investments in equity securities with a readily determinable fair value totaled $175 million at September 30, 2018 ($140 million at December 31, 2017). The net unrealized gain recognized in earnings on equity securities totaled $2 million for the three months ended September 30, 2018, and an unrealized gain of $9 million for the nine months ended September 30, 2018. The aggregate carrying value of the Company’s investments in equity securities where fair value is not readily determinable totaled $101 million at September 30, 2018, reflecting the cost of the investments. There were no adjustments to the cost basis of these investments for impairment or observable price changes for the three and nine months ended September 30, 2018.
Derivatives
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.
The Company had $2,437 million notional United States dollar equivalent open interest rate derivatives designated as cash flow hedges at September 30, 2018, with a net gain included in AOCL of $30 million after tax (net loss of $3 million after tax at December 31, 2017). These contracts have maturity dates that extend to 2022. In the third quarter of 2018, the Company terminated certain interest rate contracts and realized a net gain in AOCL of $33 million after tax.
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The following tables provide the fair value and balance sheet classification of derivative instruments at September 30, 2018 and December 31, 2017:
Fair Value of Derivative Instruments | Sep 30, 2018 | |||||||||
In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheet | ||||||
Asset derivatives: | ||||||||||
Derivatives designated as hedging instruments: | ||||||||||
Interest rate swaps | Deferred charges and other assets | $ | 43 | $ | (2 | ) | $ | 41 | ||
Foreign currency contracts | Other current assets | 168 | (38 | ) | 130 | |||||
Commodity contracts | Other current assets | 116 | (8 | ) | 108 | |||||
Commodity contracts | Deferred charges and other assets | 150 | (2 | ) | 148 | |||||
Total | $ | 477 | $ | (50 | ) | $ | 427 | |||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign currency contracts | Other current assets | $ | 192 | $ | (115 | ) | $ | 77 | ||
Commodity contracts | Other current assets | 10 | (1 | ) | 9 | |||||
Commodity contracts | Deferred charges and other assets | 11 | (1 | ) | 10 | |||||
Total | $ | 213 | $ | (117 | ) | $ | 96 | |||
Total asset derivatives | $ | 690 | $ | (167 | ) | $ | 523 | |||
Liability derivatives: | ||||||||||
Derivatives designated as hedging instruments: | ||||||||||
Interest rate swaps | Other noncurrent obligations | $ | 4 | $ | (2 | ) | $ | 2 | ||
Foreign currency contracts | Accrued and other current liabilities | 43 | (38 | ) | 5 | |||||
Commodity contracts | Accrued and other current liabilities | 98 | (8 | ) | 90 | |||||
Commodity contracts | Other noncurrent obligations | 91 | (7 | ) | 84 | |||||
Total | $ | 236 | $ | (55 | ) | $ | 181 | |||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign currency contracts | Accrued and other current liabilities | $ | 157 | $ | (94 | ) | $ | 63 | ||
Commodity contracts | Accrued and other current liabilities | 8 | (1 | ) | 7 | |||||
Commodity contracts | Other noncurrent obligations | 13 | (1 | ) | 12 | |||||
Total | $ | 178 | $ | (96 | ) | $ | 82 | |||
Total liability derivatives | $ | 414 | $ | (151 | ) | $ | 263 | |||
1. | Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
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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 Sheet | ||||||
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 | $ | 121 | $ | (95 | ) | $ | 26 | ||
Commodity contracts | Other current assets | 50 | (5 | ) | 45 | |||||
Commodity contracts | Deferred charges and other assets | 7 | (3 | ) | 4 | |||||
Total | $ | 178 | $ | (103 | ) | $ | 75 | |||
Total asset derivatives | $ | 319 | $ | (158 | ) | $ | 161 | |||
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 | $ | 186 | $ | (90 | ) | $ | 96 | ||
Commodity contracts | Accrued and other current liabilities | 45 | (6 | ) | 39 | |||||
Commodity contracts | Other noncurrent obligations | 8 | (3 | ) | 5 | |||||
Total | $ | 239 | $ | (99 | ) | $ | 140 | |||
Total liability derivatives | $ | 591 | $ | (172 | ) | $ | 419 | |||
1. | Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
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 liabilities. The Company posted cash collateral of $5 million at September 30, 2018 ($26 million at December 31, 2017). Counterparties posted cash collateral of $24 million with the Company at September 30, 2018 (zero at December 31, 2017).
Income Statement Effect of Derivative Instruments
Foreign currency derivatives not designated as hedges are used to offset foreign exchange gains or losses resulting from the underlying exposures of foreign currency denominated assets and liabilities. The amount charged on a pretax basis related to foreign currency derivatives not designated as a hedge, which was included in “Sundry income (expense) - net” in the consolidated statements of income, was a gain of $57 million for the three months ended September 30, 2018 ($5 million loss for the three months ended September 30, 2017) and a gain of $118 million for the nine months ended September 30, 2018 ($165 million loss for the nine months ended September 30, 2017). The income statement effects of other derivatives were immaterial.
Reclassification from AOCL
The net after-tax amounts to be reclassified from AOCL to income within the next 12 months are a $1 million loss for interest rate contracts, an $18 million gain for commodity contracts and a $9 million gain for foreign currency contracts.
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NOTE 19 - FAIR VALUE MEASUREMENTS
A summary of the Company's recurring and nonrecurring fair value measurements can be found in Note 22 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. If applicable, updates have been included in the respective section below.
Fair Value Measurements on a Recurring Basis
The following tables summarize 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 at Sep 30, 2018 | Quoted Prices in Active Markets for Identical Items (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||
In millions | ||||||||||||
Assets at fair value: | ||||||||||||
Cash equivalents and restricted cash equivalents 1 | $ | — | $ | 3,419 | $ | — | $ | 3,419 | ||||
Marketable securities 2 | — | 370 | — | 370 | ||||||||
Equity securities 3 | 21 | 154 | — | 175 | ||||||||
Debt securities: 3 | ||||||||||||
Government debt 4 | — | 688 | — | 688 | ||||||||
Corporate bonds | — | 1,011 | — | 1,011 | ||||||||
Derivatives relating to: 5 | ||||||||||||
Interest rates | — | 43 | — | 43 | ||||||||
Foreign currency | — | 360 | — | 360 | ||||||||
Commodities | 75 | 212 | — | 287 | ||||||||
Total assets at fair value | $ | 96 | $ | 6,257 | $ | — | $ | 6,353 | ||||
Liabilities at fair value: | ||||||||||||
Long-term debt including debt due within one year 6 | $ | — | $ | 31,163 | $ | — | $ | 31,163 | ||||
Derivatives relating to: 5 | ||||||||||||
Interest rates | — | 4 | — | 4 | ||||||||
Foreign currency | — | 200 | — | 200 | ||||||||
Commodities | 30 | 180 | — | 210 | ||||||||
Total liabilities at fair value | $ | 30 | $ | 31,547 | $ | — | $ | 31,577 | ||||
1. | Treasury bills, time deposits, and money market funds included in "Cash and cash equivalents" and money market funds included in "Other current assets" in the consolidated balance sheets and held at amortized cost, which approximates fair value. |
2. | Primarily time deposits with maturities of greater than three months at time of acquisition. |
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 18 for the classification of derivatives in the consolidated balance sheets. |
6. | See Note 18 for information on fair value measurements of long-term debt. |
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Basis of Fair Value Measurements on a Recurring Basis at Dec 31, 2017 | Quoted Prices in Active Markets for Identical Items (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||
In millions | ||||||||||||
Assets at fair value: | ||||||||||||
Cash equivalents and restricted cash equivalents 1 | $ | — | $ | 7,485 | $ | — | $ | 7,485 | ||||
Marketable securities 2 | — | 956 | — | 956 | ||||||||
Interests in trade accounts receivable conduits 3 | — | — | 677 | 677 | ||||||||
Equity securities 4 | 88 | 52 | — | 140 | ||||||||
Debt securities: 4 | ||||||||||||
Government debt 5 | — | 639 | — | 639 | ||||||||
Corporate bonds | — | 733 | — | 733 | ||||||||
Derivatives relating to: 6 | ||||||||||||
Foreign currency | — | 172 | — | 172 | ||||||||
Commodities | 47 | 100 | — | 147 | ||||||||
Total assets at fair value | $ | 135 | $ | 10,137 | $ | 677 | $ | 10,949 | ||||
Liabilities at fair value: | ||||||||||||
Long-term debt including debt due within one year 7 | $ | — | $ | 34,175 | $ | — | $ | 34,175 | ||||
Derivatives relating to: 6 | ||||||||||||
Interest rates | — | 4 | — | 4 | ||||||||
Foreign currency | — | 295 | — | 295 | ||||||||
Commodities | 31 | 261 | — | 292 | ||||||||
Total liabilities at fair value | $ | 31 | $ | 34,735 | $ | — | $ | 34,766 | ||||
1. | Treasury bills, time deposits, and money market funds included in "Cash and cash equivalents" and money market funds included in "Other current assets" in the consolidated balance sheets and held at amortized cost, which approximates fair value. |
2. | Primarily time deposits with maturities of greater than three months at time of acquisition. |
3. | Included in "Accounts and notes receivable - Other" in the consolidated balance sheets. See Note 11 for additional information on transfers of financial assets. |
4. | 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. |
5. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations. |
6. | See Note 18 for the classification of derivatives in the consolidated balance sheets. |
7. | See Note 18 for information on fair value measurements of long-term debt. |
The following table summarizes the changes in fair value measurements of interests held in trade receivable conduits using Level 3 inputs for the three and nine months ended September 30, 2018 and 2017:
Fair Value Measurements Using Level 3 Inputs for Interests Held in Trade Receivable Conduits 1 | Three Months Ended | Nine Months Ended | ||||||||||
Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | |||||||||
In millions | ||||||||||||
Balance at beginning of period | $ | 24 | $ | 1,684 | $ | 677 | $ | 1,237 | ||||
(Loss) gain included in earnings 2 | — | (15 | ) | 3 | (17 | ) | ||||||
Purchases 3 | — | 2,327 | — | 7,608 | ||||||||
Settlements 3, 4 | (24 | ) | (2,157 | ) | (680 | ) | (6,989 | ) | ||||
Balance at end of period | $ | — | $ | 1,839 | $ | — | $ | 1,839 | ||||
1. | Included in "Accounts and notes receivable - Other" in the consolidated balance sheets. |
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 three and nine months ended September 30, 2018. |
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Fair Value Measurements on a Nonrecurring Basis
As part of the Synergy Program, the Company has or will shut down a number of manufacturing, R&D and corporate facilities around the world. In the first nine months of 2018, manufacturing, R&D and other non-manufacturing facilities and the write-off of inventory associated with this plan were written down to zero. The impairment charges related to the Synergy Program, totaling $133 million, were included in "Restructuring and asset related charges - net" in the consolidated statements of income. See Note 5 for additional information on the Company's restructuring activities.
As discussed in Notes 5 and 10, the Company recorded impairments, classified as Level 3 measurements, on certain indefinite-lived intangible assets and equity method investments in joint ventures in the three and nine months ended September 30, 2018. The fair value of the indefinite-lived intangible assets that were tested for impairment was $450 million, after an impairment loss of $85 million. The fair value of the equity method investment in joint ventures was $51 million, after an impairment loss of $41 million. These impairment charges were recorded in "Restructuring and asset related charges - net" in the consolidated statements of income.
NOTE 20 - VARIABLE INTEREST ENTITIES
A summary of Dow and DuPont's variable interest entities ("VIEs") can be found in Note 23 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. DuPont did not hold a variable interest in any joint ventures at September 30, 2018, for which it is the primary beneficiary. In addition, the maximum exposure to loss related to the nonconsolidated VIEs for which DuPont did hold a variable interest at September 30, 2018, is not considered material to the consolidated financial statements. The following discussion addresses variable interests held by Dow.
Assets and Liabilities of Consolidated VIEs
The Company's consolidated financial statements include the assets, liabilities and results of operations of VIEs for which Dow 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 September 30, 2018 and December 31, 2017:
Assets and Liabilities of Consolidated VIEs | Sep 30, 2018 | Dec 31, 2017 | ||||
In millions | ||||||
Cash and cash equivalents | $ | 133 | $ | 107 | ||
Other current assets | 136 | 131 | ||||
Net property | 769 | 907 | ||||
Other noncurrent assets | 44 | 50 | ||||
Total assets 1 | $ | 1,082 | $ | 1,195 | ||
Current liabilities | $ | 278 | $ | 303 | ||
Long-term debt | 148 | 249 | ||||
Other noncurrent obligations | 33 | 41 | ||||
Total liabilities 2 | $ | 459 | $ | 593 | ||
1. | All assets were restricted at September 30, 2018 and December 31, 2017. |
2. | All liabilities were nonrecourse at September 30, 2018 and December 31, 2017. |
In addition, Dow 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 less than $1 million (zero restricted) at September 30, 2018 ($671 million, zero restricted, at December 31, 2017), and current liabilities of zero (zero nonrecourse) at September 30, 2018 (less than $1 million, zero nonrecourse, at December 31, 2017).
Amounts presented in the consolidated balance sheets and the preceding table as restricted assets or nonrecourse obligations relating to consolidated VIEs at September 30, 2018 and December 31, 2017, are adjusted for intercompany eliminations and parental guarantees.
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Nonconsolidated VIEs
The following table summarizes the carrying amounts of assets and liabilities included in the consolidated balance sheets at September 30, 2018 and December 31, 2017, related to variable interests in joint ventures or entities for which Dow is not the primary beneficiary. The Company's maximum exposure to loss is the same as the carrying amounts, unless otherwise noted below.
Carrying Amounts of Assets and Liabilities Related to Nonconsolidated VIEs | Sep 30, 2018 | Dec 31, 2017 | |||||
In millions | Description of asset or liability | ||||||
Hemlock Semiconductor L.L.C. | Equity method investment 1 | $ | (699 | ) | $ | (752 | ) |
Silicon joint ventures | Equity method investments 2 | $ | 99 | $ | 103 | ||
AgroFresh Solutions, Inc. | Equity method investment 2 | $ | 48 | $ | 51 | ||
Other receivable 3 | $ | — | $ | 4 | |||
1. | Classified as "Other noncurrent obligations" in the consolidated balance sheets. The Company's maximum exposure to loss was zero at September 30, 2018 (zero at December 31, 2017). |
2. | Classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets. |
3. | Classified as "Accounts and notes receivable - Other" in the consolidated balance sheets. |
NOTE 21 - SEGMENTS AND GEOGRAPHIC REGIONS
Beginning in the third quarter of 2018, DowDuPont realigned the following joint ventures, global businesses and product lines 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 global business in the Performance Materials & Coatings reportable segment to the Electronics & Imaging reportable segment. |
• | Realignment of certain cellulosics product lines from the Nutrition & Health operating segment in the Nutrition & Biosciences reportable segment to the Consumer Solutions global business in the Performance Materials & Coatings reportable segment. |
• | Certain roofing products were realigned from the Building Solutions product line in the Safety & Construction reportable segment to Corporate. |
• | Realignment of the previously divested Epoxy and Chlorinated Organics global businesses from the Industrial Intermediates & Infrastructure reportable segment to Corporate. |
• | In addition, the following realignments within the Industrial Intermediates & Infrastructure reportable segment were made, which had no effect on the segment results: |
– | The Construction Chemicals global business was combined with the Polyurethanes & CAV global business. |
– | Certain product lines associated with the oil and gas industry were realigned from the Industrial Solutions global business to the Polyurethanes & CAV global business. |
The reporting changes have been retrospectively reflected in the segment results for all periods presented.
The Company's measure of profit/loss for segment reporting purposes is Operating EBITDA (for the three and nine months ended September 30, 2018) and pro forma Operating EBITDA (for the three and nine months ended September 30, 2017) as this is the manner in which the Company's chief operating decision maker ("CODM") assesses performance and allocates resources. The Company defines Operating EBITDA as earnings (i.e., “Income from continuing operations before income taxes") before interest, depreciation, amortization and foreign exchange gains (losses), excluding the impact of significant items. Pro forma Operating EBITDA is defined as pro forma earnings (i.e., pro forma “Income from continuing operations before income taxes") before interest, depreciation, amortization and foreign exchange gains (losses), excluding the impact of adjusted significant items. Reconciliations of these measures are provided on the following pages. The Company also presents pro forma net sales for the three and nine months ended September 30, 2017, as it is included in management's measure of segment performance and is regularly reviewed by the CODM.
Pro forma adjustments used in the calculation of pro forma net sales and pro forma Operating EBITDA were determined in accordance with Article 11 of Regulation S-X. Pro forma financial information is based on the historical consolidated financial statements of Dow and DuPont, adjusted to give effect to the Merger as if it had been consummated on January 1, 2016. Pro forma adjustments have been made for (1) the preliminary purchase accounting impact, (2) accounting policy alignment, (3) the elimination of the effect of events that are directly attributable to the Merger Agreement (e.g., one-time transaction costs), (4) the elimination of the impact of transactions between Dow and DuPont, and (5) the elimination of the effect of consummated divestitures required as a condition of regulatory approval for the Merger. Events that are not expected to have a continuing impact on the combined
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results (e.g., inventory step-up costs) are excluded from the pro forma adjustments. The fair value estimates reflected in the unaudited pro forma information are based on those used in the Current Report on Form 8-K/A filed with the SEC on October 26, 2017, and subsequent measurement period adjustments are not reflected.
