1.Europe, Middle East, Africa and Africa.India.
Properties of Dowthe Company include facilities which, in the opinion of management, are suitable and adequate for their use and will have sufficient capacity for the Company'sCompany’s current needs and expected near-term growth. All of the Company'sCompany’s plants are owned or leased, subject to certain easements of other persons which, in the opinion of management, do not substantially interfere with the continued use of such properties or materially affect their value. No title examination of the properties has been made for the purpose of this report. Additional information with respect to the Company's property, plant and equipment and leases is contained in Notes 11, 15 and 1617 to the Consolidated Financial Statements.
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| ITEM 3. LEGAL PROCEEDINGS |
Asbestos-Related Matters of Union Carbide Corporation
Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc.
For additional information, see Part II, Item 7. Other Matters, Asbestos-Related Matters of Union Carbide Corporation in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Notes 1 and 16 to the Consolidated Financial Statements.
Environmental MattersProceedings
In April 2012 and May 2015, Dow Silicones Corporation ("Dow Silicones"), a wholly owned subsidiary of the Company, received the following notifications from the U.S. Environmental Protection Agency ("EPA"), Region 5 related to Dow Silicones' Midland, Michigan, manufacturing facility (the “Facility”): 1) a Notice of Violation and Finding of Violation which alleges a number of violations in connection with the detection, monitoring and control of certain organic hazardous air pollutants at the Facility and various recordkeeping and reporting violations under the Clean Air Act and 2) a Notice of Violation alleging a number of violations relating to the management of hazardous wastes at the Facility pursuant to the Resource Conservation and Recovery Act. Discussions between the EPA, the U.S. Department of Justice ("DOJ") and Dow Silicones are ongoing.
On March 14, 2017, FilmTec Corporation ("FilmTec"), a wholly owned subsidiary of the Company, received notifications from the EPA, Region 5 and the DOJ of a proposed penalty for alleged violations of the Clean Air Act at FilmTec's Edina, Minnesota, manufacturing facility. Discussion between the EPA, DOJ and FilmTec are ongoing.
On July 5, 2018, the Company received a draft consent decree from the EPA,U.S. Environmental Protection Agency ("EPA"), the DOJU.S. Department of Justice ("DOJ") and the Louisiana Department of Environmental Quality, (“DEQ”), relating to the operation of steam-assisted flares at Dow’sthe Company’s olefins manufacturing facilities in Freeport, Texas; Plaquemine, Louisiana; and St. Charles, Louisiana. Discussions between the EPA, the DOJ and the DEQ are ongoing.
On July 7, 2018, the Company received an informal notice that the EPA, Region 6 was contemplating filing a Notice of Violation with a proposed penalty for alleged violations uncovered during a prior inspection related to the management of hazardous wastes at the Company's Freeport, Texas, manufacturing facility, pursuant to the Risk Management Plan requirements of the Clean Air Act. Discussions betweenJune 2, 2020, the EPA and the Company are ongoing.
On July 26, 2018, DC Alabama,DOJ added Performance Materials NA, Inc. (“DCA”), a wholly owned subsidiary of the Company, received aas an additional signatory to the existing draft consent order (“Order”decree based on the operation of steam-assisted flares at the Sabine olefins manufacturing facility in Orange, Texas (the "Orange, TX Facility"). Performance Materials NA, Inc. acquired the Orange, TX Facility in February 2019 and became a subsidiary of the Company in April 2019. On January 19, 2021, a proposed final consent decree was filed in the U.S. District Court for the Eastern District of Louisiana to address these matters. Notice of the consent decree was published in the Federal Register on January 28, 2021 and public comments are required to be submitted within 30 days of that publication. The consent decree would require the Company to pay a $3 million civil penalty and $424,786 to specified local projects in Louisiana. The consent decree would further require the Company to install and operate additional air pollution control and monitoring technology on these steam-assisted flares at an estimated cost of approximately $294 million, to be completed over the next several years.
On August 27, 2019, the EPA, DOJ, Texas Environmental Quality Board, and Texas Office of the Attorney General (the “Government Agencies”) fromadded Performance Materials NA, Inc., a wholly owned subsidiary of the Alabama Department of Environmental Management (“ADEM”)Company, as an additional signatory to an existing draft consent decree relating to alleged unpermitted discharges of industrial process water and certain water quality and equipmentenvironmental violations at DCA’s silicon metal production facility locatedthe Orange, TX Facility. Performance Materials NA, Inc. acquired the Orange, TX Facility in Mt. Meigs, Alabama. DCAFebruary 2019 and became a subsidiary of the Company in April 2019. The alleged violations were first identified during multimedia environmental inspections that the EPA conducted at the Orange, TX Facility while under prior ownership in March 2009 and December 2015, and involve the management of materials in the Orange, TX Facility’s wastewater treatment system, hazardous waste management, and air emissions, including leak detection and repair. Discussions are ongoing between the Government Agencies, the Company, and the ADEM negotiatedOrange, TX Facility’s prior owner, who is the termsother named signatory.
On November 8, 2019, a proposed consent decree was filed in the U.S. District Court for the Eastern District of Michigan, Civil Action No. 1:19-cv-13292 between the Company and executedfederal, state and tribal trustees to resolve allegations of natural resource damages arising from the historic operations of the Company’s Midland, Michigan, manufacturing facility. On November 14, 2019, a Notice of Lodging and Notice of Availability and Request for Comments on Draft Restoration Plan/Environmental Assessment was published in the Federal Register. The DOJ filed a Joint Motion for Entry of the Consent Decree on May 8, 2020, which was granted and entered as a final Order that containsorder on July 20, 2020. The consent decree required the Company to pay a civil penalty of $250,000$15 million cash settlement to be used for trustee-selected remediation projects and certain additional requirements. Discussions between DCA and the ADEM are ongoing.
On November 27, 2018, Union Carbide signed a consent decree with the DOJ on behalf of the EPA, Region 2 relating$6.75 million to alleged disposal of mercuryspecified local projects managed by a third party which Union Carbide contracted with at the Port Refinery siteparties. These funds were paid in Rye Brook, New York.December 2020. The consent decree containsfurther requires the Company to complete 13 additional environmental restoration projects which are valued by the trustees at approximately $77 million, to be conducted over the next several years.
On December 18, 2020, Dow and several other parties received a complaint and proposed consent decree from the EPA relating to environmental contamination at the Gulfco Marine Maintenance Superfund Site in Freeport, Texas. The proposed consent decree includes a requirement for three defendants to make a collective payment of $120,198 and$1.2 million for EPA’s past response costs as well as an obligation to conduct certain additional requirements.response actions at the site. The finalproposed consent decree is subject towas submitted for notice and a 30-day public comment period. period on December 29, 2020.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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| ITEM 4. MINE SAFETY DISCLOSURES |
Not applicable.
| | | | | | | | |
| Dow Inc. and Subsidiaries | |
| The Dow Chemical Company and Subsidiaries | |
| PART II | |
ITEM 5. MARKET FOR REGISTRANT’S | | |
| ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
On December 11, 2015, DowApril 1, 2019, DowDuPont Inc. (“DowDuPont” and E. I. du Ponteffective June 3, 2019, n/k/a DuPont de Nemours, Inc.) completed the separation of its materials science business and Dow Inc. became the direct parent company of The Dow Chemical Company (“DuPont”) entered into an Agreement and Plan of Merger, as amended on March 31, 2017 (the "Merger Agreement") to effect an all-stock, merger of equals strategic combination resulting in a newly formed corporation named DowDuPontits consolidated subsidiaries (“TDCC” and together with Dow Inc. ("DowDuPont"). On August 31, 2017, pursuant to, “Dow” or the terms“Company”), owning all of the Merger Agreement,outstanding common shares of TDCC. Dow Inc. is now an independent, publicly traded company and DuPont each merged with subsidiaries of DowDuPont (the "Mergers") and, as a result of the Mergers, became subsidiaries of DowDuPont (collectively, the "Merger"). See Note 3 to the Consolidated Financial Statements for additional information on the Merger.
Prior to the Merger, the principal market for the Company’sDow Inc. common stock wasis listed on the New York Stock Exchange traded under the symbol “DOW.” Effective with the Merger, there is no longer a public trading market for the Company'sDow Inc. common stock asbegan regular-way trading on April 2, 2019.
Dow Inc. has paid dividends on a quarterly basis since the Company became a wholly owned subsidiaryseparation from DowDuPont and expects to continue to do so, subject to approval by the Company’s Board of DowDuPont.
Directors.Quarterly market price of common stock and dividend information related to periods prior to the Merger can be found in Note 2627 to the Consolidated Financial Statements.
In connection withAt January 31, 2021, there were 78,276 stockholders of record.
See Part III, Item 11. Executive Compensation for information relating to shares authorized for issuance under Dow Inc.'s equity compensation plans.
The Company grants stock-based compensation to employees and non-employee directors in the Merger, on August 31, 2017, all outstanding Dowform of stock incentive plans, which include stock options, restricted stock units and deferred stock awards were converted into stock options and deferred stock awards with respect to DowDuPont commonrestricted stock. The Company also provides stock-based compensation in the form of performance stock options and deferred stock awards have the same terms and conditions under the applicable plans and award agreements priorunits. See Note 21 to the Merger. All outstanding and nonvested performance deferred stock awards were converted into deferred stock awards with respect to DowDuPontConsolidated Financial Statements for additional information.
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of Dow Inc. common stock atby the greaterCompany during the three months ended December 31, 2020:
| | | | | | | | | | | | | | |
| Issuer Purchases of Equity Securities | Total number of shares purchased as part of the Company's publicly announced share repurchase program | Approximate dollar value of shares that may yet be purchased under the Company's publicly announced share repurchase program 1 (In millions) |
| Period | Total number of shares purchased | Average price paid per share |
|
| October 2020 | — | | $ | — | | — | | $ | 2,375 | |
| November 2020 | — | | $ | — | | — | | $ | 2,375 | |
| December 2020 | — | | $ | — | | — | | $ | 2,375 | |
| Fourth quarter 2020 | — | | $ | — | | — | | $ | 2,375 | |
1.On April 1, 2019, Dow Inc.'s Board of Directors ratified the share repurchase program originally approved on March 15, 2019, authorizing up to $3.0 billion to be spent on the repurchase of the applicable performance target or the actual performance asCompany's common stock, with no expiration date.
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| ITEM 6. SELECTED FINANCIAL DATA |
Omitted pursuant | | | | | | | | | | | | | | | | | |
| Selected Financial Data - Dow Inc. | | | | | |
| In millions, except as noted (Unaudited) | 2020 | 2019 | 2018 | 2017 | 2016 |
| Summary of Operations | | | | | |
| Net sales | $ | 38,542 | | $ | 42,951 | | $ | 49,604 | | $ | 43,730 | | $ | 36,264 | |
Income (loss) from continuing operations, net of tax 1 | $ | 1,294 | | $ | (1,717) | | $ | 2,940 | | $ | (1,287) | | $ | 1,478 | |
| Per share of common stock (in dollars): | | | | | |
Earnings (loss) per common share from continuing operations - basic 1 | $ | 1.64 | | $ | (2.42) | | $ | 3.80 | | $ | (1.88) | | $ | 1.57 | |
Earnings (loss) per common share from continuing operations - diluted 1 | $ | 1.64 | | $ | (2.42) | | $ | 3.80 | | $ | (1.88) | | $ | 1.55 | |
Cash dividends declared per share of common stock 2 | $ | 2.80 | | $ | 2.10 | | $ | — | | $ | 1.38 | | $ | 1.84 | |
| Year-end Financial Position | | | | | |
| Total assets | $ | 61,470 | | $ | 60,524 | | $ | 83,699 | | $ | 85,852 | | $ | 79,511 | |
| Long-term debt | $ | 16,491 | | $ | 15,975 | | $ | 19,253 | | $ | 19,757 | | $ | 20,444 | |
| | | | | |
| Financial Ratios | | | | | |
| Research and development expenses as percent of net sales | 2.0 | % | 1.8 | % | 1.6 | % | 1.8 | % | 2.1 | % |
Income (loss) from continuing operations before income taxes as percent of net sales 1 | 5.4 | % | (2.9) | % | 7.6 | % | 0.5 | % | 3.5 | % |
Return on stockholders' equity 1 | 9.9 | % | (10.0) | % | 14.3 | % | 1.5 | % | 15.3 | % |
| Gross debt as a percent of total capitalization | 56.8 | % | 54.7 | % | 37.2 | % | 39.1 | % | 43.9 | % |
| Net debt as a percent of total capitalization | 47.9 | % | 50.9 | % | 33.7 | % | 31.1 | % | 35.1 | % |
| | | | | | | | | | | | | | | | | |
| Selected Financial Data - TDCC | | | | | |
| In millions, except as noted (Unaudited) | 2020 | 2019 | 2018 | 2017 | 2016 |
| Summary of Operations | | | | | |
| Net sales | $ | 38,542 | | $ | 42,951 | | $ | 49,604 | | $ | 43,730 | | $ | 36,264 | |
Income (loss) from continuing operations, net of tax 1 | $ | 1,304 | | $ | (1,595) | | $ | 2,940 | | $ | (1,287) | | $ | 1,478 | |
| Year-end Financial Position | | | | | |
| Total assets | $ | 61,345 | | $ | 60,390 | | $ | 83,699 | | $ | 85,852 | | $ | 79,511 | |
| Long-term debt | $ | 16,491 | | $ | 15,975 | | $ | 19,253 | | $ | 19,757 | | $ | 20,444 | |
| | | | | |
| Financial Ratios | | | | | |
| Research and development expenses as percent of net sales | 2.0 | % | 1.8 | % | 1.6 | % | 1.8 | % | 2.1 | % |
Income (loss) from continuing operations before income taxes as percent of net sales 1 | 5.4 | % | (2.6) | % | 7.6 | % | 0.5 | % | 3.5 | % |
Return on stockholders' equity 1 | 9.5 | % | (8.6) | % | 14.3 | % | 1.5 | % | 15.3 | % |
| Gross debt as a percent of total capitalization | 55.8 | % | 53.3 | % | 37.2 | % | 39.1 | % | 43.9 | % |
| Net debt as a percent of total capitalization | 46.8 | % | 49.6 | % | 33.7 | % | 31.1 | % | 35.1 | % |
1.See Notes 3, 5, 6, 7, 8, 12, 13, 15 and 16 to General Instruction Ithe Consolidated Financial Statements for information on items materially impacting the results for the years ended December 31, 2020, 2019 and 2018, including the effects of Form10-K.the U.S. Tax Cuts and Jobs Act, enacted on December 22, 2017; Swiss tax reform; loss on early redemption of debt; integration and separation costs; charges related to restructuring programs; goodwill impairment and other asset related charges (including charges related to Sadara Chemical Company); a charge related to environmental remediation; litigation related charges, awards and adjustments; charges associated with agreements entered into with DuPont and Corteva as part of the separation from DowDuPont; adjustments to the warranty accrual of an exited business; and net gains on divestitures and asset sales.
2.Amounts shown for 2020 and 2019 represent dividends declared by Dow Inc. Amounts shown for 2017 and 2016 represent cash dividends declared by TDCC prior to the Merger. Subsequent to the Merger, TDCC has no common shares outstanding.
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| ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
On April 1, 2019, DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc. or "DuPont") completed the separation of its materials science business and Dow Inc. became the direct parent company of The Dow Chemical Company and its consolidated subsidiaries (“TDCC” and together with Dow Inc., “Dow” or the “Company”), owning all of the outstanding common shares of TDCC. For filings related to the period commencing April 1, 2019 and thereafter, TDCC was deemed the predecessor to Dow Inc., and the historical results of TDCC are deemed the historical results of Dow Inc. for periods prior to and including March 31, 2019. As a result of the parent/subsidiary relationship between Dow Inc. and TDCC, and considering that the financial statements and disclosures of each company are substantially similar, the companies are filing a combined report for this Annual Report on Form 10-K. The information reflected in the report is equally applicable to both Dow Inc. and TDCC, except where otherwise noted.
The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017. TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries (“Historical DuPont”) each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business.
As of the effective date and time of the distribution, DowDuPont did not beneficially own any equity interest in Dow and no longer consolidated Dow and its consolidated subsidiaries into its financial results. The consolidated financial results of Dow for all periods presented reflect the distribution of TDCC’s agricultural sciences business (“AgCo”) and specialty products business (“SpecCo”) as discontinued operations, as well as reflect the receipt of Historical DuPont’s ethylene and ethylene copolymers businesses (other than its ethylene acrylic elastomers business) (“ECP”) as a common control transaction from the closing of the Merger on August 31, 2017 ("Merger Date"). See Note 3 to the Consolidated Financial Statements and Dow Inc.'s Amendment No. 4 to the Registration Statement on Form 10 filed with the U.S. Securities and Exchange Commission ("SEC") on March 8, 2019 for additional information.
Throughout this Annual Report on Form 10-K, unless otherwise indicated, amounts and activity are presented on a continuing operations basis.
Except as otherwise indicated by the context, the terms "Union Carbide" means Union Carbide Corporation, a wholly owned subsidiary of the Company, and "Dow Silicones" means Dow Silicones Corporation, a wholly owned subsidiary of the Company.
Items Affecting Comparability of Financial Results
As a result of the separation from DowDuPont, pro forma net sales and pro forma Operating EBIT for the years ended December 31, 2019 and 2018 are provided in this section and based on the consolidated financial statements of TDCC, adjusted to give effect to the separation from DowDuPont as if it had been consummated on January 1, 2017. Pro forma adjustments include (1) the margin impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva, Inc. ("Corteva") in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont, and (2) the elimination of the impact of events directly attributable to the Merger, internal reorganization and business realignment, separation, distribution and other related transactions (e.g., one-time transaction costs). These adjustments impacted the consolidated results as well as the reportable segments. See Note 26 to the Consolidated Financial Statements for a summary of the pro forma adjustments impacting segment measures for the years ended December 31, 2019 and 2018.
STATEMENT ON COVID-19 AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOIL PRICE VOLATILITY
Overview of Dow’s Response to COVID-19
The pandemic caused by coronavirus disease 2019 ("COVID-19") has impacted all geographic regions where Dow products are produced and sold. Financial markets were volatile towards the end of the first quarter and early in the second quarter of 2020, primarily due to uncertainty with respect to the severity and duration of the pandemic, coupled with fluctuations in crude oil prices due in part to the global spread of COVID-19. As the second quarter progressed, crude oil prices increased, driven by improved supply and demand fundamentals, which continued into the second half of 2020. Financial markets also continued a gradual and uneven recovery in the second half of 2020.
The global, regional and local spread of COVID-19 resulted in significant global mitigation measures, including government-directed quarantines, social distancing and shelter-in-place mandates, travel restrictions and/or bans, and restricted access to certain corporate facilities and manufacturing sites. Most of the Company’s manufacturing facilities have been designated essential operations by local governments. As a result, nearly all of the Company’s manufacturing sites and facilities continue to operate and are doing so safely, having implemented social distancing and enhanced health, safety and sanitization measures as directed by Dow's regional Crisis Management Teams (“CMTs”). The CMTs continue to work closely with site leadership and are adjusting alert levels as warranted on a site by site basis.
In the second quarter of 2020, the CMTs initiated implementation of the Company’s comprehensive Return to Workplace ("RTW") plan that is tailored for each site and includes several health and safety measures to be followed in a gradual and phased approach. Employees in Europe, Middle East, Africa, and India ("EMEAI") and Asia Pacific returned to the workplace throughout the third quarter of 2020. In the fourth quarter of 2020, many EMEAI sites once again reduced on-site workforce in accordance with governmental regulations. A significant number of employees in the U.S. & Canada and Latin America continue to work remotely as the Company monitors the pandemic evolution, awaiting acceptable and safe levels to implement its RTW phases. If ongoing mitigation efforts are successful, sites in the U.S. & Canada expect to implement additional RTW phases in the first and second quarters of 2021 and Latin America anticipates RTW during the second quarter of 2021. At the time of this filing, approximately half of Dow’s global workforce is working remotely. The Company continues to encourage its workforce to practice safe behaviors in the workplace and while away from work to help prevent community spread of COVID-19.
Dow’s materials science expertise and production capabilities are used to develop some of the most vital hygiene and medical products and technologies to fight the COVID-19 pandemic, such as disinfectants, sanitizers, cleansers, plastics used in the production of disposable personal protective equipment for medical professionals, and memory foam for hospital beds. The Company has continued to look for ways to contribute time, talent and materials science expertise to help fight and combat the pandemic while creating some new opportunities for innovation and business. Dow’s contributions to fight the COVID-19 pandemic included the following:
•The Company collaborated with nine key partners across a myriad of industries to develop and donate 100,000 isolation gowns to help equip frontline workers in Texas, Louisiana and Mexico.
•Dow, Whirlpool Corporation and Reynolds Consumer Products jointly developed a powered, air-purifying respirator which takes the place of a traditional medical face mask and face shield.
•Dow developed and shared an open source design for a simplified face shield and donated 100,000 face shields to hospitals in Michigan.
•Five Dow sites in the United States, Europe and Latin America produced more than 200 metric tons of hand sanitizer, equivalent to more than 880,000 eight-ounce bottles, which were primarily donated to local health systems and government agencies.
•The Company and The Dow Company Foundation committed $4 million to aid COVID-19 relief efforts, with donations going towards global relief organizations, as well as non-profits in communities where Dow operates.
During this public health crisis, the Company is focused on the health and safety of its employees, contractors, customers and suppliers around the world and maintaining the safe and reliable operations of its manufacturing sites. Although supply disruptions and related logistical issues have posed challenges across all modes of transportation, the Company’s manufacturing sites have continued to operate during the COVID-19 pandemic, with no significant impact to manufacturing whether through shutdowns or shortages in labor, raw materials or personal protective equipment. Supply chain and logistical challenges are expected to stabilize in 2021. Contingency plans remain in place in the event of significant impacts from COVID-19 infection resurgences.
The Company continues to maintain a strong financial position and build further liquidity in the midst of the economic recession triggered by the COVID-19 pandemic. The Company started 2020 with significant committed liquidity facilities. As markets became more volatile and uncertain during the first quarter of 2020, the Company took proactive measures to further bolster liquidity by drawing down certain uncommitted credit facilities, which were subsequently repaid in the second quarter of 2020, and partially monetizing investments in company-owned life insurance policies, which were fully repaid in the fourth quarter of 2020. At December 31, 2020, the Company had cash and committed and available forms of liquidity of $14.6 billion. The Company also has no substantive long-term debt maturities until the second half of 2024.
The Company took proactive actions to electively focus on cash and maintain financial strength with a continued emphasis on safe, reliable operations and disciplined capital allocation. These actions included:
•Further reduced the 2020 capital expenditures to $1.25 billion.
•Decreased operating expenses by $500 million through structural cost improvements.
��Unlocked nearly $500 million in structural improvements in working capital.
•Temporarily suspended share repurchases.
•Delayed planned maintenance turnaround spending, where appropriate, without compromising safety or the ability to serve customer needs.
•Temporarily idled select manufacturing facilities to balance production to demand across markets more severely affected by restrained economic activity. This included the idling of three polyethylene production units and two elastomers units; running Dow's polyurethanes assets, including propylene oxide and methylene diphenyl diisocyanate, at reduced operating rates; reducing siloxanes operating rates globally and extending a planned maintenance turnaround at a silicones production unit in Zhangjiagang, China. All of these assets returned to more normalized operating rates in the third quarter of 2020.
•Implementing a restructuring program ("2020 Restructuring Program"), which was approved by the Board of Directors ("Board") of Dow Inc. on September 29, 2020, targeting more than $300 million in annualized Operating EBITDA1 benefit by the end of 2021. This program includes a 6 percent reduction in Dow’s global workforce costs as well as actions to rationalize the Company's manufacturing assets, including asset write-down and write-off charges, related contract termination fees and environmental remediation costs. See Note 6 to the Consolidated Financial Statements for additional information.
Review of 2020 Financial Impacts from COVID-19
Net sales were $38.5 billion in 2020, down 10 percent from net sales of $43.0 billion in 2019, as the COVID-19 pandemic disrupted the global economy and supply and demand fundamentals. The most significant impacts from the pandemic occurred in the first half of the year, with a gradual yet uneven recovery taking hold as the second half of the year progressed.
In the first six months of 2020, the Company's sales declined 18 percent compared with the same period last year, with the most significant impact on demand in the second quarter of 2020. Strong demand in food packaging, health and hygiene, home care and pharma end-markets was more than offset by volume declines for products used in consumer durable good end-markets, including construction, furniture and bedding and automotive, with the most notable impacts in the Industrial Intermediates & Infrastructure and Performance Materials & Coatings operating segments. Demand for products used in consumer durable goods remained lower through the second quarter largely due to the delayed restart in these industries from May to June.
1.Operating EBITDA is a non-GAAP measure. Dow defines Operating EBITDA as earnings (i.e., "Income (loss) from continuing operations before income taxes") before interest, depreciation and amortization, excluding the impact of significant items.
Local price declined in the first and second quarters of 2020, largely impacted by lower global energy prices. In March and April 2020, crude oil prices declined significantly, due in part to the COVID-19 pandemic, coupled with increased supply from oil producers. Crude oil prices increased in the latter half of the second quarter as supply and demand fundamentals improved, driving higher feedstock costs, which proved beneficial to product prices and margins in the third and fourth quarters of 2020.
In the third quarter of 2020, net sales increased 16 percent compared with the second quarter of 2020, due to increasing demand and higher local prices. Sales increased sequentially in all operating segments and geographic regions, reflecting improved demand trends in furniture and bedding, appliances, packaging, construction and automotive end-markets. Local price also increased sequentially, reflecting higher global energy prices and improved supply and demand fundamentals, with increases in all geographic regions. Local price increases were reported in Packaging & Specialty Plastics and Industrial Intermediates & Infrastructure, which more than offset declines in Performance Materials & Coatings. Operating rates increased from second quarter lows, as the Company raised rates to match demand trends as the global economic recovery gained traction. The Company's deliberate focus on structural cost reductions and prudent cash management resulted in sequentially higher margins and cash flow in the third quarter of 2020.