Segment Information | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Corp. | Total | ||||||||||||||||||||
In millions | ||||||||||||||||||||||||||||||
Three months ended Sep 30, 2018 | ||||||||||||||||||||||||||||||
Net sales | $ | 1,946 | $ | 2,476 | $ | 3,821 | $ | 6,119 | $ | 1,195 | $ | 1,678 | $ | 1,408 | $ | 1,402 | $ | 78 | $ | 20,123 | ||||||||||
Operating EBITDA 1 | $ | (104 | ) | $ | 628 | $ | 654 | $ | 1,191 | $ | 412 | $ | 414 | $ | 430 | $ | 389 | $ | (185 | ) | $ | 3,829 | ||||||||
Equity in earnings (losses) of nonconsolidated affiliates | $ | (3 | ) | $ | 3 | $ | 54 | $ | 83 | $ | 35 | $ | 4 | $ | — | $ | 6 | $ | (4 | ) | $ | 178 | ||||||||
Three months ended Sep 30, 2017 | ||||||||||||||||||||||||||||||
Net sales | $ | 1,532 | $ | 2,234 | $ | 3,228 | $ | 5,260 | $ | 832 | $ | 682 | $ | 637 | $ | 792 | $ | 157 | $ | 15,354 | ||||||||||
Pro forma net sales | $ | 1,911 | $ | 2,227 | $ | 3,226 | $ | 5,490 | $ | 1,197 | $ | 1,466 | $ | 1,299 | $ | 1,310 | $ | 159 | $ | 18,285 | ||||||||||
Pro forma Operating EBITDA 2 | $ | (239 | ) | $ | 460 | $ | 676 | $ | 1,147 | $ | 411 | $ | 312 | $ | 325 | $ | 353 | $ | (224 | ) | $ | 3,221 | ||||||||
Equity in earnings (losses) of nonconsolidated affiliates | $ | (5 | ) | $ | 10 | $ | 41 | $ | 64 | $ | 29 | $ | 3 | $ | 1 | $ | (1 | ) | $ | 10 | $ | 152 | ||||||||
Nine months ended Sep 30, 2018 | ||||||||||||||||||||||||||||||
Net sales | $ | 11,484 | $ | 7,379 | $ | 11,421 | $ | 18,228 | $ | 3,551 | $ | 5,173 | $ | 4,301 | $ | 4,112 | $ | 229 | $ | 65,878 | ||||||||||
Operating EBITDA 1 | $ | 2,472 | $ | 1,749 | $ | 1,990 | $ | 3,822 | $ | 1,217 | $ | 1,265 | $ | 1,313 | $ | 1,084 | $ | (536 | ) | $ | 14,376 | |||||||||
Equity in earnings (losses) of nonconsolidated affiliates | $ | (1 | ) | $ | 4 | $ | 299 | $ | 250 | $ | 124 | $ | 12 | $ | 4 | $ | 19 | $ | (26 | ) | $ | 685 | ||||||||
Nine months ended Sep 30, 2017 | ||||||||||||||||||||||||||||||
Net sales | $ | 4,729 | $ | 6,599 | $ | 9,094 | $ | 15,364 | $ | 2,164 | $ | 1,203 | $ | 1,225 | $ | 1,716 | $ | 324 | $ | 42,418 | ||||||||||
Pro forma net sales | $ | 11,555 | $ | 6,558 | $ | 9,086 | $ | 16,300 | $ | 3,582 | $ | 4,371 | $ | 3,834 | $ | 3,852 | $ | 331 | $ | 59,469 | ||||||||||
Pro forma Operating EBITDA 2 | $ | 2,387 | $ | 1,374 | $ | 1,605 | $ | 3,424 | $ | 1,259 | $ | 944 | $ | 954 | $ | 908 | $ | (627 | ) | $ | 12,228 | |||||||||
Equity in earnings (losses) of nonconsolidated affiliates | $ | (1 | ) | $ | 32 | $ | 101 | $ | 130 | $ | 139 | $ | 9 | $ | 1 | $ | (1 | ) | $ | (8 | ) | $ | 402 | |||||||
1. | A reconciliation of "Income from continuing operations, net of tax" to Operating EBITDA is provided below. |
2. | A reconciliation of "Income from continuing operations, net of tax" to pro forma Operating EBITDA is provided on the following page. |
Reconciliation of "Income from continuing operations, net of tax" to Operating EBITDA for the Three and Nine Months Ended Sep 30, 2018 | Three Months Ended | Nine Months Ended | ||||
In millions | Sep 30, 2018 | Sep 30, 2018 | ||||
Income from continuing operations, net of tax | $ | 535 | $ | 3,491 | ||
+ Provision for income taxes on continuing operations | 320 | 1,274 | ||||
Income from continuing operations before income taxes | $ | 855 | $ | 4,765 | ||
+ Depreciation and amortization | 1,470 | 4,450 | ||||
- Interest income 1 | 38 | 144 | ||||
+ Interest expense and amortization of debt discount | 362 | 1,072 | ||||
- Foreign exchange gains (losses), net 1, 2 | (103 | ) | (258 | ) | ||
- Significant items | (1,077 | ) | (3,975 | ) | ||
Operating EBITDA | $ | 3,829 | $ | 14,376 | ||
1. | Included in "Sundry income (expense) - net." |
2. | Excludes a $50 million pretax foreign exchange loss significant item related to adjustments to DuPont's foreign currency exchange contracts as a result of U.S. tax reform during the nine months ended September 30, 2018. |
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Reconciliation of "Income from continuing operations, net of tax" to Pro Forma Operating EBITDA for the Three and Nine Months Ended Sep 30, 2017 | Three Months Ended | Nine Months Ended | ||||
In millions | Sep 30, 2017 | Sep 30, 2017 | ||||
Income from continuing operations, net of tax | $ | 554 | $ | 2,828 | ||
+ Provision for income taxes on continuing operations | 571 | 1,239 | ||||
Income from continuing operations before income taxes | $ | 1,125 | $ | 4,067 | ||
+ Depreciation and amortization | 1,001 | 2,518 | ||||
- Interest income 1 | 39 | 86 | ||||
+ Interest expense and amortization of debt discount | 283 | 728 | ||||
- Foreign exchange gains (losses), net 1 | 72 | 16 | ||||
+ Pro forma adjustments | 134 | 3,179 | ||||
- Adjusted significant items 2 | (789 | ) | (1,838 | ) | ||
Pro forma Operating EBITDA | $ | 3,221 | $ | 12,228 | ||
1. | Included in "Sundry income (expense) - net." |
2. | Adjusted significant items, excluding the impact of one-time transaction costs directly attributable to the Merger and reflected in the pro forma adjustments. |
The significant items for the three and nine months ended September 30, 2018, are presented on an as reported basis. The adjusted significant items for the three and nine months ended September 30, 2017, are presented on a pro forma basis. The following tables summarize the pretax impact of significant items and adjusted significant items by segment that are excluded from Operating EBITDA and pro forma Operating EBITDA above:
Significant Items by Segment for the Three Months Ended Sep 30, 2018 | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Corp. | Total | ||||||||||||||||||||
In millions | ||||||||||||||||||||||||||||||
Loss on change in joint venture ownership 1 | $ | — | $ | — | $ | — | $ | — | $ | (6 | ) | $ | — | $ | — | $ | — | $ | — | $ | (6 | ) | ||||||||
Integration and separation costs 2 | — | — | — | — | — | — | — | — | (666 | ) | (666 | ) | ||||||||||||||||||
Inventory step-up amortization 3 | (109 | ) | — | — | — | — | — | — | — | — | (109 | ) | ||||||||||||||||||
Restructuring and asset related charges - net 4 | (220 | ) | — | — | (7 | ) | — | — | — | (2 | ) | (61 | ) | (290 | ) | |||||||||||||||
Loss on early extinguishment of debt 5 | — | — | — | — | — | — | — | — | (6 | ) | (6 | ) | ||||||||||||||||||
Total | $ | (329 | ) | $ | — | $ | — | $ | (7 | ) | $ | (6 | ) | $ | — | $ | — | $ | (2 | ) | $ | (733 | ) | $ | (1,077 | ) | ||||
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 Intended Business Separation activities. |
3. | Includes the fair value step-up of DuPont's inventories as a result of the Merger. See Note 3 for additional information. |
4. | Includes Board approved restructuring plans and asset related charges, which include other asset impairments. See Note 5 for additional information. |
5. | See Note 12 for additional information. |
Adjusted Significant Items by Segment for the Three Months Ended Sep 30, 2017 | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Corp. | Total | ||||||||||||||||||||
In millions | ||||||||||||||||||||||||||||||
Gain on divestiture 1 | $ | — | $ | — | $ | — | $ | 227 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 227 | ||||||||||
Integration and separation costs 2 | — | — | — | — | — | — | — | — | (459 | ) | (459 | ) | ||||||||||||||||||
Inventory step-up amortization 3 | (83 | ) | — | — | (28 | ) | (50 | ) | (104 | ) | (68 | ) | (34 | ) | — | (367 | ) | |||||||||||||
Restructuring and asset related charges - net 4 | — | — | — | — | — | — | — | — | (180 | ) | (180 | ) | ||||||||||||||||||
Transaction costs and productivity actions 5 | — | — | — | — | — | — | — | — | (10 | ) | (10 | ) | ||||||||||||||||||
Total | $ | (83 | ) | $ | — | $ | — | $ | 199 | $ | (50 | ) | $ | (104 | ) | $ | (68 | ) | $ | (34 | ) | $ | (649 | ) | $ | (789 | ) | |||
1. | Includes the sale of Dow's EAA Business. See Note 3 for additional information. |
2. | Costs related to the Merger and the ownership restructure of Dow Silicones. |
3. | Includes the fair value step-up in DuPont's inventories as a result of the Merger of $360 million and the amortization of a basis difference related to the fair value step-up in inventories of $7 million. See Note 3 for additional information. |
4. | Includes Board approved restructuring plans and asset related charges, which includes other asset impairments. See Note 5 for additional information. |
5. | Includes implementation costs associated with Dow's restructuring programs and other productivity actions. |
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Significant Items by Segment for the Nine Months Ended Sep 30, 2018 | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Corp. | Total | ||||||||||||||||||||
In millions | ||||||||||||||||||||||||||||||
Net loss on divestitures and change in joint venture ownership 1 | $ | 24 | $ | (20 | ) | $ | 20 | $ | — | $ | (27 | ) | $ | — | $ | — | $ | — | $ | — | $ | (3 | ) | |||||||
Integration and separation costs 2 | — | — | — | — | — | — | — | — | (1,681 | ) | (1,681 | ) | ||||||||||||||||||
Inventory step-up amortization 3 | (1,424 | ) | — | — | (2 | ) | — | (67 | ) | — | (1 | ) | — | (1,494 | ) | |||||||||||||||
Restructuring and asset related charges - net 4 | (315 | ) | (14 | ) | (11 | ) | (16 | ) | (2 | ) | — | 1 | (21 | ) | (363 | ) | (741 | ) | ||||||||||||
Loss on early extinguishment of debt 5 | — | — | — | — | — | — | — | — | (6 | ) | (6 | ) | ||||||||||||||||||
Income tax related item 6 | — | — | — | — | — | — | — | — | (50 | ) | (50 | ) | ||||||||||||||||||
Total | $ | (1,715 | ) | $ | (34 | ) | $ | 9 | $ | (18 | ) | $ | (29 | ) | $ | (67 | ) | $ | 1 | $ | (22 | ) | $ | (2,100 | ) | $ | (3,975 | ) | ||
1. | Includes a gain related to Dow's sale of its equity interest in MEGlobal, a gain related to Agriculture asset sales and a loss related to post-closing adjustments on the Dow Silicones ownership restructure. |
2. | Costs related to post-Merger integration and Intended Business Separation activities, and costs related to the ownership restructure of Dow Silicones. |
3. | Includes the fair value step-up of DuPont's inventories as a result of the Merger and the acquisition of the H&N Business. See Note 3 for additional information. |
4. | Includes Board approved restructuring plans and asset related charges, which include other asset impairments. See Note 5 for additional information. |
5. | See Note 12 for additional information. |
6. | Includes a foreign exchange loss related to adjustments to DuPont's foreign currency exchange contracts as a result of U.S. tax reform. |
Adjusted Significant Items by Segment for the Nine Months Ended Sep 30, 2017 | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Corp. | Total | ||||||||||||||||||||
In millions | ||||||||||||||||||||||||||||||
Gains on divestitures 1 | $ | — | $ | — | $ | — | $ | 227 | $ | — | $ | 162 | $ | — | $ | — | $ | 7 | $ | 396 | ||||||||||
Integration and separation costs 2 | — | — | — | — | — | — | — | — | (997 | ) | (997 | ) | ||||||||||||||||||
Inventory step-up amortization 3 | (83 | ) | — | — | (28 | ) | (50 | ) | (104 | ) | (68 | ) | (34 | ) | — | (367 | ) | |||||||||||||
Litigation related charges, awards and adjustments 4 | (469 | ) | — | — | 137 | — | — | — | — | — | (332 | ) | ||||||||||||||||||
Restructuring and asset related charges - net 5 | — | 3 | — | — | (3 | ) | (6 | ) | (4 | ) | (265 | ) | (205 | ) | (480 | ) | ||||||||||||||
Transaction costs and productivity actions 6 | — | — | — | — | — | — | — | — | (58 | ) | (58 | ) | ||||||||||||||||||
Total | $ | (552 | ) | $ | 3 | $ | — | $ | 336 | $ | (53 | ) | $ | 52 | $ | (72 | ) | $ | (299 | ) | $ | (1,253 | ) | $ | (1,838 | ) | ||||
1. | Includes the sale of Dow's EAA Business, the sale of DuPont's global food safety diagnostic business and post-closing adjustments on the split-off of Dow's chlorine value chain. |
2. | Costs related to the Merger and the ownership restructure of Dow Silicones. |
3. | Includes the fair value step-up in DuPont's inventories as a result of the Merger and the amortization of a basis difference related to the fair value step-up in inventories. See Note 3 for additional information. |
4. | Includes an arbitration matter with Bayer CropScience and a patent infringement matter with Nova Chemicals Corporation. See Note 13 for additional information. |
5. | Includes Board approved restructuring plans and asset related charges, which includes other asset impairments. See Note 5 for additional information. |
6. | Includes implementation costs associated with Dow's restructuring programs and other productivity actions. |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On December 11, 2015, The Dow Chemical Company ("Dow") and E. I. du Pont de Nemours and Company ("DuPont") entered into an Agreement and Plan of Merger ("Merger Agreement"), as amended on March 31, 2017, to effect an all-stock merger of equals strategic combination resulting in a newly formed corporation named DowDuPont Inc. ("DowDuPont" or the "Company"). On August 31, 2017, pursuant to the Merger Agreement, Dow and DuPont each merged with wholly owned subsidiaries of DowDuPont ("Mergers") and, as a result of the Mergers, Dow and DuPont became subsidiaries of DowDuPont (collectively, the "Merger"). Prior to the Merger, DowDuPont did not conduct any business activities other than those required for its formation and matters contemplated by the Merger Agreement. Dow was determined to be the accounting acquirer in the Merger. As a result, the historical financial statements of Dow for the periods prior to the Merger are considered to be the historical financial statements of DowDuPont. The results of DuPont are included in DowDuPont's consolidated results from the Merger date forward.
DowDuPont intends to pursue, subject to the receipt of approval by the Board of Directors ("Board") of DowDuPont and customary closing conditions, the separation of the combined Company's agriculture, materials science and specialty products businesses through one or more tax-efficient transactions ("Intended Business Separations").
Except as otherwise indicated by the context, the term "Dow" includes Dow and its consolidated subsidiaries, "DuPont" includes DuPont and its consolidated subsidiaries, "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.
Items Affecting Comparability of Financial Results
Due to the size of each of Dow's and DuPont's businesses prior to the Merger, in this section certain supplemental unaudited pro forma financial information is provided that assumes the Merger had been consummated on January 1, 2016. Adjustments have been made in the unaudited pro forma financial information for (1) the preliminary purchase accounting impact, (2) accounting policy alignment, (3) the elimination of the effect of events that are directly attributable to the Merger Agreement (e.g., one-time transaction costs), (4) the elimination of the impact of transactions between Dow and DuPont, and (5) the elimination of the effect of consummated divestitures required as a condition of regulatory approval for the Merger. Events that are not expected to have a continuing impact on the combined results (e.g., inventory step-up costs) are excluded. These adjustments impacted the consolidated results as well as the reportable segments. For additional information, see the Supplemental Unaudited Pro Forma Combined Financial Information in this section.
OVERVIEW
The following is a summary of the results from continuing operations for the three months ended September 30, 2018:
• | The Company reported net sales in the third quarter of 2018 of $20.1 billion, up 31 percent from $15.4 billion in the third quarter of 2017, with broad-based sales growth across all segments and geographic regions. Portfolio & Other contributed 22 percent of the sales increase, primarily reflecting the Merger, which impacted all segments except Performance Materials & Coatings and Industrial Intermediates & Infrastructure. |
• | Local price was up 6 percent compared with the same period last year, primarily in response to higher feedstock and raw material costs. Local price increased in all operating segments, except Electronics & Imaging (down 1 percent), including a double-digit increase in Performance Materials & Coatings (up 13 percent). Local price increased in all geographic regions. |
• | Volume increased 4 percent compared with the third quarter of 2017, with increases in all operating segments, except Nutrition & Biosciences (down 4 percent) and Performance Materials & Coatings (down 1 percent), including a double-digit increase in Industrial Intermediates & Infrastructure (up 14 percent). Volume increased in all geographic regions, led by a double-digit increase in Asia Pacific (up 12 percent). |
• | Currency had an unfavorable impact of 1 percent on sales, driven primarily by Latin America. |
• | Research and development ("R&D") expenses totaled $740 million in the third quarter of 2018, up from $528 million in the third quarter of 2017. Selling, general and administrative ("SG&A") expenses were $1,496 million in the third quarter of 2018, up from $1,001 million in the third quarter of 2017. R&D and SG&A expenses increased primarily due to the Merger. |
• | Restructuring and asset related charges - net were $290 million in the third quarter of 2018, consisting of $67 million of severance and related benefit costs, $86 million of asset write-downs and write-offs and $9 million of costs associated with |
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exit and disposal activities related to the DowDuPont Cost Synergy Program (the “Synergy Program”); asset impairments of $126 million; and $2 million of other.
• | Integration and separation costs were $666 million in the third quarter of 2018, up from $354 million in the third quarter of 2017, reflecting post-Merger integration and Intended Business Separation activities. |
• | Equity in earnings of nonconsolidated affiliates was $178 million in the third quarter of 2018, up from $152 million in the third quarter of 2017, as higher earnings from the Kuwait joint ventures were partially offset by lower equity earnings from the Thai joint ventures. |
• | Sundry income (expense) - net was income of $47 million in the third quarter of 2018, down from income of $394 million in the third quarter of 2017, reflecting an increase in foreign exchange losses which was partially offset by income related to non-operating pension and other postretirement benefit plans. The third quarter of 2017 also included a $227 million gain from Dow's divestiture of the global ethylene acrylic acid copolymers and ionomers business ("EAA Business"). |
• | On June 25, 2018, the Company announced that its Board declared a dividend of $0.38 per share, paid on September 14, 2018, to shareholders of record on August 31, 2018. |
• | The Company spent $1 billion on repurchases of DowDuPont common stock in the third quarter of 2018, completing the share repurchase program announced on November 2, 2017. |
• | In the third quarter of 2018, Dow and DuPont each made discretionary contributions of $1,100 million to their respective principal U.S. pension plans. |
In addition to the financial highlights above, the following events occurred during or subsequent to the third quarter of 2018:
• | The Form 10 registration statement for the separation of DowDuPont's materials science business (filed as Dow Holdings Inc.) was filed with the U.S. Securities and Exchange Commission ("SEC") on September 7, 2018, as amended on October 19, 2018. |
• | On September 12, 2018, Dow announced new low capital intensity, high return investments in its upstream and downstream silicones franchise to accelerate innovation and support global customer demand in high growth markets. The investment plans include a series of incremental siloxane debottlenecking and efficiency improvement projects, a new hydroxyl functional siloxane polymer plant in Carrollton, Kentucky, and additional expansion projects to increase capacity in performance silicones products and intermediates, including a new specialty resin plant in Zhangjiagang, Jiangsu, China. |
• | On October 11, 2018, the Company announced that its Board declared a dividend of $0.38 per share, payable on December 14, 2018, to shareholders of record on November 30, 2018. |
• | The initial Form 10 registration statement for the separation of DowDuPont's agriculture business (filed as Corteva, Inc.) was filed with the SEC on October 18, 2018. |
• | On November 1, 2018, the Company announced a new $3 billion share buyback program, which expires on March 31, 2019 - commensurate with the expected timing of the materials science spin-off. |
• | On November 1, 2018, the Company announced the capital structure for each of the three intended companies, including targeted credit ratings, operating cash and adjusted debt levels. |
• | On November 1, 2018, the Company announced it is increasing its cost synergy commitment from $3.3 billion to $3.6 billion. |
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Selected Financial Data | Three Months Ended | Nine Months Ended | ||||||||||
In millions, except per share amounts | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 20,123 | $ | 15,354 | $ | 65,878 | $ | 42,418 | ||||
Cost of sales ("COS") | $ | 15,477 | $ | 12,186 | $ | 49,766 | $ | 33,141 | ||||
Percent of net sales | 76.9 | % | 79.4 | % | 75.5 | % | 78.1 | % | ||||
Research and development expenses | $ | 740 | $ | 528 | $ | 2,311 | $ | 1,355 | ||||
Percent of net sales | 3.7 | % | 3.4 | % | 3.5 | % | 3.2 | % | ||||
Selling, general and administrative expenses | $ | 1,496 | $ | 1,001 | $ | 5,143 | $ | 2,480 | ||||
Percent of net sales | 7.4 | % | 6.5 | % | 7.8 | % | 5.8 | % | ||||
Effective tax rate | 37.4 | % | 50.8 | % | 26.7 | % | 30.5 | % | ||||
Net income available for common stockholders | $ | 497 | $ | 514 | $ | 3,369 | $ | 2,723 | ||||
Earnings per common share – basic | $ | 0.22 | $ | 0.32 | $ | 1.45 | $ | 2.04 | ||||
Earnings per common share – diluted | $ | 0.21 | $ | 0.32 | $ | 1.44 | $ | 2.01 | ||||
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RESULTS OF OPERATIONS
Summary of Sales Results | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 20,123 | $ | 15,354 | $ | 65,878 | $ | 42,418 | ||||
Pro forma net sales | $ | 18,285 | $ | 59,469 | ||||||||
As Reported Net Sales in the Current Period Compared with As Reported Net Sales in the Prior Period
Sales Variances by Segment and Geographic Region - As Reported | ||||||||||||||||||||
Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 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 | ||||||||||
Agriculture | 3 | % | (5 | )% | 3 | % | 26 | % | 27 | % | 2 | % | — | % | (2 | )% | 143 | % | 143 | % |
Performance Materials & Coatings | 13 | (1 | ) | (1 | ) | — | 11 | 11 | 2 | (1 | ) | — | 12 | |||||||
Industrial Intermediates & Infrastructure | 5 | (1 | ) | 14 | — | 18 | 8 | 2 | 16 | — | 26 | |||||||||
Packaging & Specialty Plastics | 7 | — | 5 | 4 | 16 | 4 | 2 | 7 | 6 | 19 | ||||||||||
Electronics & Imaging | (1 | ) | — | 3 | 42 | 44 | — | 1 | 2 | 61 | 64 | |||||||||
Nutrition & Biosciences | 2 | (2 | ) | (4 | ) | 150 | 146 | 3 | — | — | 327 | 330 | ||||||||
Transportation & Advanced Polymers | 4 | (1 | ) | 1 | 117 | 121 | 3 | 2 | 1 | 245 | 251 | |||||||||
Safety & Construction | 2 | (1 | ) | 5 | 71 | 77 | 2 | 1 | 2 | 135 | 140 | |||||||||
Total | 6 | % | (1 | )% | 4 | % | 22 | % | 31 | % | 5 | % | 2 | % | 5 | % | 43 | % | 55 | % |
U.S. & Canada | 7 | % | — | % | 1 | % | 19 | % | 27 | % | 5 | % | — | % | 2 | % | 51 | % | 58 | % |
EMEA 2 | 8 | (1 | ) | 1 | 19 | 27 | 6 | 6 | 3 | 36 | 51 | |||||||||
Asia Pacific | 4 | (1 | ) | 12 | 30 | 45 | 4 | 1 | 16 | 46 | 67 | |||||||||
Latin America | 4 | (4 | ) | 6 | 20 | 26 | 6 | (2 | ) | 3 | 27 | 34 | ||||||||
Total | 6 | % | (1 | )% | 4 | % | 22 | % | 31 | % | 5 | % | 2 | % | 5 | % | 43 | % | 55 | % |
1. | Portfolio & Other primarily reflects sales related to the Merger (impacts all segments, except Performance Materials & Coatings and Industrial Intermediates & Infrastructure). Portfolio & Other also includes sales for the acquisition of FMC Corporation's ("FMC") Health and Nutrition Business (the "H&N Business") acquired on November 1, 2017, impacting Nutrition & Biosciences. Portfolio & Other also reflects the following divestitures: a portion of Dow AgroSciences' Brazil corn seed business ("DAS Divested Ag Business"), divested on November 30, 2017 (impacting Agriculture), the EAA Business, divested on September 1, 2017 (impacting Packaging & Specialty Plastics) and SKC Haas Display Films group of companies, divested June 30, 2017 (impacting Electronics & Imaging). |
2. | Europe, Middle East and Africa. |
The Company reported net sales in the third quarter of 2018 of $20.1 billion, up 31 percent from $15.4 billion in the third quarter of 2017, primarily due to the Merger, increased selling prices and demand growth, reflecting additional capacity from U.S. Gulf Coast growth projects and increased supply from Sadara Chemical Company ("Sadara"). Sales growth was broad-based with increases in all segments and geographic regions. Portfolio & Other changes contributed 22 percent of the sales increase, primarily reflecting the Merger, and impacted all segments, except Performance Materials & Coatings and Industrial Intermediates & Infrastructure. Local price was up 6 percent compared with the same period last year, in response to higher feedstock and raw material costs. Local price increased in all geographic regions and most segments, with the most notable increases in Performance Materials & Coatings (up 13 percent), Packaging & Specialty Plastics (up 7 percent) and Industrial Intermediates & Infrastructure (up 5 percent), which were partially offset by a decrease in Electronics & Imaging (down 1 percent). Volume increased 4 percent with gains in most segments, except Nutrition & Biosciences (down 4 percent) and Performance Materials & Coatings (down 1 percent). The most notable volume increases were in Industrial Intermediates & Infrastructure (up 14 percent), Packaging & Specialty Plastics and Safety & Construction (both up 5 percent). Volume increased in all geographic regions, including a double-digit increase in Asia Pacific (up 12 percent). Currency was down 1 percent compared with the same period last year, driven primarily by Latin America currencies (down 4 percent).
Net sales for the first nine months of 2018 were $65.9 billion, up 55 percent from $42.4 billion in the same period last year, driven by the Merger, higher sales volume, reflecting additional capacity from U.S. Gulf Coast growth projects and increased supply from Sadara, increased selling prices and the favorable impact of currency. Sales growth was broad-based with increases in all segments and geographic regions. Portfolio & Other changes contributed 43 percent of the sales increase, primarily reflecting the Merger. Volume increased 5 percent compared with the same period last year, as increases in Industrial Intermediates & Infrastructure (up 16 percent), Packaging & Specialty Plastics (up 7 percent), Electronics & Imaging and Safety & Construction
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(both up 2 percent) and Transportation & Advanced Polymers (up 1 percent) more than offset declines in Agriculture (down 2 percent) and Performance Materials & Coatings (down 1 percent). Nutrition & Biosciences volume was flat. Volume increased in all geographic regions, including a double-digit increase in Asia Pacific (up 16 percent). Local price was up 5 percent compared with the same period last year, with increases in all geographic regions, driven by pricing initiatives in response to higher feedstock and raw material costs. Local price increased in most segments, with the most notable increases in Performance Materials & Coatings (up 11 percent), Industrial Intermediates & Infrastructure (up 8 percent) and Packaging & Specialty Plastics (up 4 percent). Local price in Electronics & Imaging was flat. Currency was up 2 percent compared with the same period last year, driven primarily by EMEA (up 6 percent).
As Reported Net Sales in the Current Period Compared with Pro Forma Net Sales in the Prior Period
Sales Variances by Segment and Geographic Region - Net Sales in Current Period Compared with Pro Forma Net Sales in Prior Period | ||||||||||||||||||||
Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 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 | ||||||||||
Agriculture | 3 | % | (6 | )% | 8 | % | (3 | )% | 2 | % | 3 | % | 1 | % | (4 | )% | (1 | )% | (1 | )% |
Performance Materials & Coatings | 13 | (1 | ) | (1 | ) | — | 11 | 11 | 2 | — | — | 13 | ||||||||
Industrial Intermediates & Infrastructure | 5 | (1 | ) | 14 | — | 18 | 8 | 2 | 16 | — | 26 | |||||||||
Packaging & Specialty Plastics | 6 | — | 5 | — | 11 | 3 | 2 | 7 | — | 12 | ||||||||||
Electronics & Imaging | (1 | ) | — | 1 | — | — | — | 1 | 1 | (3 | ) | (1 | ) | |||||||
Nutrition & Biosciences | 1 | (1 | ) | 3 | 11 | 14 | — | 2 | 4 | 12 | 18 | |||||||||
Transportation & Advanced Polymers | 6 | (1 | ) | 3 | — | 8 | 5 | 3 | 4 | — | 12 | |||||||||
Safety & Construction | 2 | (1 | ) | 6 | — | 7 | 1 | 2 | 4 | — | 7 | |||||||||
Total | 5 | % | (1 | )% | 5 | % | 1 | % | 10 | % | 4 | % | 2 | % | 4 | % | 1 | % | 11 | % |
U.S. & Canada | 5 | % | — | % | 2 | % | 1 | % | 8 | % | 3 | % | — | % | 1 | % | 1 | % | 5 | % |
EMEA | 7 | (1 | ) | 2 | 1 | 9 | 5 | 6 | 4 | 1 | 16 | |||||||||
Asia Pacific | 4 | (1 | ) | 11 | 1 | 15 | 3 | 1 | 13 | — | 17 | |||||||||
Latin America | 6 | (5 | ) | 10 | (2 | ) | 9 | 6 | (2 | ) | 2 | — | 6 | |||||||
Total | 5 | % | (1 | )% | 5 | % | 1 | % | 10 | % | 4 | % | 2 | % | 4 | % | 1 | % | 11 | % |
1. | Pro forma net sales for Agriculture excludes sales related to the November 30, 2017, divestiture of the DAS Divested Ag Business for the period January 1, 2017 through August 31, 2017. Sales for the month of September 2017 are included in Portfolio & Other. Pro forma net sales for Packaging & Specialty Plastics excludes sales related to the September 1, 2017, divestiture of the EAA Business for the period January 1, 2017 through August 31, 2017. Portfolio & Other includes sales for the acquisition of the H&N Business acquired on November 1, 2017, impacting Nutrition & Biosciences. Portfolio & Other also reflects the following divestitures: SKC Haas Display Films group of companies (divested June 30, 2017) and the authentication business (divested on January 6, 2017), both impacting Electronics & Imaging; and, the divestiture of the global food safety diagnostic business (divested February 28, 2017), impacting Nutrition & Biosciences. |
The Company reported net sales in the third quarter of 2018 of $20.1 billion, up 10 percent from pro forma net sales of $18.3 billion in the third quarter of 2017, with increases across all geographic regions and segments, except Electronics & Imaging which was flat. Double-digit net sales increases were reported in Industrial Intermediates & Infrastructure (up 18 percent), Nutrition & Biosciences (up 14 percent), Packaging & Specialty Plastics and Performance Materials & Coatings (both up 11 percent), and Asia Pacific (up 15 percent). Local price was up 5 percent compared with pro forma results in the same period last year with increases in all geographic regions, in response to higher feedstock and raw material costs. Local price increased across most segments, except Electronics & Imaging (down 1 percent), including a double-digit increase in Performance Materials & Coatings (up 13 percent). Volume increased 5 percent compared with pro forma results in the same period last year, with gains in all geographic regions and segments, except Performance Materials & Coatings (down 1 percent), including double-digit increases in Industrial Intermediates & Infrastructure (up 14 percent), Asia Pacific (up 11 percent), and Latin America (up 10 percent). Currency was down 1 percent compared with the same period last year, driven primarily by Latin America (down 5 percent).
Net sales for the first nine months of 2018 were $65.9 billion, up 11 percent from pro forma net sales of $59.5 billion in the same period last year, with increases across most segments and all geographic regions. Double-digit net sales increases were reported in Industrial Intermediates & Infrastructure (up 26 percent), Nutrition & Biosciences (up 18 percent), Performance Materials & Coatings (up 13 percent), Packaging & Specialty Plastics and Transportation & Advanced Polymers (both up 12 percent). These increases were partially offset by declines in Agriculture and Electronics & Imaging (both down 1 percent). Net sales increased in Asia Pacific (up 17 percent), EMEA (up 16 percent), Latin America (up 6 percent) and U.S. & Canada (up 5 percent). Volume increased 4 percent compared with pro forma results in the same period last year, as increases in Industrial Intermediates &
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Infrastructure (up 16 percent), Packaging & Specialty Plastics (up 7 percent), Nutrition & Biosciences, Safety & Construction and Transportation & Advanced Polymers (all up 4 percent) and Electronics & Imaging (up 1 percent) more than offset a decline in Agriculture (down 4 percent). Performance Materials & Coatings volume was flat. Volume increased in all geographic regions, including a double-digit increase in Asia Pacific (up 13 percent). Local price was up 4 percent compared with pro forma results in the same period last year with increases in all geographic regions, driven by pricing initiatives in response to higher feedstock and raw material costs. Local price increased across most segments, including double-digit increases in Performance Materials & Coatings (up 11 percent). Local price in Nutrition & Biosciences and Electronics & Imaging was flat. Currency was up 2 percent compared with the same period last year, driven primarily by EMEA (up 6 percent).
Cost of Sales
COS was $15.5 billion in the third quarter of 2018, up from $12.2 billion in the third quarter of 2017. The increase was primarily due to the Merger, 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 higher planned maintenance turnaround costs, which more than offset lower commissioning expenses related to U.S. Gulf Coast growth projects and cost synergies. COS in the third quarter of 2018 was also negatively impacted by a $109 million charge for the fair value step-up in DuPont's inventories as a result of the Merger (related to Agriculture). COS in the third quarter of 2017 was negatively impacted by a $360 million charge for the fair value step-up in inventories assumed in the Merger and related to Agriculture ($82 million), Packaging & Specialty Plastics ($28 million), Electronics & Imaging ($47 million), Nutrition & Biosciences ($104 million), Transportation & Advanced Polymers ($67 million) and Safety & Construction ($32 million), and an $8 million charge for transactions costs and productivity actions (related to Corporate).
For the first nine months of 2018, COS was $49.8 billion, up from $33.1 billion in the first nine months of 2017. The increase was primarily due to the Merger, higher sales volume, higher feedstock and other raw material costs, increased costs from planned maintenance turnaround activity and unplanned events, which more than offset lower commissioning expenses related to U.S. Gulf Coast growth projects and cost synergies. COS in the first nine months of 2018 was negatively impacted by a $1,494 million charge for the fair value step-up in DuPont's inventories as a result of the Merger and the acquisition of the H&N Business, related to Agriculture ($1,424 million), Nutrition & Biosciences ($67 million), Packaging & Specialty Plastics ($2 million) and Safety & Construction ($1 million). In addition to the items previously discussed, in the first nine months of 2017, COS was negatively impacted by a $41 million charge for transaction costs and productivity actions (related to Corporate).
Research and Development Expenses
R&D expenses totaled $740 million in the third quarter of 2018, up from $528 million in the third quarter of 2017. For the first nine months of 2018, R&D expenses totaled $2,311 million, up from $1,355 million in the first nine months of 2017. R&D expenses increased primarily due to the Merger.
Selling, General and Administrative Expenses
SG&A expenses were $1,496 million in the third quarter of 2018, up from $1,001 million in the third quarter of 2017. For the first nine months of 2018, SG&A expenses totaled $5,143 million, up from $2,480 million in the first nine months of 2017. SG&A expenses increased primarily due to the Merger.
Amortization of Intangibles
Amortization of intangibles was $462 million in the third quarter of 2018, up from $244 million in the third quarter of 2017. In the first nine months of 2018, amortization of intangibles was $1,424 million, up from $556 million in the same period last year. The increase in amortization is primarily due to an increase in intangible assets as a result of the Merger. See Note 10 to the Consolidated Financial Statements for additional information on intangible assets.
Restructuring and Asset Related Charges - Net
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont approved post-merger restructuring actions under the Synergy Program, adopted by the DowDuPont Board of Directors. The plan is designed to integrate and optimize the organization following the Merger and in preparation for the Intended Business Separations. Based on all actions approved to date under the Synergy Program, the Company expects to record total pretax restructuring charges of approximately $2 billion, comprised of approximately $875 million to $975 million of severance and related benefit costs; $400 million to $615 million of asset write-downs and write-offs; and $400 million to $450 million of costs associated with exit and disposal activities.
As a result of these actions, the Company recorded pretax restructuring charges of $179 million for the three and nine months ended September 30, 2017, comprised of severance and related benefit costs. For the three months ended September 30, 2018, the Company recorded pretax restructuring charges of $162 million, consisting of severance and related benefit costs of $67 million, asset write-downs and write-offs of $86 million and costs associated with exit and disposal activities of $9 million. For the nine
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months ended September 30, 2018, the Company recorded pretax restructuring charges of $604 million, consisting of severance and related benefit costs of $361 million, asset write-downs and write-offs of $167 million and costs associated with exit and disposal activities of $76 million. The restructuring charges for the nine months ended September 30, 2018 were related to each segment as follows: $183 million in Agriculture, $21 million in Safety & Construction, $11 million in Industrial Intermediates & Infrastructure, $7 million in Packaging & Specialty Plastics, $2 million in Electronics & Imaging, $381 million in Corporate and a benefit of $1 million in Transportation & Advanced Polymers. The Company expects to record additional restructuring charges in 2018 and 2019 and expects the Synergy Program to be completed by the end of 2019.
Dow 2016 Restructuring Plan
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. See Note 5 to the Consolidated Financial Statements for details on the Company's restructuring activities.