Net sales in the fourth quarter of 2020 increased 10 percent sequentially, with continued demand recovery as the global economy continued to strengthen. Sales increased sequentially in all operating segments and geographic regions, reflecting strong supply and demand fundamentals which drove both price and volume gains. Local price increased in all segments and all geographic regions. Volume increased in all geographic regions and in Packaging & Specialty Plastics and Industrial Intermediates & Infrastructure, reflecting consumer-driven demand and industrial market recovery. Volume declined in Performance Materials & Coatings, primarily due to seasonal demand declines for coating applications. Operating rates continued to increase in the fourth quarter of 2020 and margins expanded.
Notably, net sales in the fourth quarter of 2020 increased 5 percent compared with the fourth quarter of 2019, with increases in local price and volume. Local price increased 2 percent compared with the same quarter last year, primarily driven by improved pricing in polyethylene and polyurethane applications. Volume returned to pre-pandemic levels in all operating segments and was led by demand growth in Packaging & Specialty Plastics and Performance Materials & Coatings.
The Company enters 2021 with sequential momentum and is well-positioned for continued profitable growth in the ongoing economic recovery and improving industry cycle. The Company will maintain its disciplined focus on capital allocation priorities as it benefits from an improving cost structure, financial flexibility and a low-cost operating model. As the market recovery broadens, Dow anticipates increasing margins as differentiated parts of the portfolio see improving demand. Longer-term, the Company expects to deliver ongoing significant value through increased innovation, operational efficiencies and a leading environmental, social, and governance profile that will further distinguish Dow from its peers.
At the time of this filing, the ultimate severity and duration of the COVID-19 pandemic cannot be reasonably estimated. The COVID-19 pandemic has had, and could continue to have, a substantial negative impact on the Company’s results of operations, financial condition and cash flows. The effects of the COVID-19 pandemic for the year ended December 31, 2020 and the additional risks associated with these conditions are more fully discussed in this report in Part I, Item 1A, Risk Factors. The Company is actively monitoring for potential financial impacts from the COVID-19 pandemic and oil price volatility, including, but not limited to: gauging the financial health of its customers; assessing liquidity; evaluating the recoverability of its assets; enhancing cyber security monitoring; and evaluating ongoing appropriateness of its estimates.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. While there have been no significant impacts to the Company's provision for income taxes on continuing operations in 2020 as a result of the CARES Act legislation, the Company filed a tax loss carryback claim for $291 million in accordance with the provisions of the CARES Act.
ABOUT DOW
Dow combines science and technology to develop innovative solutions that are essential to human progress. Dow has one of the strongest and broadest toolkits in the industry, with robust technology,global breadth, asset integration and scale, focused innovation and competitive capabilities that enable itleading business positions to address complex global issues. achieve profitable growth. The Company’s ambition is to become the most innovative, customer centric, inclusive and sustainable materials science company, with a purpose to deliver a sustainable future for the world through our materials science expertise and collaboration with our partners. Dow’s market-driven, industry-leading portfolio of advanced materials,plastics, industrial intermediates, coatings and plastics deliversilicones businesses delivers a broad range of differentiated technology-basedscience-based products and solutions tofor its customers in 175 countries in high-growth marketsmarket segments, such as packaging, infrastructure, mobility and consumer care. The Company's products are manufactured at 164Dow operates 106 manufacturing sites in 3531 countries acrossand employs approximately 35,700 people.
In 2020, the globe. In 2018, DowCompany had annual sales of approximately $60 billion.
In 2018, 36$38.5 billion, of which 35 percent of the Company’s sales were to customers in the U.S. & Canada; 3034 percent were in Europe, Middle East and Africa ("EMEA");EMEAI; while the remaining 3431 percent were to customers in Asia Pacific and Latin America.
In 2018,2020, the Company and its consolidated subsidiaries did not operate in countries subject to U.S. economic sanctions and export controls as imposed by the U.S. State Department or in countries designated by the U.S. State Department as state sponsors of terrorism, including Iran, the Democratic People's Republic of Korea (North Korea), Sudan and Syria. The Company has policies and procedures in place designed to ensure that it and its consolidated subsidiaries remain in compliance with applicable U.S. laws and regulations.
Except as otherwise indicated by the context, the term "Union Carbide" means Union Carbide Corporation, a wholly owned subsidiary of Dow, and "Dow Silicones" means Dow Silicones Corporation (formerly known as Dow Corning Corporation, which changed its name effective as of February 1, 2018), a wholly owned subsidiary of Dow.
OVERVIEW
Effective AugustThe following is a summary of the results from continuing operations for the Company for the year ended December 31, 2017, pursuant2020:
The Company reported net sales in 2020 of $38.5 billion, down 10 percent from $43.0 billion in 2019, with declines across all geographic regions and operating segments, reflecting the impact of the COVID-19 pandemic on economies and supply and demand fundamentals, most notably in the first half of the year. These declines were due to a decrease in local price of 7 percent and a volume decline of 3 percent. Currency was flat.
Local price decreased 7 percent compared with the mergersame period last year, with decreases in all operating segments, including a double-digit decline in Packaging & Specialty Plastics (down 11 percent). Local price decreased in all geographic regions, including a double-digit decline in EMEAI (down 12 percent).
Volume decreased 3 percent compared with 2019. Industrial Intermediates & Infrastructure and Performance Materials & Coatings reported volume declines (both down 6 percent) while Packaging & Specialty Plastics volume increased 1 percent. Volume decreased in the U.S. & Canada (down 8 percent), partially offset by an increase in EMEAI (up 1 percent). Volume was flat in Asia Pacific and Latin America.
Restructuring and asset related charges - net were $708 million in 2020, primarily reflecting actions taken under the 2020 Restructuring Program.
Integration and separation costs for Dow Inc. and TDCC were $239 million in 2020, down from $1,063 million and $1,039 million, respectively, in 2019, reflecting the Agreementwind-down of post-Merger integration and Plan of Merger, datedbusiness separation activities. Integration and separation activities were completed as of December 11, 2015, as amended31, 2020.
Equity in earnings (losses) of nonconsolidated affiliates was a loss of $18 million in 2020, compared with a loss of $94 million in 2019. Equity in earnings (losses) of nonconsolidated affiliates improved primarily due to lower equity losses from Sadara Chemical Company ("Sadara") which were partially offset by lower equity earnings from the Kuwait joint ventures.
Sundry income (expense) - net for Dow Inc. and TDCC was income of $1,269 million and income of $1,274 million, respectively, in 2020 compared with income of $461 million and income of $573 million, respectively, in 2019. Sundry income (expense) - net increased primarily due to gains on Marchthe sale of certain rail and marine and terminal operations and assets and gains related to a legal matter, which were partially offset by losses on the early extinguishment of debt.
Net income (loss) available for Dow Inc. and TDCC common stockholder(s) was income of $1,225 million and $1,235 million, respectively, in 2020, compared with a loss of $1,359 million and $1,237 million, respectively, in 2019. Earnings (loss) per share for Dow Inc. was earnings of $1.64 per share in 2020, compared with a loss of $1.84 per share in 2019.
In 2020, Dow Inc. declared and paid dividends to common stockholders of $2.80 per share ($2,071 million).
In 2020, Dow Inc. repurchased $125 million of the Company's common stock.
Other notable events and highlights from the year ended December 31, 2017, 2020 include:
•Dow and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, as a result, Dow and DuPont became subsidiaries of DowDuPont (the "Merger"). Following the Merger, Dow and DuPont intend to pursue, subject to certain customary conditions, including, among others, the effectiveness of registration statements filed with the U.S. Securities and Exchange Commission ("SEC") and approvalwas named by the boardHuman Rights Campaign ("HRC") Foundation to its 2020 list of directors“Best Places to Work” for LGBTQ+ equality. This marks the Company’s 15th consecutive year receiving a perfect score on HRC’s Corporate Equality Index, a national benchmarking tool on corporate policies and practices pertinent to LGBTQ+ employees.
•Dow received two 2020 BIG Innovation Awards from the Business Intelligence Group for DOWSIL™ TC-3015 Reworkable Thermal Gel and ECOFAST™ Pure Sustainable Textile Treatment.
•In February 2020, TDCC announced the completion of DowDuPont,a public offering of €2.25 billion aggregate principal amount of its notes.
•In the separationfirst quarter of 2020, TDCC redeemed $1.25 billion of its 3.0 percent notes due November 15, 2022.
•In March 2020, Dow announced a commitment of $3 million to aid COVID-19 relief efforts worldwide. This included $2 million for immediate support of impacts caused by COVID-19, including donations to the COVID-19 Solidarity Fund, Direct Relief, and local and regional nonprofit organizations in Dow communities around the globe and $1 million to build community resilience in the recovery phase.
•In response to global needs related to COVID-19, in March 2020, the Company announced plans to produce hand sanitizer at five of its manufacturing sites around the world: Auburn, Michigan; South Charleston, West Virginia; Seneffe, Belgium; Hortolandia, Brazil and Stade, Germany. A majority of the combined company's agriculture, materials sciencehand sanitizer produced was donated to health systems and specialty products businessesgovernment agencies for distribution.
•In April 2020, Dow announced the Company had developed a simplified face shield design and shared the design through onean open-source file to help accelerate production rates of the critically-needed personal protective equipment.
•Effective April 9, 2020, following the Company's Annual Meeting of Stockholders ("2020 Meeting") Dow Inc.'s Board elected Jim Fitterling, Dow’s Chief Executive Officer, as Chairman. In connection with that election, the Board elected Jeff M. Fettig to serve as Lead Director until the 2021 Annual Meeting of Stockholders or more tax-efficient transactions ("Intended Business Separations"). See Note 3until a successor is duly elected and qualified. The Company also announced that Jill S. Wyant, currently Executive Vice President of Innovation and Transformation at Ecolab, Inc., was elected to the Consolidated Financial Statements for additional information onBoard at the Merger.
Effective2020 Meeting and Ruth G. Shaw retired from the Board following the 2020 Meeting after 15 years of exemplary leadership, in accordance with the Merger, Dow’s business activities are components of its parent company’s business operations. Dow’s business activities, including the assessment of performance and allocation of resources, ultimately are reviewed and managed by DowDuPont. Information used by the chief operating decision maker of Dow relates to the Company in its entirety. Accordingly, there are no separate reportable business segments for the Company under Accounting Standards Codification Topic 280 “Segment Reporting” and the Company’s business results are reported in this Form 10-K as a single operating segment.
As a resultdirector tenure requirements of the Merger, DowDuPont owns allCompany's Corporate Governance Guidelines.
•Effective April 9, 2020, following the 2020 Meeting, Dow Inc.'s Board designated Dow's business presidents Jack Broodo, Diego Donoso, Mauro Gregorio and Jane Palmieri, as Executive Officers of the common stock of Dow. Pursuant to General Instruction I(1)(a) and (b) of Form 10-K “Omission of Information by Certain Wholly-Owned Subsidiaries,” the Company is filing this Form 10-K with a reduced disclosure format.
Company.
•On April 30, 2020, the Company announced the temporary idling or operating rate reductions of select manufacturing assets to balance production with demand across markets more severely affected by restrained economic activity. These assets returned to more normalized operating rates in the third quarter of 2020.
Intended Business Separations•Dow published its 2019 Shine Inclusion Report, providing progress on the Company's inclusion and diversity strategy, goals and performance.
•Dow was named to the 2020 DiversityInc Top 50 Companies for Diversity list for the third consecutive year. Dow was also included on four of DiversityInc's Specialty Lists including: Top Companies for Employee Resource Groups, Top Companies for Supplier Diversity, Top Companies for People with Disabilities, and Top Companies for LGBT Employees.
•In furtheranceMay 2020, the Company’s global headquarters community of Midland, Michigan, experienced widespread devastation caused by heavy rain and two dam failures, which led to extensive flooding and damage to homes and businesses in the area. The Company’s manufacturing facilities were not significantly impacted by the flooding. In response to this natural disaster, Dow pledged $1 million in financial support for immediate relief and long-term recovery efforts associated with the impact of the Intended Business Separations,flooding and its aftermath.
•In June 2020, the Company launched Dow ACTs (Advocacy, Community and DuPont are engagedTalent), a strategic framework that outlined a new set of actions Dow is taking to address systemic racism and racial injustice. In addition, Dow pledged $5 million over the next five years to help advance racial equality and social justice.
•In June 2020, Dow published its annual Sustainability Report and announced new sustainability targets, which align to and build upon its 2025 Sustainability Goals, including targets to Protect the Climate, Stop the Waste and Close the Loop. By 2030, Dow expects to reduce its net annual carbon emissions by five million metric tons, or 15 percent from its 2020 baseline. Additionally, Dow intends to be carbon neutral by 2050, in alignment with the Paris Agreement. By 2030, Dow plans to help stop the waste by enabling one million metric tons of plastic to be collected, reused or recycled through its direct actions and partnerships. By 2035, Dow will help close the loop with a target to have 100 percent of its products sold into packaging applications be reusable or recyclable.
•Dow was named to the 2020 Disability Equality Index® "Best Places to Work," by receiving the top score for the fourth year in a series of internal reorganizationrow.
•In July 2020, Dow launched its MobilityScience™ platform, designed to enhance the customer experience by tailoring technologies, products, and realignment steps (the “Internal Reorganization”)services from across Dow businesses to realign their businesses into three subgroups: agriculture,the transportation industry. The platform is pursuing accelerated growth by addressing mobility mega-trends with materials science innovation, and specialty products. DowDuPont has also formed two whollyenabling a seamless experience for Dow’s customers and partners.
•On August 13, 2020, Gaurdie Banister Jr., former President and CEO of Aera Energy LLC, an oil and gas exploration and production company jointly owned subsidiaries:by Shell Oil Company and ExxonMobil Corporation, was elected to Dow Holdings Inc. (“DHI”),'s Board.
•In August 2020, TDCC announced the completion of a public offering of $2.0 billion aggregate principal amount of its notes.
•Dow Silicones voluntarily repaid the full $2.0 billion outstanding principal balance under a certain third party credit agreement.
•In September 2020, TDCC and Union Carbide completed cash tender offers for certain debt securities. A total of $493 million aggregate principal amount was tendered and retired.
•Dow was named as one of the 2020 PEOPLE's "50 Companies that Care" by Great Place to serveWork® and PEOPLE.
•Dow received four 2020 Sustainability Awards from the Business Intelligence Group, including the Sustainability Initiative of the Year Award for Dow's Carbon Partnership with International Olympic Committee as a holding company for its materials science business, and Corteva, Inc. (“Corteva”), to serve as a holding company for its agriculture business. Following the separation and distribution of DHI, which is targeted to occur by April 1, 2019, DowDuPont,well as the remaining company, which is referred to herein as “New DuPont,” will continue to hold the agriculture and specialty products businesses. New DuPont is then targeted to complete the separation and distribution of Corteva on June 1, 2019, resulting in New DuPont holding the specialty products businesses of DowDuPont. Following the distributions, DowDuPont will be known as DuPont.
As partSustainability Products of the Internal Reorganization, 1)Year Award for ECOFAST™ Pure Sustainable Textile Treatment and SunSpheres™ BIO SPF Booster.
•On September 15, 2020, the Company announced that John Sampson will rejoin Dow as Senior Vice President, Operations, Manufacturing and Engineering, succeeding Peter Holicki, who will retire in 2021 after more than 34 years of service with Dow.
•On September 30, 2020, TDCC completed the sale of rail infrastructure operations and assets and liabilities of the materials science business will be transferred or conveyed to legal entities that then will be aligned under DHI, 2) the assets and liabilities of the agriculture business will be transferred or conveyed to legal entities that then will be aligned under Corteva, and 3) the assets and liabilities of the specialty products business will be transferred or conveyed to legal entities that then will be aligned with New DuPont. Following the Internal Reorganization, DowDuPont expects to distribute DHI and Corteva through separate, pro rata U.S. federal tax-free spin-offs in which DowDuPont stockholders, at such time, would receive shares of common stock of DHI and of Corteva.
Additional information is includedsix sites in the Form 10 registration statementsU.S. & Canada for the separationgross cash proceeds in excess of DowDuPont's materials science business (filed as Dow Holdings Inc.) filed with the SEC on September 7, 2018, as amended on October 19, 2018 and November 19, 2018, and the agriculture business (filed as Corteva, Inc.) filed with the SEC on October 18, 2018, as amended on December 19, 2018.
Impact From Recently Enacted Tariffs
Certain countries where the Company’s products are manufactured, distributed or sold have recently enacted tariffs on certain products. The Company has analyzed the direct impact from the enacted tariffs and does not expect them to have a material impact on results of operations in 2019. The Company is taking actions to mitigate the impact by leveraging its global asset base to adjust its product and raw material flows.
PRINCIPAL PRODUCT GROUPS
The Company's principal product groups aligned with the materials science business include: Coatings & Performance Monomers, Consumer Solutions, Hydrocarbons & Energy, Industrial Solutions, Packaging and Specialty Plastics, Polyurethanes & CAV and Corporate. The principal product groups aligned with the agriculture business include: Crop Protection and Seed; and those aligned with the specialty products business include: Electronics & Imaging, Industrial Biosciences, Nutrition & Health, Safety & Construction and Transportation & Advanced Polymers.
$310 million.
•Dow was named to the Forbes JUST 100 list, recognizing the Company's commitment to serve all stakeholders. Dow was the top scoring chemical company in the workers category.
•In October 2020, Dow launched its first digital waste management platform, Rethink+. Rethink+ is a plastics take-back program that aims to prevent post-consumer plastic waste from going to landfills by digitally connecting waste generators, waste aggregators, waste processors and recyclers.
•Dow received five R&D 100 Awards from R&D Magazine for innovative technologies including: DOWSIL™EC-6601 Electrically Conductive Adhesive, DOWSIL™EI-2888 Primerless Silicone Encapsulant, ENGAGE™ 11000 Polyolefin Elastomers, NEOSEED® NE-8800 Emulsion, and RHOBARR™ 320 Polyolefin Dispersion for Paper and Board.
•Dow received the 2020 National Safety Council Green Cross for Safety® Innovation Award for its Aerial Lift Safety Project.
•Dow was named to the Dow Jones Sustainability World Index - marking the 21st time the Company has been named to this global benchmark.
•On December 1, 2020, TDCC completed the sale of certain U.S. Gulf Coast marine and terminal operations and assets for gross cash proceeds of $620 million.
•In December 2020, Dow Inc.’s Board designated John Sampson as an Executive Officer of the Company, effective January 1, 2021.
In addition to the highlights above, the following events occurred subsequent to December 31, 2020:
•On January 28, 2021, Dow announced plans to further advance and expand its digitalization efforts to deliver long-term value creation, by accelerating investment in three key areas (“Digital Acceleration”): expanding digital tools to accelerate materials science innovation; further enhancing the e-commerce buying and fulfillment experience for Dow's customers; and adopting real-time digital manufacturing insights, operational data intelligence and demand sensing to enhance the productivity and reliability of Dow’s operations. The Company expects more than $300 million in incremental annual run rate Operating EBITDA generation by the end of 2025 related to Digital Acceleration, with an additional one-time $100 million in structural working capital efficiency gains, driven in part by enhanced planning from digital tools. The activities related to Digital Acceleration are expected to result in additional cash expenditures of approximately $400 million, primarily through the end of 2022.
RESULTS OF OPERATIONS
Net Sales
The following table summarizestables summarize net sales, variancespro forma net sales and sales variance by operating segment and geographic region from the prior year:
| | | | | | | | | | | |
| Summary of Sales Results | | | |
| In millions | 2020 | 2019 | 2018 |
| Net sales | $ | 38,542 | | $ | 42,951 | | $ | 49,604 | |
| Pro forma net sales | | $ | 42,998 | | $ | 49,852 | |
| | Sales Variances by Operating Segment and Geographic Region - As Reported | | Sales Variances by Operating Segment and Geographic Region - As Reported |
| | | | | | | | | | | | 2020 | 2019 |
| Sales Variances by Geographic Region | Local Price & Product Mix | Currency | Volume | Portfolio & Other | Total | |
| Percentage change from prior year | 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 |
| 2018 | | | | |
| Packaging & Specialty Plastics | | Packaging & Specialty Plastics | (11) | % | — | % | 1 | % | — | % | (10) | % | (12) | % | (1) | % | (3) | % | — | % | (16) | % |
| Industrial Intermediates & Infrastructure | | Industrial Intermediates & Infrastructure | (5) | | — | | (6) | | — | | (11) | | (12) | | (1) | | — | | — | | (13) | |
| Performance Materials & Coatings | | Performance Materials & Coatings | (6) | | — | | (6) | | 1 | | (11) | | (6) | | (2) | | (3) | | 3 | | (8) | |
| Total | | Total | (7) | % | — | % | (3) | % | — | % | (10) | % | (11) | % | (1) | % | (2) | % | 1 | % | (13) | % |
| Total, excluding the Hydrocarbons & Energy business | | Total, excluding the Hydrocarbons & Energy business | (5) | % | — | % | (4) | % | — | % | (9) | % | (11) | % | (2) | % | 1 | % | 1 | % | (11) | % |
| U.S. & Canada | 3 | % | — | % | 1 | % | — | % | 4 | % | U.S. & Canada | (5) | % | — | % | (8) | % | — | % | (13) | % | (11) | % | — | % | (3) | % | 1 | % | (13) | % |
| EMEA | 4 |
| 4 |
| 3 |
| — |
| 11 |
| |
| EMEAI | | EMEAI | (12) | | — | | 1 | | — | | (11) | | (9) | | (3) | | (4) | | — | | (16) | |
| Asia Pacific | 2 |
| 1 |
| 15 |
| (1 | ) | 17 |
| Asia Pacific | (6) | | — | | — | | — | | (6) | | (12) | | (1) | | 5 | | — | | (8) | |
| Latin America | 3 |
| — |
| 3 |
| (3 | ) | 3 |
| Latin America | (7) | | — | | — | | — | | (7) | | (14) | | — | | (3) | | — | | (17) | |
| Total | 4 | % | 1 | % | 5 | % | (1 | )% | 9 | % | Total | (7) | % | — | % | (3) | % | — | % | (10) | % | (11) | % | (1) | % | (2) | % | 1 | % | (13) | % |
| | | | |
| 2017 | | | | |
| U.S. & Canada | 6 | % | — | % | 5 | % | 4 | % | 15 | % | |
| EMEA | 10 |
| 1 |
| 6 |
| 3 |
| 20 |
| |
| Asia Pacific | 4 |
| — |
| 7 |
| 7 |
| 18 |
| |
| Latin America | 2 |
| — |
| (1 | ) | — |
| 1 |
| |
| Total | 6 | % | — | % | 5 | % | 4 | % | 15 | % | |
| | | |
| 2016 | | | |
| U.S. & Canada | (7 | )% | — | % | 3 | % | 2 | % | (2 | )% | |
| EMEA | (6 | ) | (1 | ) | 4 |
| (1 | ) | (4 | ) | |
| Asia Pacific | (6 | ) | — |
| 6 |
| 9 |
| 9 |
| |
| Latin America | (6 | ) | — |
| — |
| (1 | ) | (7 | ) | |
| Total | (6 | )% | — | % | 3 | % | 2 | % | (1 | )% | |
1.Portfolio & Other includes the sales impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation, which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont.
| | | | | | | | | | | | | | | | | |
Sales Variances by Operating Segment and Geographic Region - As Reported
Percentage change from prior year | 2018 |
| Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total |
| Packaging & Specialty Plastics | 1 | % | 2 | % | 5 | % | 5 | % | 13 | % |
| Industrial Intermediates & Infrastructure | 5 | | 1 | | 13 | | — | | 19 | |
| Performance Materials & Coatings | 10 | | 1 | | (2) | | — | | 9 | |
| Total | 4 | % | 1 | % | 6 | % | 2 | % | 13 | % |
| Total, excluding the Hydrocarbons & Energy business | 4 | % | 1 | % | 7 | % | 2 | % | 14 | % |
| U.S. & Canada | 4 | % | — | % | 2 | % | 2 | % | 8 | % |
| EMEAI | 5 | | 3 | | 4 | | 2 | | 14 | |
| Asia Pacific | 2 | | 1 | | 19 | | 3 | | 25 | |
| Latin America | 5 | | — | | 4 | | 2 | | 11 | |
| Total | 4 | % | 1 | % | 6 | % | 2 | % | 13 | % |
1.Portfolio & Other includes the sales impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation, which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont.
2020 Versus 2019
The Company reported net sales of $38.5 billion in 2020, down 10 percent from $43.0 billion in 2019, with local price down 7 percent and volume down 3 percent. Net sales fordecreased in all geographic regions and operating segments, reflecting impacts from the global COVID-19 pandemic on economies and supply and demand fundamentals, most notably in the first half of the year. Local price decreased in all operating segments and in all geographic regions, primarily in response to lower global energy prices. Local price decreased in Packaging & Specialty Plastics (down 11 percent), Industrial Intermediates & Infrastructure (down 5 percent) and Performance Materials & Coatings (down 6 percent). Volume declined 3 percent, driven by the U.S. & Canada (down 8 percent), which was partially offset by demand growth in EMEAI (up 1 percent). Volume was flat in Asia Pacific and Latin America. Volume increased in Packaging & Specialty Plastics (up 1 percent) and decreased in Industrial Intermediates & Infrastructure and Performance Materials & Coatings (both down 6 percent). Excluding the Hydrocarbons & Energy business, sales declined 9 percent.