Asset Impairments
During the three months ended September 30, 2018, the Company recognized an $85 million pretax impairment charge in “Restructuring and asset related charges - net” in the consolidated statements of income related to certain in-process research and development (“IPR&D") assets related to the Agriculture segment.
In addition, based on updated projections for the Company’s equity method investments in joint ventures in China related to the Agriculture segment, management determined the fair value of the equity method investments was below the carrying value and had no expectation the fair value will be recovered due to the continuing unfavorable regulatory environment, including lack of intellectual property protection, uncertain product registration timing and limited freedom to operate. As a result, management concluded the impairment is other than temporary and recorded an impairment charge of $41 million in “Restructuring and asset related charges - net” in the consolidated statements of income. See Notes 5, 10 and 19 to the Consolidated Financial Statements for additional information.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to the Merger and the ownership restructure of Dow Silicones, as well as post-Merger integration and Intended Business Separation activities, were $666 million in the third quarter of 2018, up from $354 million in the third quarter of 2017. In the first nine months of 2018, integration and separation costs were $1,681 million, up from $599 million in the same period last year. Integration and separation costs are related to the Corporate segment.
Equity in Earnings of Nonconsolidated Affiliates
The Company's share of the earnings of nonconsolidated affiliates was $178 million in the third quarter of 2018, up from $152 million in the third quarter of 2017, as higher earnings from the Kuwait joint ventures were partially offset by lower equity earnings from the Thai joint ventures. In the first nine months of 2018, the Company's share of the earnings of nonconsolidated affiliates was $685 million, up from $402 million in the first nine months of 2017, as higher earnings from the Kuwait joint ventures and lower equity losses from Sadara were partially offset by lower equity earnings from the Thai joint ventures and the HSC Group, which reflected customer settlements in the first quarter of 2017 related to long-term polysilicon sales agreements.
Sundry Income (Expense) - Net
Sundry income (expense) – net includes a variety of income and expense items such as foreign currency exchange gains or 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. Sundry income (expense) – net in the third quarter of 2018 was income of $47 million, compared with income of $394 million in the third quarter of 2017. The third quarter of 2018 included income related to non-operating pension and other postretirement benefit plans and interest income. These gains more than offset foreign currency exchange losses. The third quarter of 2017 included a $227 million gain from Dow's divestiture of the EAA Business (related to Packaging & Specialty Plastics) and foreign currency exchange gains.
In the first nine months of 2018, sundry income (expense) - net was income of $340 million compared with income of $272 million in the first nine months of 2017. In addition to the amounts previously discussed, the first nine months of 2018 included gains on sales of investments and other assets, including a $20 million gain for post-closing adjustments on Dow's sale of its equity interest in MEGlobal (related to Industrial Intermediates & Infrastructure) and a $24 million gain related to Agriculture asset sales. These gains more than offset foreign currency exchange losses, including a $50 million foreign exchange loss related to adjustments to foreign currency exchange contracts for the change in the U.S. tax rate (related to Corporate), and a $47 million loss for adjustments related to the Dow Silicones ownership restructure ($27 million related to Electronics & Imaging and $20 million related to Performance Materials & Coatings). The first nine months of 2017 included the amounts previously discussed, a $469 million loss related to the Dow AgroSciences arbitration matter with Bayer CropScience (related to Agriculture), a $137 million gain
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related to the Nova patent infringement award (related to Packaging & Specialty Plastics), and gains on sales of investments and other assets. See Notes 1, 2, 3, 6, 13 and 16 to the Consolidated Financial Statements for additional information.
Interest Expense and Amortization of Debt Discount
Interest expense and amortization of debt discount was $362 million in the third quarter of 2018, up from $283 million in the third quarter of 2017. Interest expense and amortization of debt discount was $1,072 million for the first nine months of 2018, up from $728 million in the same period last year. The increase primarily reflects debt assumed in the Merger as well as lower capitalized interest.
Provision for Income Taxes on Continuing Operations
The Company's effective tax rate fluctuates based on, among other factors, where income is earned, reinvestment assertions regarding foreign income and the level of income relative to tax credits available. The Company's tax rate is also influenced by the level of equity earnings, since most of the earnings from the Company's equity method investments are taxed at the joint venture level.
On December 22, 2017, the Tax Cuts and Jobs Act ("The Act") was enacted. The Act reduces the U.S. federal corporate income tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves towards a territorial system. The Company recorded adjustments related to The Act in the three and nine months ended September 30, 2018, which resulted in benefits of $116 million and $38 million, respectively, to "Provision for income taxes on continuing operations."
The effective tax rate for the third quarter of 2018 was 37.4 percent, compared with an effective tax rate of 50.8 percent for the third quarter of 2017. The tax rate in the third quarter of 2018 was unfavorably impacted by a charge associated with a valuation allowance against the net deferred tax asset position of a DuPont legal entity in Brazil, costs associated with the Merger (including a $61 million net tax cost on repatriation activities to facilitate the Intended Business Separations), the tax impact of certain net exchange losses recognized on the remeasurement of the net monetary asset positions which were not deductible in their local jurisdictions, non-deductible restructuring costs, and certain provisions in The Act related to the taxability of foreign earnings and a tax charge related to an internal entity restructuring associated with the Intended Business Separations. The tax rate in the third quarter of 2018 was favorably impacted by the reduced U.S. federal corporate tax rate as well as the effective tax rate impacts related to the non-deductible amortization of the fair value step-up in DuPont’s inventories as a result of the Merger. Discretionary pension contributions to the U.S. plans, made in the third quarter of 2018 and deducted on 2017 tax returns, resulted in a tax benefit of $154 million associated with the reversal of a portion of the U.S. federal deferred tax remeasurement associated with The Act, offset partially by a tax charge of $27 million related to the reduction of a tax benefit recorded in 2017. The tax rate for the third quarter of 2017 was primarily impacted by a $267 million tax charge related to changes in tax attributes in the United States and Germany as a result of the Merger.
For the first nine months of 2018, the effective tax rate was 26.7 percent, compared with 30.5 percent for the first nine months of 2017. In addition to the items previously discussed, the tax rate for the first nine months of 2018 was favorably impacted by tax benefits related to the issuance of stock-based compensation. The tax rate for the first nine months of 2017, in addition to the items previously discussed, reflected a tax benefit from the Bayer CropScience arbitration matter and the adoption of Accounting Standards Update ("ASU") 2016-09, which resulted in the recognition of excess tax benefits related to equity compensation in the provision for income taxes. See Notes 7 and 13 to the Consolidated Financial Statements for additional information.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $38 million in the third quarter of 2018, up from $20 million in the third quarter of 2017. For the first nine months of 2018, net income attributable to noncontrolling interests was $117 million, compared with $85 million for the same period last year.
Net Income Available for DowDuPont Inc. Common Stockholders
Net income available for common stockholders was $497 million, or $0.21 per share, in the third quarter of 2018, compared with $514 million, or $0.32 per share, in the third quarter of 2017. Net income available for common stockholders in the first nine months of 2018 was $3,369 million or $1.44 per share, compared with $2,723 million, or $2.01 per share, in the same period of 2017. See Note 8 to the Consolidated Financial Statements for details on the Company's earnings per share calculations.
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SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following supplemental unaudited pro forma combined statements of income (the "unaudited pro forma income statements") for DowDuPont are presented to illustrate the estimated effects of the Merger, assuming that the Merger had been consummated on January 1, 2016. Activity for the three and nine months ended September 30, 2017, was prepared on a pro forma basis (the “unaudited pro forma information”). The unaudited pro forma information was prepared in accordance with Article 11 of Regulation S-X. Pro forma adjustments have been made for (1) the preliminary purchase accounting impact, (2) accounting policy alignment, (3) the elimination of the effect of events that are directly attributable to the Merger Agreement (e.g., one-time transaction costs), (4) the elimination of the impact of transactions between Dow and DuPont, and (5) the elimination of the effect of consummated divestitures required as a condition of approval for the Merger. Events that are not expected to have a continuing impact on the combined results (e.g., inventory step-up costs) are excluded from the unaudited pro forma information. The unaudited pro forma information does not reflect restructuring or integration activities or other costs following the Merger that may be incurred to achieve cost or growth synergies of DowDuPont. The unaudited pro forma income statement provides shareholders with summary financial information and historical data that is on a basis consistent with how DowDuPont reports current financial information.
The Merger was accounted for under Accounting Standards Codification ("ASC") Topic 805, "Business Combinations" ("ASC 805"), under which Dow was designated as the accounting acquirer in the Merger for accounting purposes. Under ASC 805, Dow accounted for the transaction by using Dow historical financial information and accounting policies and adding the assets and liabilities of DuPont as of August 31, 2017 (the "Merger Date") at their respective fair values. The assets and liabilities of DuPont were measured based on various preliminary estimates at the Merger Date using assumptions that DowDuPont believes are reasonable based on information that was currently available. The fair value estimates reflected in the unaudited pro forma information are based on those used in the Current Report on Form 8-K/A filed with the SEC on October 26, 2017, and subsequent measurement period adjustments are not reflected.
The unaudited pro forma income statements have been presented for informational purposes only and are not necessarily indicative of what DowDuPont’s results of operations actually would have been had the Merger been completed on January 1, 2016. In addition, the unaudited pro forma income statements do not purport to project the future operating results of the Company. The unaudited pro forma income statements were based on and should be read in conjunction with the separate historical financial statements and accompanying notes contained in each of the Dow and DuPont Quarterly Reports on Form 10-Q for the quarter ended September 30, 2017. See Notes 1 and 3 to the Consolidated Financial Statements for additional information.
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Unaudited Pro Forma Combined Statement of Income | Three Months Ended Sep 30, 2017 | |||||||||||||||||
Adjustments | ||||||||||||||||||
In millions, except per share amounts | DWDP 1, 2 | Historical DuPont 2, 3 | Reclass 2, 4 | Divestitures 5 | Pro Forma 6 | Pro Forma | ||||||||||||
Net sales | $ | 15,354 | $ | 3,182 | $ | 11 | $ | (225 | ) | $ | (37 | ) | $ | 18,285 | ||||
Cost of sales | 12,186 | 2,016 | 115 | (106 | ) | 13 | 14,224 | |||||||||||
Other operating charges | — | 141 | (141 | ) | — | — | — | |||||||||||
Research and development expenses | 528 | 291 | (7 | ) | (26 | ) | 5 | 791 | ||||||||||
Selling, general and administrative expenses | 1,001 | 822 | (217 | ) | (41 | ) | 7 | 1,572 | ||||||||||
Other (loss) income, net | — | (183 | ) | 183 | — | — | — | |||||||||||
Amortization of intangibles | 244 | — | 31 | — | 148 | 423 | ||||||||||||
Restructuring and asset related charges (credits) - net | 179 | 11 | — | — | (10 | ) | 180 | |||||||||||
Integration and separation costs | 354 | — | 219 | (9 | ) | (105 | ) | 459 | ||||||||||
Equity in earnings of nonconsolidated affiliates | 152 | — | 13 | — | (4 | ) | 161 | |||||||||||
Sundry income (expense) - net | 394 | — | (205 | ) | (1 | ) | — | 188 | ||||||||||
Interest expense and amortization of debt discount | 283 | 71 | — | — | (20 | ) | 334 | |||||||||||
Income (Loss) from continuing operations before income taxes | 1,125 | (353 | ) | 2 | (44 | ) | (79 | ) | 651 | |||||||||
Provision (Credit) for income taxes on continuing operations | 571 | (124 | ) | 2 | (10 | ) | (47 | ) | 392 | |||||||||
Income (Loss) from continuing operations, net of tax | 554 | (229 | ) | — | (34 | ) | (32 | ) | 259 | |||||||||
Net income attributable to noncontrolling interests | 20 | 5 | — | — | 2 | 27 | ||||||||||||
Net income (loss) from continuing operations attributable to DowDuPont Inc. | 534 | (234 | ) | — | (34 | ) | (34 | ) | 232 | |||||||||
Preferred stock dividends | — | 2 | — | — | (2 | ) | — | |||||||||||
Net income (loss) from continuing operations available for DowDuPont Inc. common stockholders | $ | 534 | $ | (236 | ) | $ | — | $ | (34 | ) | $ | (32 | ) | $ | 232 | |||
Per common share data: | ||||||||||||||||||
Earnings per common share from continuing operations - basic | $ | 0.10 | ||||||||||||||||
Earnings per common share from continuing operations - diluted | $ | 0.10 | ||||||||||||||||
Weighted-average common shares outstanding - basic | 2,328.0 | |||||||||||||||||
Weighted-average common shares outstanding - diluted | 2,349.7 | |||||||||||||||||
1. | See the U.S. GAAP consolidated statements of income. |
2. | Amounts have been updated to reflect certain reclassifications required under ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which was adopted on January 1, 2018, and required retrospective application. |
3. | Reflects DuPont activity for the period from July 1, 2017 to August 31, 2017. |
4. | Certain reclassifications were made to conform with the presentation used for DowDuPont. The reclassifications are consistent with those identified and disclosed in the Current Report on Form 8-K/A filed with the SEC on October 26, 2017. |
5. | Includes the following divestitures agreed to with certain regulatory agencies as a condition of approval for the Merger: Dow’s EAA Business; the DAS Divested Ag Business; and DuPont’s cereal broadleaf herbicides and chewing insecticides portfolio as well as its crop protection research and development pipeline and organization. For additional information regarding these divestitures, see Note 4 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. |
6. | Certain pro forma adjustments were made to illustrate the estimated effects of the Merger, assuming that the Merger had been consummated on January 1, 2016. The pro forma adjustments are consistent with those identified and disclosed in the Company's Current Report on Form 8-K/A filed with the SEC on October 26, 2017. |
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Unaudited Pro Forma Combined Statement of Income | Nine Months Ended Sep 30, 2017 | |||||||||||||||||
Adjustments | ||||||||||||||||||
In millions, except per share amounts | DWDP 1, 2 | Historical DuPont 2, 3 | Reclass 2, 4 | Divestitures 5 | Pro Forma 6 | Pro Forma | ||||||||||||
Net sales | $ | 42,418 | $ | 18,349 | $ | 84 | $ | (1,219 | ) | $ | (163 | ) | $ | 59,469 | ||||
Cost of sales | 33,141 | 10,464 | 387 | (523 | ) | 65 | 43,534 | |||||||||||
Other operating charges | — | 521 | (521 | ) | — | — | — | |||||||||||
Research and development expenses | 1,355 | 1,117 | (27 | ) | (104 | ) | 19 | 2,360 | ||||||||||
Selling, general and administrative expenses | 2,480 | 3,368 | (583 | ) | (143 | ) | 29 | 5,151 | ||||||||||
Other (loss) income, net | — | (106 | ) | 106 | — | — | — | |||||||||||
Amortization of intangibles | 556 | — | 139 | — | 591 | 1,286 | ||||||||||||
Restructuring and asset related charges (credits) - net | 166 | 323 | — | — | (10 | ) | 479 | |||||||||||
Integration and separation costs | 599 | — | 605 | (24 | ) | (183 | ) | 997 | ||||||||||
Equity in earnings of nonconsolidated affiliates | 402 | — | 55 | — | (15 | ) | 442 | |||||||||||
Sundry income (expense) - net | 272 | — | (278 | ) | (12 | ) | — | (18 | ) | |||||||||
Interest expense and amortization of debt discount | 728 | 254 | — | — | (80 | ) | 902 | |||||||||||
Income from continuing operations before income taxes | 4,067 | 2,196 | (33 | ) | (437 | ) | (609 | ) | 5,184 | |||||||||
Provision for income taxes on continuing operations | 1,239 | 228 | (33 | ) | (88 | ) | (233 | ) | 1,113 | |||||||||
Income from continuing operations, net of tax | 2,828 | 1,968 | — | (349 | ) | (376 | ) | 4,071 | ||||||||||
Net income attributable to noncontrolling interests | 85 | 20 | — | — | 7 | 112 | ||||||||||||
Net income from continuing operations attributable to DowDuPont Inc. | 2,743 | 1,948 | — | (349 | ) | (383 | ) | 3,959 | ||||||||||
Preferred stock dividends | — | 7 | — | — | (7 | ) | — | |||||||||||
Net income from continuing operations available for DowDuPont Inc. common stockholders | $ | 2,743 | $ | 1,941 | $ | — | $ | (349 | ) | $ | (376 | ) | $ | 3,959 | ||||
Per common share data: | ||||||||||||||||||
Earnings per common share from continuing operations - basic | $ | 1.70 | ||||||||||||||||
Earnings per common share from continuing operations - diluted | $ | 1.68 | ||||||||||||||||
Weighted-average common shares outstanding - basic | 2,322.9 | |||||||||||||||||
Weighted-average common shares outstanding - diluted | 2,346.2 | |||||||||||||||||
1. | See the U.S. GAAP consolidated statements of income. |
2. | Amounts have been updated to reflect certain reclassifications required under ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which was adopted on January 1, 2018, and required retrospective application. |
3. | Reflects DuPont activity for the period from January 1, 2017 to August 31, 2017. |
4. | Certain reclassifications were made to conform with the presentation used for DowDuPont. The reclassifications are consistent with those identified and disclosed in the Current Report on Form 8-K/A filed with the SEC on October 26, 2017. |
5. | Includes the following divestitures agreed to with certain regulatory agencies as a condition of approval for the Merger: Dow’s EAA Business; the DAS Divested Ag Business; and DuPont’s cereal broadleaf herbicides and chewing insecticides portfolio as well as its crop protection research and development pipeline and organization. For additional information regarding these divestitures, see Note 4 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. |
6. | Certain pro forma adjustments were made to illustrate the estimated effects of the Merger, assuming that the Merger had been consummated on January 1, 2016. The pro forma adjustments are consistent with those identified and disclosed in the Company's Current Report on Form 8-K/A filed with the SEC on October 26, 2017. |
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OUTLOOK
Global demand for DowDuPont's products remains strong, supported by solid fundamentals, including business investment, manufacturing output, job growth and wage increases. Going forward, DowDuPont remains well positioned to continue to drive top-line gains from above-GDP demand growth for the Company's products and new product launches, while further delivering productivity and cost synergy savings.
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 2018. The Company is taking actions to mitigate the impact by leveraging its global asset base to adjust its product and raw material flows.