2019 Versus 2018 were $60.3
The Company reported net sales of $43.0 billion up 9in 2019, down 13 percent from $55.5$49.6 billion in 2017,2018, driven by higher sales volume, reflecting additional capacity from U.S. Gulf Coast growth projects and increased supply from Sadara Chemical Company ("Sadara"), increaseda decrease in local price, decreased volume and the favorableunfavorable impact of currency. Sales increaseddeclines were broad-based and occurred in all segments and geographic regions with double-digit gains in Asia Pacific (up 17 percent) and EMEA (up 11 percent). Volume increased 5 percent as increases in Polyurethanes & CAV, Packaging and Specialty Plastics, Industrial Solutions, Hydrocarbons & Energy, Electronics & Imaging, Nutrition & Health and Safety & Construction more than offset declines in Seed, Consumer Solutions, Coatings & Performance Monomers, Industrial Biosciences and Transportation & Advanced Polymers. Volume was flat in Crop Protection. Volume increased in all geographic regions, including a double-digit increase in Asia Pacific (up 15 percent).regions. Local price increased 4decreased 11 percent, primarily in response to higherlower feedstock and raw material costs and pricing initiatives.pressures. Local price increaseddecreased in Packaging & Specialty Plastics and Industrial Intermediates & Infrastructure (both down 12 percent) and in Performance Materials & Coatings (down 6 percent). Local price decreased in all geographic regions. Volume decreased 2 percent with declines in all geographic regions except Asia Pacific (up 5 percent). Volume declines were primarily driven by lower hydrocarbon co-product sales. Volume decreased in Packaging & Specialty Plastics and Performance Materials & Coatings (both down 3 percent), while Industrial Intermediates & Infrastructure volume was flat. Currency unfavorably impacted net sales by 1 percent compared with the prior year, driven primarily by EMEAI (down 3 percent). Portfolio & Other improved sales by 1 percent. Excluding the Hydrocarbons & Energy business, sales declined 11 percent.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales Variances by Operating Segment and Geographic Region - Pro Forma Basis |
| 2020 1 | 2019 |
| Percentage change from prior year | Local Price & Product Mix | Currency | Volume | Total | Local Price & Product Mix | Currency | Volume | Total |
| Packaging & Specialty Plastics | (11) | % | — | % | 1 | % | (10) | % | (12) | % | (1) | % | (3) | % | (16) | % |
| Industrial Intermediates & Infrastructure | (5) | | — | | (6) | | (11) | | (12) | | (2) | | 1 | | (13) | |
| Performance Materials & Coatings | (6) | | — | | (5) | | (11) | | (6) | | (2) | | (1) | | (9) | |
| Total | (7) | % | — | % | (3) | % | (10) | % | (11) | % | (1) | % | (2) | % | (14) | % |
| Total, excluding the Hydrocarbons & Energy business | (5) | % | — | % | (4) | % | (9) | % | (10) | % | (2) | % | 1 | % | (11) | % |
| U.S. & Canada | (5) | % | — | % | (8) | % | (13) | % | (11) | % | — | % | (2) | % | (13) | % |
| EMEAI | (12) | | — | | 1 | | (11) | | (9) | | (3) | | (4) | | (16) | |
| Asia Pacific | (6) | | — | | — | | (6) | | (12) | | (1) | | 5 | | (8) | |
| Latin America | (7) | | — | | — | | (7) | | (15) | | — | | (3) | | (18) | |
| Total | (7) | % | — | % | (3) | % | (10) | % | (11) | % | (1) | % | (2) | % | (14) | % |
1.As reported net sales for the year ended December 31, 2020 compared with pro forma net sales for the year ended December 31, 2019.
| | | | | | | | | | | | | | | | | |
Sales Variances by Operating Segment and Geographic Region - Pro Forma Basis
Percentage change from prior year | 2018 |
| Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total |
| Packaging & Specialty Plastics | 1 | % | 1 | % | 5 | % | — | % | 7 | % |
| Industrial Intermediates & Infrastructure | 5 | | 1 | | 13 | | — | | 19 | |
| Performance Materials & Coatings | 10 | | 1 | | (2) | | 2 | | 11 | |
| Total | 4 | % | 1 | % | 6 | % | — | % | 11 | % |
| Total, excluding the Hydrocarbons & Energy business | 4 | % | 1 | % | 7 | % | — | % | 12 | % |
| U.S. & Canada | 3 | % | — | % | 2 | % | 1 | % | 6 | % |
| EMEAI | 5 | | 3 | | 4 | | — | | 12 | |
| Asia Pacific | 3 | | 1 | | 18 | | — | | 22 | |
| Latin America | 5 | | — | | 4 | | — | | 9 | |
| Total | 4 | % | 1 | % | 6 | % | — | % | 11 | % |
1.Portfolio & Other includes the sales impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation, which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont.
2020 Versus 2019 - Pro Forma
The Company reported net sales of $38.5 billion for 2020, down 10 percent from pro forma net sales of $43.0 billion in 2019, with local price down 7 percent and volume down 3 percent. Net sales decreased in all geographic regions and across all principal product groups, except Packagingoperating segments, reflecting impacts from the global COVID-19 pandemic on economies and Specialty Plasticssupply and Electronics & Imaging which were flat, withdemand fundamentals, most notably in the most notable increases in Consumer Solutions, Polyurethanes & CAV, Hydrocarbons & Energy, Coatings & Performance Monomers and Industrial Solutions. Portfolio & Other decreased sales 1 percent, reflecting the divestiturefirst half of the global Ethylene Acrylic Acid copolymersyear. Local price decreased in all operating segments and ionomers business ("EAA Business"), a portion of Dow AgroSciences' corn seed business in Brazil ("DAS Divested Ag Business") and the divestiture of SKC Haas Display Films group of companies. Currency increased sales by 1 percent, driven primarily by EMEA (up 4 percent).
Net sales for 2017 were $55.5 billion, up 15 percent from $48.2 billion in 2016, primarily reflecting increased local price, higher sales volume and the addition of the Dow Silicones business. Sales increased in all geographic regions, with double-digit increasesprimarily in EMEA (up 20response to lower global energy prices. Local price decreased in Packaging & Specialty Plastics (down 11 percent), Asia Pacific (up 18Industrial Intermediates & Infrastructure (down 5 percent) and Performance Materials & Coatings (down 6 percent). Volume declined 3 percent, driven by the U.S. & Canada (down 8 percent), which was partially offset by an increase in EMEAI (up 151 percent). Volume was flat in Asia Pacific and Latin America. Volume increased in Packaging & Specialty Plastics (up 1 percent) and decreased in Industrial Intermediates & Infrastructure (down 6 percent) and Performance Materials & Coatings (down 5 percent). Excluding the Hydrocarbons & Energy business, sales declined 9 percent.
2019 Versus 2018 - Pro Forma
The Company reported pro forma net sales for 2019 of $43.0 billion, down 14 percent from $49.9 billion for 2018, primarily driven by a decrease in local price, decreased volume and the unfavorable impact of currency. Sales declines were broad-based and occurred in all segments and geographic regions. Local price increased 6decreased 11 percent, with increasesprimarily in all geographic regions, including a double-digit increase in EMEA (up 10 percent), driven by broad-based pricing actions as well as higherresponse to lower feedstock and raw material prices.costs and pricing pressures. Local price increased across most principal product groups with the most notable increasesdecreased in HydrocarbonsPackaging & Energy, Polyurethanes & CAV, Coatings & Performance Monomers, Packaging and Specialty Plastics and Industrial SolutionsIntermediates & Infrastructure (both down 12 percent) and Consumer Solutions.in Performance Materials & Coatings (down 6 percent). Local price was flatdecreased in Safety & Construction and Transportation & Advanced Polymers and declined in Crop Protection, Electronics & Imaging and Industrial Biosciences.all geographic regions. Volume increased 5decreased 2 percent with increases across all principal product groups, except Seed, with notable increases reported in Hydrocarbons & Energy, Polyurethanes & CAV, Packaging and Specialty Plastics, Electronics & Imaging and Industrial Solutions. Volume was flat in Crop Protection. Volume increaseddeclines in all geographic regions, except Latin AmericaAsia Pacific (up 5 percent). Volume decreased in Packaging & Specialty Plastics (down 3 percent) and Performance Materials & Coatings (down 1 percent) and increased in Industrial Intermediates & Infrastructure (up 1 percent). PortfolioCurrency unfavorably impacted net sales by 1 percent compared with the prior year, driven primarily by EMEAI (down 3 percent). Excluding the Hydrocarbons & Other increasedEnergy business, sales declined 11 percent.
sales 4 percent, primarily reflecting the addition of the Dow Silicones business, partially offset by divestitures, including the SKC Haas Display Films group of companies, the EAA Business and the DAS Divested Ag Business.
Cost of Sales
Cost of sales ("COS") was $47.7$33.3 billion in 2018, up $4.12020, down $3.4 billion from $43.6compared with $36.7 billion in 2017.2019. COS increaseddecreased in 20182020 primarily due to increased sales volume, which reflected additional capacity from U.S. Gulf Coast growth projects and increased supply from Sadara, higherlower feedstock and other raw material costs, decreased sales volume and increasedlower planned maintenance turnaround costs, which were partially offset by higher performance-based compensation costs. Operating rates declined significantly in the second quarter of 2020, as the Company temporarily idled certain manufacturing facilities and selectively adjusted operating rates at other facilities to balance production to demand in response to the COVID-19 pandemic. These facilities returned to more than offset lower commissioning expensesnormalized operating rates in the third quarter of 2020. Overall, operating rates increased in the third and fourth quarters of 2020. In 2019, COS also included $75 million of transaction-related costs resulting from the separation from DowDuPont (related to Corporate) and $399 million of environmental charges related to U.S. Gulf Coast growth projectsPackaging & Specialty Plastics ($5 million), Industrial Intermediates & Infrastructure ($8 million), Performance Materials & Coatings ($50 million) and cost synergies.Corporate ($336 million). COS as a percentage of sales was 79.186.5 percent in 20182020 compared with 78.685.3 percent in 2017.2019.
COS was $43.6$36.7 billion in 2017, up $5.92019, down $4.4 billion from $37.7$41.1 billion in 2016,2018. COS decreased in 2019 primarily due to increased sales volume, higherlower feedstock energy and other raw material costs, higher commissioning expensesdecreased sales volume, cost synergies, stranded cost removal and a favorable adjustment to the warranty accrual of an exited business, which were partially offset by $75 million of transaction-related costs resulting from the separation from DowDuPont (related to Corporate) and $399 million of environmental charges related to U.S. Gulf Coast growth projects,Packaging & Specialty Plastics ($5 million), Industrial Intermediates & Infrastructure ($8 million), Performance Materials & Coatings ($50 million) and the addition of the Dow Silicones business.Corporate ($336 million). COS as a percentage of sales was 78.685.3 percent in 20172019 compared with 78.282.8 percent in 2016. See Note 5 to the Consolidated Financial Statements for additional information on the Dow Silicones ownership restructure.2018.
Personnel Count
The Company permanently employed approximately 54,000 people at December 31, 2018 and 2017, down from approximately 56,000 people at December 31, 2016, primarily due to the Company's restructuring programs.
Research and Development Expenses
Research and development (“R&D”)&D expenses were $1,536$768 million in 2018,2020, compared with $1,648$765 million in 20172019 and $1,593$800 million in 2016. In 2018,2018. R&D expenses in 2020 increased compared with 2019 primarily due to higher performance-based compensation costs which were partially offset by cost reductions. R&D expenses in 2019 decreased compared with 2018 primarily due to cost synergiesreductions and lower performance-based compensation costs. In 2017, R&D expenses increased primarily due to the addition of the Dow Silicones business.
Selling, General and Administrative Expenses
Selling, general and administrative (“("SG&A”&A") expenses were $2,846$1,471 million in 2018,2020, compared with $2,920$1,590 million and $1,585 million for Dow Inc. and TDCC, respectively, in 2019 and $1,782 million in 2017 and $2,953 million in 2016. In 2018,2018. SG&A expenses in 2020 decreased primarily due to cost reductions which were partially offset by higher performance-based compensation costs. SG&A was also favorably impacted by the recovery of legal costs related to the Nova
Chemicals Corporation ("Nova") ethylene asset matter and the reversal of a bad debt reserve related to an arbitration judgment. SG&A expenses in 2019 decreased compared with 2018 primarily due to cost reductions, cost synergies, stranded cost removal and lower performance-based compensation costs. In 2017, SG&A expenses decreased as cost reduction initiatives and reduced litigation expenses, aswere favorably impacted by a resultrecovery of the favorable impact from the recoverya portion of legal costs related to the Nova Chemicals Corporation ("Nova") patent infringement award, more than offset higher spending fromlitigation matter in the additionthird quarter of the Dow Silicones business.2019. See Note 16 to the Consolidated Financial Statements for additional information on the Nova award.litigation matters.
Amortization of Intangibles
Amortization of intangibles was $622$401 million in 2018, essentially flat2020, compared with $624$419 million in 2017.2019 and $469 million in 2018. Amortization of intangibles in 2017 increased from $544 million in 2016,decreased primarily due to the addition of the Dow Silicones business.certain intangible assets becoming fully amortized. See Note 13 to the Consolidated Financial Statements for additional information on intangible assets.
Restructuring, Goodwill Impairment and Asset Related Charges - Net
DowDuPont Agriculture DivisionRestructuring, goodwill impairment and asset related charges - net were $708 million in 2020, $3,219 million in 2019 and $221 million in 2018.
2020 Restructuring Program
During the fourth quarter of 2018 and in connection with the ongoing integration activities, DowDuPontOn September 29, 2020, Dow Inc.'s Board approved restructuring actions to simplifyachieve the Company's structural cost improvement initiatives in response to the continued economic impact from the COVID-19 pandemic. The restructuring program is designed to reduce structural costs and optimize certain organizational structures withinenable the Agriculture division in preparation for its intended separation as a standalone company ("Agriculture Division Program"). Company to further enhance competitiveness while the COVID-19 economic recovery gains traction. These actions are expected to be substantially complete by the end of 2021.
As a result of these actions, the Company expects to record total pretax restructuring charges of $31 million, comprised of $28 million of severance and related benefit costs and $3 million of asset write-downs and write-offs. For the year ended December 31, 2018,in 2020 the Company recorded pretax restructuring charges of $25$573 million, consisting of severance and related benefit costs of $24$297 million, and asset write-downs and write-offs of $1$196 million and costs associated with exit and disposal activities of $80 million. The Company expects actions related to the Agriculture Division Program to be substantially completerestructuring charges by mid 2019.segment were as follows: $11 million in Packaging & Specialty Plastics, $22 million in Industrial Intermediates & Infrastructure, $177 million in Performance Materials & Coatings and $363 million in Corporate.
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont approved post-mergerpost-Merger restructuring actions under the DowDuPont Cost Synergy Program (the "Synergy Program") which iswas designed to integrate and optimize the organization following the Merger and in preparation for the Intended Business Separations.business separations. The Company expects to record total pretax restructuring charges of approximately $1.3 billion, which included initial estimates of approximately $525 million to $575 million of severance and related benefit costs; $400 million to $440 million of asset write-downs and write-offs, and $290 million to $310 million of costs associated with exit and disposal activities.below reflect charges from continuing operations.
As a result of the Synergy Program, the Company recorded pretax restructuring charges of $687$184 million in 2017,2018, consisting of severance and related benefit costs of $357$137 million, asset write-downs and write-offs of $287$33 million and costs associated with exit and disposal activities of $43 million. For the year ended December 31, 2018, the Company recorded pretax restructuring charges of $551 million, consisting of severance and related benefit costs of $204 million, asset write-downs and write-offs of
$226 million and costs associated with exit and disposal activities of $121 million. The Company expects to record additional restructuring charges during 2019 and substantially complete the Synergy Program by the end of 2019.
2016 Restructuring
On June 27, 2016, Dow's Board of Directors approved a restructuring plan that incorporated actions related to the ownership restructure of Dow Silicones. These actions, aligned with Dow’s value growth and synergy targets, resulted in a global workforce reduction of approximately 2,500 positions, with most of these positions resulting from synergies related to the ownership restructure of Dow Silicones. As a result of these actions, the Company recorded pretax restructuring charges of $449 million in the second quarter of 2016, consisting of severance and related benefit costs of $268 million, asset write-downs and write-offs of $153 million and costs associated with exit and disposal activities of $28 million.
In 2017, the Company recorded a favorable adjustment to the 2016 restructuring charge related to costs associated with exit and disposal activities of $7 million.
In 2018, the Company recorded a favorable adjustment to the 2016 restructuring charge related to severance and related benefit costs of $8 million and an unfavorable adjustment to costs associated with exit and disposal activities of $14 million. The 2016 restructuring activitiescharges by segment were substantially complete at June 30, 2018, with remaining liabilities foras follows: $13 million in Packaging & Specialty Plastics, $11 million in Industrial Intermediates & Infrastructure, $7 million in Performance Materials & Coatings and $153 million in Corporate.
In 2019, the Company recorded pretax restructuring charges of $292 million, consisting of severance and related benefit costs of $123 million, asset write-downs and write-offs of $143 million and costs associated with exit and disposal activities of $26 million. The restructuring charges by segment were as follows: $1 million in Packaging & Specialty Plastics, $7 million in Industrial Intermediates & Infrastructure, $28 million in Performance Materials & Coatings and $256 million in Corporate.
In 2020, the Company recorded pretax restructuring charges of $86 million for severance and related benefit costs, related to be settled over time. See Note 7Corporate. Cash expenditures related to the Consolidated Financial Statements for details onSynergy Program were substantially completed at the Company's restructuring activities.end of 2020.
2019 Goodwill Impairment
Upon completion of thethe goodwill impairment testing in the fourth quarter of 2017,2019, the Company determined the fair value of the Coatings & Performance Monomers reporting unit was lower than its carrying amount. As a result, the Company recorded an impairment charge of $1,491$1,039 million in the fourth quarter of 2017. There were no2019 related to Performance Materials & Coatings.
Asset Related Charges
2020 Charges
In 2020, the Company recognized pretax impairment charges of $49 million, including additional pretax impairment charges for capital additions made to a bio-ethanol manufacturing facility in 2016 or 2018.Santa Vitoria, Minas Gerais, Brazil ("Santa Vitoria"), which was impaired in 2017 and divested in 2020, as well as charges for miscellaneous write-offs and write-downs of non-manufacturing assets and the write-down of certain corporate leased equipment. The impairment charges were included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Packaging & Specialty Plastics ($19 million), Performance Materials & Coatings ($15 million) and Corporate ($15 million). See Note 23 for additional information.
2019 Charges
On August 13, 2019, the Company entered into a definitive agreement to sell its acetone derivatives business to ALTIVIA Ketones & Additives, LLC. The transaction closed on November 1, 2019 and included the Company's acetone derivatives related inventory and production assets, located in Institute, West Virginia, in addition to the site infrastructure, land, utilities and certain railcars. The Company remains at the Institute site as a tenant. As a result of the divestiture, the Company recognized a pretax impairment charge of $75 million in the third quarter of 2019. The impairment charge by segment was as follows: $24 million in Packaging & Specialty Plastics and $51 million in Corporate.
In the fourth quarter of 2019, the Company concluded that its equity method investment in Sadara was other-than-temporarily impaired. The Company also reserved certain accounts and notes receivable and accrued interest balances due to uncertainty on the timing of collection. As a result, the Company recorded a $1,755 million pretax charge related to Sadara. The charge by segment was as follows: $370 million in Packaging & Specialty Plastics, $1,168 million in Industrial Intermediates & Infrastructure and $217 million in Corporate.
In 2019, the Company recognized additional pretax impairment charges of $58 million related primarily to capital additions at its Santa Vitoria manufacturing facility, which was impaired in 2017. The impairment charges by segment were as follows: $44 million in Packaging & Specialty Plastics, $9 million in Performance Materials & Coatings and $5 million in Corporate.
2018 Charges
In 2018, the Company recognized additional pretax impairment charges of $34 million related primarily to capital additions at its Santa Vitoria manufacturing facility. The impairment charge was related to Packaging & Specialty Plastics.
See Note 6 to the Consolidated Financial Statements for additional information on therestructuring, goodwill impairment charge.
Asset Related Charges
2018 Charges
In 2018, the Company recognized an additional pretax impairment charge of $34 million related primarily to capital additions made to the biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017.
2017 Charges
In 2017, the Company recognized a $622 million pretax impairment charge related to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil. The Company determined it would not pursue an expansion of the facility’s ethanol mill into downstream derivative products, primarily as a result of cheaper ethane-based production as well as the Company’s new assets coming online on the U.S. Gulf Coast which can be used to meet growing market demands in Brazil. As a result of this decision, cash flow analysis indicated the carrying amount of the impacted assets was not recoverable.
The Company also recognized other pretax impairment charges of $317 million in the fourth quarter of 2017, including charges related to manufacturing assets of $230 million, an equity method investment of $81 million and other assets of $6 million.
2016 Charges
In 2016, the Company recognized a $143 million pretax impairment charge related to its equity interest in AgroFresh Solutions, Inc. (“AFSI”) due to a decline in the market value of AFSI. See Notes 7, 12, 22 and 23 to the Consolidated Financial Statements for additional information on asset related charges.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to the Mergerpost-Merger integration and business separation activities (through December 31, 2020) and the ownership restructure of Dow Silicones (through May 31, 2018), as well as post-Merger integration and Intended Business Separation activities, were $1,044$239 million in 2018, $7862020, $1,063 million and $1,039 million for Dow Inc. and TDCC, respectively, in 2019 and $1,179 million in 20172018. In 2018 and $349 million in 2016. In 2018,2019, integration and separation costs ramped upwere higher as a result of post-mergerpost-Merger integration and Intended Business Separationbusiness separation activities. Integration and business separation activities were completed as of December 31, 2020. Integration and separation costs are related to Corporate.
Asbestos-Related ChargeEquity in Earnings (Losses) of Nonconsolidated Affiliates
The Company’s share of equity in earnings (losses) of nonconsolidated affiliates in 2020 was a loss of $18 million, compared with a loss of $94 million in 2019 and earnings of $555 million in 2018. In 2016,2020, equity losses decreased primarily due to lower equity losses from Sadara, driven by improved industry supply and demand fundamentals in the Companythird and Union Carbide, a wholly owned subsidiary, electedfourth quarters of 2020, which were partially offset by lower equity earnings from the Kuwait joint ventures due to change the method of accounting for asbestos-related defense and processing costs from expensing as incurred to estimating and accruing a liability. As a result of this accounting policy change, the Company recorded a pretax charge of $1,009 million for asbestos-related defense costs through the terminal year of 2049.lower monoethylene glycol prices. The Company also recorded a pretax charge of $104 millionhad equity losses in 2019 compared with equity earnings in 2018 primarily due to increaselower equity earnings from the asbestos-related liability for pendingKuwait joint ventures due to lower monoethylene glycol and future claims throughpolyethylene prices and the terminal year of 2049. There was no adjustment to the asbestos-related liability for pendingThai joint ventures and
future claims and defense and processing costs in 2017 or 2018. increased equity losses from Sadara. See Notes 1 and 16Note 12 to the Consolidated Financial Statements for additional information on asbestos-related matters.the Company’s evaluation of its equity method investment in Sadara for other-than-temporary impairment in 2019.
Dow’s share of the earnings of nonconsolidated affiliates in 2018 was $950 million, compared with $762 million in 2017 and $442 million in 2016. In 2018, equity earnings increased as higher earnings from the Kuwait joint ventures, lower equity losses from Sadara and higher earnings from the HSC Group, which included settlements with a customer related to long-term polysilicon sales agreements, were partially offset by lower equity earnings from the Thai joint ventures.
In 2017, equity earnings increased as lower equity losses from Sadara and higher equity earnings from the Kuwait joint ventures and the HSC Group, which included settlements with a customer related to long-term polysilicon sales agreements, were partially offset by the impact of the Dow Silicones ownership restructure and lower equity earnings from the Thai joint ventures.
Sundry Income (Expense) - Net
Sundry income (expense) – net includes a variety of income and expense items such as foreign currency exchange gains and losses, interest income, dividends from investments, gains and losses on sales of investments and assets, non-operating pension and other postretirement benefit plan credits or costs, and certain litigation matters.
TDCC
Sundry income (expense) - net for 20182020 was income of $181$1,274 million, compared with income of $195$573 million in 20172019 and income of $1,486$96 million in 2016.2018.
In 2020, sundry income (expense) - net included a $544 million gain related to the Nova ethylene asset matter (related to Packaging & Specialty Plastics), a $499 million gain related to the sale of certain U.S. Gulf Coast marine and terminal operations and assets ($17 million related to Packaging & Specialty Plastics, $61 million related to Industrial Intermediates & Infrastructure and $421 million related to Corporate), a $233 million gain related to the sale of rail infrastructure operations and assets in the U.S. & Canada ($48 million related to Packaging & Specialty Plastics and $185 million related to Corporate), and non-operating pension and postretirement benefit plan credits. These were partially offset by a $149 million loss on the early extinguishment of debt (related to Corporate), foreign currency exchange losses, $11 million in charges associated with agreements entered into with DuPont and Corteva as part of the separation and distribution, which provides for cross-indemnities and allocations of obligations and liabilities for periods prior to, at and after completion of the separation (related to Corporate), a $13 million loss related to the divestiture of a bio-ethanol manufacturing facility in Brazil (related to Packaging & Specialty Plastics) and a $2 million loss on an asset sale (related to Corporate). See Notes 5, 7, 15, 16, 20 and 26 to the Consolidated Financial Statements for additional information.
In 2019, sundry income (expense) - net included foreign currency exchange gains, non-operating pension and postretirement benefit plan credits and gains on sales of assets and investments, as well as a net gain of $205 million related to litigation matters, which included a $170 million gain related to a legal matter with Nova (related to Packaging & Specialty Plastics), and an $85 million gain related to an adjustment of the Dow Silicones breast implant liability (related to Corporate), which were partially offset by a $50 million charge (net of indemnifications of $37 million), related to the settlement of the Dow Silicones commercial creditor matters (related to Corporate). In 2019, sundry income (expense) - net also included a $102 million loss on the early extinguishment of debt and a gain of $2 million on post-closing adjustments related to previous divestitures (both related to Corporate). See Notes 7, 15, 16, 20 and 26 to the Consolidated Financial Statements for additional information.