SEGMENT RESULTS
Beginning in the third quarter of 2018, DowDuPont realigned the following joint ventures, global businesses and product lines 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 global business in the Performance Materials & Coatings reportable segment to the Electronics & Imaging reportable segment. |
• | Realignment of certain cellulosics product lines from the Nutrition & Health operating segment in the Nutrition & Biosciences reportable segment to the Consumer Solutions global business in the Performance Materials & Coatings reportable segment. |
• | Certain roofing products were realigned from the Building Solutions product line in the Safety & Construction reportable segment to Corporate. |
• | Realignment of the previously divested Epoxy and Chlorinated Organics global businesses from the Industrial Intermediates & Infrastructure reportable segment to Corporate. |
• | In addition, the following realignments within the Industrial Intermediates & Infrastructure reportable segment were made, which had no effect on the segment results: |
– | The Construction Chemicals global business was combined with the Polyurethanes & CAV global business. |
– | Certain product lines associated with the oil and gas industry were realigned from the Industrial Solutions global business to the Polyurethanes & CAV global business. |
The reporting changes have been retrospectively reflected in the following discussion of segment results for all periods presented.
The Company's measure of profit/loss for segment reporting purposes is Operating EBITDA (for the three and nine months ended September 30, 2018) and pro forma Operating EBITDA (for the three and nine months ended September 30, 2017) as this is the manner in which the Company's chief operating decision maker ("CODM") assesses performance and allocates resources. The Company defines Operating EBITDA as earnings (i.e., “Income from continuing operations before income taxes") before interest, depreciation, amortization and foreign exchange gains (losses), excluding the impact of significant items. Pro forma Operating EBITDA is defined as pro forma earnings (i.e., pro forma “Income from continuing operations before income taxes") before interest, depreciation, amortization and foreign exchange gains (losses), excluding the impact of adjusted significant items. Reconciliations of these measures can be found in Note 21 to the Consolidated Financial Statements. The Company also presents pro forma net sales for the three and nine months ended September 30, 2017, as it is included in management’s measure of segment performance and is regularly reviewed by the CODM. Prior year data has been updated to conform with the current year presentation.
Pro forma adjustments used in the calculation of pro forma net sales and pro forma Operating EBITDA were determined in accordance with Article 11 of Regulation S-X and were based on the historical consolidated financial statements of Dow and DuPont, adjusted to give effect to the Merger as if it had been consummated on January 1, 2016. For additional information on the pro forma adjustments made, see Supplemental Unaudited Pro Forma Combined Financial Information in the preceding section.
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AGRICULTURE
The Agriculture segment leverages the Company’s technology, customer relationships and industry knowledge to improve the quantity, quality and safety of the global food supply and the global production agriculture industry. Land available for worldwide agricultural production is increasingly limited so production growth will need to be achieved principally through improving crop yields and productivity. The segment’s two global businesses, Seed and Crop Protection, deliver a broad portfolio of products and services that are specifically targeted to achieve gains in crop yields and productivity, including well-established brands of seed products, crop chemicals, seed treatment, agronomy and digital services. R&D focuses on leveraging germplasm and plant science technology to increase farmer productivity and to enhance the value of grains and oilseeds through improved seed traits, superior seed germplasm and effective use of crop protection solutions.
Agriculture | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 1,946 | $ | 1,532 | $ | 11,484 | $ | 4,729 | ||||
Pro forma net sales | $ | 1,911 | $ | 11,555 | ||||||||
Operating EBITDA | $ | (104 | ) | $ | 2,472 | |||||||
Pro forma Operating EBITDA | $ | (239 | ) | $ | 2,387 | |||||||
Equity losses | $ | (3 | ) | $ | (5 | ) | $ | (1 | ) | $ | (1 | ) |
Agriculture | Three Months Ended | Nine Months Ended | ||
Percentage change from prior year | Sep 30, 2018 | Sep 30, 2018 | ||
Change in Net Sales from Prior Period due to: | ||||
Local price & product mix | 3 | % | 2 | % |
Currency | (5 | ) | — | |
Volume | 3 | (2 | ) | |
Portfolio & other | 26 | 143 | ||
Total | 27 | % | 143 | % |
Change in Net Sales in Current Period from Pro Forma Net Sales in Prior Period due to: | ||||
Local price & product mix | 3 | % | 3 | % |
Currency | (6 | ) | 1 | |
Volume | 8 | (4 | ) | |
Portfolio & other | (3 | ) | (1 | ) |
Total | 2 | % | (1 | )% |
Agriculture net sales were $1,946 million in the third quarter of 2018, up from $1,532 million in the third quarter of 2017. Net sales in the third quarter of 2018 were up 2 percent from pro forma net sales of $1,911 million in the third quarter of 2017. The increase was primarily due to 8 percent growth in volume and a 3 percent increase in local price, partially offset by a 3 percent decrease in portfolio and a 6 percent decrease in currency.
Volume increased primarily in Crop Protection due to growth in fungicides and insecticides driven by new product launches including Picoxy-based products in Latin America and PYRAXALTTM in Asia Pacific, as well as growth in seed applied technologies and improved channel inventory levels in Latin America. In Seeds, increased volume was due to gains in corn seeds in Latin America, partially driven by an early start to the selling season in Latin America. Unfavorable currency impacts primarily due to the Brazilian real were partially offset by increases in local price in Crop Protection to offset currency pressure. The portfolio loss reflected the inclusion of one month of the Dow AgroSciences corn seed remedy in the 2017 results.
Operating EBITDA was a loss of $104 million in the third quarter of 2018, compared with a pro forma Operating EBITDA loss of $239 million in the same quarter last year. Cost synergies, volume growth, lower performance-based compensation and lower pension/OPEB costs were partially offset by higher raw material costs and increased R&D spend to continue advancing the pipeline.
Agriculture net sales were $11,484 million for the first nine months of 2018, up from $4,729 million in the first nine months of 2017. Net sales in the first nine months of 2018 were down 1 percent from pro forma net sales of $11,555 million in the first nine months of 2017. Net sales declined as a 4 percent decrease in volume and a 1 percent decline due to portfolio was partially offset by a 3 percent increase in local price and a 1 percent benefit from currency.
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The decline in volume was driven by lower planted area in U.S. & Canada partially offset by new product launches in Asia Pacific. Increased volume in Latin America for the start of the summer season was offset by decreases in Seeds in the region due to lower sales in the Brazil safrinha season. The increase in local price was driven by favorable mix in U.S. & Canada and increases in Crop Protection pricing in Latin America to offset currency pressure. The portfolio loss reflected the inclusion of one month of the Dow AgroSciences corn seed remedy in 2017 results.
Operating EBITDA was $2,472 million in the first nine months of 2018, up 4 percent from pro forma Operating EBITDA of $2,387 million in the first nine months of 2017. Cost synergies, lower pension/OPEB costs and the favorable impact of currency were partially offset by lower volume, higher royalty expense and investments to support new product launches and digital platforms.
PERFORMANCE MATERIALS & COATINGS
The Performance Materials & Coatings segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. Using silicones, acrylics and cellulosics-based technology platforms, these businesses serve the needs of the coatings, home care, personal care, appliance and industrial end-markets. The segment has broad geographic reach with R&D and manufacturing facilities located in key geographic regions.
Performance Materials & Coatings | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 2,476 | $ | 2,234 | $ | 7,379 | $ | 6,599 | ||||
Pro forma net sales | $ | 2,227 | $ | 6,558 | ||||||||
Operating EBITDA | $ | 628 | $ | 1,749 | ||||||||
Pro forma Operating EBITDA | $ | 460 | $ | 1,374 | ||||||||
Equity earnings | $ | 3 | $ | 10 | $ | 4 | $ | 32 | ||||
Performance Materials & Coatings | Three Months Ended | Nine Months Ended | ||
Percentage change from prior year | Sep 30, 2018 | Sep 30, 2018 | ||
Change in Net Sales from Prior Period due to: | ||||
Local price & product mix | 13 | % | 11 | % |
Currency | (1 | ) | 2 | |
Volume | (1 | ) | (1 | ) |
Portfolio & other | — | — | ||
Total | 11 | % | 12 | % |
Change in Net Sales in Current Period from Pro Forma Net Sales in Prior Period due to: | ||||
Local price & product mix | 13 | % | 11 | % |
Currency | (1 | ) | 2 | |
Volume | (1 | ) | — | |
Portfolio & other | — | — | ||
Total | 11 | % | 13 | % |
Performance Materials & Coatings net sales were $2,476 million in the third quarter of 2018, up from net sales of $2,234 million in the third quarter of 2017. Net sales increased 11 percent compared with pro forma net sales of $2,227 million in the same quarter last year, with local price up 13 percent and currency and volume each down 1 percent. Local price increased in all geographic regions and in both businesses. Local price increased in Consumer Solutions primarily due to disciplined price/volume management in upstream silicone intermediates. Coatings & Performance Monomers local price increased in response to higher feedstock and raw material costs. Volume decreased in Consumer Solutions in all geographic regions, except Latin America, due to capacity constraints and a strategic focus on products that maximize margin. Volume increased in Coatings & Performance Monomers in all geographic regions, except EMEA, as a result of demand recovery in architectural and industrial coatings.
Operating EBITDA was $628 million in the third quarter of 2018, up 37 percent from pro forma Operating EBITDA of $460 million in the third quarter of 2017, as higher selling prices and cost synergies more than offset increased feedstock and other raw material costs.
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Performance Materials & Coatings net sales for the first nine months of 2018 were $7,379 million, up from net sales of $6,599 million in the first nine months of 2017. Net sales increased 13 percent compared with pro forma net sales of $6,558 million in the first nine months of 2017, with local price up 11 percent and a benefit from currency of 2 percent, while volume was flat. Local price increased in both businesses and all geographic regions. Volume was flat in Consumer Solutions and decreased slightly in Coatings & Performance Monomers. Volume decreased in EMEA and U.S. & Canada, more than offsetting increased volume in Asia Pacific and Latin America.
Operating EBITDA was $1,749 million for the first nine months of 2018, up 27 percent from pro forma Operating EBITDA of $1,374 million in the first nine months of 2017, as higher selling prices and cost synergies more than offset increased feedstock and other raw material costs and lower gains from the sales of assets and investments.
INDUSTRIAL INTERMEDIATES & INFRASTRUCTURE
The Industrial Intermediates & Infrastructure segment consists of two global businesses: Industrial Solutions and Polyurethanes & CAV. These customer-centric global businesses develop and market customized materials using advanced technology and unique chemistries. These businesses serve the needs of market segments as diverse as appliance, coatings, infrastructure, and oil and gas. The segment has broad geographic reach and R&D and manufacturing facilities located in key geographic regions. This segment also includes 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.
Dow is responsible for marketing a majority of Sadara products outside of the Middle East zone through Dow's established sales channels. As part of this arrangement, Dow purchases and sells Sadara products for a marketing fee.
Industrial Intermediates & Infrastructure | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 3,821 | $ | 3,228 | $ | 11,421 | $ | 9,094 | ||||
Pro forma net sales | $ | 3,226 | $ | 9,086 | ||||||||
Operating EBITDA | $ | 654 | $ | 1,990 | ||||||||
Pro forma Operating EBITDA | $ | 676 | $ | 1,605 | ||||||||
Equity earnings | $ | 54 | $ | 41 | $ | 299 | $ | 101 | ||||
Industrial Intermediates & Infrastructure | Three Months Ended | Nine Months Ended | ||
Percentage change from prior year | Sep 30, 2018 | Sep 30, 2018 | ||
Change in Net Sales from Prior Period due to: | ||||
Local price & product mix | 5 | % | 8 | % |
Currency | (1 | ) | 2 | |
Volume | 14 | 16 | ||
Portfolio & other | — | — | ||
Total | 18 | % | 26 | % |
Change in Net Sales in Current Period from Pro Forma Net Sales in Prior Period due to: | ||||
Local price & product mix | 5 | % | 8 | % |
Currency | (1 | ) | 2 | |
Volume | 14 | 16 | ||
Portfolio & other | — | — | ||
Total | 18 | % | 26 | % |
Industrial Intermediates & Infrastructure net sales were $3,821 million in the third quarter of 2018, up from net sales of $3,228 million in the third quarter of 2017. Net sales increased 18 percent compared with pro forma net sales of $3,226 million in the same quarter last year, with volume up 14 percent, local price up 5 percent and currency down 1 percent. Volume increased in all businesses and geographic regions. Polyurethanes & CAV reported volume increases in all geographic regions, except Latin America, reflecting growth in EMEA and Asia Pacific from increased supply from Sadara and higher demand for chlor-alkali and vinyl products in EMEA. Industrial Solutions volume increased in all regions driven by increased supply from Sadara and increased demand for industrial specialties, with double-digit growth in intermediates for crop defense, energy heat management and food
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and feed manufacturing. Local price increased in all 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 and propylene glycol which more than offset price declines in isocyanates. Currency had a negative impact of 1 percent, primarily in EMEA and Asia Pacific.
Operating EBITDA was $654 million in the third quarter of 2018, down 3 percent compared with pro forma Operating EBITDA of $676 million in the third quarter of 2017. Operating EBITDA decreased as the impact of higher feedstock and other raw material costs, the easing of isocyanate margins, and the impact of an unplanned outage associated with an isocyanates facility in the U.S. Gulf Coast more than offset higher selling prices, cost synergies, demand growth and higher equity earnings from the Kuwait joint ventures.
Industrial Intermediates & Infrastructure net sales for the first nine months of 2018 were $11,421 million, up from net sales of $9,094 million in the first nine months of 2017. Net sales increased 26 percent compared with pro forma net sales of $9,086 million in the first nine months of 2017, with volume up 16 percent, local price up 8 percent and currency up 2 percent. Volume increased in all businesses and geographic regions and local price increased in all businesses and all geographic regions, except Asia Pacific.
Operating EBITDA was $1,990 million for the first nine months of 2018, up 24 percent from pro forma Operating EBITDA of $1,605 million in the first nine months of 2017. Compared with pro forma Operating EBITDA from the same period last year, Operating EBITDA increased as the impact of higher selling prices, the benefit from currency on sales, cost synergies, higher equity earnings from the Kuwait joint ventures and lower equity losses from Sadara more than offset higher feedstock and other raw material costs and the unfavorable impact of currency on costs.
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PACKAGING & SPECIALTY PLASTICS
The Packaging & Specialty Plastics segment is a market-oriented portfolio composed of two global businesses: Hydrocarbons & Energy and Packaging and Specialty Plastics. The segment is advantaged through its low cost position into key feedstocks and broad geographic reach, with manufacturing facilities located in all geographic regions. It also benefits from R&D expertise to deliver leading-edge technology that provides a competitive benefit to customers in food packaging and other high-growth end-use markets like transportation and consumer durables. Taken together, the businesses in this segment represent the world's leading plastics franchise. 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, TKOC, Map Ta Phut Olefins Company Limited and Sadara, all joint ventures of the Company.
Dow is responsible for marketing a majority of Sadara products outside of the Middle East zone through Dow’s established sales channels. As part of this arrangement, Dow purchases and sells Sadara products for a marketing fee.
Packaging & Specialty Plastics | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 6,119 | $ | 5,260 | $ | 18,228 | $ | 15,364 | ||||
Pro forma net sales | $ | 5,490 | $ | 16,300 | ||||||||
Operating EBITDA | $ | 1,191 | $ | 3,822 | ||||||||
Pro forma Operating EBITDA | $ | 1,147 | $ | 3,424 | ||||||||
Equity earnings | $ | 83 | $ | 64 | $ | 250 | $ | 130 | ||||
Packaging & Specialty Plastics | Three Months Ended | Nine Months Ended | ||
Percentage change from prior year | Sep 30, 2018 | Sep 30, 2018 | ||
Change in Net Sales from Prior Period due to: | ||||
Local price & product mix | 7 | % | 4 | % |
Currency | — | 2 | ||
Volume | 5 | 7 | ||
Portfolio & other | 4 | 6 | ||
Total | 16 | % | 19 | % |
Change in Net Sales in Current Period from Pro Forma Net Sales in Prior Period due to: | ||||
Local price & product mix | 6 | % | 3 | % |
Currency | — | 2 | ||
Volume | 5 | 7 | ||
Portfolio & other | — | — | ||
Total | 11 | % | 12 | % |
Packaging & Specialty Plastics net sales were $6,119 million in the third quarter of 2018, up from net sales of $5,260 million in the third quarter of 2017. Net sales increased 11 percent compared with pro forma net sales of $5,490 million in the same quarter last year, with local price up 6 percent and volume up 5 percent. Local price increased across all geographic regions and in both businesses in response to higher feedstock and other raw material costs. Volume increased across all geographic regions and in both businesses supported by new capacity additions on the U.S. Gulf Coast. Packaging and Specialty Plastics volume growth was driven by increases in industrial and consumer packaging, health and hygiene solutions and elastomer applications. Hydrocarbons & Energy volume increased due to higher sales of ethylene and ethylene by-products.
Operating EBITDA was $1,191 million in the third quarter of 2018, up 4 percent from pro forma Operating EBITDA of $1,147 million in the third quarter of 2017. Compared with pro forma Operating EBITDA from the same quarter last year, Operating EBITDA increased as the impact of higher sales volume, reflecting additional capacity from U.S. Gulf Coast growth projects, higher selling prices, cost synergies, higher equity earnings and lower start-up and commissioning costs more than offset higher feedstock and other raw materials costs and increased costs from planned maintenance turnarounds.
Packaging & Specialty Plastics net sales for the first nine months of 2018 were $18,228 million, up from net sales of $15,364 million in the first nine months of 2017. Net sales increased 12 percent compared with pro forma net sales of $16,300 million in the first nine months of 2017, with volume up 7 percent, local price up 3 percent and currency up 2 percent, primarily in EMEA. Volume increased in both businesses and across all geographic regions primarily due to new capacity additions on the U.S. Gulf Coast and
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increased supply from Sadara. Local price increased in both businesses and across all geographic regions in response to higher feedstock and other raw material costs.
Operating EBITDA was $3,822 million for the first nine months of 2018, up 12 percent from pro forma Operating EBITDA of $3,424 million in the first nine months of 2017. Compared with pro forma Operating EBITDA from the same period last year, Operating EBITDA increased as the impact of higher sales volume, reflecting additional capacity from growth projects, higher selling prices, the benefit from currency on sales, cost synergies, higher equity earnings and lower start-up and commissioning costs more than offset higher feedstock and other raw materials costs, the unfavorable impact of currency on costs, increased costs from planned maintenance turnarounds and the impact of weather-related disruptions on the U.S. Gulf Coast.
ELECTRONICS & IMAGING
The Electronics & Imaging segment 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. The segment is a leading provider of materials and solutions for the fabrication of semiconductors and integrated circuits and also provides innovative metallization processes for metal finishing, decorative, and industrial applications. Electronics & Imaging is a leading global supplier of key materials for the manufacturing of photovoltaics ("PV") and solar cells, including innovative metallization pastes and back sheet materials for the production of solar cells and solar modules and in the advanced printing and packaging graphics industry providing flexographic printing inks, photopolymer plates, and platemaking systems used in digital printing applications for textile, commercial and home-office use. In addition, the segment provides cutting-edge materials for the manufacturing of rigid and flexible displays for liquid crystal displays ("LCD"), advanced-matrix organic light emitting diode ("AMOLED"), and quantum dot ("QD") applications. This segment also includes the results of the HSC Group joint ventures.
Electronics & Imaging | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 1,195 | $ | 832 | $ | 3,551 | $ | 2,164 | ||||
Pro forma net sales | $ | 1,197 | $ | 3,582 | ||||||||
Operating EBITDA | $ | 412 | $ | 1,217 | ||||||||
Pro forma Operating EBITDA | $ | 411 | $ | 1,259 | ||||||||
Equity earnings | $ | 35 | $ | 29 | $ | 124 | $ | 139 | ||||
Electronics & Imaging | Three Months Ended | Nine Months Ended | ||
Percentage change from prior year | Sep 30, 2018 | Sep 30, 2018 | ||
Change in Net Sales from Prior Period due to: | ||||
Local price & product mix | (1 | )% | — | % |
Currency | — | 1 | ||
Volume | 3 | 2 | ||
Portfolio & other | 42 | 61 | ||
Total | 44 | % | 64 | % |
Change in Net Sales in Current Period from Pro Forma Net Sales in Prior Period due to: | ||||
Local price & product mix | (1 | )% | — | % |
Currency | — | 1 | ||
Volume | 1 | 1 | ||
Portfolio & other | — | (3 | ) | |
Total | — | % | (1 | )% |
Electronics & Imaging net sales were $1,195 million in the third quarter of 2018, up from $832 million in the third quarter of 2017. Net sales in the third quarter of 2018 were flat with pro forma net sales of $1,197 million in the third quarter of 2017, as volume growth was offset by lower local price.
Volume growth in the segment was driven by continued strength in semiconductor technologies and gains in display & other technologies. Increased semiconductor content in end-use applications drove strong demand in both chemical mechanical planarization (“CMP”) and advanced packaging market segments. Growth in display & other technologies was driven by strong
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demand in OLEDs, primarily in Asia Pacific. Partially offsetting this growth was a decline in photovoltaic & advanced materials on reduced demand for TEDLAR® film and SOLAMET® paste resulting from revised incentive policies in China.
Operating EBITDA was $412 million in the third quarter of 2018, flat compared with pro forma Operating EBITDA of $411 million in the third quarter of 2017. Cost synergies, volume growth and lower pension/OPEB costs were offset by higher raw material costs, higher costs due to growth investments and lower equity earnings in the third quarter of 2018 as compared with pro forma equity earnings in the third quarter of 2017.
Electronics & Imaging net sales were $3,551 million for the first nine months of 2018, up from $2,164 million in the first nine months of 2017. Net sales for the first nine months of 2018 were down 1 percent from pro forma net sales of $3,582 million in the first nine months of 2017. Net sales declined as 3 percent unfavorable impact from portfolio actions related to the prior year divestiture of the SKC Haas Display Films business, was partially offset by volume growth of 1 percent and a 1 percent benefit from currency.
Volume growth in the segment was driven by gains in semiconductor technologies, interconnect solutions and display & other technologies, primarily in Asia Pacific, partially offset by a decline in photovoltaic & advanced materials.
Operating EBITDA was $1,217 million for the first nine months of 2018, down 3 percent from pro forma Operating EBITDA of $1,259 million for the first nine months of 2017. Cost synergies, lower pension/OPEB costs, volume growth and favorable currency, were more than offset by higher unit costs, lower equity earnings as compared with pro forma equity earnings in the first nine months of 2017 and the absence of a prior-year gain on the sale of a business.
Updated Outlook
The Operating EBITDA outlook for 2018 is now expected to increase moderately as compared with 2017 pro forma Operating EBITDA, driven by cost synergies, volume growth, lower pension/OPEB costs and higher equity earnings, partially offset by higher raw material costs, the absence of a prior-year gain on the sale of a business and higher costs due to growth investments.
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NUTRITION & BIOSCIENCES
The Nutrition & Biosciences segment is an innovation-driven and customer-focused segment that provides solutions for the global food and beverage, pharma, personal care, energy and animal nutrition markets. The segment consists of two operating segments: Nutrition & Health and Industrial Biosciences. The Nutrition & Health business is one of the world's largest producers of specialty food ingredients, developing and manufacturing solutions for the global food and beverage market. The Nutrition & Health business is also one of the world's largest producers of cellulosic- and alginates-based pharma excipients. The Industrial Biosciences business is an industry pioneer and innovator that works with customers to improve the performance, productivity and sustainability of their products and processes through biotechnology and engineering solutions including enzymes, biomaterials, biocides and antimicrobial solutions and process technology.
Nutrition & Biosciences | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 1,678 | $ | 682 | $ | 5,173 | $ | 1,203 | ||||
Pro forma net sales | $ | 1,466 | $ | 4,371 | ||||||||
Operating EBITDA | $ | 414 | $ | 1,265 | ||||||||
Pro forma Operating EBITDA | $ | 312 | $ | 944 | ||||||||
Equity earnings | $ | 4 | $ | 3 | $ | 12 | $ | 9 | ||||
Nutrition & Biosciences | Three Months Ended | Nine Months Ended | ||
Percentage change from prior year | Sep 30, 2018 | Sep 30, 2018 | ||
Change in Net Sales from Prior Period due to: | ||||
Local price & product mix | 2 | % | 3 | % |
Currency | (2 | ) | — | |
Volume | (4 | ) | — | |
Portfolio & other | 150 | 327 | ||
Total | 146 | % | 330 | % |
Change in Net Sales in Current Period from Pro Forma Net Sales in Prior Period due to: | ||||
Local price & product mix | 1 | % | — | % |
Currency | (1 | ) | 2 | |
Volume | 3 | 4 | ||
Portfolio & other | 11 | 12 | ||
Total | 14 | % | 18 | % |
Nutrition & Biosciences net sales were $1,678 million in the third quarter of 2018, up from $682 million in the third quarter of 2017. Net sales in the third quarter of 2018 were up 14 percent from pro forma net sales of $1,466 million in the third quarter of 2017. The increase was primarily due to an 11 percent net benefit from portfolio actions due to the acquisition of FMC’s Health & Nutrition business, 3 percent in volume growth and a 1 percent increase in local price, partially offset by a 1 percent unfavorable impact from currency.
Volume gains in the segment were led by Nutrition & Health on continued growth in probiotics and specialty proteins, primarily in Asia Pacific. Industrial Biosciences volume grew on increased demand for clean technologies due to alkylation and acid equipment sales and in bioactives for home and personal care applications, offset by declines in microbial control solutions and biomaterials.
Operating EBITDA was $414 million in the third quarter of 2018, up 33 percent compared with pro forma Operating EBITDA of $312 million in the third quarter of 2017, driven by a portfolio benefit, cost synergies, volume growth and lower pension/OPEB costs.
Nutrition & Biosciences net sales were $5,173 million for the first nine months of 2018, up from $1,203 million in the first nine months of 2017. Net sales for the first nine months of 2018 were up 18 percent from pro forma net sales of $4,371 million in the first nine months of 2017. The increase was primarily due to a 12 percent net benefit from portfolio actions due to the acquisition of FMC's Health & Nutrition business, 4 percent in volume growth and a 2 percent benefit from currency.
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Volume growth in the segment was led by Nutrition & Health on gains in probiotics, specialty proteins and pharmaceutical excipients, driven by demand in Asia Pacific. Industrial Biosciences volume grew on improvement in clean technologies due to alkylation offerings in Asia Pacific and EMEA and acid equipment sales. Demand for bioactives in animal nutrition and home and personal care applications also contributed to volume growth.
Operating EBITDA was $1,265 million for the first nine months of 2018, up 34 percent from pro forma Operating EBITDA of $944 million in the first nine months of 2017, driven by favorable portfolio actions, cost synergies, volume growth and lower pension/OPEB costs, partially offset by higher costs due to growth investments.
TRANSPORTATION & ADVANCED POLYMERS
The Transportation & Advanced Polymers segment provides high-performance engineering resins, adhesives, lubricants and parts to engineers and designers in the transportation, electronics, medical, industrial and consumer end-markets to enable systems solutions for demanding applications and environments. The segment delivers a broad range of polymer-based high-performance materials in its product portfolio, including elastomers and thermoplastic and thermoset engineering polymers which are used by customers to fabricate components for mechanical, chemical and electrical systems. In addition, the segment produces innovative and differentiated adhesive technologies to meet customer specifications for durability, crash performance, and healthcare applications. Transportation & Advanced Polymers also targets the performance plastics and fluid solutions markets by developing technologies that differentiate customers’ products with improved performance characteristics.
Transportation & Advanced Polymers | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 1,408 | $ | 637 | $ | 4,301 | $ | 1,225 | ||||
Pro forma net sales | $ | 1,299 | $ | 3,834 | ||||||||
Operating EBITDA | $ | 430 | $ | 1,313 | ||||||||
Pro forma Operating EBITDA | $ | 325 | $ | 954 | ||||||||
Equity earnings | $ | — | $ | 1 | $ | 4 | $ | 1 | ||||
Transportation & Advanced Polymers | Three Months Ended | Nine Months Ended | ||
Percentage change from prior year | Sep 30, 2018 | Sep 30, 2018 | ||
Change in Net Sales from Prior Period due to: | ||||
Local price & product mix | 4 | % | 3 | % |
Currency | (1 | ) | 2 | |
Volume | 1 | 1 | ||
Portfolio & other | 117 | 245 | ||
Total | 121 | % | 251 | % |
Change in Net Sales in Current Period from Pro Forma Net Sales in Prior Period due to: | ||||
Local price & product mix | 6 | % | 5 | % |
Currency | (1 | ) | 3 | |
Volume | 3 | 4 | ||
Portfolio & other | — | — | ||
Total | 8 | % | 12 | % |
Transportation & Advanced Polymers net sales were $1,408 million in the third quarter of 2018, up from $637 million in the third quarter of 2017. Net sales in the third quarter of 2018 were up 8 percent from pro forma net sales of $1,299 million in the third quarter of 2017. The increase was due to a 6 percent increase in local price and 3 percent of volume growth, partially offset by a 1 percent unfavorable impact from currency.
Volume growth in the segment was primarily due to performance solutions, led by growth in VESPEL® high-performance parts in the electronics and aerospace markets, performance resins due to growth in DELRIN® and VAMAC® in the automotive market and in engineering polymers due to growth in ZYTEL® HTN. Broad based volume growth was led by U.S. & Canada and Asia Pacific. The increase in local price, primarily in engineering polymers, was driven by tight polymer supply and higher feedstock costs.
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Operating EBITDA was $430 million in the third quarter of 2018, up 32 percent compared with pro forma Operating EBITDA of $325 million in the third quarter of 2017. The increase was driven by higher local selling price, volume gains, lower pension/OPEB costs and cost synergies, partially offset by higher raw material costs.
Transportation & Advanced Polymers net sales were $4,301 million for the first nine months of 2018, up from $1,225 million in the first nine months of 2017. Net sales in the first nine months of 2018 were up 12 percent from pro forma net sales of $3,834 million in the first nine months of 2017. The increase was due to a 5 percent increase in local price, 4 percent of volume growth and a 3 percent benefit from currency.
Volume growth in the segment was primarily due to performance solutions, led by growth in KALREZ® and VESPEL® high-performance parts in the electronics and aerospace markets, performance resins due to growth in DELRIN® and HYTREL® in the automotive market and in engineering polymers due to growth in ZYTEL®. Broad based volume growth was led by Asia Pacific. The increase in local price, primarily in engineering polymers, was driven by tight polymer supply and higher feedstock costs.
Operating EBITDA was $1,313 million for the first nine months of 2018, up 38 percent from pro forma Operating EBITDA of $954 million in the first nine months of 2017 due to price and volume gains, lower pension/OPEB costs, cost synergies and favorable currency, partially offset by higher raw material costs.
SAFETY & CONSTRUCTION
The Safety & Construction segment is a leading provider of engineered products and integrated systems for a number of industries including construction, worker safety, energy, oil and gas, transportation, medical devices and water purification and separation. The segment satisfies the growing global needs of businesses, governments, and consumers for solutions that make life safer, healthier and better. By uniting market-driven science with the strength of highly regarded brands, the segment strives to bring new products and solutions to solve customers' needs faster, better and more cost effectively. The segment is a leader in safety consulting, selling training products as well as consulting services, to improve the safety, productivity and sustainability of organizations across a range of industries.
Safety & Construction | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 1,402 | $ | 792 | $ | 4,112 | $ | 1,716 | ||||
Pro forma net sales | $ | 1,310 | $ | 3,852 | ||||||||
Operating EBITDA | $ | 389 | $ | 1,084 | ||||||||
Pro forma Operating EBITDA | $ | 353 | $ | 908 | ||||||||
Equity earnings | $ | 6 | $ | (1 | ) | $ | 19 | $ | (1 | ) | ||
Safety & Construction | Three Months Ended | Nine Months Ended | ||
Percentage change from prior year | Sep 30, 2018 | Sep 30, 2018 | ||
Change in Net Sales from Prior Period due to: | ||||
Local price & product mix | 2 | % | 2 | % |
Currency | (1 | ) | 1 | |
Volume | 5 | 2 | ||
Portfolio & other | 71 | 135 | ||
Total | 77 | % | 140 | % |
Change in Net Sales in Current Period from Pro Forma Net Sales in Prior Period due to: | ||||
Local price & product mix | 2 | % | 1 | % |
Currency | (1 | ) | 2 | |
Volume | 6 | 4 | ||
Portfolio & other | — | — | ||
Total | 7 | % | 7 | % |
Safety & Construction net sales were $1,402 million in the third quarter of 2018, up from $792 million in the third quarter of 2017. Net sales in the third quarter of 2018 were up 7 percent from pro forma net sales of $1,310 million in the third quarter of 2017
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due to 6 percent of volume growth and a 2 percent increase in local price, partially offset by a 1 percent unfavorable impact from currency.
Volume growth in the segment was led by broad-based growth across industrial, life and personal protection, and medical packaging end-markets, resulting in increased sales in aramids of KEVLAR® high-strength materials and NOMEX® thermal-resistant fibers, as well as gains in water solutions and TYVEK® enterprise. These increases were partially offset by declines in construction due to a slowdown in the U.S. residential market. The increase in local price was due to price gains across most businesses.
Operating EBITDA was $389 million in the third quarter of 2018, up 10 percent from pro forma Operating EBITDA of $353 million in the third quarter of 2017. Cost synergies and productivity, lower pension/OPEB costs and volume and price gains more than offset higher raw material and freight costs and the absence of prior year one-time gains.
Safety & Construction net sales were $4,112 million for the first nine months of 2018, up from $1,716 million in the first nine months of 2017. Net sales for the first nine months of 2018 were up 7 percent from pro forma net sales of $3,852 million in the first nine months of 2017 due to 4 percent of volume growth, a 2 percent benefit from currency and a 1 percent increase in local price.
Volume growth in the segment was driven by broad-based demand in industrial applications, with strength in NOMEX® and KEVLAR®, as well as gains in TYVEK® enterprise and water solutions. The increase in local price was due to price gains across most businesses.
Operating EBITDA was $1,084 million for the first nine months of 2018, up 19 percent from pro forma Operating EBITDA of $908 million in the first nine months of 2017, due to lower pension/OPEB costs, cost synergies, volume and price gains and favorable currency, partially offset by higher raw material and freight costs and the absence of prior year one-time gains.
CORPORATE
Corporate includes certain enterprise and governance activities (including insurance operations, environmental operations, geographic management, etc.); business incubation platforms; non-business aligned joint ventures; gains and losses on the sales of financial assets; non-business aligned litigation expenses; discontinued or non-aligned businesses and pre-commercial activities.
Corporate | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net sales | $ | 78 | $ | 157 | $ | 229 | $ | 324 | ||||
Pro forma net sales | $ | 159 | $ | 331 | ||||||||
Operating EBITDA | $ | (185 | ) | $ | (536 | ) | ||||||
Pro forma Operating EBITDA | $ | (224 | ) | $ | (627 | ) | ||||||
Equity earnings (losses) | $ | (4 | ) | $ | 10 | $ | (26 | ) | $ | (8 | ) | |
Net sales for Corporate, which primarily relate to Dow's insurance operations, were $78 million in the third quarter of 2018, compared with net sales of $157 million and pro forma net sales of $159 million in the third quarter of 2017. For the first nine months of 2018, net sales were $229 million, compared with net sales of $324 million and pro forma net sales of $331 million in the same period of 2017.
Operating EBITDA was a loss of $185 million in the third quarter of 2018, compared with a pro forma Operating EBITDA loss of $224 million in the third quarter of 2017. In the first nine months of 2018, Operating EBITDA was a loss of $536 million compared with a pro forma Operating EBITDA loss of $627 million in the same period last year. Compared with pro forma Operating EBITDA in the first nine months of 2017, Operating EBITDA improved primarily due to lower pre-commercial expenses, lower discontinued business costs and cost synergies.
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SUPPLEMENTAL DIVISION INFORMATION
Discussion of segment revenue, operating EBITDA and price/volume metrics on a divisional basis for Agriculture is based on the results of the Agriculture segment; for Materials Science is based on the combined results of the Performance Materials & Coatings segment, the Industrial Intermediates & Infrastructure segment and the Packaging & Specialty Plastics segment; and for Specialty Products is based on the combined results of the Electronics & Imaging segment, the Nutrition & Biosciences segment, the Transportation & Advanced Polymers segment and the Safety & Construction segment. The Corporate segment is not included in the division metrics. The segment disclosures have been presented in this manner for informational purposes only and should not be viewed as an indication of each division’s current or future operating results on a standalone basis assuming completion of the Intended Business Separations. See the section entitled “Segment Results” for additional qualitative analysis on segment performance.