In 2018, sundry income (expense) - net included non-operating pension and other postretirement benefit plan credits, a $20 million gain related to the Company's sale of its equity interest incomein MEGlobal (related to Corporate) and gains on sales of assets and investments, which more than offset foreign currency exchange losses, a loss of $54 million on the early extinguishment of debt (related to Corporate) and a loss of $47$20 million for post-closing adjustments related to the Dow Silicones ownership restructure.restructure (related to Performance Materials & Coatings). See Notes 87, 15, 20, and 1526 to the Consolidated Financial Statements for additional information.
Dow Inc.
Sundry income (expense) - net for 2020 was income of $1,269 million, compared with income of $461 million in 2019 and $96 million in 2018.
In 2017,2020, in addition to the amounts previously discussed above for TDCC, sundry income (expense) - net included $10 million in charges associated with the agreements entered into with DuPont and Corteva as part of the separation and distribution (related to Corporate).
In 2019, in addition to the amounts previously discussed above for TDCC, sundry income (expense) - net included a $635$51 million gainloss on the divestiture of the DAS Divested Ag Business, a $227 million gain on the divestiture of the EAA Business, a $137 million gain related to the Nova patent infringement matter, interest income and gains on sales of assets and investments. These gains more than offset $682 million of non-operating pension and other postretirement benefit costs, primarilypost-closing adjustments related to a settlement charge for a U.S. non-qualified pension plan, a $469previous divestiture and $69 million lossin charges associated with the agreements entered into with DuPont and Corteva as part of the separation and distribution (both related to the Bayer CropScience arbitration matter and foreign currency exchange losses.Corporate). See Notes 1, 2, 6, 8,3, 7, 15, 16, 20 and 1926 to the Consolidated Financial Statements for additional information.
In 2016, sundry income (expense) - net included a $2,445 million gain related to the Dow Silicones ownership restructure, a $27 million favorable adjustment related to a decrease in Dow Silicone's implant liability, interest income and gains on sales
Interest Expense and Amortization of Debt Discount
Dow Inc.
Interest expense and amortization of debt discount was $1,118$827 million in 2018, up2020, down from $976$933 million in 2017,2019, primarily reflecting the effectdue to TDCC's redemption of long-term debt in 2019 and debt issuances at lower capitalized interest as a result of decreased capital spending.coupon rates in 2020. Interest expense and amortization of debt discount in 20172019 was updown from $858$1,063 million in 2016,2018, primarily reflecting the effect of the long-termdue to debt assumedreductions and lower interest bearing notes issued in the Dow Silicones ownership restructure.fourth quarter of 2018, which replaced higher interest bearing notes redeemed in the fourth quarter of 2018. See Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 11 and 15 to the Consolidated Financial Statements for additional information related to debt financing activity.
TDCC
Interest expense and amortization of debt discount was $827 million in 2020, down from $952 million in 2019 and $1,063 million in 2018. In addition to the amounts previously discussed above for Dow Inc., TDCC had interest expense related to an intercompany loan with Dow Inc. in 2019. See Note 25 to the Consolidated Financial Statements for additional information.
Provision for Income Taxes on Continuing Operations
The Company's effective tax rate fluctuates based on, among other factors, where income is earned, the level of income relative to tax attributes and the level of equity earnings, since most earnings from the Company's equity method investments are taxed at the joint venture level. The underlying factors affecting the Company's overall tax rate are summarized in Note 98 to the Consolidated Financial Statements.
On December 22, 2017,The CARES Act was enacted on March 27, 2020 in the Tax Cuts and Jobs Act (“The Act”) was enacted. The Act reducesUnited States. There were no significant impacts to the U.S. federal corporateCompany's provision for income tax rate from 35 percent to 21 percent, requires companies to paytaxes on continuing operations in 2020 as 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 to a hybrid territorial system. At December 31, 2017, the Company had not completed its accounting for the tax effects of The Act; however, the Company made a reasonable estimateresult of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118 ("SAB 118"), income tax effects of TheCARES Act werelegislation.
refined upon obtaining, preparing, and analyzing additional information during the measurement period. At December 31, 2018, the Company had completed its accounting for the tax effects of The Act.
The provision for income taxes on continuing operations was $1,285$777 million in 2018,2020, compared with $2,204$470 million in 20172019 and $9$809 million in 2016.2018. The tax rate for 2020 was unfavorably impacted by valuation allowances of $260 million related to foreign tax credits and other attributes that are more likely than not to remain unutilized prior to their expiration. The tax rate for 2020 was favorably impacted by a capital loss resulting from the divestiture of the Santa Vitoria manufacturing facility. This resulted in an effective tax rate of 37.5 percent for Dow Inc. in 2020.
The tax rate for 2019 was unfavorably impacted by non-deductible goodwill and investment impairments, geographic mix of earnings and reduced equity earnings. These factors resulted in a negative effective tax rate of 37.7 percent for Dow Inc. in 2019.
In the fourth quarter of 2019, the Company recorded the impacts of tax law changes enacted in Switzerland. As a result, deferred tax assets increased by $92 million.
The tax rate for 2018 was favorably impacted by the reduced U.S. federal corporate income tax rate as a result of Thethe Tax Cuts and Jobs Act, which was enacted on December 22, 2017, and benefits related to the issuance of stock-based compensation and unfavorably impacted by non-deductible restructuring costs and increases in statutory income in Latin America and Canada due to local currency devaluations. These factors resulted in an effective tax rate of 21.721.6 percent in 2018.
TheIncome from Discontinued Operations, Net of Tax
Income from discontinued operations, net of tax rate for 2017 was unfavorably impacted by the enactment of The Act, the impairment of goodwill for which there was no corresponding tax deduction, charges$445 million in 2019 and $1,835 million in 2018, related to tax attributes in the United Statesdistribution of AgCo and GermanySpecCo to DowDuPont as a result of the Merger and certain non-deductible costs associated with the Merger. The tax rate was favorably impacted by the geographic mix of earnings, and the adoption of Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which resulted in the recognition of excess tax benefits related to the issuance of stock-based compensation in the provision for income taxes. These factors resulted in an effective tax rate of 78.7 percent for 2017.
The tax rate for 2016 was favorably impacted by the non-taxable gain on the Dow Silicones ownership restructure and a tax benefit on the reassessment of a deferred tax liability related to the basis difference in the Company’s investment in Dow Silicones. The tax rate was also favorably impacted by the geographic mix of earnings, the availability of foreign tax credits, the deductibility of the urethane matters class action lawsuit and opt-out cases settlements, and the asbestos-related charge. A reduction in equity earnings and non-deductible costs associated with transactions and productivity actions unfavorably impacted the tax rate. These factors resulted in an effective tax rate of 0.2 percent for 2016.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $134 million in 2018, $129 million in 2017 and $86 million in 2016. Net income attributable to noncontrolling interests increased in 2018 compared with 2017, primarily due to the sale of the Company's ownership interests in the SKC Haas Display Films group of companies. Net income attributable to noncontrolling interests increased in 2017 compared with 2016, primarily due to higher earnings from Dow Silicones' consolidated joint ventures and improved results from a cogeneration facility in Brazil.separation. See Notes 18 and 23Note 3 to the Consolidated Financial Statements for additional information.
Preferred Stock DividendsNet Income Attributable to Noncontrolling Interests
On December 30, 2016, the Company converted all outstanding shares of its Cumulative Convertible Perpetual Preferred Stock, Series A ("Preferred Stock") into shares ofNet income attributable to noncontrolling interests was $69 million in 2020, $87 million in 2019 and $134 million in 2018. Net income attributable to noncontrolling interests decreased in 2019 compared with 2018, primarily due to the Company's common stock. Asacquisition of full ownership in a propylene oxide manufacturing joint venture on October 1, 2019. Net income attributable to noncontrolling interests from discontinued operations of $13 million in 2019 and $32 million in 2018 related to the distribution of AgCo and SpecCo to DowDuPont as a result of this conversion, no shares of Preferred Stockthe separation are issued or outstanding. On January 6, 2017,included in the Company filed an amendment to its Restated Certificate of Incorporation by way of a certificate of elimination with the Secretary of State of Delaware eliminating this series of preferred stock. Preferred Stock dividends of $340 million were recognized in 2016.amounts above. See Note 17Notes 19 and 24 to the Consolidated Financial Statements for additional information.
Net Income (Loss) Available for the Common StockholderStockholder(s)
Dow Inc.
Net income (loss) available for Dow Inc. common stockholders was income of $1,225 million in 2020, compared with a loss of $1,359 million in 2019 and income of $4,641 million in 2018. Earnings (loss) per share of Dow Inc. was earnings of $1.64 per share in 2020, compared with a loss of $1.84 per share in 2019 and earnings of $6.21 per share in 2018. See Note 9 to the Consolidated Financial Statements for details on Dow Inc.'s earnings per share calculations.
TDCC
Net income (loss) available for TDCC common stockholder was $4,499income of $1,235 million in 2018,2020, compared with $466loss of $1,237 million in 20172019 and $3,978income of $4,641 million in 2016. Effective with2018. Following the Merger, Dow no longer has publicly traded common stock. Dow'sseparation from DowDuPont, TDCC's common shares are owned solely by Dow Inc.
SEGMENT RESULTS
The Company conducts its parent company, DowDuPont.worldwide operations through six global businesses which are organized into the following operating segments: Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure and Performance Materials & Coatings. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. The Company did not aggregate any operating segments when determining its reportable segments. The Company reports geographic information for the following regions: U.S. & Canada, Asia Pacific, Latin America and EMEAI. The Company transfers ethylene to its downstream derivative businesses at market prices. The Company also allocated costs previously assigned to AgCo and SpecCo ("stranded costs") to the operating segments.
The Company’s measure of profit/loss for segment reporting purposes is Operating EBIT (for the year ended December 31, 2020) and pro forma Operating EBIT (for the years ended December 31, 2019 and 2018) as this is the manner in which the Company's chief operating decision maker ("CODM") assesses performance and allocates resources. The Company defines Operating EBIT as earnings (i.e., "Income (loss) from continuing operations before income taxes") before interest, excluding the impact of significant items. The Company defines pro forma Operating EBIT as earnings (i.e., "Income (loss) from continuing operations before income taxes") before interest, plus pro forma adjustments, excluding the impact of significant items. Operating EBIT by segment and pro forma Operating EBIT by segment include all operating items relating to the businesses; items that principally apply to Dow as a whole are assigned to Corporate. The Company also presents pro forma net sales for the years ended December 31, 2019 and 2018, as it is included in management’s measure of segment performance and is regularly reviewed by the CODM. Pro forma net sales includes the impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont. See Note 26 to the Consolidated Financial Statements for reconciliations of these measures and a summary of the pro forma adjustments impacting segment measures, which are consistent with the pro forma adjustments included in the Current Report on Form 8-K filed on June 3, 2019, with the SEC.
PACKAGING & SPECIALTY PLASTICS
Packaging & Specialty Plastics consists of two highly integrated global businesses: Hydrocarbons & Energy and Packaging and Specialty Plastics. The segment employs the industry’s broadest polyolefin product portfolio, supported by the Company’s proprietary catalyst and manufacturing process technologies, to work at the customer’s design table throughout the value chain to deliver more reliable and durable, higher performing, and more sustainable plastics to customers in food and specialty packaging; industrial and consumer packaging; health and hygiene; caps, closures and pipe applications; consumer durables; mobility and transportation; and infrastructure. Ethylene is transferred to downstream derivative businesses at market-based prices, which are generally equivalent to prevailing market prices for large volume purchases. This segment also includes the results of The Kuwait Styrene Company K.S.C.C. and The SCG-Dow Group, as well as a portion of the results of EQUATE Petrochemical Company K.S.C.C. ("EQUATE"), The Kuwait Olefins Company K.S.C.C. ("TKOC"), Map Ta Phut Olefins Company Limited ("Map Ta Phut") and Sadara, all joint ventures of the Company.
The Company is responsible for marketing a majority of Sadara products outside of the Middle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee.
| | | | | | | | | | | |
| Packaging & Specialty Plastics | | | |
| In millions | 2020 | 2019 | 2018 |
| Net sales | $ | 18,301 | | $ | 20,245 | | $ | 24,195 | |
| Pro forma net sales | | $ | 20,245 | | $ | 24,237 | |
| Operating EBIT | $ | 2,325 | | | |
| Pro forma Operating EBIT | | $ | 2,904 | | $ | 3,593 | |
| Equity earnings | $ | 173 | | $ | 162 | | $ | 287 | |
| | | | | | | | | | | |
| Packaging & Specialty Plastics | | | |
| Percentage change from prior year | 2020 | 2019 | 2018 |
| Change in Net Sales from Prior Period due to: | | | |
| Local price & product mix | (11) | % | (12) | % | 1 | % |
| Currency | — | | (1) | | 2 | |
| Volume | 1 | | (3) | | 5 | |
| Portfolio & other | — | | — | | 5 | |
| Total | (10) | % | (16) | % | 13 | % |
| Change in Pro Forma Net Sales from Prior Period due to: | | | |
| Local price & product mix | | (12) | % | 1 | % |
| Currency | | (1) | | 1 | |
| Volume | | (3) | | 5 | |
| | | |
| Total | | (16) | % | 7 | % |
2020 Versus 2019
Packaging & Specialty Plastics net sales were $18,301 million in 2020, down 10 percent from net sales and pro forma net sales of $20,245 million in 2019, with local price down 11 percent and volume up 1 percent. Net sales declined in the first half of the year, reflecting the impact of the COVID-19 pandemic, while strong supply and demand fundamentals took hold in the second half of the year. Local price decreased in both businesses and across all geographic regions, driven by reduced polyethylene prices and lower global energy prices. Local price declined in Hydrocarbons & Energy as prices for co-products are generally correlated to Brent crude oil prices, which declined 33 percent compared with 2019. Volume increased in Hydrocarbons & Energy as increases in EMEAI were partially offset by declines in the U.S. & Canada, Asia Pacific and Latin America. Packaging and Specialty Plastics volume was flat as increases in flexible food and specialty packaging, industrial and consumer packaging and health and hygiene applications in Asia Pacific, Latin America and EMEAI were offset by reduced demand for functional polymers, primarily due to the COVID-19 pandemic, and lower catalyst licensing activity in the U.S. & Canada.
Operating EBIT was $2,325 million in 2020, down 20 percent from pro forma Operating EBIT of $2,904 million in 2019. Operating EBIT decreased primarily due to integrated margin compression in both businesses. These declines more than offset cost reductions, decreased planned maintenance turnaround costs and increased equity earnings.
2019 Versus 2018
Packaging & Specialty Plastics net sales were $20,245 million in 2019, down 16 percent from net sales of $24,195 million in 2018. Pro forma net sales were $20,245 million in 2019, a decrease of 16 percent compared with pro forma net sales of $24,237 million in 2018, with local price down 12 percent, volume down 3 percent, and an unfavorable currency impact of 1 percent, primarily in EMEAI. Local price decreased in both businesses and across all geographic regions driven by reduced polyethylene prices and lower prices for Hydrocarbons & Energy co-products. Volume declined for the segment in all geographic regions, except Asia Pacific. Hydrocarbons & Energy volume declines more than offset volume gains in Packaging and Specialty Plastics. Volume decreased in Hydrocarbons & Energy primarily due to planned maintenance turnaround activity in Europe, increased internal consumption of ethylene on the U.S. Gulf Coast and lighter feedslate usage in Europe, leading to lower co-product production. Volume increased in Packaging and Specialty Plastics in Asia Pacific and EMEAI. Packaging and Specialty Plastics volume growth was driven by strong end-market growth in flexible food and specialty packaging, industrial and consumer packaging, and health and hygiene applications.
Pro forma Operating EBIT was $2,904 million in 2019, down 19 percent from pro forma Operating EBIT of $3,593 million in 2018. Pro forma Operating EBIT decreased primarily due to lower selling prices, reduced equity earnings at the Kuwait joint ventures due to lower polyethylene margins, lower sales volume in the Hydrocarbons & Energy business and the impact of an outage in Argentina, which more than offset lower feedstock and other raw material costs, volume gains in the Packaging and Specialty Plastics business and cost synergies.
INDUSTRIAL INTERMEDIATES & INFRASTRUCTURE
Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & Construction Chemicals - that develop important intermediate chemicals that are essential to manufacturing processes, as well as downstream, customized materials and formulations that use advanced development technologies. These businesses primarily produce and market ethylene oxide and propylene oxide derivatives that are aligned to market segments as diverse as appliances, coatings, electronics, surfactants for cleaning and sanitization, infrastructure and oil and gas. The global scale and reach of these businesses, world-class technology and R&D capabilities and materials science expertise enable the Company to be a premier solutions provider offering customers value-add sustainable solutions to enhance comfort, energy efficiency, product effectiveness and durability across a wide range of home comfort and appliances, building and construction, adhesives and lubricant applications, among others. This segment also includes a portion of the results of EQUATE, TKOC, Map Ta Phut and Sadara, all joint ventures of the Company.
The Company is responsible for marketing a majority of Sadara products outside of the Middle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee.
| | | | | | | | | | | |
| Industrial Intermediates & Infrastructure | | | |
| In millions | 2020 | 2019 | 2018 |
| Net sales | $ | 12,021 | | $ | 13,440 | | $ | 15,447 | |
| Pro forma net sales | | $ | 13,449 | | $ | 15,465 | |
| Operating EBIT | $ | 355 | | | |
| Pro forma Operating EBIT | | $ | 845 | | $ | 1,767 | |
| Equity earnings (losses) | $ | (166) | | $ | (241) | | $ | 284 | |
| | | | | | | | | | | |
| Industrial Intermediates & Infrastructure | | | |
| Percentage change from prior year | 2020 | 2019 | 2018 |
| Change in Net Sales from Prior Period due to: | | | |
| Local price & product mix | (5) | % | (12) | % | 5 | % |
| Currency | — | | (1) | | 1 | |
| Volume | (6) | | — | | 13 | |
| | | |
| Total | (11) | % | (13) | % | 19 | % |
| Change in Pro Forma Net Sales from Prior Period due to: | | | |
| Local price & product mix | | (12) | % | 5 | % |
| Currency | | (2) | | 1 | |
| Volume | | 1 | | 13 | |
| Portfolio & other | | — | | — | |
| Total | | (13) | % | 19 | % |
2020 Versus 2019
Industrial Intermediates & Infrastructure net sales were $12,021 million in 2020, down 11 percent from $13,440 million in 2019. Net sales decreased 11 percent from pro forma net sales of $13,449 million in 2019, with volume down 6 percent and local price down 5 percent. Weak demand for products used in consumer durable good end-markets, including construction, furniture and bedding, appliances and automotive, drove volume declines in Polyurethanes & Construction Chemicals in all geographic regions, reflecting the impact of the COVID-19 pandemic on consumer activities and buying patterns, most notably in the first half of the year. Volume in Industrial Solutions was also impacted by the COVID-19 pandemic, with decreases in the U.S. & Canada and Latin America which were partially offset by increases in Asia Pacific and EMEAI. The volume decline in Industrial Solutions was due to weakened demand in industrial, energy and automotive end-markets partially offset by stronger demand for products used in electronics, agriculture and pharma applications. Local price decreased in both businesses and in all geographic regions, primarily due to lower global energy prices and raw material costs.
Operating EBIT was $355 million in 2020, down 58 percent from pro forma Operating EBIT of $845 million in 2019. Operating EBIT decreased due to lower demand and margin compression, which were partially offset by cost reductions, decreased equity losses and lower planned maintenance turnaround costs. The overall decrease in equity losses was driven by lower equity losses from Sadara partially offset by decreased equity earnings from EQUATE.
2019 Versus 2018
Industrial Intermediates & Infrastructure net sales were $13,440 million in 2019, down 13 percent from $15,447 million in 2018. Pro forma net sales were $13,449 million in 2019, down from pro forma net sales of $15,465 million in 2018. Pro forma net sales decreased 13 percent in 2019, with local price down 12 percent and an unfavorable currency impact of 2 percent, primarily in EMEAI, which were partially offset by a 1 percent increase in volume. Price decreased in both businesses and all geographic regions, driven by lower feedstock and other raw material costs and unfavorable supply and demand fundamentals. Polyurethanes & Construction Chemicals reported volume increases in all geographic regions, primarily reflecting increased supply from Sadara and growth in polyurethanes systems applications, which were partially offset by a decline of caustic soda volume due to planned maintenance turnaround activities. Industrial Solutions volume decreased in EMEAI and the U.S & Canada and was flat in Latin America and Asia Pacific, primarily driven by reduced availability of glycol ethers, performance solvents and monoethylene glycol due to planned and unplanned events that more than offset higher demand for industrial specialties.
Pro forma Operating EBIT was $845 million in 2019, down 52 percent from pro forma Operating EBIT of $1,767 million in 2018. Pro forma Operating EBIT decreased as a result of margin compression across both businesses as well as lower equity earnings from the Kuwait joint ventures and increased equity losses from Sadara, which more than offset cost reductions.
PERFORMANCE MATERIALS & COATINGS
Performance Materials & Coatings includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. These businesses primarily utilize the Company's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of the architectural and industrial coatings; home care and personal care; consumer and electronics; mobility and transportation; industrial and chemical processing; and building and infrastructure end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to combine chemistry platforms to deliver differentiated offerings to customers.
| | | | | | | | | | | |
| Performance Materials & Coatings | | | |
| In millions | 2020 | 2019 | 2018 |
| Net sales | $ | 7,951 | | $ | 8,923 | | $ | 9,677 | |
| Pro forma net sales | | $ | 8,961 | | $ | 9,865 | |
| Operating EBIT | $ | 314 | | | |
| Pro forma Operating EBIT | | $ | 918 | | $ | 1,246 | |
| Equity earnings | $ | 6 | | $ | 5 | | $ | 4 | |
| | | | | | | | | | | |
| Performance Materials & Coatings | | | |
| Percentage change from prior year | 2020 | 2019 | 2018 |
| Change in Net Sales from Prior Period due to: | | | |
| Local price & product mix | (6) | % | (6) | % | 10 | % |
| Currency | — | | (2) | | 1 | |
| Volume | (6) | | (3) | | (2) | |
| Portfolio & other | 1 | | 3 | | — | |
| Total | (11) | % | (8) | % | 9 | % |
Change in Pro Forma Net Sales from Prior Period due to: 1 | | | |
| Local price & product mix | (6) | % | (6) | % | 10 | % |
| Currency | — | | (2) | | 1 | |
| Volume | (5) | | (1) | | (2) | |
| Portfolio & other | — | | — | | 2 | |
| Total | (11) | % | (9) | % | 11 | % |
1.As reported net sales for the year ended December 31, 2020 compared with pro forma net sales for the year ended December 31, 2019.
2020 Versus 2019
Performance Materials & Coatings net sales were $7,951 million in 2020, down 11 percent from net sales of $8,923 million in 2019. Net sales decreased 11 percent from pro forma net sales of $8,961 million in 2019, with local price down 6 percent and volume down 5 percent. Local price decreased in both businesses and all geographic regions. Consumer Solutions local price declined in all regions, primarily in upstream siloxanes due to weak supply and demand fundamentals. Local price decreased in Coatings & Performance Monomers in response to lower feedstock and other raw material costs. Volume declined in all geographic regions except Latin America, reflecting the impact from the COVID-19 pandemic. Consumer Solutions volume decreased as growth in home care applications was more than offset by lower demand for products used in automotive, industrial, construction and personal care end-markets as consumer activities and buying patterns were limited by the COVID-19 pandemic. Coatings & Performance Monomers volume increased in all geographic regions, except EMEAI. Volume gains were driven by higher demand for methacrylates used in protective applications, for architectural coatings as consumers continued do-it-yourself projects at home, and higher demand for vinyl acetate monomers.
Operating EBIT was $314 million in 2020, down 66 percent from pro forma Operating EBIT of $918 million in 2019. Operating EBIT decreased primarily due to margin compression, lower demand in siloxanes as a result of the COVID-19 pandemic and higher manufacturing and planned maintenance turnaround costs that more than offset volume gains in Coatings & Performance Monomers and lower SG&A costs.
2019 Versus 2018
Performance Materials & Coatings net sales were $8,923 million in 2019, down 8 percent from net sales of $9,677 million in 2018. Pro forma net sales were $8,961 million in 2019, down 9 percent from pro forma net sales of $9,865 million in 2018 with local price down 6 percent, an unfavorable currency impact of 2 percent and volume down 1 percent. Local price decreased in both businesses and all geographic regions. Local price decreased in Consumer Solutions due to lower siloxanes prices, primarily in Asia Pacific and EMEAI. Coatings & Performance Monomers local price declined in all geographic regions in response to lower feedstock and other raw material costs. Volume for the segment declined in all geographic regions, except Asia Pacific. Consumer Solutions volume was flat, with volume growth in Asia Pacific, offset by volume declines in Latin America and EMEAI. Consumer Solutions volume was flat in the U.S. & Canada. Coatings & Performance Monomers volume declined in all geographic regions. The decline in volume was driven by increased captive use of coatings products which drove soft demand in coating applications, primarily architectural binders, and lower demand for acrylates and methacrylates due to supply and demand balances.
Pro forma Operating EBIT was $918 million in 2019, down 26 percent from pro forma Operating EBIT of $1,246 million in 2018. Pro forma Operating EBIT decreased primarily due to margin compression in both businesses, which more than offset lower planned maintenance turnaround spending and cost synergies.