Net Sales by Division | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 1 | Sep 30, 2018 | Sep 30, 2017 1 | ||||||||
Agriculture | $ | 1,946 | $ | 1,911 | $ | 11,484 | $ | 11,555 | ||||
Performance Materials & Coatings | 2,476 | 2,227 | 7,379 | 6,558 | ||||||||
Industrial Intermediates & Infrastructure | 3,821 | 3,226 | 11,421 | 9,086 | ||||||||
Packaging & Specialty Plastics | 6,119 | 5,490 | 18,228 | 16,300 | ||||||||
Materials Science | $ | 12,416 | $ | 10,943 | $ | 37,028 | $ | 31,944 | ||||
Electronics & Imaging | 1,195 | 1,197 | 3,551 | 3,582 | ||||||||
Nutrition & Biosciences | 1,678 | 1,466 | 5,173 | 4,371 | ||||||||
Transportation & Advanced Polymers | 1,408 | 1,299 | 4,301 | 3,834 | ||||||||
Safety & Construction | 1,402 | 1,310 | 4,112 | 3,852 | ||||||||
Specialty Products | $ | 5,683 | $ | 5,272 | $ | 17,137 | $ | 15,639 | ||||
Net Sales Variance by Division 1 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 | ||||||||||||||||||
Local Price & Product Mix | Currency | Volume | Portfolio / Other 2 | Total | Local Price & Product Mix | Currency | Volume | Portfolio / Other 2 | Total | |||||||||||
Percent change from prior year | ||||||||||||||||||||
Agriculture | 3 | % | (6 | )% | 8 | % | (3 | )% | 2 | % | 3 | % | 1 | % | (4 | )% | (1 | )% | (1 | )% |
Materials Science | 7 | % | — | % | 6 | % | — | % | 13 | % | 6 | % | 2 | % | 8 | % | — | % | 16 | % |
Specialty Products | 2 | % | — | % | 3 | % | 3 | % | 8 | % | 2 | % | 2 | % | 3 | % | 3 | % | 10 | % |
Total | 5 | % | (1 | )% | 5 | % | 1 | % | 10 | % | 4 | % | 2 | % | 4 | % | 1 | % | 11 | % |
Operating EBITDA by Division | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 1 | Sep 30, 2018 | Sep 30, 2017 1 | ||||||||
Agriculture | $ | (104 | ) | $ | (239 | ) | $ | 2,472 | $ | 2,387 | ||
Performance Materials & Coatings | 628 | 460 | 1,749 | 1,374 | ||||||||
Industrial Intermediates & Infrastructure | 654 | 676 | 1,990 | 1,605 | ||||||||
Packaging & Specialty Plastics | 1,191 | 1,147 | 3,822 | 3,424 | ||||||||
Materials Science | $ | 2,473 | $ | 2,283 | $ | 7,561 | $ | 6,403 | ||||
Electronics & Imaging | 412 | 411 | 1,217 | 1,259 | ||||||||
Nutrition & Biosciences | 414 | 312 | 1,265 | 944 | ||||||||
Transportation & Advanced Polymers | 430 | 325 | 1,313 | 954 | ||||||||
Safety & Construction | 389 | 353 | 1,084 | 908 | ||||||||
Specialty Products | $ | 1,645 | $ | 1,401 | $ | 4,879 | $ | 4,065 | ||||
1. | Information for the three and nine months ended September 30, 2017, was prepared on a pro forma basis. |
2. | Pro forma net sales for Agriculture excludes sales related to the November 30, 2017, divestiture of a portion of the DAS Divested Ag Business for the period January 1, 2017 through August 31, 2017. Sales for the month of September 2017 are included in Portfolio & Other. Pro forma net sales for Materials Science excludes sales related to the September 1, 2017, divestiture of the EAA Business for the period January 1, 2017 through August 31, 2017. Portfolio & Other includes sales for the acquisition of the H&N Business acquired on November 1, 2017, impacting Specialty Products. Portfolio & Other also reflects the following divestitures: SKC Haas Display Films group of companies (divested June 30, 2017), the authentication business (divested on January 6, 2017), and the divestiture of the global food safety diagnostic business (divested February 28, 2017), all impacting Specialty Products. |
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CHANGES IN FINANCIAL CONDITION
The Company had cash and cash equivalents and marketable securities of $7,309 million at September 30, 2018 and $14,394 million at December 31, 2017, of which $5,572 million at September 30, 2018 and $12,177 million at December 31, 2017, was held by subsidiaries in foreign countries, including United States territories. 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 is currently evaluating the impact of The Act on its permanent reinvestment assertion. The Act requires 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 (see Note 7 to the Consolidated Financial Statements for further details of The Act). A tax liability was accrued for the estimated U.S. federal tax on all unrepatriated earnings at December 31, 2017, in accordance with 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 Company 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. During 2018, 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. During the three and nine months ended September 30, 2018, the Company recorded tax expense of $61 million associated with these repatriation activities.
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 | Nine Months Ended | |||||
In millions | Sep 30, 2018 | Sep 30, 2017 1 | ||||
Cash provided by (used for): | ||||||
Operating activities | $ | (370 | ) | $ | (2,522 | ) |
Investing activities | (1,439 | ) | 10,154 | |||
Financing activities | (4,484 | ) | (1,310 | ) | ||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (246 | ) | 254 | |||
Cash reclassified as held for sale | — | (37 | ) | |||
Summary | ||||||
Increase (Decrease) in cash, cash equivalents and restricted cash | $ | (6,539 | ) | $ | 6,539 | |
Cash, cash equivalents and restricted cash at beginning of period | 14,015 | 6,624 | ||||
Cash, cash equivalents and restricted cash at end of period | $ | 7,476 | $ | 13,163 | ||
Less: Restricted cash and cash equivalents, included in "Other current assets" | 537 | 15 | ||||
Cash and cash equivalents at end of period | $ | 6,939 | $ | 13,148 | ||
1. | Updated for ASU 2016-15 (including SEC interpretive guidance) and ASU 2016-18. See Notes 1 and 2 to the Consolidated Financial Statements for additional information. |
Cash Flows from Operating Activities
In the first nine months of 2018, cash used for operating activities was $370 million, compared with cash used for operating activities of $2,522 million in the same period last year. In the first nine months of 2018, cash used for working capital requirements, pension contributions and integration and separation costs more than offset cash earnings. In the first nine months of 2017, cash used for working capital requirements, cash payments related to the Bayer CropScience arbitration matter and the PFOA multi-district litigation settlement and pension contributions more than offset cash earnings, a one-time cash receipt from the Nova patent infringement award and advance payments from customers for long-term ethylene supply agreements.
Net Working Capital | Sep 30, 2018 | Dec 31, 2017 | ||||
In millions | ||||||
Current assets | $ | 45,405 | $ | 49,893 | ||
Current liabilities | 27,680 | 26,128 | ||||
Net working capital | $ | 17,725 | $ | 23,765 | ||
Current ratio | 1.64:1 | 1.91:1 | ||||
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Cash Flows from Investing Activities
In the first nine months of 2018, cash used for investing activities was $1,439 million, reflecting capital expenditures and purchases of investments, which more than offset proceeds from sales and maturities of investments and proceeds from interests in trade accounts receivable conduits. In the first nine months of 2017, cash provided by investing activities was $10,154 million, primarily due to proceeds from interests in trade accounts receivable conduits, cash acquired in the Merger and proceeds from sales and maturities of investments which more than offset capital expenditures and investments in and loans to nonconsolidated affiliates, primarily with Sadara.
Capital spending was $2,558 million in the first nine months of 2018, compared with $2,301 million in the first nine months of 2017. The Company expects full year capital spending in 2018 to be approximately $4.4 billion to $4.7 billion, inclusive of capital spending for targeted cost synergy and business separation projects.
In the first nine months of 2018, Dow entered into a shareholder loan reduction agreement with Sadara and converted $215 million of the existing loan balance into equity. Dow expects to loan between zero and $200 million to Sadara during the remainder of 2018. All or a portion of the outstanding loans to Sadara could potentially be converted into equity in future periods.
Cash Flows from Financing Activities
In the first nine months of 2018, cash used for financing activities was $4,484 million compared with $1,310 million in the same period last year. The increase was primarily due to purchases of treasury stock, increased payments on long-term debt, increased dividends paid to stockholders and lower proceeds from sales/issuance of common stock, which were partially offset by an increase in notes payable and proceeds from issuance of long-term debt.
Reclassification of Prior Period Amounts Related to Accounts Receivable Securitization
In connection with the review and implementation of ASU 2016-15, including additional interpretive guidance from the SEC related to the required method for calculating the cash received from beneficial interests in trade accounts receivable conduits, Dow changed the prior period presentation and amount of proceeds from interests in trade accounts receivable conduits. In the first nine months of 2017, changes related to the calculation and presentation of proceeds from interests in trade accounts receivable conduits resulted in a reclassification of $6,989 million from cash used for operating activities to cash provided by investing activities. In the fourth quarter of 2017, Dow 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 cash flows from operating activities to a non-GAAP measure regarding cash flows from operating activities excluding the impact of ASU 2016-15 and related interpretive guidance for the nine months ended September 30, 2018 and 2017. 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 Company utilizes in support of its operating activities.
Cash Flows from Operating Activities Excluding the Impact of ASU 2016-15 and Additional Interpretive Guidance (non-GAAP) | Nine Months Ended | |||||
Sep 30, 2018 | Sep 30, 2017 | |||||
In millions | ||||||
Cash flows from operating activities - Updated for impact of ASU 2016-15 and additional interpretive guidance (GAAP) | $ | (370 | ) | $ | (2,522 | ) |
Less: Impact of ASU 2016-15 and additional interpretive guidance | (657 | ) | (6,989 | ) | ||
Cash flows from operating activities - Excluding impact of ASU 2016-15 and additional interpretive guidance (non-GAAP) | $ | 287 | $ | 4,467 | ||
Free Cash Flow
The Company defines free cash flow as cash from operating activities less capital expenditures. Under this definition, free cash flow represents the cash that remains available to the Company, after investing in its asset base, to fund obligations using the Company's primary source of incremental liquidity - cash flows from operating activities. Free cash flow is an integral financial measure used in the Company's financial planning process. This financial measure is not recognized in accordance with U.S. GAAP and should not be viewed as an alternative to U.S. GAAP financial measures of performance. All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, the Company's free cash flow definition may not be consistent with the methodologies used by other companies.
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For additional information relating to the change in cash used for operating activities, see the discussion in the previous section entitled "Cash Flows from Operating Activities."
Reconciliation of "Cash From Operating Activities" to Free Cash Flow (non-GAAP) | Nine Months Ended | |||||
In millions | Sep 30, 2018 | Sep 30, 2017 1 | ||||
Cash from operating activities (GAAP) | $ | (370 | ) | $ | (2,522 | ) |
Less: Capital expenditures | 2,558 | 2,301 | ||||
Free cash flow (non-GAAP) | $ | (2,928 | ) | $ | (4,823 | ) |
1. | "Cash from operating activities" was updated for ASU 2016-15 (including SEC interpretive guidance) and ASU 2016-18. See Notes 1 and 2 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. Management expects the generation of cash from operations and the ability to access the debt capital markets and other sources of liquidity will continue to provide sufficient liquidity and financial flexibility to meet the Company’s and its subsidiaries obligations as they come due.
Dow's Liquidity Sources
Credit Ratings
At October 31, 2018, Dow's credit ratings 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 | Rating Watch Positive |
Downgrades in Dow's credit ratings would increase borrowing costs on certain indentures and could impact its ability to access credit markets.
Commercial Paper - Dow
Dow issues promissory notes under U.S. and Euromarket commercial paper programs. At September 30, 2018, Dow had $594 million of commercial paper outstanding ($231 million at December 31, 2017). Dow maintains access to the commercial paper market at competitive rates. Amounts outstanding under Dow's commercial paper programs during the period may be greater, or less, than the amount reported at the end of the period.
Committed Credit Facilities - Dow
In the event the Company has short-term liquidity needs, it can access liquidity through Dow's committed and available credit facilities. On May 27, 2018, Dow renewed a $200 million Bilateral Revolving Credit Facility agreement, which has a maturity date in May 2020 and provides for interest at floating rates, as defined in the agreement. On July 20, 2018, Dow renewed a $200 million Bilateral Revolving Credit Facility agreement, which has a maturity date in July 2020 and provides for interest at floating rates, as defined in the agreement. On August 4, 2018, Dow renewed a $100 million Bilateral Revolving Credit Facility agreement, which has a maturity date in August 2020 and provides for interest at floating rates, as defined in the agreement.
On October 30, 2018, Dow terminated and replaced its $5.0 billion Five Year Competitive Advance and Revolving Credit Facility Agreement under substantially similar terms and conditions, which has a maturity date in October 2023. In addition, Dow amended a $100 million Bilateral Revolving Credit Facility agreement, which has a maturity date in October 2019 and provides for interest at floating rates, as defined in the agreement.
In connection with the Dow Silicones ownership restructure, on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness under a certain third party credit agreement ("Dow Term Loan Facility"). Dow subsequently guaranteed the obligations of Dow Silicones under the Dow Term Loan Facility and, as a result, the covenants and events of default applicable to the Dow Term Loan Facility are substantially similar to the covenants and events of default set forth in Dow's Five Year Competitive Advance and Revolving Credit Facility. In the second quarter of 2018, Dow Silicones exercised a 19-month extension option making amounts borrowed under the Dow Term Loan Facility repayable on December 30, 2019, and amended the Dow Term Loan Facility to include an additional 2-year extension option, at Dow Silicones' election, upon satisfaction of certain customary conditions precedent.
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In September 2018, Dow 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, Dow will use select trade accounts receivable to collateralize the credit facility with certain lenders. At September 30, 2018, the facility had not been drawn upon.
At September 30, 2018, Dow had total committed credit facilities of $11.7 billion with remaining available credit facilities of $7.2 billion.
In October 2018, Dow 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, Dow will use select trade accounts receivable to collateralize the credit facility with certain lenders. See Note 15 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, for additional information on committed and available credit facilities.
DuPont's Liquidity Sources
Credit Ratings
At October 31, 2018, DuPont's credit ratings were as follows:
Credit Ratings | Long-Term Rating | Short-Term Rating | Outlook |
Standard & Poor’s | A- | A-2 | Stable |
Moody’s Investors Service | A3 | P-2 | Negative |
Fitch Ratings | A | F1 | Rating Watch Negative |
Downgrades in DuPont's credit ratings would increase borrowing costs on certain indentures and could impact its ability to access debt capital markets.
Commercial Paper - DuPont
DuPont issues promissory notes under U.S. commercial paper programs. At September 30, 2018, DuPont had $2,518 million of commercial paper outstanding ($1,436 million at December 31, 2017). DuPont maintains access to the commercial paper market at competitive rates. Amounts outstanding under DuPont's commercial paper programs during the period may be greater, or less, than the amount reported at the end of the period.
Committed Credit Facilities - DuPont
In the event the Company has short-term liquidity needs, it can access liquidity through DuPont's committed and available credit facilities. At September 30, 2018, DuPont had total committed credit facilities of $8.8 billion with remaining available credit facilities of $5.5 billion. See Note 15 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, for additional information on committed and available credit facilities.
Term Loan and Revolving Credit Facilities - DuPont
In March 2016, DuPont entered into a credit agreement that provides for a three-year, senior unsecured term loan facility in the aggregate principal amount of $4.5 billion (as may be amended, from time to time, the "Term Loan Facility") under which DuPont may make up to seven term loan borrowings and amounts repaid or prepaid are not available for subsequent borrowings. The proceeds from the borrowings under the Term Loan Facility will be used for DuPont's general corporate purposes including debt repayment, working capital and funding a portion of the Company's costs and expenses. The Term Loan Facility was amended in 2018 to extend the maturity date to June 2020, at which time all outstanding borrowings, including accrued but unpaid interest, become immediately due and payable, and to extend the date on which the commitment to lend terminates to June 2019. At September 30, 2018, DuPont had made four term loan borrowings in an aggregate principal amount of $2.0 billion and had unused commitments of $2.5 billion under the Term Loan Facility. In addition, in 2018, DuPont amended its $3.0 billion revolving credit facility to extend the maturity date to June 2020.
Committed Receivable Repurchase Facility - DuPont
In February 2018, in line with seasonal agricultural working capital requirements, DuPont entered into a committed receivable repurchase agreement of up to $1.3 billion (the "2018 Repurchase Facility") which expires in December 2018. From time to time, DuPont and the banks modify the monthly commitment amounts to better align with working capital requirements. Under the 2018 Repurchase Facility, DuPont may sell a portfolio of available and eligible outstanding customer notes receivables within the Agriculture segment to participating institutions and simultaneously agree to repurchase at a future date. See Note 12 to the Consolidated Financial Statements for additional information.
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Debt
The Company’s public debt instruments and primary, private credit agreements (collectively "Debt Instruments") reside with Dow and DuPont (the "Subsidiaries"). See Note 12 to the Consolidated Financial Statements for information related to the Subsidiaries' notes payable and long-term debt activity since December 31, 2017, including debt retired and issued. The following table reflects the debt of the Subsidiaries:
Total Debt | Sep 30, 2018 | Dec 31, 2017 | ||||||||||||||||
In millions | Dow | DuPont | Total | Dow | DuPont | Total | ||||||||||||
Notes payable | $ | 910 | $ | 3,847 | $ | 4,757 | $ | 484 | $ | 1,464 | $ | 1,948 | ||||||
Long-term debt due within one year | 2,605 | 513 | 3,118 | 752 | 1,315 | 2,067 | ||||||||||||
Long-term debt | 17,085 | 10,208 | 27,293 | 19,765 | 10,291 | 30,056 | ||||||||||||
Total debt | $ | 20,600 | $ | 14,568 | $ | 35,168 | $ | 21,001 | $ | 13,070 | $ | 34,071 | ||||||
The Debt Instruments of the Subsidiaries contain, among other provisions, certain customary restrictive covenant and default provisions. Dow’s Five Year Competitive Advance and Revolving Credit Facility contains a financial covenant that Dow must maintain its ratio of consolidated indebtedness to its 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 equals or exceeds $500 million. The ratio of Dow’s consolidated indebtedness to its consolidated capitalization was 0.41 to 1.00 at September 30, 2018. DuPont’s Term Loan Facility and revolving credit facility contain a financial covenant requiring that the ratio of total indebtedness to total capitalization for DuPont and its consolidated subsidiaries not exceed 0.6667 to 1.00. At September 30, 2018, management believes each of the Subsidiaries were in compliance with all of their respective covenants and default provisions. For additional information on the Subsidiaries' debt covenants and default provisions, see Note 15 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
Dividends
On June 25, 2018, the Company announced that its Board declared a dividend of $0.38 per share, paid on September 14, 2018, to shareholders of record on August 31, 2018.
On October 11, 2018, the Company announced that its Board declared a dividend of $0.38 per share, payable on December 14, 2018, to shareholders of record on November 30, 2018.
Share Repurchase Programs
On November 2, 2017, the Company announced the Board authorized an initial $4 billion share repurchase program, which had no expiration date. The Company spent $1 billion on repurchases of DowDuPont common stock under the program in the fourth quarter of 2017. In the first nine months of 2018, the Company spent $3 billion on repurchases of DowDuPont common stock under the program, thereby completing this share repurchase program.
On November 1, 2018, the Company announced a new $3 billion share buyback program, which expires on March 31, 2019 - commensurate with the expected timing of the materials science spin-off.
See Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds, for additional information.
Pension Plans
Dow and DuPont have defined benefit pension plans in the U.S. and a number of other countries. Dow and DuPont did not merge their pension plans and other postretirement benefit plans as a result of the Merger. Dow and DuPont's funding policies are to contribute to defined benefit pension plans in the U.S. and a number of other countries based on pension funding laws and local country requirements. Contributions exceeding funding requirements may be and have been made at Dow and DuPont's discretion.