CORPORATE
Corporate includes certain enterprise and governance activities (including insurance operations, environmental operations, etc.); non-business aligned joint ventures; non-business aligned litigation expenses; and discontinued or non-aligned businesses.
| | | | | | | | | | | |
| Corporate | | | |
| In millions | 2020 | 2019 | 2018 |
| Net sales | $ | 269 | | $ | 343 | | $ | 285 | |
| Pro forma net sales | | $ | 343 | | $ | 285 | |
| Operating EBIT | $ | (279) | | | |
| Pro forma Operating EBIT | | $ | (315) | | $ | (370) | |
| Equity losses | $ | (31) | | $ | (20) | | $ | (20) | |
2020 Versus 2019
Net sales for Corporate, which primarily relate to the Company's insurance operations, were $269 million in 2020, down from net sales and pro forma net sales of $343 million in 2019.
Operating EBIT was a loss of $279 million in 2020, compared with a pro forma Operating EBIT loss of $315 million in 2019. Compared with 2019, Operating EBIT improved primarily due to cost reductions and stranded cost removal throughout 2019.
2019 Versus 2018
Net sales and pro forma net sales for Corporate, which primarily relate to the Company's insurance operations, were $343 million in 2019, up from net sales and pro forma net sales of $285 million in 2018.
Pro forma Operating EBIT was a loss of $315 million in 2019, compared with a pro forma Operating EBIT loss of $370 million in 2018. Compared with 2018, pro forma Operating EBIT improved primarily due to cost reductions and stranded cost removal.
OUTLOOK
Operating Segments & End-Market Expectations
In 2021, the Company expects continued volatility across crude oil, natural gas and feedstocks, driven by external macroeconomic and geopolitical factors, including the continuation of an uneven recovery from the COVID-19 pandemic. Overall, the Company expects crude oil prices to be, on average, higher than 2020 with an expectation of firming prices in the second half of the year. Crude oil fundamentals suggest global supply will meet or slightly lag demand; however, the uneven pandemic recovery could slow demand, leading to further volatility in prices.
The Company expects natural gas prices to remain competitive. The Company expects the U.S. & Canada gas supply to continue to recover through 2021. Robust supplies of natural gas are expected to keep domestic prices globally competitive. U.S. exports of liquefied natural gas ("LNG") are expected to remain strong. In Europe, the supply of natural gas is expected to continue to be plentiful, both from pipeline supply and from growing LNG imports.
In Packaging & Specialty Plastics, the global economic recovery is expected to drive demand growth, notably for flexible food and specialty packaging, industrial and consumer packaging and functional polymers. Integrated margins are expected to improve, supported by strong supply and demand fundamentals expected in the first half of the year and the Company’s regional feedstock cost advantages. Profitability could vary materially, particularly in the latter part of the year, depending on supply and demand dynamics, global gross domestic product ("GDP") growth rates, industry operating rates, timing of new industry capacity startups and fluctuations in global crude oil, natural gas and feedstock prices. The Hydrocarbons & Energy business expects to bring online approximately 130,000 metric tons of additional ethylene capacity in Canada as part of its suite of incremental growth investments. The new capacity is expected to come online in the first half of 2021.
In Industrial Intermediates & Infrastructure, above GDP top line growth is expected, driven by strong demand for products used in furniture and bedding, appliances, automotive, construction, electronics and pharma applications. Prices are expected to increase for most products, including continued recovery in monoethylene glycol pricing.
Supply and demand fundamentals for methylene diphenyl diisocyanate and propylene oxide are expected to remain consistent with what was experienced in 2020, with additional industry capacity anticipated to come online in 2021. Margins are also expected to improve, driven by demand growth.
In Performance Materials & Coatings, prices for siloxanes are expected to improve compared with 2020, but remain below peak pricing that was seen in 2018. Downstream silicones volume is expected to grow in excess of GDP, particularly for products used in mobility and transportation, high performance building and construction, industrial and consumer and electronics applications. The Company will continue to pursue incremental downstream silicones capacity debottleneck and growth projects to meet expected demand in consumer driven end-markets. Global architectural coatings and industrial coatings demand is anticipated to see continued recovery as the do-it-yourself and retail end-markets remain strong and contractor demand improves. Highly competitive environments in both architectural and industrial coatings are expected to continue, but the Company looks to capture opportunities from customers’ shift to sustainable chemistries where Dow has unique technologies and solutions to compete.
Other factors impacting operating segment profitability include:
•Planned maintenance turnaround spending is expected to be approximately $400 million higher, including joint ventures. Spending will be higher in the second and third quarters, as the COVID-19 pandemic delayed certain planned maintenance turnaround activities in 2020.
•Equity in earnings (losses) of nonconsolidated affiliates is expected to be flat compared with 2020 as projected margin improvements are expected to be partially offset by increased planned maintenance turnaround spending at joint ventures.
Projected Uses of Cash
Items that may impact the consolidated statements of cash flows in 2021 include:
•Required cash contributions to global pension plans are expected to be approximately $300 million.
•Capital expenditures are expected to be approximately $1.6 billion. The Company will adjust its spending through the year as economic conditions develop.
•Cash expenditures related to the Digital Acceleration program announced on January 28, 2021 are expected to be approximately $150 million in 2021.
•Cash outflows related to the Company's 2020 Restructuring Program, including restructuring implementation costs, are expected to be approximately $350 million.
•Cash dividends from equity companies are expected to be approximately $200 million lower than 2020.
•Cash outflows to drive further deleveraging are expected to be $1 billion.
Sadara debt re-profile
In January 2021, Sadara reached an agreement in principle with its lenders to re-profile Sadara’s outstanding project financing debt. Key features of the Sadara debt re-profile are expected to include:
•An extension of the contractual debt maturity from 2029 to 2038.
•A modified repayment schedule aligned with Sadara’s projected cash generation profile, including a grace period until June 2026 during which interest-only payments are required, and an excess cash sweep mechanism to prepay debt.
•No change to the notional debt amount and no other early repayment requirements.
As a result, Sadara is expected to have significantly improved cash flow self-sufficiency. The re-profiling agreements have not been finalized and remain subject to modification until the transaction formally closes, which is expected to occur in the first quarter of 2021. The impacts to Dow’s commitments are expected to include the following, which are in proportion to Dow’s 35 percent ownership interest in Sadara:
•Dow will provide guarantees for $1.3 billion of Sadara’s debt, effectively replacing approximately $4.0 billion of prior guarantees.
•Additionally, Dow will provide guarantees for its portion of all Sadara interest payments due during the grace period. Dow's pro-rata share of any potential shortfall will be funded by a new $500 million revolving credit facility guaranteed by Dow, which is expected to be established by Sadara in the first quarter of 2021.
•Dow’s existing $220 million letter of credit related to the guarantee of one future Sadara debt service schedule payment will be cancelled.
As a result of these actions, the Company does not expect to provide any shareholder loans or equity contributions to Sadara in 2021. The impact of the debt re-profiling efforts and related actions taken by the Company are not expected to have a material impact on the Company’s results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $2,669$5,104 million at December 31, 20182020 and $6,188$2,367 million at December 31, 2017,2019, of which $1,963$862 million at December 31, 20182020 and $4,318$986 million at December 31, 2017,2019, was held by subsidiaries in foreign countries, including United States territories. The decrease in cash and cash equivalents held by subsidiaries in foreign countries is due to repatriation activities. For each of its foreign subsidiaries, the Company makes an assertion regarding the amount of earnings intended for permanent reinvestment, with the balance available to be repatriated to the United States.
The Company has completed its evaluation of the impact of The Act on its permanent reinvestment assertion. The Act required companies to pay a one-time transition tax on earnings of foreign subsidiaries, a majority of which were previously considered permanently reinvested by the Company. A tax liability was accrued for the estimated U.S. federal tax on all unrepatriated earnings at December 31, 2017, with further refinement during the 2018 measurement period, in accordance with The Act. The cumulative effect at December 31, 2018, was a charge of $780 million to "Provision for income taxes" in the consolidated statements of income, of which the full amount was covered by tax attributes (see Note 9 to the Consolidated Financial Statements for further details of The Act). The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries'
operational activities and future foreign investments. The CompanyDow has the ability to repatriate additional funds to the U.S., which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/or U.S. state income taxes and the impact of foreign currency movements. At December 31, 2018,2020, management believed that sufficient liquidity was available in the United States. The Company has and expects to continue repatriating certain funds from its non-U.S. subsidiaries that are not needed to finance local operations or separation activities;operations; however, these particular repatriation activities have not and are not expected to result in a significant incremental tax liability to the Company.
The Company’s cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | |
| Cash Flow Summary | Dow Inc. | TDCC |
| In millions | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 |
| Cash provided by (used for): | | | | | | |
| Operating activities - continuing operations | $ | 6,252 | | $ | 5,713 | | $ | 3,096 | | $ | 6,263 | | $ | 5,706 | | $ | 3,096 | |
| Operating activities - discontinued operations | (26) | | 217 | | 1,158 | | — | | 371 | | 1,158 | |
| Operating activities | 6,226 | | 5,930 | | 4,254 | | 6,263 | | 6,077 | | 4,254 | |
| Investing activities - continuing operations | (841) | | (2,158) | | (1,826) | | (841) | | (2,158) | | (1,826) | |
| Investing activities - discontinued operations | — | | (34) | | (369) | | — | | (34) | | (369) | |
| Investing activities | (841) | | (2,192) | | (2,195) | | (841) | | (2,192) | | (2,195) | |
| Financing activities - continuing operations | (2,764) | | (4,077) | | (5,351) | | (2,801) | | (4,224) | | (5,351) | |
| Financing activities - discontinued operations | — | | (18) | | (53) | | — | | (18) | | (53) | |
| Financing activities | (2,764) | | (4,095) | | (5,404) | | (2,801) | | (4,242) | | (5,404) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 107 | | (27) | | (99) | | 107 | | (27) | | (99) | |
| Summary | | | | | | |
| Increase (decrease) in cash, cash equivalents and restricted cash | 2,728 | | (384) | | (3,444) | | 2,728 | | (384) | | (3,444) | |
| Cash, cash equivalents and restricted cash at beginning of year | 2,380 | | 2,764 | | 6,208 | | 2,380 | | 2,764 | | 6,208 | |
| Cash, cash equivalents and restricted cash at end of year | $ | 5,108 | | $ | 2,380 | | $ | 2,764 | | $ | 5,108 | | $ | 2,380 | | $ | 2,764 | |
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 4 | | 13 | | 40 | | 4 | | 13 | | 40 | |
| Cash and cash equivalents at end of year | $ | 5,104 | | $ | 2,367 | | $ | 2,724 | | $ | 5,104 | | $ | 2,367 | | $ | 2,724 | |
|
| | | | | | | | | |
| Cash Flow Summary | 2018 | 2017 1 | 2016 1 |
| In millions |
| Cash provided by (used for): | | | |
| Operating activities | $ | 3,894 |
| $ | (4,958 | ) | $ | (2,957 | ) |
| Investing activities | (2,128 | ) | 7,552 |
| 5,092 |
|
| Financing activities | (5,164 | ) | (3,331 | ) | (4,014 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (100 | ) | 320 |
| (77 | ) |
| Summary | | | |
| Decrease in cash, cash equivalents and restricted cash | (3,498 | ) | (417 | ) | (1,956 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | 6,207 |
| 6,624 |
| 8,580 |
|
| Cash, cash equivalents and restricted cash at end of year | $ | 2,709 |
| $ | 6,207 |
| $ | 6,624 |
|
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 40 |
| 19 |
| 17 |
|
| Cash and cash equivalents at end of year | $ | 2,669 |
| $ | 6,188 |
| $ | 6,607 |
|
| |
1. | Updated for ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" (including SEC interpretive guidance) and ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." See Notes 1 and 2 to the Consolidated Financial Statements for additional information. |
Cash Flows from Operating Activities
Cash provided by operating activities from continuing operations increased in 20182020 compared with 2017,2019. The improvement was primarily due to the change in the Company's accounts receivable securitization facilities discussed on the following page, a decrease in integration and separation costs. Also contributing to the improvement from the prior year was a decrease in performance-based compensation payments, a cash usedreceipt for working capital requirementsthe refund of withholding tax related to the Nova ethylene asset matter and higher cash earnings,an increase in advance payments from customers, which were partially offset by a decrease in dividends received from nonconsolidated affiliates, a reduction in cash generated from working capital and a cash receipt in 2019 related to the absence of certain cash receipts in 2017.Nova ethylene asset matter. Cash used forprovided by operating activities from continuing operations increased in 20172019 compared with 2016,2018. The increase was primarily due to an increaseimprovements in cash used for working capital, requirements, higher pension contributions resulting from a change in control provision in a non-qualified U.S. pension plan, higher integration and separation costs and a cash payment related to the Bayer CropScience arbitration matter, partially offset by a cash receipt related to the Nova patent infringement award and advancedethylene asset matter, advance payments from customers for long-term ethyleneproduct supply agreements.agreements, lower pension contributions and higher dividends received from nonconsolidated affiliates, which were partially offset by a decrease in cash earnings.
| | | | | | | | | | | | | | |
| Net Working Capital and Current Ratio at Dec 31 | Dow Inc. | TDCC |
| In millions | 2020 | 2019 | 2020 | 2019 |
| Current assets | $ | 19,084 | | $ | 16,815 | | $ | 18,998 | | $ | 16,733 | |
| Current liabilities | 11,108 | | 10,679 | | 10,574 | | 10,150 | |
| Net working capital | $ | 7,976 | | $ | 6,136 | | $ | 8,424 | | $ | 6,583 | |
| Current ratio | 1.72:1 | 1.57:1 | 1.80:1 | 1.65:1 |
| | | | | | | | | | | | | | | | | | | | |
| Working Capital Metrics | Three Months Ended 1 | Twelve Months Ended |
| Mar 31, 2020 | Jun 30, 2020 | Sep 30, 2020 | Dec 31, 2020 | Dec 31, 2020 | Dec 31, 2019 |
| Days sales outstanding in trade receivables | 45 | | 50 | | 43 | | 41 | | 46 | | 45 | |
| Days sales in inventory | 69 | | 72 | | 63 | | 57 | | 65 | | 65 | |
| Days payables outstanding | 63 | | 68 | | 58 | | 56 | | 66 | | 65 | |
1.Due to the impacts related to the COVID-19 pandemic, quarterly working capital metrics are presented for 2020.
Cash provided by (used for) operating activities from discontinued operations in 2020 and 2019 primarily related to cash payments and receipts the Company had with DuPont and Corteva that related to certain agreements and matters related to the separation from DowDuPont. Cash provided by operating activities from discontinued operations decreased in 2019 compared with 2018, primarily due to the separation of AgCo and SpecCo on April 1, 2019. See Note 3 to the Consolidated Financial Statements for additional information.
Cash Flows from Investing Activities
Cash used for investing activities from continuing operations in 2020 was primarily for capital expenditures, purchases of investments, investments in and loans to nonconsolidated affiliates (related to Sadara) and acquisitions of property and businesses, which were partially offset by proceeds from sales and maturities of investments and proceeds from sales of property and businesses. Cash used for investing activities from continuing operations in 2019 was primarily for capital expenditures, purchases of investments and investments in and loans to nonconsolidated affiliates, which were partially offset by proceeds from sales and maturities of investments. Cash used for investing activities from continuing operations in 2018 was primarily for capital expenditures and purchases of investments, which were partially offset by proceeds from sales and maturities of investments and proceeds from interests in trade accounts receivable conduits. Cash provided by investing activities
The Company loaned Sadara $333 million in 2017 was primarily from proceeds from interests2020 ($473 million in trade accounts receivable conduits, proceeds from sales2019 and maturitieszero in 2018). As a result of investments and proceeds from divestitures, including the divestitures of the DAS Divested Ag Business and the EAA Business, which were partially offset by capital expenditures, purchases of investments and investments in and loans to nonconsolidated affiliates, primarily with Sadara. Cash provided by investing activities in 2016 was primarily from proceeds from interests in trade accounts receivable conduits and net cash acquired in the Dow Silicones ownership restructure, which were partially offset by capital expenditures and investments in and loans to nonconsolidated affiliates, primarily with Sadara.
In 2018,Sadara's debt re-profiling, the Company entered into adoes not expect to provide any shareholder loan reduction agreement with Sadara and converted $312 million of the remaining loan and accrued interest balance into equity. The Company's note receivable from Sadara was zero at December 31, 2018. In addition, in the fourth quarter of 2018, the Company waived $70 million of accounts receivable with Sadara, which was converted into equity. In 2017, the Company loaned $735 million to Sadara and converted $718 million intoloans or equity and had a note receivable from Sadara of $275 million at December 31, 2017. The Company expects to loan up to $500 millioncontributions to Sadara in 2019.2021. See NoteNotes 12 and 16 to the Consolidated Financial Statements for additional information.
The Company's capital expenditures related to continuing operations, including capital expenditures of consolidated variable interest entities, were $2,538$1,252 million in 2018, $3,1442020, $1,961 million in 20172019 and $3,804$2,091 million in 2016.2018. Capital spending was lower in 2020 as the Company proactively reduced its capital expenditures to focus on cash and maintaining financial strength during the COVID-19 pandemic. The Company expects capital spending in 20192021 to be approximately $2.5 billion, below depreciation and amortization expense and inclusive$1.6 billion. The Company will adjust its spending through the year as economic conditions develop.
Capital spending in 2018, 20172019 and 20162020, included spending related to certain U.S. Gulf Coast investment projects including: a world-scale ethylene production facility and an ELITE™ Enhanced Polyethylene production facility, both of which commenced operations in 2017; a NORDEL™ Metallocene EPDM production facility, a Low Density Polyethylene ("LDPE") production facility, a High Melt Index ("HMI") AFFINITY™ polymer production facility and debottlenecking of an existing bi-modal gas phase polyethylene production facility, all of which commenced operations in 2018.2018; an expansion of the Company's new ethylene production facility in Freeport, Texas, which commenced operations in 2020, bringing the facility's total ethylene capacity to 2,000 kilotonnes per annum and making it the largest ethylene cracker in the world; the addition of a furnace to the Company's ethylene production facility in Alberta, Canada, which is expected to commence operations in the first half of 2021; and the retrofit of one of the Company's Louisiana steam crackers with Dow's proprietary fluidized catalytic dehydrogenation ("FCDh") technology to produce on-purpose propylene, which is expected by the end of 2021.
Cash used for investing activities from discontinued operations in 2019 was primarily for capital expenditures, partially offset by proceeds from the sales of property, businesses and ownership interests in nonconsolidated affiliates. Cash used for investing activities from discontinued operations in 2018 was primarily for capital expenditures, partially offset by proceeds from the sales of property and businesses.
Cash Flows from Financing Activities
Cash used for financing activities from continuing operations in 2020 included payments on long-term debt, changes in short-term notes payable and transaction financing, debt issuance and other costs, which were partially offset by proceeds from issuance of long-term debt. In addition, Dow Inc. included cash outflows for dividends paid to stockholders and purchases of treasury stock and TDCC included cash outflows for dividends paid to Dow Inc. Cash used for financing activities from continuing operations in 2019 included payments on long-term debt and dividends paid to DowDuPont, which were partially offset by proceeds from issuance of long-term debt. In addition, Dow Inc. received cash as part of the separation from DowDuPont, which was more than offset by dividends paid to stockholders and purchases of treasury stock. Cash used for financing activities in continuing operations in 2018 included dividends paid to DowDuPont and payments of long-term debt, which were partially offset by proceeds from issuance of long-term debt. Cash used for financing activities in 2017 included dividends paid to stockholders through the close of the Merger, a dividend paid to DowDuPont in the fourth quarter of 2017, and payments of long-term debt. Cash used for financing activities in 2016 included dividends paid to stockholders (including the accelerated payment of the fourth quarter preferred dividend), repurchases of common stock and payments of long-term debt. See Notes 15 and 1718 to the Consolidated Financial Statements for additional information related to the issuance and retirement of debt and the Company's share repurchases and dividends.
Reclassification of Prior Year Amounts RelatedCash used for financing activities from discontinued operations in 2019 and 2018 primarily related to Accounts Receivable Securitizationdistributions to noncontrolling interests and employee taxes paid for share-based payment arrangements.
In connection with the review and implementation
Non-GAAP Cash Flow Measures
Cash Flows from Operating Activities - Continuing Operations - Excluding Impact of ASU 2016-15 and additional interpretive guidance from the SEC related to the required method for calculating the cash received from beneficial interests in trade accounts receivable conduits, the Company changed the prior year presentation and amount of proceeds from interests in trade accounts receivable conduits. Changes related to the calculation and presentation of proceeds from interests in trade accounts receivable conduits resulted in a reclassification from cash used for operating activities to cash provided by investing activities of $9,462 million in 2017 and $8,551 million in 2016. In the fourth quarter of 2017, the Company suspended further sales of trade accounts receivable through these facilities and began reducing outstanding balances through collections of trade accounts receivable previously sold to such conduits. In September and October 2018, the North American and European facilities, respectively, were amended and the terms of the agreements changed from off-balance sheet arrangements to secured borrowing arrangements.
The following table reconciles cashCash flows from operating activities to a non-GAAP measure regarding- continuing operations, excluding the impact of Accounting Standards Update ("ASU") 2016-15, is defined as cash flows fromprovided by operating activities - continuing operations, excluding the impact of ASU 2016-15 and related interpretive guidance for the years ended December 31, 2018, 2017 and 2016.guidance. Management believes this non-GAAP financial measure is relevant and meaningful as it presents cash flows from operating activities inclusive of all trade accounts receivable collection activity, which the CompanyDow utilizes in support of its operating activities. This measure is only applicable for the year ended December 31, 2018 as there were no sales of trade accounts receivable under the applicable programs for the years ended December 31, 2020 and 2019.
Free Cash Flow
Dow defines free cash flow as cash flows from operating activities - continuing operations, excluding the impact of ASU 2016-15, less capital expenditures. Under this definition, free cash flow represents the cash generated by Dow from operations after investing in its asset base. Free cash flow, combined with cash balances and other sources of liquidity, represents the cash available to fund obligations and provide returns to shareholders. Free cash flow is an integral financial measure used in Dow's financial planning process.
Operating EBITDA and Pro Forma Operating EBITDA
Dow defines Operating EBITDA (for the year ended December 31, 2020) as earnings (i.e., "Income from continuing operations before income taxes") before interest, depreciation and amortization, excluding the impact of significant items. Pro forma Operating EBITDA (for the years ended December 31, 2019 and 2018) is defined as earnings (i.e. "Income (loss) from continuing operations before income taxes") before interest, depreciation and amortization, plus pro forma adjustments, excluding the impact of significant items.
|
| | | | | | | | | | |
| | Cash Flows from Operating Activities Excluding Impact of ASU 2016-15 and Additional Interpretive Guidance (non-GAAP) | 2018 | 2017 | 2016 |
| |
| | In millions |
| | Cash flows from operating activities - Updated for impact of ASU 2016-15 and additional interpretive guidance (GAAP) | $ | 3,894 |
| $ | (4,958 | ) | $ | (2,957 | ) |
| | Less: Impact of ASU 2016-15 and additional interpretive guidance | (657 | ) | (9,462 | ) | (8,551 | ) |
| | Cash flows from operating activities - Excluding impact of ASU 2016-15 and additional interpretive guidance (non-GAAP) | $ | 4,551 |
| $ | 4,504 |
| $ | 5,594 |
|
Cash Flow Conversion
Dow defines cash flow conversion (Operating EBITDA or pro forma Operating EBITDA to cash flow from operations) as cash flows from operating activities - continuing operations, excluding the impact of ASU 2016-15, divided by Operating EBITDA or pro forma Operating EBITDA. Management believes cash flow conversion is an important financial metric as it helps the Company determine how efficiently it is converting its earnings into cash flow.
These financial measures are not recognized in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and should not be viewed as alternatives to U.S. GAAP financial measures of performance. All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, Dow's definitions may not be consistent with the methodologies used by other companies.
| | | | | | | | | | | | | | |
| Reconciliation of Non-GAAP Cash Flow Measures | Dow Inc. | |
| In millions | 2020 | 2019 | 2018 | | | |
| Cash provided by operating activities - continuing operations (GAAP) | $ | 6,252 | | $ | 5,713 | | $ | 3,096 | | | | |
| Impact of ASU 2016-15 and related interpretive guidance | — | | — | | 657 | | | | |
| Cash flows from operating activities - continuing operations - excluding impact of ASU 2016-15 (non-GAAP) | $ | 6,252 | | $ | 5,713 | | $ | 3,753 | | | | |
| Capital expenditures | (1,252) | | (1,961) | | (2,091) | | | | |
| Free cash flow (non-GAAP) | $ | 5,000 | | $ | 3,752 | | $ | 1,662 | | | | |
| | | | | | | | | | | |
| Reconciliation of Cash Flow Conversion | Dow Inc. |
| In millions | 2020 | 2019 1 | 2018 1 |
| Income (loss) from continuing operations, net of tax (GAAP) | $ | 1,294 | | $ | (1,717) | | $ | 2,940 | |
| + Provision for income taxes on continuing operations | 777 | | 470 | | 809 | |
| Income (loss) from continuing operations before income taxes | $ | 2,071 | | $ | (1,247) | | $ | 3,749 | |
| - Interest income | 38 | | 81 | | 82 | |
| + Interest expense and amortization of debt discount | 827 | | 933 | | 1,063 | |
| + Pro forma adjustments ² | — | | 65 | | 180 | |
| - Significant items ³ | 145 | | (4,682) | | (1,326) | |
| Operating EBIT (non-GAAP) | $ | 2,715 | | $ | 4,352 | | $ | 6,236 | |
| + Depreciation and amortization | 2,874 | | 2,938 | | 2,909 | |
| Operating EBITDA (non-GAAP) | $ | 5,589 | | $ | 7,290 | | $ | 9,145 | |
| Cash flows from operating activities - continuing operations - excluding impact of ASU 2016-15 (non-GAAP) | $ | 6,252 | | $ | 5,713 | | $ | 3,753 | |
| Cash flow conversion (Operating EBITDA or pro forma Operating EBITDA to cash flow from operations) (non-GAAP) | 111.9 | % | 78.4 | % | 41.0 | % |
1.Operating EBIT, depreciation and amortization and Operating EBITDA for the years ended December 31, 2019 and 2018 are presented on a pro forma basis.
2.Pro forma adjustments for the years ended December 31, 2019 and 2018 include: (1) the margin impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont and (2) the elimination of the impact of events directly attributable to the Merger, internal reorganization and business realignment, separation, distribution and other related transactions (e.g., one-time transaction costs).
3.The year ended December 31, 2020 includes integration and separation costs, restructuring and asset related charges - net, a gain on a warranty accrual adjustment of an exited business, restructuring implementation costs, a net gain on divestitures and asset sale, a gain related to a legal matter with Nova, a loss on early extinguishment of debt and a loss associated with agreements entered into with DuPont and Corteva as part of the separation and distribution. The year ended December 31, 2019 includes integration and separation costs, restructuring, goodwill impairment and asset related charges - net, a gain on a warranty accrual adjustment of an exited business, environmental charges, a loss related to previous divestitures, a loss on early extinguishment of debt, a net gain related to litigation matters and a loss associated with agreements entered into with DuPont and Corteva as part of the separation and distribution. The year ended December 31, 2018 includes a post-closing adjustment related to the Dow Silicones ownership restructure, integration and separation costs, restructuring and asset related charges - net, a gain on divestiture and a loss on early extinguishment of debt. See Note 26 to the Consolidated Financial Statements for additional information.
Liquidity & Financial Flexibility
The Company’s primary source of incremental liquidity is cash flows from operating activities. The generation of cash from operations and the Company's ability to access debtcapital markets is expected to meet the Company’s cash requirements for working capital, capital expenditures, debt maturities, contributions to pension plans, dividend distributions to its parent companystockholders, share repurchases and other needs. In addition to cash from operating activities, the Company’s current liquidity sources also include TDCC's U.S. and Euromarket commercial paper programs, committed and uncommitted credit facilities, committed accounts receivable facilities, a U.S. retail note program (“InterNotes®”) and other debt markets.
The Company continues to maintain a strong financial position with all of its committed credit facilities undrawn and fully available at December 31, 2020. Cash and committed and available forms of liquidity were $14.6 billion at December 31, 2020. The Company also has no substantive long-term debt maturities until the second half of 2024. Additional details on sources of liquidity are as follows:
Commercial Paper
DowTDCC issues promissory notes under its U.S. and Euromarket commercial paper programs. The CompanyTDCC had $10 million ofno commercial paper outstanding at December 31, 20182020 ($231151 million at December 31, 2017)2019). The CompanyTDCC maintains access to the commercial paper market at competitive rates. Amounts outstanding under the Company'sTDCC's commercial paper programs during the period may be greater or less than the amount reported at the end of the period. Subsequent to December 31, 2018, the Company2020, TDCC issued approximately $1.6$1.3 billion of commercial paper.
Committed Credit Facilities
In the event Dow has short-term liquidity needs and is unable to issue commercial paper for any reason, DowThe Company also has the ability to access liquidity through itsTDCC's committed and available credit facilities. At December 31, 2018, the Company2020, TDCC had total committed credit facilities of $12.1 billion and available credit facilities of $7.6$8.1 billion. In 2020, Dow Silicones voluntarily repaid $2.0 billion of principal under a certain third party credit agreement. See Note 15 to the Consolidated Financial Statements for additional information on committed and available credit facilities.
Committed Accounts Receivable Facilities
In addition to the above committed credit facilities, the Company maintains a committed accounts receivable facility in the U.S. where eligible trade accounts receivable, up to $900 million, may be sold at any point in time. The Company also maintains a committed accounts receivable facility in Europe where eligible trade accounts receivable, up to €400 million, may be sold at any point in time. See Note 14 to the Consolidated Financial Statements for additional information.
Company-Owned Life Insurance
The Company has investments in company-owned life insurance ("COLI") policies, which are recorded at their cash surrender value as of each balance sheet date. The Company has the ability to monetize its investment in its COLI policies as an additional source of liquidity. At December 31, 2019, the Company had monetized $85 million of its existing COLI policies' value. In the first nine months of 2020, the Company monetized an additional $211 million as a proactive measure to bolster liquidity at the onset of the COVID-19 pandemic. In the fourth quarter of 2020, the Company repaid all existing drawdowns against the cash surrender value, which resulted in no monetization of its existing COLI policies' value at December 31, 2020. See Note 7 to the Consolidated Financial Statements for additional information.
Uncommitted Credit Facilities and Outstanding Letters
Dow has entered into various uncommitted bilateral credit arrangements as a potential source of Credit
The Company had uncommitted credit facilities in the form of unused bank credit lines of approximately $3,480 million at December 31, 2018.excess liquidity. These lines can be used to support short-term liquidity needs and for general purposes, including letters of credit. OutstandingIn the first quarter of 2020, the Company took proactive measures to further bolster liquidity by drawing down certain uncommitted credit facilities, which were subsequently repaid in the second quarter of 2020.
Letters of Credit
TDCC utilizes letters of credit were $439 million at December 31, 2018 ($433 million at December 31, 2017). These letters of creditto support commitments made in the ordinary course of business. While the terms and amounts of letters of credit change, TDCC generally has approximately $400 million of outstanding letters of credit at any given time. In addition, at December 31, 2020, the Company had a $220 million outstanding letter of credit related to the Company’s share of one future debt service schedule payment of Sadara. See Note 16 to the Consolidated Financial Statements for additional information related to guarantees.
Shelf Registration - U.S.
On July 26, 2019, Dow Inc. and TDCC filed a shelf registration statement with the SEC. The shelf indicates that Dow Inc. may offer common stock; preferred stock; depositary shares; debt securities; guarantees; warrants to purchase common stock, preferred stock and debt securities; and stock purchase contracts and stock purchase units, with pricing and availability of any such offerings depending on market conditions. The shelf also indicates that TDCC may offer debt securities, guarantees and warrants to purchase debt securities, with pricing and availability of any such offerings depending on market conditions. Also on July 26, 2019, TDCC filed a new prospectus supplement under this shelf registration to register an unlimited amount of securities for issuance under InterNotes®.
Debt
As Dowthe Company continues to maintain its strong balance sheet and financial flexibility, management is focused on net debt (a non-GAAP financial measure), as Dowthe Company believes this is the best representation of the Company’sits financial leverage at this point in time. As shown in the following table, net debt is equal to total gross debt minus "Cash and cash equivalents" and "Marketable securities." At December 31, 2018,2020, net debt as a percent of total capitalization increasedfor Dow Inc. and TDCC decreased to 38.047.9 percent and 46.8 percent, respectively, compared with 35.450.9 percent and 49.6 percent, respectively, at December 31, 2017, primarily due to a decrease2019.
| | | | | | | | | | | | | | |
| Total Debt at Dec 31 | Dow Inc. | TDCC |
| In millions | 2020 | 2019 | 2020 | 2019 |
| Notes payable | $ | 156 | | $ | 586 | | $ | 156 | | $ | 586 | |
| Long-term debt due within one year | 460 | | 435 | | 460 | | 435 | |
| Long-term debt | 16,491 | | 15,975 | | 16,491 | | 15,975 | |
| Gross debt | $ | 17,107 | | $ | 16,996 | | $ | 17,107 | | $ | 16,996 | |
| - Cash and cash equivalents | 5,104 | | 2,367 | | 5,104 | | 2,367 | |
- Marketable securities 1 | 45 | | 21 | | 45 | | 21 | |
| Net debt | $ | 11,958 | | $ | 14,608 | | $ | 11,958 | | $ | 14,608 | |
| Gross debt as a percent of total capitalization | 56.8 | % | 54.7 | % | 55.8 | % | 53.3 | % |
| Net debt as a percent of total capitalization | 47.9 | % | 50.9 | % | 46.8 | % | 49.6 | % |
1.Included in cash and cash equivalents, which more than offset a decrease"Other current assets" in gross debt.the consolidated balance sheets.
|
| | | | | | |
| Total Debt at Dec 31 | | |
| In millions | 2018 | 2017 |
| Notes payable | $ | 305 |
| $ | 484 |
|
| Long-term debt due within one year | 340 |
| 752 |
|
| Long-term debt | 19,254 |
| 19,765 |
|
| Gross debt | $ | 19,899 |
| $ | 21,001 |
|
| - Cash and cash equivalents | $ | 2,669 |
| $ | 6,188 |
|
| - Marketable securities | 100 |
| 4 |
|
| Net debt | $ | 17,130 |
| $ | 14,809 |
|
| Gross debt as a percent of total capitalization | 41.6 | % | 43.7 | % |
| Net debt as a percent of total capitalization | 38.0 | % | 35.4 | % |
In February 2020, the fourth quarterCompany issued €2.25 billion aggregate principal amount of 2018,notes (“Euro Notes”). The Euro Notes included €1.0 billion aggregate principal amount of 0.50 percent notes due 2027, €750 million aggregate principal amount of 1.125 percent notes due 2032 and €500 million aggregate principal amount of 1.875 percent notes due 2040. The Euro Notes have a weighted average coupon rate of approximately 1.0 percent. In addition, the Company redeemed $1.25 billion of 3.0 percent notes issued by the Company with maturity in 2022.
In August 2020, the Company issued $2.0 billion aggregate principal amount of senior unsecurednotes. The notes in an offering under Rule 144Aincluded $850 million aggregate principal amount of 2.1 percent notes due 2030 and $1.15 billion aggregate principal amount of 3.6 percent notes due 2050 (together, the Securities Act"Notes"). In September 2020, TDCC also used $556 million of 1933,aggregate proceeds from the Notes to fund cash tender offers for certain of its debt securities and certain debt securities of Union Carbide, of which included $500$493 million due 2025; $600 million due 2028 and $900 million due 2048. See Note 15 to the Consolidated Financial Statements for additional information on the interest related to these notes. In addition, the Companyaggregate principal amount was tendered and redeemed $2.1 billion of notesretired.
The Company may at any time repurchase certain debt securities in the open market or in privately negotiated transactions subject to: the applicable terms under which any such debt securities were issued, with maturity in 2019. In addition, DHI, the intended parentcertain internal approvals of the Company, afterand applicable laws and regulations of the Intended Business Separations, is obligated,relevant jurisdiction in which any such potential transactions might take place. This in no way obligates the Company to make any such repurchases nor should it issue a guarantee in respect of outstanding or committed indebtedness under Dow’s Five Year Competitive Advance and Revolving Credit Facility Agreement (“Revolving Credit Agreement”), dated October 30, 2018, (as described below),be considered an offer to enter into a supplemental indenture with the Company and the trustee under the existing base indenture governing certain notes issued by the Company under which it will guarantee all outstanding debt securities and all amounts due under the existing base indenture.do so.
Dow’sTDCC’s public debt instruments and primary, private credit agreements contain, among other provisions, certain customary restrictive covenant and default provisions. The Company’sTDCC’s most significant debt covenant with regard to its financial position is the obligation to maintain the ratio of the Company’sits consolidated indebtedness to consolidated capitalization at no greater than 0.65 to 1.00 at any time the aggregate outstanding amount of loans under the Five Year Competitive Advance and Revolving Credit Facility Agreement ("Revolving Credit Agreement") equals or exceeds $500 million. The ratio of the Company’sTDCC’s consolidated indebtedness to consolidated capitalization as defined in the Revolving Credit Agreementwas 0.410.53 to 1.00 at December 31, 2018.2020. Management believes the CompanyTDCC was in compliance with all of its covenants and default provisions at December 31, 2018. See Note 15 to the Consolidated Financial Statements for information related to the Company’s notes payable and long-term debt activity and information on Dow’s covenants and default provisions.2020.
On October 30, 2018,April 1, 2019, DowDuPont completed the separation of its materials science business and Dow terminated and replaced its $5.0 billionInc. became the direct parent company of TDCC. In conjunction with the separation, Dow Inc. is obligated, substantially concurrently with the issuance of any guarantee in respect of outstanding or committed indebtedness under the Revolving Credit Agreement, to enter into a supplemental indenture with TDCC and the trustee under substantially similar termsTDCC’s existing 2008 base indenture governing certain notes issued by TDCC. Under such supplemental indenture, Dow Inc. will guarantee all outstanding debt securities and conditions. The new Revolving Credit Agreement has a maturity date in October 2023. Theall amounts due under such existing base indenture and will become subject to certain covenants and events of default under the existing base indenture.
In addition, the Revolving Credit Agreement includes an event of default which would be triggered in the event DHIDow Inc. incurs or guarantees third party indebtedness for borrowed money in excess of $250 million or engages in any material business activity or directly owns any material assets, in each case, subject to certain conditions and exceptions. DHIDow Inc. may, at its option, cure the event of default by delivering an unconditional and irrevocable guarantyguarantee to the administrative agent within thirty days of the event or events giving rise to such event of default.
ManagementNo such events have occurred or have been triggered at the time of the filing of this Annual Report on Form 10-K. See Note 15 to the Consolidated Financial Statements for information related to TDCC’s notes payable and long-term debt activity and information on TDCC’s debt covenants and default provisions.
While taking into consideration the current economic environment, management expects that the Company will continue to have sufficient liquidity and financial flexibility to meet all of its business obligations.
Credit Ratings
AtTDCC's credit ratings at January 31, 2019, the Company's credit ratings2021 were as follows:
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| | | | | | | | | | |
| Credit Ratings | Long-Term Rating | Short-Term Rating | Outlook |
| Standard & Poor’s | BBBBBB- | A-2A-3 | Stable |
| Moody’s Investors Service | Baa2 | P-2 | Stable |
| Fitch Ratings | BBB+ | F2 | StableNegative |
On April 9, 2020, Standard & Poor's ("S&P") announced a credit rating change for TDCC from BBB and A-2 to BBB- and A-3, maintaining stable outlook. The decision was made as part of S&P’s broader review of the chemicals sector, in light of the global impact of COVID-19 and lower oil prices. On April 13, 2020, Fitch Ratings ("Fitch") re-affirmed TDCC’s BBB+ and F2 rating, and revised its outlook to negative from stable. The decision was made as part of Fitch’s annual review process.
Downgrades in the Company’sTDCC’s credit ratings will increase borrowing costs on certain indentures and could impact the Company’sits ability to access debt capital markets.
Dividends
Dow Inc.
The following table provides dividends paid to common stockholders for the years ended December 31, 2020, 2019 and 2018:
| | | | | | | | | | | |
| Dividends Paid for the Years Ended Dec 31 | 2020 | 2019 1 | 2018 2 |
| In millions, except per share amounts |
| Dividends paid, per common share | $ | 2.80 | | $ | 2.10 | | N/A |
| Dividends paid to common stockholders | $ | 2,071 | | $ | 1,550 | | N/A |
| | | |
1.Reflects Dow Inc. activity subsequent to the separation from DowDuPont.
2.In 2018, the common stock of Dow Inc. and TDCC was owned solely by DowDuPont and therefore the Company did not have publicly traded stock.
TDCC
Effective with the Merger, DowTDCC no longer has publicly traded common stock. Dow'sFrom the Merger Date through March 31, 2019, TDCC's common shares arewere owned solely by its parent company, DowDuPont. The Company hasPursuant to the Merger Agreement, TDCC committed to fund a portion of DowDuPont's share repurchases, dividends paid to common stockholders and certain governance expenses. In addition, share repurchases by DowDuPont were partially funded by TDCC through 2018. Funding iswas accomplished through intercompany loans. On a quarterly basis, the Company’sTDCC's Board reviewed and determined a
dividend distribution to DowDuPont to settle the intercompany loans. The dividend distribution considersconsidered the level of the Company’sTDCC’s earnings and cash flows and the outstanding intercompany loan balances. For the year ended December 31, 2018, the CompanyTDCC declared and paid dividends to DowDuPont of $3,711 million ($1,056$535 million for the year ended December 31, 2017).2019 and $3,711 million for the year ended December 31, 2018. See Note 2425 to the Consolidated Financial Statements for additional information.
Pre-MergerEffective with the separation from DowDuPont on April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. TDCC has committed to fund Dow Inc.'s dividends paid to common stockholders, are as follows:share repurchases and certain governance expenses. Funding is accomplished through intercompany loans. TDCC's Board reviews and determines a dividend distribution to Dow Inc. to settle the intercompany loans. For the year ended December 31, 2020, TDCC declared and paid dividends to Dow Inc. of $2,233 million ($201 million for the year ended December 31, 2019). At December 31, 2020, TDCC's intercompany loan balance with Dow Inc. was insignificant. See Note 25 to the Consolidated Financial Statements for additional information.
|
| | | | | | |
| Dividends Paid for the Years Ended Dec 31 | 2017 | 2016 |
| In millions, except per share amounts |
| Dividends paid, per common share | $ | 1.84 |
| $ | 1.84 |
|
| Dividends paid to common stockholders | $ | 2,179 |
| $ | 2,037 |
|
Dividends paid to preferred shareholders 1 | $ | — |
| $ | 425 |
|
| |
1. | Dividends paid to preferred shareholders in 2016 includes payment of the fourth quarter 2016 declared dividend. |
Share Repurchase Program
Effective withDow Inc.
On April 1, 2019, Dow Inc.'s Board ratified the Merger, Dow no longer has publicly tradedshare repurchase program originally approved on March 15, 2019, authorizing up to $3.0 billion to be spent on the repurchase of the Company's common stock, and therefore haswith no ongoingexpiration date. In 2020, Dow Inc. repurchased $125 million of the Company's common stock. At December 31, 2020, approximately $2.4 billion of the share repurchase program.program authorization remained available for repurchases. The Company will continue to evaluate the repurchase of additional shares to cover dilution as economic conditions develop.
Pension Plans
The Company has both funded and unfunded defined benefit pension plans that cover employees in the United States and a number of other countries. As a result of the Company’s separation from DowDuPont, the number of significant defined benefit pension plans administered by the Company decreased from 45 plans to 35 plans, with approximately $270 million of net unfunded pension liabilities transferred to DowDuPont. Plans administered by other subsidiaries of DowDuPont that were transferred to the Company were not significant. There were no changes in the number of significant other postretirement benefit plans administered by the Company as a result of the separation. Existing Company plans that were significantly impacted by the transfer of active plan participants to DowDuPont were remeasured, resulting in curtailment gains and losses and recognition of special termination benefits.
In 2018, 20172020, 2019 and 2016,2018, the Company contributed $1,656$299 million, $1,676$261 million and $629$1,651 million to its continuing operations pension plans respectively, including contributions to fund benefit payments for its non-qualified pension plans.plans ($299 million, $266 million and $1,656 million, including contributions to plans of discontinued operations). In the third quarter of 2018, the Company made a $1,100 million discretionary contribution to its principal U.S. pension plan, which is included in the 2018 contribution amount above. The discretionary contribution was primarily based on the Company's funding policy, which permits contributions to defined benefit pension plans when economics encourage funding, and reflected considerations relating to tax deductibility and capital structure.
The provisions of a U.S. non-qualified pension plan require the payment of plan obligations to certain participants upon a change in control of the Company which occurred at the time of the Merger. Certain participants could elect to receive a lump-sum payment or direct the Company to purchase an annuity on their behalf using the after-tax proceeds of the lump sum. In the fourth quarter of 2017, the Company paid $940 million to plan participants and $230 million to an insurance company for the purchase of annuities, which were included in "Pension contributions" in the consolidated statements of cash flows. The Company also paid $205 million for income and payroll taxes for participants electing the annuity option. The Company recorded a settlement charge of $687 million associated with the payout in the fourth quarter of 2017.
Dow expects to contribute approximately $240$300 million to its pension plans in 2019.2021. See Note 1920 to the Consolidated Financial Statements for additional information concerning the Company’s pension plans.
Restructuring Programs
The activitiesactions related to the DowDuPont Agriculture Division Program and the Synergy2020 Restructuring Program are expected to result in additional cash expenditures of approximately $480 million to $510$365 million, primarily through the endfirst quarter of 2019,2022, consisting of severance and related benefit costs and costs associated with exit and disposal activities, including contract cancellation penalties and environmental remediation. Restructuring implementation costs, primarily decommissioning and demolition activities related to asset actions, are expected to result in additional cash expenditures of approximately $150 million, primarily through the third quarter of 2022.
The activities related to the Synergy Program are expected to result in additional cash payments of approximately $35 million, primarily through the second quarter of 2021, consisting of severance and related benefit costs and costs associated with exit and disposal activities, including environmental remediation (see Note 7 to the Consolidated Financial Statements). remediation.
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 costsactivities, which 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.
time. See Note 6 to the Consolidated Financial Statements for additional information on the Company's restructuring activities.
Digital Acceleration
On January 28, 2021, Dow announced plans for Digital Acceleration: expanding digital tools to accelerate materials science innovation; further enhancing the e-commerce buying and fulfillment experience for Dow's customers; and adopting real-time digital manufacturing insights, operational data intelligence and demand sensing to enhance the productivity and reliability of Dow’s operations. The activities related to Digital Acceleration are expected to result in additional cash expenditures of approximately $400 million, primarily through the end of 2022.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to the Merger, post-Merger integration and Intended Business Separationbusiness separation activities and costs related to the ownership restructure of Dow Silicones, were $1,044$239 million in 2018, $7862020, $1,063 million and $1,039 million for Dow Inc. and TDCC, respectively, in 2019 and $1,179 million in 2017 and $349 million in 2016.2018. Integration and separation costs related to post-Merger integration and Intended Business Separationbusiness separation activities are expected to continue to be significant in 2019.were completed as of December 31, 2020.
Contractual Obligations
The following table summarizes the Company’s contractual obligations, commercial commitments and expected cash requirements for interest at December 31, 2018.2020. Additional information related to these obligations can be found in Notes 15, 16, 17 and 1920 to the Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | |
| Contractual Obligations at Dec 31, 2020 | Payments Due In | |
| In millions | 2021 | 2022-2023 | 2024-2025 | 2026 and beyond | Total |
| Dow Inc. | | | | | |
Long-term debt obligations 1 | $ | 460 | | $ | 617 | | $ | 1,796 | | $ | 14,443 | | $ | 17,316 | |
Expected cash requirements for interest 2 | 764 | | 1,453 | | 1,354 | | 8,368 | | 11,939 | |
| Pension and other postretirement benefits | 421 | | 1,201 | | 1,586 | | 8,625 | | 11,833 | |
Operating leases 3 | 477 | | 699 | | 406 | | 703 | | 2,285 | |
Purchase obligations 4 | 2,624 | | 4,082 | | 3,292 | | 3,384 | | 13,382 | |
Other noncurrent obligations 5 | — | | 1,059 | | 717 | | 1,394 | | 3,170 | |
| Total | $ | 4,746 | | $ | 9,111 | | $ | 9,151 | | $ | 36,917 | | $ | 59,925 | |
| TDCC | | | | | |
Long-term debt obligations 1 | $ | 460 | | $ | 617 | | $ | 1,796 | | $ | 14,443 | | $ | 17,316 | |
Expected cash requirements for interest 2 | 764 | | 1,453 | | 1,354 | | 8,368 | | 11,939 | |
| Pension and other postretirement benefits | 421 | | 1,201 | | 1,586 | | 8,625 | | 11,833 | |
Operating leases 3 | 477 | | 699 | | 406 | | 703 | | 2,285 | |
Purchase obligations 4 | 2,624 | | 4,082 | | 3,292 | | 3,384 | | 13,382 | |
Other noncurrent obligations 5 | — | | 1,025 | | 619 | | 1,371 | | 3,015 | |
| Total | $ | 4,746 | | $ | 9,077 | | $ | 9,053 | | $ | 36,894 | | $ | 59,770 | |
|
| | | | | | | | | | | | | | | |
| Contractual Obligations at Dec 31, 2018 | Payments Due In | |
| In millions | 2019 | 2020-2021 | 2022-2023 | 2024 and beyond | Total |
Long-term debt obligations 1 | $ | 340 |
| $ | 8,080 |
| $ | 1,990 |
| $ | 9,518 |
| $ | 19,928 |
|
Expected cash requirements for interest 2 | 949 |
| 1,779 |
| 1,172 |
| 6,915 |
| 10,815 |
|
| Pension and other postretirement benefits | 370 |
| 818 |
| 2,576 |
| 5,614 |
| 9,378 |
|
| Operating leases | 412 |
| 697 |
| 550 |
| 978 |
| 2,637 |
|
Purchase obligations 3 | 3,160 |
| 4,719 |
| 3,801 |
| 6,476 |
| 18,156 |
|
Other noncurrent obligations 4 | — |
| 900 |
| 606 |
| 1,750 |
| 3,256 |
|
| Total | $ | 5,231 |
| $ | 16,993 |
| $ | 10,695 |
| $ | 31,251 |
| $ | 64,170 |
|
| |
1. | Excludes unamortized debt discount and issuance costs of $334 million. Includes capital lease obligations of $369 million. Assumes the option to extend the Dow Silicones Term Loan facility will be exercised. |
| |
2. | Cash requirements for interest on long-term debt was calculated using current interest rates at December 31, 2018, and includes $4,915 million of various floating rate notes. |
| |
3. | Includes outstanding purchase orders and other commitments greater than $1 million obtained through a survey conducted within the Company. |
| |
4. | Includes liabilities related to asbestos litigation, environmental remediation, legal settlements and other noncurrent liabilities. The table excludes uncertain tax positions due to uncertainties in the timing of the effective settlement of tax positions with the respective taxing authorities and deferred tax liabilities as it is impractical to determine whether there will be a cash impact related to these liabilities. The table also excludes deferred revenue as it does not represent future cash requirements arising from contractual payment obligations. |
1.Excludes unamortized debt discount and issuance costs of $365 million. Includes finance lease obligations of $518 million.