In the third quarter of 2018, Dow made a $1,100 million discretionary contribution to its principal U.S. pension plan and increased its total 2018 estimated pension contributions to approximately $1,600 million, of which $1,538 million had been contributed through September 30, 2018.
In the third quarter of 2018, DuPont made a $1,100 million discretionary contribution to its principal U.S. pension plan and increased its total 2018 estimated pension contributions to approximately $1,300 million, of which $1,266 million had been contributed through September 30, 2018.
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The discretionary contributions made in the third quarter of 2018 were aligned with each of Dow and DuPont’s funding policies, which may permit discretionary contributions to defined benefit pension plans when economics encourage funding, and reflected considerations relating to tax deductibility and capital structure.
For additional information regarding Dow and DuPont's pension plans, see Note 16 to the Consolidated Financial Statements and Note 19 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
Restructuring
DowDuPont Cost Synergy Program
The activities related to the DowDuPont Cost Synergy Program ("Synergy Program") are expected to result in additional cash expenditures of approximately $840 million to $990 million, primarily by the end of 2019, consisting of severance and related benefit costs and costs associated with exit and disposal activities, including environmental remediation (see Note 5 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; 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.
Contractual Obligations
Information related to the Company’s contractual obligations, commercial commitments and expected cash requirements for interest can be found in the Company's 2017 Annual Report on Form 10-K, Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources. Additional information related to these obligations can be found in Notes 15, 16 and 19 to the Consolidated Financial Statements in the Company’s 2017 Annual Report on Form 10-K. With the exception of the items noted below, there have been no material changes in the Company’s contractual obligations since December 31, 2017.
Contractual Obligations | Payments Due In | ||||||||||||||
In millions | 2018 | 2019-2020 | 2021-2022 | 2023 and beyond | Total | ||||||||||
Purchase obligations 1 | $ | 4,060 | $ | 5,956 | $ | 4,701 | $ | 7,562 | $ | 22,279 | |||||
Pension and other postretirement benefits | $ | 224 | $ | 1,521 | $ | 1,668 | $ | 12,524 | $ | 15,937 | |||||
1. | Includes take-or-pay and throughput obligations and outstanding purchase orders and other commitments greater than $1 million, obtained through a survey conducted by the Subsidiaries. |
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 the entities (see Note 20 to the Consolidated Financial Statements). In addition, see Note 11 to the Consolidated Financial Statements for information regarding transfers of financial assets.
Guarantees arise in the ordinary course of business from relationships with customers and nonconsolidated affiliates when the Subsidiaries undertake an obligation to guarantee the performance of others if specific triggering events occur. The Subsidiaries had combined outstanding guarantees at September 30, 2018, of $5,771 million, compared with $5,960 million at December 31, 2017. Additional information related to the guarantees of the Subsidiaries can be found in the “Guarantees” section of Note 13 to the Consolidated Financial Statements.
Fair Value Measurements
See Note 19 to the Consolidated Financial Statements for additional information concerning fair value measurements.
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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 conformity 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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 10-K”) describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. DowDuPont’s accounting policies that are impacted by judgments, assumptions and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2017 10-K. Since December 31, 2017, there have been no material changes in the Company’s accounting policies that are impacted by judgments, assumptions and estimates. See the discussion in this section for information regarding the Company's interim goodwill impairment testing.
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"). 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.
Asbestos-Related Claim Activity | 2018 | 2017 | ||
Claims unresolved at Jan 1 | 15,427 | 16,141 | ||
Claims filed | 5,279 | 5,598 | ||
Claims settled, dismissed or otherwise resolved | (7,861 | ) | (6,560 | ) |
Claims unresolved at Sep 30 | 12,845 | 15,179 | ||
Claimants with claims against both Union Carbide and Amchem | (4,778 | ) | (5,544 | ) |
Individual claimants at Sep 30 | 8,067 | 9,635 | ||
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 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 Asbestos-Related Matters of Union Carbide Corporation in Note 13 to the Consolidated Financial Statements and Part II, Item 1. Legal Proceedings.
Valuation of Assets and Impairment Considerations
As a result of the Merger and the related acquisition method of accounting, DuPont’s assets and liabilities were measured at fair value, and any declines in the projected cash flows could have a material, negative impact on the fair value of the Company’s reporting units and assets, particularly within the Agriculture and Specialty Products divisions, and therefore could result in an impairment.
As previously disclosed in the Form 10-Q for the quarter ended June 30, 2018, the Company commenced strategic business reviews during the third quarter of 2018 inclusive of assembling updated financial projections. During the three months ended September 30, 2018, and in connection with these strategic business reviews and the update to financial projections, DowDuPont’s subsidiary, DuPont, a separate SEC registrant, was required to perform an interim test of goodwill for its agriculture reporting unit. As a result of the analysis performed, DuPont recorded a pretax, noncash goodwill impairment charge of $4.5 billion in its stand-alone quarterly report on Form 10-Q for the quarter ended September 30, 2018. However, the impairment charge did not survive at the DowDuPont
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level. The impairment test performed for DowDuPont’s Agriculture reporting unit is based on a combination of DuPont’s agriculture reporting unit and Dow’s agriculture reporting unit. Based on the analysis performed at the DowDuPont level, the fair value of the combined Agriculture reporting unit exceeded its carrying value by more than 10 percent, and therefore no goodwill impairment existed for DowDuPont.
The Company also performed an impairment test on indefinite-lived intangibles and determined that the fair value of certain IPR&D assets had declined as a result of delays in timing of commercialization and increases to expected R&D costs. This resulted in a pretax impairment charge of $85 million. The assumptions and estimates used in determining the fair values of this reporting unit and its indefinite-lived intangibles contain uncertainties, and any changes to these assumptions and estimates could have a negative impact and result in a future impairment. See Note 10 to the Consolidated Financial Statements for additional information on the impairment test performed.
There were no other indicators for the Company’s other reporting units that would suggest that it is more likely than not that the fair value is less than its carrying value at September 30, 2018; however, there can be no assurances that goodwill will not be impaired in future periods. The Company will perform its annual goodwill and intangible asset impairment test in the fourth quarter, which may result in additional impairments. For additional information see Note 10 to the Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Note 18 to the Consolidated Financial Statements. See also Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, of the Company's 2017 Annual Report on Form 10-K for information on the Company's utilization of financial instruments and an analysis of the sensitivity of these instruments.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s 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’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's 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's internal control over financial reporting.
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DowDuPont Inc. PART II - OTHER INFORMATION |
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various litigation matters, including, but not limited to, product liability, patent infringement, antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. Information regarding certain of these matters is set forth below and in Note 13 to the Consolidated Financial Statements.
Litigation
Asbestos-Related Matters of Union Carbide Corporation, a wholly owned subsidiary of Dow
No material developments regarding this matter occurred in the third quarter of 2018. For a current status of this matter, see Note 13 to the Consolidated Financial Statements; and Management’s Discussion and Analysis of Financial Condition and Results of Operations, Asbestos-Related Matters of Union Carbide Corporation.
PFOA: Environmental and Litigation Proceedings
For purposes of this report, the term PFOA means collectively perfluorooctanoic acid and its salts, including the ammonium salt and does not distinguish between the two forms. Information related to this matter is included in Note 13 to the Consolidated Financial Statements under the heading PFOA Matters.
Fayetteville Works Facility, Fayetteville, North Carolina
In August 2017, the U.S. Attorney’s Office for the Eastern District of North Carolina served DuPont with a grand jury subpoena for testimony and the production of documents related to alleged discharges of GenX from the Fayetteville Works facility into the Cape Fear River. DuPont has been served with additional subpoenas relating to the same issue and in the second quarter of 2018, received a subpoena expanding the scope to any PFCs discharged from the Fayetteville Works facility into the Cape Fear River. Additional information related to this matter is included in Note 13 to the Consolidated Financial Statements under the heading "DuPont Matters: Fayetteville Works Facility, North Carolina."
La Porte Plant, La Porte, Texas - Crop Protection - Release Incident Investigations
On November 15, 2014, there was a release of methyl mercaptan at DuPont’s La Porte facility. The release occurred at the site’s Crop Protection unit resulting in four employee fatalities inside the unit. DuPont continues to cooperate with governmental agencies, including the U.S. Environmental Protection Agency ("EPA"), the Chemical Safety Board and the Department of Justice ("DOJ"), which are still conducting investigations. These investigations could result in sanctions and civil or criminal penalties against DuPont. In the second quarter of 2018, DuPont, the DOJ and the EPA reached a resolution-in-principle, for $3.1 million, regarding certain EPA civil claims. The resolution-in-principle was approved by the court in the third quarter of 2018 and has been paid.
Environmental Proceedings
The Company believes it is remote that the following matters will have a material impact on its financial position, liquidity or results of operations. The description is included per Regulation S-K, Item 103(5)(c) of the Securities Exchange Act of 1934.
Mt. Meigs, Alabama, Matter
DC Alabama, Inc. (“DCA”), a wholly owned subsidiary of Dow, received a draft consent order (“Order”) from the Alabama Department of Environmental Management (“ADEM”) dated July 26, 2018, 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 final Order that contains a civil penalty of $250,000 and certain additional requirements. Discussions between DCA and the ADEM are ongoing.
Freeport, Texas, Matter
On March 20, 2018, Dow received an informal notice that Region 6 of the EPA 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 Dow's Freeport, Texas, manufacturing facility, pursuant to the Resource Conservation and Recovery Act. Discussions between the EPA and Dow occurred periodically following the inspection. On September 20, 2018, the EPA and Dow entered into a Consent Agreement and Final Order, which Dow agreed to pay a $500,000 fine, conduct an audit under the Texas Audit Act resolving issues with the state of Texas and certify compliance with specified hazardous waste requirements with the EPA.
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Divested Neoprene Facility, La Place, Louisiana - EPA Compliance Inspection
In 2016, the EPA conducted a focused compliance investigation at the Denka Performance Elastomer LLC (“Denka”) neoprene manufacturing facility in La Place, Louisiana. DuPont sold the neoprene business, including this manufacturing facility, to Denka in the fourth quarter of 2015. Subsequent to this inspection, the EPA, the DOJ, the Louisiana Department of Environmental Quality ("LDEQ"), DuPont and Denka began discussions in the spring of 2017 relating to the inspection conclusions and allegations of noncompliance arising under the Clean Air Act, including leak detection and repair. These discussions, which include potential settlement options, continue.
ITEM 1A. RISK FACTORS
There have been no material changes in the Company's risk factors discussed in Part I, Item 1A, Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of the Company’s common stock by the Company during the three months ended September 30, 2018:
Issuer Purchases of Equity Securities | Total number of shares purchased as part of the Company's publicly announced share repurchase program 1 | 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 | ||||||||
July 2018 | — | $ | — | — | $ | 1,000 | ||||
August 2018 | 10,648,106 | $ | 68.43 | 10,648,106 | $ | 271 | ||||
September 2018 | 3,872,831 | $ | 70.06 | 3,872,831 | $ | — | ||||
Third quarter 2018 | 14,520,937 | $ | 68.87 | 14,520,937 | $ | — | ||||
1. | On November 2, 2017, the Company announced the Board of Directors authorized an initial $4 billion share repurchase program, which was completed in the third quarter of 2018. On November 1, 2018, the Company announced a new $3 billion share buyback program, which expires on March 31, 2019 - commensurate with the expected timing of the materials science spin-off. |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
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ITEM 5. OTHER INFORMATION
In the first quarter of 2018, the Company adopted new accounting standards that required retrospective application. The Company updated the Consolidated Statements of Income as a result of adopting Accounting Standards Update ("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 of Cash Flows were updated as a result of adopting ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" and ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." In the third quarter of 2018, the U.S. Securities and Exchange Commission's ("SEC") Office of the Chief Accountant provided additional guidance related to ASU 2016-15 that indicated an entity must evaluate daily transaction activity to calculate the value of cash received from beneficial interests in conduits, resulting in additional updates to the consolidated statements of cash flows. See Notes 1 and 2 to the Consolidated Financial Statements for additional information.
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 In millions | For the Years Ended Dec 31, | |||||||||||||||||
2017 As Filed | 2017 Updated 1 | 2016 As Filed | 2016 Updated 1 | 2015 As Filed | 2015 Updated 1 | |||||||||||||
Cost of sales | $ | 50,414 | $ | 49,791 | $ | 37,640 | $ | 37,668 | $ | 37,745 | $ | 37,512 | ||||||
Research and development expenses | $ | 2,110 | $ | 2,141 | $ | 1,584 | $ | 1,593 | $ | 1,598 | $ | 1,564 | ||||||
Selling, general and administrative expenses | $ | 4,021 | $ | 4,064 | $ | 2,956 | $ | 2,953 | $ | 2,948 | $ | 2,898 | ||||||
Sundry income (expense) - net | $ | 966 | $ | 417 | $ | 1,452 | $ | 1,486 | $ | 4,716 | $ | 4,399 | ||||||
1. | Reflects changes resulting from the adoption of ASU 2017-07. |
Summary of Changes to the Consolidated Statements of Cash Flows In millions | For the Years Ended Dec 31, | |||||||||||||||||
2017 As Filed | 2017 Updated 1 | 2016 As Filed | 2016 Updated 1 | 2015 As Filed | 2015 Updated 1 | |||||||||||||
Operating Activities | ||||||||||||||||||
Accounts and notes receivable | $ | (2,589 | ) | $ | (9,782 | ) | $ | (1,539 | ) | $ | (8,833 | ) | $ | (84 | ) | $ | (7,788 | ) |
Proceeds from interests in trade accounts receivable conduits | $ | 2,269 | $ | — | $ | 1,257 | $ | — | $ | 1,034 | $ | — | ||||||
Other assets and liabilities, net | $ | 1,563 | $ | 1,565 | $ | (717 | ) | $ | (723 | ) | $ | (48 | ) | $ | (45 | ) | ||
Cash provided by (used for) operating activities | $ | 8,695 | $ | (765 | ) | $ | 5,600 | $ | (2,957 | ) | $ | 7,607 | $ | (1,128 | ) | |||
Investing Activities | ||||||||||||||||||
Payment into escrow / trust accounts | $ | (701 | ) | $ | — | $ | (835 | ) | $ | — | $ | — | $ | — | ||||
Distribution from escrow / trust accounts | $ | 143 | $ | — | $ | 835 | $ | — | $ | — | $ | — | ||||||
Acquisitions of property and businesses, net of cash acquired | $ | 19 | $ | 50 | $ | (187 | ) | $ | (187 | ) | $ | (123 | ) | $ | (123 | ) | ||
Cash acquired in step acquisition of nonconsolidated affiliate | $ | — | $ | — | $ | 1,050 | $ | 1,070 | $ | — | $ | — | ||||||
Proceeds from interests in trade accounts receivable conduits | $ | — | $ | 9,462 | $ | — | $ | 8,551 | $ | — | $ | 8,738 | ||||||
Cash provided by (used for) investing activities | $ | 4,274 | $ | 14,325 | $ | (3,479 | ) | $ | 5,092 | $ | (1,350 | ) | $ | 7,388 | ||||
Financing Activities | ||||||||||||||||||
Contingent payment for acquisition of businesses | $ | — | $ | (31 | ) | $ | — | $ | — | $ | — | $ | — | |||||
Cash used for financing activities | $ | (6,523 | ) | $ | (6,554 | ) | $ | (4,014 | ) | $ | (4,014 | ) | $ | (3,132 | ) | $ | (3,132 | ) |
Summary | ||||||||||||||||||
Increase (decrease) in cash, cash equivalents and restricted cash | $ | 6,831 | $ | 7,391 | $ | (1,970 | ) | $ | (1,956 | ) | $ | 2,923 | $ | 2,926 | ||||
Cash, cash equivalents and restricted cash at beginning of period | $ | 6,607 | $ | 6,624 | $ | 8,577 | $ | 8,580 | $ | 5,654 | $ | 5,654 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 13,438 | $ | 14,015 | $ | 6,607 | $ | 6,624 | $ | 8,577 | $ | 8,580 | ||||||
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. |
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Summary of Changes to the Consolidated Statements of Cash Flows In millions | Three Months Ended | Six Months Ended | ||||||||||
Mar 31, 2017 | Jun 30, 2017 | |||||||||||
As Filed 1 | Updated 2 | As Filed 1 | Updated 2 | |||||||||
Operating Activities | ||||||||||||
Accounts and notes receivable | $ | (1,327 | ) | $ | (2,773 | ) | $ | (3,233 | ) | $ | (6,151 | ) |
Cash used for operating activities | $ | (76 | ) | $ | (1,522 | ) | $ | (101 | ) | $ | (3,019 | ) |
Investing Activities | ||||||||||||
Proceeds from interests in trade accounts receivable conduits | $ | 551 | $ | 1,997 | $ | 1,914 | $ | 4,832 | ||||
Cash provided by (used for) investing activities | $ | (353 | ) | $ | 1,093 | $ | 192 | $ | 3,110 | |||
1. | Reflects amounts previously reported in the Company's Quarterly Report on Form 10-Q for the periods ended March 31, 2018 and June 30, 2018. |
2. | In the third quarter of 2018, the SEC's Office of the Chief Accountant provided additional guidance related to ASU 2016-15 that indicated an entity must evaluate daily transaction activity to calculate the value of cash received from beneficial interests in conduits, resulting in additional updates to the consolidated statements of cash flows. |
ITEM 6. EXHIBITS
EXHIBIT NO. | DESCRIPTION | ||
23* | Ankura Consulting Group, LLC's Consent. | ||
31.1* | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2* | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1* | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2* | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101.INS | XBRL Instance Document. | ||
101.SCH | XBRL Taxonomy Extension Schema Document. | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | ||
*Filed herewith
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DowDuPont Inc. Trademark Listing |
®™ | CORIAN, CYAZYPYR, DELRIN, DOW, DOW SEMENTES, HYTREL, KALREZ, KEVLAR, MORGAN, NOMEX, PYRAXALT, RYNAXYPYR, SOLAMET, TEDLAR, TYVEK, VAMAC, VESPEL and ZYTEL are trademarks of The Dow Chemical Company ("Dow") or E. I. du Pont de Nemours and Company ("DuPont") or affiliated companies of Dow or DuPont. |
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DowDuPont Inc. Signatures |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DOWDUPONT INC.
Registrant
Date: November 2, 2018
By: | /s/ JEANMARIE F. DESMOND | By: | /s/ RONALD C. EDMONDS | |
Name: | Jeanmarie F. Desmond | Name: | Ronald C. Edmonds | |
Title: | Co-Controller | Title: | Co-Controller | |
City: | Wilmington | City: | Midland | |
State: | Delaware | State: | Michigan | |
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