2.Cash requirements for interest on long-term debt was calculated using current interest rates at December 31, 2020, and includes $235 million of various floating rate notes.
4.Includes outstanding purchase orders and other commitments greater than $1 million obtained through a survey conducted within the Company.
5.Includes liabilities related to asbestos litigation, environmental remediation, legal matters and other noncurrent liabilities. In addition to these items, Dow Inc. includes liabilities related to noncurrent obligations with DuPont and Corteva. The table excludes uncertain tax positions due to uncertainties in the timing of the effective settlement of tax positions with the respective taxing authorities and deferred tax liabilities as it is impractical to determine whether there will be a cash impact related to these liabilities. The table also excludes deferred revenue and negative investment balances related to equity method investments as these items do not represent future cash requirements arising from contractual payment obligations.
The Company expects to meet its contractual obligations through its normal sources of liquidity and believes it has the financial resources to satisfy these contractual obligations.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are obligations the Company has with nonconsolidated entities related to transactions, agreements or other contractual arrangements. The Company holds variable interests in joint ventures accounted for under the equity method of accounting. The Company is not the primary beneficiary of these joint ventures and therefore is not required to consolidate these entities (see Note 2324 to the Consolidated Financial Statements). In addition, see Note 14 to the Consolidated Financial Statements for information regarding the transfer of financial assets.
Guarantees arise during the ordinary course of business from relationships with customers, committed accounts receivable facilities and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others if specific triggering events occur. The Company had outstanding guarantees at December 31, 20182020 of $5,408$251 million, compared with $5,663$3,952 million at December 31, 2017.2019. In the fourth quarter of 2020, the remaining project completion conditions related to the Sadara project finance guarantees were fulfilled. Additional information related to guarantees can be found in the “Guarantees” section of Note 16 to the Consolidated Financial Statements.
Fair Value Measurements
See Note 1920 to the Consolidated Financial Statements for information related to fair value measurements of pension and other postretirement benefit plan assets; see Note 2122 for information related to other-than-temporary impairments; and, see Note 2223 for additional information concerning fair value measurements.
OTHER MATTERS
Recent Accounting Guidance
See Note 2 to the Consolidated Financial Statements for a summary of recent accounting guidance.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Following are the Company’s accounting policies impacted by judgments, assumptions and estimates:
Litigation
The Company is subject to legal proceedings and claims arising out of the normal course of business including product liability, patent infringement, employment matters, governmental tax and regulation disputes, contract and commercial litigation and other actions. The Company routinely assesses the legal and factual circumstances of each matter, the likelihood of any adverse outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known claim. DowThe Company has an active risk management program consisting of numerous insurance policies secured from many carriers covering various timeframes. These policies may provide coverage that could be utilized to minimize the financial impact, if any, of certain contingencies. The required reserves may change in the future due to new developments in each matter. For further discussion, see Note 16 to the Consolidated Financial Statements.
Asbestos-Related Matters of Union Carbide Corporation
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. ("Amchem"). Each year, Ankura Consulting Group, LLC ("Ankura") performs a review for Union Carbide based upon historical asbestos claims, resolution and historicalasbestos-related defense spending.and processing costs, through the terminal year of 2049. Union Carbide compares current asbestos claim and resolution activity, including asbestos-related defense and defense spending activityprocessing costs, to the results of the most recent Ankura study at each balance sheet date to determine whether the asbestos-related liability continues to be appropriate.
In 2016, the Company elected to change its method of accounting for Union Carbide's asbestos-related defense and processing costs from expensing as incurred to estimating and accruing a liability. In addition to performing their annual review of pending and future asbestos claim resolution activity, Ankura also performed a review of Union Carbide's asbestos-related defense and processing costs to determine a reasonable estimate of future defense and processing costs to be included in the asbestos-related liability, through the terminal year of 2049.
For additional information, see Part I, Item 3. Legal Proceedings; Asbestos-Related Matters of Union Carbide Corporation in Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Notes 1 and 16 to the Consolidated Financial Statements.
Environmental Matters
The Company determines the costs of environmental remediation of its facilities and formerly owned facilities based on evaluations of current law and existing technologies. Inherent uncertainties exist in such evaluations primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies. The recorded liabilities are adjusted periodically as remediation efforts progress, or as additional technical or legal information becomes available. At December 31, 2018,2020, the Company had accrued obligations of $820$1,244 million for probable environmental remediation and restoration costs, including $156$248 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately twoone and a half times that amount. For further discussion, see Environmental Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 1 and 16 to the Consolidated Financial Statements.
Goodwill
The Company performs goodwill impairment testing at the reporting unit level. Reporting units are the level at which discrete financial information is available and reviewed by business management on a regular basis. The Company tests goodwill for impairment annually (in the fourth quarter), or more frequently when events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit has declined below its carrying value. Goodwill is evaluated for impairment using qualitative and/or quantitative testing procedures. The separation from DowDuPont on April 1, 2019, did not impact the composition of the Company's six reporting units: Coatings & Performance Monomers, Consumer Solutions, Hydrocarbons & Energy, Industrial Solutions, Packaging and Specialty Plastics and Polyurethanes & Construction Chemicals. The ECP businesses received as part of the separation from DowDuPont are included in the Hydrocarbons & Energy and Packaging and Specialty Plastics reporting units. At December 31, 2018, the Company has defined 12 reporting units;2020, goodwill iswas carried by allfive out of thesesix of the Company's reporting units.
The Company has the option to first perform qualitative testing to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors assessed at the Company level include, but are not limited to, GDP growth rates, long-term hydrocarbon and energy prices, equity and credit market activity, discount rates, foreign exchange rates and overall financial performance. Qualitative factors assessed at the reporting unit level include, but are not limited to, changes in industry and market structure, competitive environments, planned capacity and new product launches, cost factors such as raw material prices, and financial performance of the reporting unit. If the Company chooses not to complete a qualitative assessment for a given reporting unit or if the initial assessment indicates that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying value, additional quantitative testing is required.
Quantitative testing requires the fair value of the reporting unit to be compared with its carrying value. If the reporting unit's carrying value exceeds its fair value, an impairment charge is recognized for the difference. The Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units. This valuation technique has been selected by management as the most meaningful valuation method due to the limited number of market comparables for the Company's reporting units. However, where market comparables are available, the Company includes EBIT/EBITDA multiples as part of the reporting unit valuation analysis. The discounted cash flow valuations are completed using the following key assumptions: projected revenue growth rates or compounded annual growth rates, discount rates, tax rates, terminal values, currency exchange rates, and forecasted long-term hydrocarbon and energy prices, by geographic arearegion and by year, which include the Company's key feedstocks as well as natural gas and crude oil (due to its correlation to naphtha). Currency exchange rates and long-term hydrocarbon and energy prices are established for the Company as a whole and applied consistently to all reporting units, while revenue growth rates, discount rates and tax rates are established by reporting unit to account for differences in business fundamentals and industry risk. These key assumptions drive projected EBIT/EBITDA and EBIT/EBITDA margins, which are key elements of management’s internal control over the reporting unit valuation analysis.
2018
2020 Goodwill Impairment Testing
In 2018,2020, there were no events or changes in circumstances identified that warranted interim goodwill impairment testing. In the fourth quarter of 2018,2020, qualitative testing was performed for all reporting units carrying goodwill. Based on the results of the qualitative testing, quantitative testing was performed on twoone reporting units and a qualitative assessment was performed for the remaining reporting units. For the quantitative testing, the fair values exceeded carrying values for both reporting units. Fair values exceeded carrying value in all scenarios where sensitivity analysis was performed, and the differences between fair value and carrying value of each reporting unit were determined to be reasonable.unit. For the qualitative assessments, management considered the factors at both the Company level and the reporting unit level. Based on the qualitative assessment,assessments for the reporting units, management concluded it is not more likely than not that the fair value of the reporting unit is less than the carrying value of the reporting unit. For the quantitative testing, the fair value exceeded the carrying value of the reporting unit.
Pension and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could have been settled at December 31, 2018,2020, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually and are disclosed in Note 1920 to the Consolidated Financial Statements. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect expense recognized and obligations recorded in future periods. The U.S. pension plans represent 7168 percent of the Company’s pension plan assets and 69 percent of the pension obligations.
The Company uses the spot rate approach to determine the discount rate utilized to measure the service cost and interest cost components of net periodic pension and other postretirement benefit costs for the U.S. and other selected countries. Under the spot rate approach, the Company calculates service costscost and interest costscost by applying individual spot rates from the Willis Towers Watson RATE:Link yield curve (based on high-quality corporate bond yields) for each selected country to the separate expected cash flow components of service cost and interest cost; service cost and interest cost for all other plans (including all plans prior to adoption) are determined on the basis of the single equivalent discount rates derived in determining those plan obligations.
The following information relates to the U.S. plans only; a similar approach is used for the Company’s non-U.S. plans.
The Company determines the expected long-term rate of return on assets by performing a detailed analysis of historical and expected returns based on the strategic asset allocation approved by the Company's Investment Committee and the underlying return fundamentals of each asset class. The Company’s historical experience with the pension fund asset performance is also considered. The expected return of each asset class is derived from a forecasted future return confirmed by historical experience. The expected long-term rate of return is an assumption and not what is expected to be earned in any one particular year. The weighted-average long-term rate of return assumption used for determining net periodic pension expense for 20182020 was 7.927.95 percent. The weighted-average assumption to be used for determining 20192021 net periodic pension expense is 7.947.96 percent. Future actual pension expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Company’s pension plans.
The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are based on the yield on high-quality corporate fixed income investments at the measurement date. Future expected actuarially determined cash flows for Dow’sthe Company’s U.S. plans are individually discounted at the spot rates under the Willis Towers Watson U.S. RATE:Link 60-90 corporate yield curve (based on 60th to 90th percentile high-quality corporate bond yields) to arrive at the plan’s obligations as of the measurement date. The weighted average discount rate utilized to measure pension obligations increaseddecreased to 4.392.71 percent at December 31, 2018,2020, from 3.663.41 percent at December 31, 2017.2019.
At December 31, 2018,2020, the U.S. qualified plans were underfunded on a projected benefit obligation basis by $4,066$5,873 million. The underfunded amount decreased $1,297increased $1,105 million compared with December 31, 2017.2019. The decreaseincrease in the underfunded amount in 20182020 was primarily due to the impact of higherlower discount rates, and discretionary plan contributions made in 2018.which was partially offset by overall favorable asset returns. The Company contributed $1,285 milliondid not make contributions to the U.S. qualified plans in 2018.2020.
The assumption for the long-term rate of increase infor the compensation levels for the U.S. qualified plans was 4.25 percent.unchanged. The Company uses a generational mortality table to determine the duration of its pension and other postretirement obligations.
The following discussion relates to the Company’s significant pension plans.
The Company bases the determination of pension expense on a market-related valuation of plan assets that reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return calculated using the market-related value of plan assets and the actual return based on the market value of plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plans, both gains and losses have been recognized and amortized. At December 31, 2018,2020, net lossesgains of $1,505$1,396 million remain to be recognized in the calculation of the market-related value of plan assets. These net lossesgains will result in increasesdecreases in future pension expense as they are recognized in the market-related value of assets.
The net decreaseincrease in the market-related value of assets due to the recognition of prior lossesgains is presented in the following table:
| | | | | |
| Net Increase in Market-Related Asset Value Due to Recognition of Prior Gains |
| In millions |
| 2021 | $ | 359 | |
| 2022 | 182 | |
| 2023 | 627 | |
| 2024 | 228 | |
| Total | $ | 1,396 | |
|
| | | |
| Net Decrease in Market-Related Asset Value Due to Recognition of Prior Losses |
| In millions |
| 2019 | $ | 504 |
|
| 2020 | 299 |
|
| 2021 | 263 |
|
| 2022 | 439 |
|
| Total | $ | 1,505 |
|
TheAt December 31, 2020, the Company expects pension expense to decrease in 20192021 by approximately $130$25 million. The decrease in pension expense is primarily due to the impact of higher discount rates and the full year impact of the significant 2018 contributions to the Company's U.S. pension plans.lower interest cost component.
A 25 basis point increase or decrease in the long-term return on assets assumption would change the Company’s total pension expense for 20192021 by $58$61 million. A 25 basis point increase in the discount rate assumption would lower the Company's total pension expense for 20192021 by $52$55 million. A 25 basis point decrease in the discount rate assumption would increase the Company's total pension expense for 20192021 by $62$60 million. A 25 basis point change in the long-term return and discount rate assumptions would have an immaterial impact on the other postretirement benefit expense for 2019.2021.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of available evidence, both positive and negative, the Company recognizes future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not.
At December 31, 2018,2020, the Company had a net deferred tax asset balance of $1,367$1,810 million, after valuation allowances of $1,320$1,302 million.
In evaluating the ability to realize the deferred tax assets, the Company relies on, in order of increasing subjectivity, taxable income in prior carryback years, the future reversals of existing taxable temporary differences, tax planning strategies and forecasted taxable income using historical and projected future operating results.
At December 31, 2018,2020, the Company had deferred tax assets for tax loss and tax credit carryforwards of $2,244$2,004 million, $300$708 million of which is subject to expiration in the years 20192021 through 2023.2025. In order to realize these deferred tax assets for tax loss and tax credit carryforwards, the Company needs taxable income of approximately $28,758$27,331 million across multiple jurisdictions. The taxable income needed to realize the deferred tax assets for tax loss and tax credit carryforwards that are subject to expiration between 2019from 2021 through 20232025 is approximately $4,458$6,405 million.
The Company recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination. At December 31, 2018,2020, the Company had uncertain tax positions for both domestic and foreign issues of $313$373 million.
The Company accrues for non-income tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. At December 31, 2018,2020, the Company had a non-income tax contingency reserve for both domestic and foreign issues of $91$33 million.
OnIndemnification Assets and Liabilities
In connection with the 2019 separation from DowDuPont and the 2016 ownership restructure of Dow Silicones, Dow entered into agreements that established each party’s indemnification obligations for certain tax, environmental, litigation and other matters, subject to certain conditions and limits. The Company records indemnification assets when collection is deemed probable and engages with indemnifying parties and assesses publicly available information to evaluate collectability. The underlying tax, environmental, litigation and other liabilities for which the Company claims indemnification are subject to significant judgment and potential disputes could adversely impact collectability. The Company assesses the collectability of indemnification assets when events or changes in circumstances indicate the carrying values may not be recoverable. At December 22, 2017, 31, 2020, indemnification assets were $225 million and $115 million for Dow Inc. and TDCC, respectively ($210 million and $100 million for Dow Inc. and TDCC respectively at December 31, 2019).
The Act was enacted, making significant changesCompany records indemnification liabilities when it is probable that a liability has been incurred and the amount can be reasonably estimated. At December 31, 2020, indemnification liabilities related to the U.S. tax law (see Note 9agreements were $657 million for Dow Inc. and zero for TDCC ($848 million for Dow Inc. and zero for TDCC at December 31, 2019). This represents management’s best estimate of the Company’s obligations under the agreements, although it is reasonably possible that future events could cause the actual values to be higher or lower than those projected or those recorded. For further discussion, see Notes 3 and 16 to the Consolidated Financial Statements for additional information). At December 31, 2017, the Company had not completed its accounting for the tax effects of The Act; however, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with SAB 118, income tax effects of The Act were refined upon obtaining, preparing, and analyzing additional information during the measurement period. At December 31, 2018, the Company had completed its accounting for the tax effects of The Act.Statements.
Environmental Matters
Environmental Policies
Dow is committed to world-class environmental, health and safety (“EH&S”) performance, as demonstrated by industry-leading performance, a long-standing commitment to RESPONSIBLE CARE®Responsible Care®, and a strong commitment to achieve the Company’sCompany's 2025 Sustainability Goals – goals that set the standard for sustainability in the chemical industry by focusing on improvements in Dow’sthe Company’s local corporate citizenship and product stewardship, and by actively pursuing methods to reduce the Company’sits environmental impact.
To meet the Company’s public commitments, as well as the stringent laws and government regulations related to environmental protection and remediation to which its global operations are subject, Dowthe Company has well-defined policies, requirements and management systems. Dow’sThe Company's EH&S Management System (“EMS”) defines the “who, what, when and how” needed for the businesses to achieve the Company’s policies, requirements, performance objectives, leadership expectations and public commitments. To ensure effective utilization, the EMS is integrated into a company-wide management system for EH&S, Operations, Quality and Human Resources.
It is Dow’sthe Company's policy to adhere to a waste management hierarchy that minimizes the impact of wastes and emissions on the environment. First, Dow workswork to eliminate or minimize the generation of waste and emissions at the source through research, process design, plant operations and maintenance. Second, Dow findsfind ways to reuse and recycle materials. Finally, unusable or non-recyclable hazardous waste is treated before disposal to eliminate or reduce the hazardous nature and volume of the waste. Treatment may include destruction by chemical, physical, biological or thermal means. Disposal of waste materials in landfills is considered only after all other options have been thoroughly evaluated. DowThe Company has specific requirements for waste that is transferred to non-Dow facilities, including the periodic auditing of these facilities.
DowThe Company believes third-party verification and transparent public reporting are cornerstones of world-class EH&S performance and building public trust. Numerous Dow sites in Europe, Latin America, Asia Pacific and the U.S. & Canada have received third-party verification of Dow’sthe Company’s compliance with RESPONSIBLE CARE®Responsible Care® and with outside specifications such as ISO-14001. DowThe Company continues to be a global champion of RESPONSIBLE CARE®Responsible Care® and has worked to broaden the application and impact of RESPONSIBLE CARE®Responsible Care® around the world through engagement with suppliers, customers and joint venture partners.
Dow’s
The Company’s EH&S policies helped the Companyto achieve improvements in many aspects of EH&S performance in 2018. Dow’s processhealth and safety performance was excellenttargets in 20182020. The Company’s safety continued to improve in 2020 based on process and improvements were made in injury/illness rates. Safety remains a priority for the entire Company. Further improvementpersonal safety project implementations. Improvement in these areas, as well as environmental compliance, remains a top management priority, with initiatives underway to further improve performance and compliance in 20192021 as Dowthe Company continues to implement the Company's 2025 Sustainability Goals.Goals and new, progressive, multi-decade sustainability targets around advancing a circular economy and climate protection.
Detailed information on Dow’s performance regarding environmental matters and goals can be found online on Dow’sis accessible through the Company's Science & Sustainability webpage at www.dow.comwww.dow.com/sustainability. The Company's website and its content are not deemed incorporated by reference into this report.
Chemical Security
Public and political attention continues to be placed on the protection of critical infrastructure, including the chemical industry, from security threats. Terrorist attacks, natural disasters and cyber incidents have increased concernglobal concerns about the security and safety of chemical production and distribution. Many, including Dowthe Company and the American Chemistry Council, have called for uniform risk-based and performance-based national standards for securing the U.S. chemical industry. The Maritime Transportation Security Act of 2002 and itsU.S. regulations further set forth risk-based and performance-based standards that must be met at U.S. Coast Guard-regulated facilities. The Company is subject to U.S. Chemical Plant Security legislation was passed in 2006regulations and Chemical Facility Anti-Terrorism Standards which were implemented by the U.S. Department of Homeland Security is now implementing the regulations known as the Chemical Facility Anti-Terrorism Standards.Security. The Company is complying withalso subject to the requirements of the Rail Transportation Security Rule issued by the U.S. Transportation Security Administration. DowThe Company continues to support uniform risk-based national standards for securing the chemical industry.
The focusSince 1988, the Company has maintained a comprehensive, multi-level security plan that focuses on security, emergency planning, preparedness and response is not new to Dow. A comprehensive, multi-level security plan for the Company has been maintained since 1988.response. This plan, which has been activated in response to significant world and national events, since then, is reviewed on an annual basis. DowThe Company continues to improve its security plans, placing emphasis on the safety of Dow communities and people by being prepared to meet risks at any level and to address both internal and external identifiable risks. The security plan includes regular vulnerability assessments, security audits, mitigation efforts and physical security upgrades designed to reduce vulnerability. Dow’sThe Company’s security plans are also are developeddesigned to avert interruptions of normal business operations that could materially and adversely affect the Company’s results of operations, liquidityfinancial condition and financial condition.cash flows.
DowThe Company played a key role in the development and implementation of the American Chemistry Council’s RESPONSIBLE CARE®Responsible Care® Security Code ("Security Code"), which requires that all aspects of security – including facility, transportation and cyberspace – be assessed and gaps addressed. Through the Company’s global implementation of the Security Code, Dowthe Company has permanently heightened the level of security – not just in the United States, but worldwide. DowThe Company employs several hundred employees and contractors in its Emergency Services and Security department worldwide. In 2019, the Company established its Global Security Operations Center ("GSOC") to provide 24-hour/day, 365-day/year real-time monitoring of global risks to Dow assets and people. The GSOC employs state-of-the-art social media monitoring, threat reporting and geo-fencing capabilities to analyze global risks and report those risks, facilitating decision-making and actions to prevent Dow crises.
Through the implementation of the Security Code, including voluntary security enhancements and upgrades, made since 2002, Dowthe Company is well-positioned to comply with U.S. chemical facility regulations and other regulatory security frameworks. Dow is currently participatingThe Company participates with the American Chemistry Council to periodically review and update the Security Code.
DowThe Company continues to work collaboratively across the supply chain on RESPONSIBLE CARE®Responsible Care®, Supply Chain Design, Emergency Preparedness, Shipment Visibilitysupply chain design, emergency preparedness, shipment visibility and transportation of hazardous materials. Dow is cooperatingThe Company cooperated with public and private entities to lead the implementation of advanced tank car design, and track and trace technologies. Further, Dow’sthe Company’s Distribution Risk Review process that has been in place for decades was expanded to addressaddresses potential threats in all modes of transportation across the Company’s supply chain. To reduce vulnerabilities, Dowthe Company maintains security measures that meet or exceed regulatory and industry security standards in all areas in which the Company operates.they operate.
Dow'sThe Company's initiatives relative to chemical security, emergency preparedness and response, Community Awareness and Emergency Responses and crisis management are implemented consistently at all Dow sites on a global basis. DowThe Company participates with chemical associations globally and participates as an active member of the U.S. delegation to the G7 Global Partnership Sub-Working Group on Chemical Security.
Climate Change
Climate change matters for Dowthe Company are likely to be driven by changesseveral categories of risks related to the transition to a lower-carbon economy (“Transition Risks”) and risks related to the physical impacts of climate change (“Physical Risks”).
Transition Risks
Transition Risks include carbon pricing mechanisms, transition to lower emissions technology, increased cost of raw materials, and mandates on and regulation of existing products and services. Carbon pricing is a market-based strategy for lowering global warming emissions by putting a monetary value on carbon emissions, allowing for the costs of climate impacts and opportunities for low-carbon energy options to be reflected in regulations, public policyproduction and physical climate parameters.
Regulatory Matters
Regulatory matters include capconsumption choices. Approximately 35 percent of Dow’s carbon emissions are generated from operations in Canada and trade schemes; increasedthe European Union (“EU”) where carbon pricing is already in place. As part of the European Green Deal, the European Commission proposed a 2030 greenhouse gas (“GHG”) limits;emissions reduction target of at least 55 percent below 1990 levels, with a goal for the EU to be carbon neutral by 2050. In China, an emissions trading system, initially proposed to cover the power sector only, is expected to gradually expand to cover a total of eight sectors, including the petrochemical and taxes on GHG emissions, fuelchemical industries, though no specific timeline for implementation and energy. The potential implications of each of these matters are all very similar, includingexpansion has been outlined.
These carbon pricing mechanisms will not only increase Dow’s direct costs to operate but will also result in increased cost of purchased energy additional capital costs for installation or modification of GHG emitting equipment, and additional costs associated directly with GHG emissions (such as cap and trade systems or carbon taxes), which are primarily related to energy use. It is difficult to estimatecosts. Dow mitigates the potentialdirect cost impact of these regulatory matters onexisting regulation through research and development projects designed to increase energy prices.
Reducing Dow's overallefficiency, and capital investment projects that will reduce the Company’s energy usage and carbon footprint. The Company is also exploring options for carbon capture, utilization and storage (“CCUS”) and electrification of Dow’s processes. Dow sees CCUS as a mechanism to help bridge the time period between the onset of increased carbon regulation and the technology available to economically reduce Dow’s GHG emissions through new and unfolding projects will decrease the potential impact of these regulatory matters.emissions. Dow also hasincorporates a dedicated commercial grouptheoretical internal carbon price into its business planning and risk management strategies. This theoretical price of carbon is also included in internal calculations used for prioritizing capital projects. Ultimately the goal of utilizing an internal carbon price is to handle energy contractsmitigate the risk of Dow’s carbon exposure to help ensure future resiliency.
Physical Risks
Operationally, climate change may result in more frequent severe weather events, potential changes in precipitation patterns and purchases, including managing emissions trading.extreme variability in weather patterns, which can disrupt operations. Several of Dow’s production facilities are located in water-scarce areas and water shortages could impact normal production. Changes in average precipitation could have an impact on the availability and price of water. The Company has not experienced any material impact relatedengineered susceptible facilities, particularly on the U.S. Gulf Coast, to regulated GHG emissions. The Companybetter withstand severe weather and rising sea levels, and continues to evaluatestudy the long-term implications of changing climate parameters on water availability, plant siting issues and monitor this area for future developments.
Physical Climate Parameters
Many scientific academies throughout the world have concluded that it is very likely that human activities are contributing to global warming. At this point, it is difficult to predict and assess the probability and opportunity of a global warming trend on Dow specifically.other impacts. Preparedness plans are developed that detail actions needed in the event of severe weather. These measures have historically been in place and these activities and associated costs are driven by normal operational preparedness. Dow continues
In 2019, the most recent period for which data is available, the Company’s greenhouse gas intensity was down approximately 3 percent from 2018 and by a total of approximately 13 percent since the baseline year of 2006. In addition, the Company is on track to study the long-term implicationsmeet its target of changing climate parameters on water availability, plant siting issues, and impacts and opportunities for products.purchasing 750 megawatts of renewable power by 2025.
Dow’s Energy business and Public Affairs and Sustainability functions are tasked with developing and implementing a comprehensive strategy that addresses the potential challenges of energy security and GHG emissions on the Company. The Company continues progress toward its defined 2025 Sustainability Goals and is taking further action to elevatelessen its internal focus and external positions - to focus on the root causes of GHG emissions - including the unsustainable use of energy. Dow's energy plan provides the roadmap:
Conserve - aggressively pursue energy efficiency and conservation
Optimize - increase and diversify energy resources
Accelerate - develop cost-effective, clean, renewable and alternative energy sources
Transition - to a sustainable energy future
Through corporate energy efficiency programs and focused GHG management efforts,carbon impact moving forward. In June 2020, the Company has and is continuingannounced a new, multi-decade carbon target to reduce its GHG emissions footprint. The Company’s manufacturing intensity, measured in Btu per poundnet annual carbon emission by 5 million metric tons compared with its 2020 baseline, a reduction of approximately 15 percent, and an intention to be carbon neutral (Scopes 1+2+3, as defined by the Greenhouse Gas Protocol, plus product has improvedbenefits) by more than 40 percent since 1990. As part of the Company's 2025 Sustainability Goals, Dow will maintain GHG emissions below 2006 levels on an absolute basis for all GHGs.2050.
Dow’s action plan to achieve carbon neutrality by 2050 includes:
Dow•Optimizing energy efficiency of facilities and processes
•Increasing renewables in purchased power mix
•Investments in CCUS
•Developing low-carbon technologies for emission reductions
•Deploying materials to enable emissions reductions for customers and industries
The Company intends to meet its commitment to implement the recommendations of the Financial Stability Board Task Force on Climate-RelatedClimate-related Financial Disclosures ("Task Force"TCFD") over the next two to four years, which isyears. Disclosures aligned with TCFD recommendations will be included in the recommendations of the Task Force.Company’s annual Sustainability Report.
Environmental Remediation
DowThe Company accrues the costs of remediation of its facilities and formerly owned facilities based on current law and regulatory requirements. The nature of such remediation can include management of soil and groundwater contamination. The accounting policies adopted to properly reflect the monetary impacts of environmental matters are discussed in Note 1 to the Consolidated Financial Statements. To assess the impact on the financial statements, environmental experts review currently available facts to evaluate the probability and scope of potential liabilities. Inherent uncertainties exist in such evaluations primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and the ability to apply remediation technologies. These liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. DowThe Company had an accrued liability of $664$996 million at December 31, 2018,2020, related to the remediation of current or former Dow-owned sites. At December 31, 2017,2019, the liability related to remediation was $726$948 million.
In addition to current and former Dow-owned sites, under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and equivalent state laws (hereafter referred to collectively as "Superfund Law"), Dowthe Company is liable for remediation of other hazardous waste sites where Dowthe Company allegedly disposed of, or arranged for the treatment or disposal of, hazardous substances. Because Superfund Law imposes joint and several liability upon each party at a site, Dowthe Company has evaluated its potential liability in light of the number of other companies that have also have been named potentially responsible parties (“PRPs”) at each site, the estimated apportionment of costs among all PRPs, and the financial ability and commitment of each to pay its expected share. The Company’s remaining liability for the remediation of Superfund sites was $156$248 million at December 31, 20182020 ($152207 million at December 31, 2017)2019). The Company has not recorded any third-party recovery related to these sites as a receivable.
Information regarding environmental sites is provided below:
| | | | | | | | | | | | | | |
| Environmental Sites | Dow-owned Sites 1 | Superfund Sites 2 |
| 2020 | 2019 | 2020 | 2019 |
| Number of sites at Jan 1 | 178 | | 178 | | 133 | | 131 | |
| Sites added during year | 7 | | 7 | | — | | 6 | |
| Sites closed during year | — | | (7) | | (1) | | (4) | |
| Number of sites at Dec 31 | 185 | | 178 | | 132 | | 133 | |
|
| | | | | | | | |
| Environmental Sites | Dow-owned Sites 1 | Superfund Sites 2 |
| 2018 | 2017 | 2018 | 2017 |
| Number of sites at Jan 1 | 244 |
| 189 |
| 131 |
| 131 |
|
| Sites added during year | 3 |
| 60 |
| 2 |
| 2 |
|
| Sites closed during year | (9 | ) | (5 | ) | (2 | ) | (2 | ) |
| Number of sites at Dec 31 | 238 |
| 244 |
| 131 |
| 131 |
|
| |
1. | Dow-owned sites are sites currently or formerly owned by Dow. In the United States, remediation obligations are imposed by the Resource Conservation and Recovery Act or analogous state law. At December 31, 2018, 32 of these sites (35 sites at December 31, 2017) were formerly owned by Dowell Schlumberger, Inc., a group of companies in which the Company previously owned a 50 percent interest. Dow sold its interest in Dowell Schlumberger in 1992. |
| |
2. | Superfund sites are sites, including sites not owned by Dow, where remediation obligations are imposed by Superfund Law. |
2.Superfund sites are sites, including sites not owned by the Company, where remediation obligations are imposed by Superfund Law.
Additional information is provided below for the Company’s Midland, Michigan, manufacturing site and Midland off-site locations (collectively, the "Midland sites"), as well as a Superfund site in Wood-Ridge, New Jersey, the locations for which the Company has the largest potential environmental liabilities.
In the early days of operations at the Midland manufacturing site, wastes were usually disposed of on-site, resulting in soil and groundwater contamination, which has been contained and managed on-site under a series of Resource Conservation and Recovery Act permits and regulatory agreements. The Hazardous Waste Operating License for the Midland manufacturing site, issued in 2003, and renewed and replaced in September 2015, also included provisions for the Company to conduct an investigation to determine the nature and extent of off-site contamination from historic Midland manufacturing site operations. In January 2010, the Company, the U.S. Environmental Protection Agency ("EPA") and the State of Michigan ("State") entered into an Administrative Order on Consent that requires the Company to conduct a remedial investigation, a feasibility study and a remedial design for the Tittabawassee River, the Saginaw River and the Saginaw Bay, and pay the oversight costs of the EPA and the State under the authority of CERCLA. See Note 16 to the Consolidated Financial Statements for additional information. At December 31, 2018, the Company had an accrual of $134 million ($131 million at December 31, 2017) forfurther information relating to Midland off-site environmental remediation and investigation associated with the Midland sites. In 2018, the Company spent $26 million ($24 million in 2017) for environmental remediation at the Midland sites.matters.
Rohm and Haas, a wholly owned subsidiary of Dow,the Company, is a PRP at the Wood-Ridge, New Jersey Ventron/Velsicol Superfund Site, and the adjacent Berry’s Creek Study Area ("BCSA") (collectively, the "Wood-Ridge sites"). Rohm and Haas is a successor in interest to a company that owned and operated a mercury processing facility, where wastewater and waste handling resulted in contamination of soils and adjacent creek sediments. TheIn 2018, the Berry’s Creek Study Area Potentially Responsible Party Group (“PRP groupGroup”), consisting of over 100 PRPs, completed a multi-stage Remedial Investigation ("RI") pursuant to an Administrative Order on Consent with U.S. EPA Region 2 to identify contamination in surface water, sediment and biota related to numerous contaminated sites inInvestigation/Feasibility Study for the Berry's Creek watershed, and submitted the report to the
EPA in June 2016. That same month,BCSA. During that time, the EPA concluded that an "iterative“iterative or adaptive approach"approach” was appropriate for cleaning up the BCSA. Thus, each phase of remediation will be followed by a period of monitoring to assess its effectiveness and determine if there is a need for more work. The Feasibility Study ("FS") forIn September 2018, the first phase of work was submitted in the third quarter of 2018. The EPA selected the interim remedy and issued an interimsigned a Record of Decision ("ROD"ROD 1"). which describes the initial phase of the EPA’s plan to clean-up the BCSA. ROD 1 will remediate waterways and major tributaries in the most contaminated part of the BCSA. The PRP group is negotiatingGroup has signed agreements among the PRP's to fund design of the selected remedy and with the EPA to design the selected remedy. Although there is currently much uncertainty as to what will ultimately be required to remediate the BCSA and Rohm and Haas's share of these costs has yet to be determined, the range of activities that are required in the interim RODRecord of Decision is known in general terms. Based on the interim remedy selected by the EPA, the overall remediation accrual for the Wood-Ridge sites was increased by $21 million in the fourth quarter of 2018.
At December 31, 2018,2020, the Company had an accrual of $106accrued liabilities totaling $370 million ($88368 million at December 31, 2017)2019) for environmental remediation at the Midland and Wood-Ridge sites. In 2018,2020, the Company spent $6$53 million ($732 million in 2017) on2019) for environmental remediation at the Midland and Wood-Ridge sites.
InDuring the fourththird quarter of 2016,2020, the Company accrued additional liabilities totaling $106 million related to environmental remediation matters resulting from the Company's evaluation of the costs required to manage remediation activities at sites Dow will permanently shut down as part of its 2020 Restructuring Program. In addition, the Company recorded indemnification assets of $50 million related to Dow Silicones' environmental matters. Net of indemnifications, the Company recognized a pretax charge of $295$56 million forrelated to these environmental remediation at a number of historical locations, including the Midland manufacturing site/off-site matters, and the Wood-Ridge sites, primarily resulting from the culmination of negotiations with regulators and/or final agency approval. This charge was included in "Cost of sales""Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income.
During the third quarter of 2019, the Company accrued additional liabilities totaling $447 million related to environmental remediation matters at a number of current and historical locations. The additional accrual primarily resulted from: the culmination of long-standing negotiations and discussions with regulators and agencies, including technical studies supporting higher cost estimates for final or staged remediation plans; the Company’s evaluation of the cost required to manage remediation activities at sites affected by Dow’s separation from DowDuPont and related agreements with Corteva and DuPont; and, the Company’s review of its closure strategies and obligations to monitor ongoing operations and maintenance activities. In addition, the Company recorded indemnification assets of $48 million related to Dow Silicones’ environmental matters. Net of indemnifications, the Company recognized a pretax charge of $399 million related to these environmental matters, included in “Cost of sales” in the consolidated statements of income.
In total, the Company’s accrued liability for probable environmental remediation and restoration costs was $820$1,244 million at December 31, 2018,2020, compared with $878$1,155 million at December 31, 2017.2019. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately twoone and a half times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s results of operations, financial condition and cash flows.
The amounts charged to income on a pretax basis related to environmental remediation totaled $174$234 million in 2018, $1712020, $588 million in 20172019 and $504$176 million in 2016.2018. The amounts charged to income on a pretax basis related to operating the Company’sCompany's current pollution abatement facilities, excluding internal recharges, totaled $772$616 million in 2018, $6402020, $677 million in 20172019 and $623$695 million in 2016.2018. Capital expenditures for environmental protection were $76$80 million in 2018, $792020, $83 million in 20172019 and $66$55 million in 2016.2018.
Asbestos-Related Matters of Union Carbide Corporation
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.
The table below provides information regarding asbestos-related claims pending against Union Carbide and Amchem based on criteria developed by Union Carbide and its external consultants.consultants:
| | | | | | | | | | | |
| Asbestos-Related Claim Activity | 2020 | 2019 | 2018 |
| Claims unresolved at Jan 1 | 11,117 | | 12,780 | | 15,427 | |
| Claims filed | 4,857 | | 5,743 | | 6,599 | |
| Claims settled, dismissed or otherwise resolved | (6,848) | | (7,406) | | (9,246) | |
| Claims unresolved at Dec 31 | 9,126 | | 11,117 | | 12,780 | |
| Claimants with claims against both Union Carbide and Amchem | (2,904) | | (3,837) | | (4,675) | |
| Individual claimants at Dec 31 | 6,222 | | 7,280 | | 8,105 | |
|
| | | | | | |
| Asbestos-Related Claim Activity | 2018 | 2017 | 2016 |
| Claims unresolved at Jan 1 | 15,427 |
| 16,141 |
| 18,778 |
|
| Claims filed | 6,599 |
| 7,010 |
| 7,813 |
|
| Claims settled, dismissed or otherwise resolved | (9,246 | ) | (7,724 | ) | (10,450 | ) |
| Claims unresolved at Dec 31 | 12,780 |
| 15,427 |
| 16,141 |
|
| Claimants with claims against both Union Carbide and Amchem | (4,675 | ) | (5,530 | ) | (5,741 | ) |
| Individual claimants at Dec 31 | 8,105 |
| 9,897 |
| 10,400 |
|
Plaintiffs’ lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous claimants. As a result, the damages alleged are not expressly identified as to Union Carbide, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no asbestos personal injury cases in which only Union Carbide and/or Amchem are the sole named defendants. For these reasons and based upon Union Carbide’s litigation and settlement experience, Union Carbide does not consider the damages alleged against Union Carbide and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.
For additional information see Part I, Item 3. Legal Proceedings and Asbestos-Related Matters andof Union Carbide Corporation in Note 16 to the Consolidated Financial Statements.
| | |
| ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Dow’sThe Company’s business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies that enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as hedges per the accounting guidance related to derivatives and hedging activities, where appropriate. A secondary objective is to add value by creating additional non-specific exposure within established limits and policies; derivatives used for this purpose are not designated as hedges. The potential impact of creating such additional exposures is not material to the Company’s results.
The global nature of Dow’sthe Company’s business requires active participation in the foreign exchange markets. The Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company’s foreign currency risk management is to optimize the U.S. dollar value of net assets and cash flows. To achieve this objective, the Company hedges on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps and nonderivative instruments in foreign currencies. Exposures primarily relate to assets, liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to operating activities. The largest exposures are denominated in European currencies, the Chinese yuan, the Japanese yen and the Chinese yuan,Thai baht, although exposures also exist in other currencies ofin Asia Pacific, Canada, Latin America, the Middle East, Africa, India and India.Canada.
The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. To achieve this objective, the Company hedges using interest rate swaps, “swaptions,” and exchange-traded instruments. The Company’s primary exposure is to the U.S. dollar yield curve.
DowThe Company has a portfolio of equity securities derived primarily from the investment activities of its insurance subsidiaries. This exposure is managed in a manner consistent with the Company’s market risk policies and procedures.
Inherent in Dow’sthe Company’s business is exposure to price changes for several commodities. Some exposures can be hedged effectively through liquid tradable financial instruments. Natural gas and crude oil, along with feedstocks for ethylene and propylene production, constitute the main commodity exposures. Over-the-counter and exchange traded instruments are used to hedge these risks, when feasible.
DowThe Company uses value-at-risk (“VAR”), stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the maximum potential loss in fair market values, given a certain move in prices over a certain period of time, using specified confidence levels. The VAR methodology used by the Company is a variance/covariance model. This model uses a 97.5 percent confidence level and includes at least one year of historical data. The 20182020 and 20172019 year-end and average daily VAR for the aggregate of all positions are shown below. These amounts are immaterial relative to the total equity of the Company.
| | | | | | | | | | | | | | |
| Total Daily VAR by Exposure Type at Dec 31 | 2020 | 2019 |
| In millions | Year-end | Average | Year-end | Average |
| Commodities | $ | 23 | | $ | 19 | | $ | 7 | | $ | 12 | |
| Equity securities | 18 | | 17 | | 10 | | 11 | |
| Foreign exchange | 11 | | 15 | | 43 | | 36 | |
| Interest rate | 142 | | 153 | | 77 | | 69 | |
| Composite | $ | 194 | | $ | 204 | | $ | 137 | | $ | 128 | |
|
| | | | | | | | | | | | |
| Total Daily VAR by Exposure Type at Dec 31 | 2018 | 2017 |
| In millions | Year-end | Average | Year-end | Average |
| Commodities | $ | 26 |
| $ | 30 |
| $ | 32 |
| $ | 35 |
|
| Equity securities | 12 |
| 7 |
| 4 |
| 9 |
|
| Foreign exchange | 26 |
| 28 |
| 26 |
| 38 |
|
| Interest rate | 81 |
| 80 |
| 70 |
| 76 |
|
| Composite | $ | 145 |
| $ | 145 |
| $ | 132 |
| $ | 158 |
|
The Company’s dailycomposite VAR for the aggregate of all positions increased from a composite VAR of $132$137 million at December 31, 20172019 to a composite VAR of $145$194 million at December 31, 2018.2020. The commodities VAR increased due to an increase in managed exposures and an increase in commodity volatility. The equity securities VAR increased due to an increase in equity volatility. The foreign exchange VAR decreased due to a decrease in managed exposures. The interest rate VAR increased due to an increase in exposure. The equity securities VAR increased due tointerest rate volatility and an increase in managed exposures and higher equity volatility. The commodities VAR decreased due to a decrease in managedinterest rate exposure. See Note 2122 to the Consolidated Financial Statements for further disclosure regarding market risk.
| | |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Dow Chemical CompanyInc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Dow Chemical CompanyInc. and subsidiaries (the "Company") as of December 31, 20182020 and 2017,2019, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2018,2020, and the related notes and the schedule listed in the Index at Item 15(a)2 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 11, 2019,5, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Changes in Accounting Principles
As discussed in Note 16 to the financial statements, in the fourth quarter of 2016, the Company changed its accounting policy from expensing asbestos-related defense and processing costs as incurred to the accrual of asbestos-related defense and processing costs when probable of occurring and estimable. As discussed in Note 41 to the financial statements, in the first quarter of 2018,2019, the Company changed its method of accounting for revenueleases due to the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts842, Leases.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill – Annual Impairment Assessment – Refer to Note 1 and Note 13 to the financial statements
Critical Audit Matter Description
The Company tests goodwill for impairment annually (in the fourth quarter), or more frequently when events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit has declined below its carrying value. The Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units, which requires management to make significant estimates and assumptions related to projected revenue growth rates, discount rates, and earnings before interest, taxes, depreciation and amortization (“EBITDA”). Changes in these assumptions could have a significant impact on the fair value of the reporting unit and the amount of any goodwill impairment charge. As of December 31, 2020, the Company has six reporting units, all but one of which have goodwill.
Throughout 2020, the Coronavirus (COVID-19) has had substantial negative impact on the results of the Company’s operations and financial performance of its reporting units. With Customersunprecedented volatility in global financial and commodities markets, the Company’s reporting units experienced decreased demand in certain end-customer markets, changes in supply and demand fundamentals, and margin compression caused by lowering of global energy prices. Given the uncertainty as to the ultimate severity and duration of the COVID-19 pandemic, the volatility in the value of Company’s shares, and uneven course of economic recovery, leading up to its annual goodwill impairment test in the fourth quarter the Company continuously monitored the impact of the pandemic on its reporting units to determine if it was more likely than not that the fair value was less than the carrying value for any of its reporting units. Based on the results of qualitative assessments completed as part of the annual impairment test for all reporting units, the Company moved to performing a quantitative test for one reporting unit. The discounted cash flows of this reporting unit supported a fair value in excess of the carrying value and as such no goodwill impairment charges were recorded.
Given the significant judgments made by management to estimate the fair value of the reporting unit, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to projected revenue growth rates, discount rates, EBITDA and EBITDA margin required a high degree of auditor judgment and an increased extent of effort, including the assistance of our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates and assumptions related to projected revenue growth rates, discount rates, EBITDA and EBITDA margin for the reporting unit subject to the quantitative test included the following, among other procedures:
•With the assistance of our fair value specialists, we tested the effectiveness of internal controls over the goodwill impairment evaluation, including controls over the selection of the discount rates and over forecasts of future revenue growth rates, EBITDA, and EBITDA margin.
•We performed a retrospective review comparing actual revenue and EBITDA results of the reporting unit for 2020 to the forecasted results from 2019.
•We performed a retrospective review comparing management’s estimates and assumptions relating to revenue, EBITDA, and EBITDA margin projections for the reporting unit used for the purpose of current year’s annual impairment test to the projections previously used in connection with the prior year annual impairment test.
•We evaluated the consistency of estimates and assumptions relating to revenue and EBITDA growth inherent in the discounted cash flow model for the reporting unit to those used by management in other annual forecasting activities.
•With the assistance of our fair value specialists, we performed a benchmarking exercise comparing management’s estimates and assumptions related to revenue growth, EBITDA and EBITDA margin for the reporting unit as of the measurement date to the revenue growth, EBITDA and EBITDA margins of a peer group of public companies for the most recent three years and the projection period.
•With the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and (2) the projections of long-term revenue growth and the discount rates by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rates selected by management.
| | |
| /s/ DELOITTE & TOUCHE LLP |
| Midland, Michigan |
| February 5, 2021 |
We have served as the Company's auditor since 1905.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and the Board of Directors of The Dow Chemical Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Dow Chemical Company and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15(a)2 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 5, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Changes in Accounting Principles
As discussed in Note 1 to the financial statements, in the first quarter of 2019, the Company changed the method of accounting for leases due to the adoption of Accounting Standards Codification (ASC) Topic 842, Leases.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
Goodwill – Annual Impairment Assessment – Refer to Note 1 and Note 13 to the financial statements
Critical Audit Matter Description
The Company tests goodwill for impairment annually (in the fourth quarter), or more frequently when events or changes in circumstances, indicate it is more likely than not that the fair value of a reporting unit has declined below its carrying value. In performing quantitative assessments, the Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units, which requires management to make significant estimates and assumptions related to projected revenue growth rates, discount rates, and earnings before interest, taxes, depreciation and amortization (“EBITDA”), and EBITDA margin. Changes in these assumptions could have a significant impact on the fair value of the reporting unit and the amount of any goodwill impairment charge. At December 31, 2020, the Company has six reporting units, all but one of which have goodwill.
Throughout 2020, the Coronavirus (COVID-19) has had substantial negative impact on the results of the Company’s operations and financial performance of its reporting units. With unprecedented volatility in global financial and commodities markets, the Company’s reporting units experienced decreased demand in certain end-customer markets, changes in supply and demand fundamentals, and margin compression caused by lowering of global energy prices. Given the uncertainty as to the ultimate severity and duration of the COVID-19 pandemic, the volatility in the value of Company’s shares, and uneven course of economic recovery, leading up to its annual goodwill impairment test in the fourth quarter the Company continuously monitored the impact of the pandemic on its reporting units to determine if it was more likely than not that the fair value was less than the carrying value for any of its reporting units. Based on the results of qualitative assessments completed as part of the annual impairment test for all reporting units, the Company moved to performing a quantitative test for one reporting unit. The discounted cash flows of this reporting unit supported a fair value in excess of the carrying value and as such no goodwill impairment charges were recorded.
Given the significant judgments made by management to estimate the fair value of the reporting unit, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to projected revenue growth rates, discount rates, EBITDA and EBITDA margin required a high degree of auditor judgment and an increased extent of effort, including the assistance of our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates and assumptions related to projected revenue growth rates, discount rates, EBITDA and EBITDA margin for the reporting unit subject to the quantitative test included the following, among other procedures:
•With the assistance of our fair value specialists, we tested the effectiveness of internal controls over the goodwill impairment evaluation, including quarterly impairment monitoring controls and controls over the selection of the discount rates and over forecasts of future revenue growth rates, EBITDA, and EBITDA margin.
•We performed a retrospective review comparing actual revenue and EBITDA results of the reporting unit for 2020 to the forecasted results from 2019.
•We performed a retrospective review comparing management’s estimates and assumptions relating to revenue, EBITDA, and EBITDA margin projections for the reporting unit used for the purpose of current year’s annual impairment test to the projections previously used in connection with the prior year annual impairment test.
•We evaluated the consistency of estimates and assumptions relating to revenue and EBITDA growth inherent in the discounted cash flow model for the reporting unit to those used by management in other annual forecasting activities.
•With the assistance of our fair value specialists, we performed a benchmarking exercise comparing management’s estimates and assumptions related to revenue growth, EBITDA and EBITDA margin for the reporting unit as of the measurement date to the revenue growth, EBITDA and EBITDA margins of a peer group of public companies for the most recent three years and the projection period.
•With the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and (2) the projections of long-term revenue growth and the discount rates by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rates selected by management.
|
| |
| /s/ DELOITTE & TOUCHE LLP |
| Midland, Michigan |
| February 5, 2021 |
Deloitte & Touche LLP
Midland, Michigan
February 11, 2019
We have served as the Company's auditor since 1905.
Dow Inc. and Subsidiaries
Consolidated Statements of Income
| | | | | | | | | | | |
| (In millions, except per share amounts) For the years ended Dec 31, | 2020 | 2019 | 2018 |
| Net sales | $ | 38,542 | | $ | 42,951 | | $ | 49,604 | |
| Cost of sales | 33,346 | | 36,657 | | 41,074 | |
| Research and development expenses | 768 | | 765 | | 800 | |
| Selling, general and administrative expenses | 1,471 | | 1,590 | | 1,782 | |
| Amortization of intangibles | 401 | | 419 | | 469 | |
| Restructuring, goodwill impairment and asset related charges - net | 708 | | 3,219 | | 221 | |
| Integration and separation costs | 239 | | 1,063 | | 1,179 | |
| Equity in earnings (losses) of nonconsolidated affiliates | (18) | | (94) | | 555 | |
| Sundry income (expense) - net | 1,269 | | 461 | | 96 | |
| Interest income | 38 | | 81 | | 82 | |
| Interest expense and amortization of debt discount | 827 | | 933 | | 1,063 | |
| Income (loss) from continuing operations before income taxes | 2,071 | | (1,247) | | 3,749 | |
| Provision for income taxes on continuing operations | 777 | | 470 | | 809 | |
| Income (loss) from continuing operations, net of tax | 1,294 | | (1,717) | | 2,940 | |
| Income from discontinued operations, net of tax | 0 | | 445 | | 1,835 | |
| Net income (loss) | 1,294 | | (1,272) | | 4,775 | |
| Net income attributable to noncontrolling interests | 69 | | 87 | | 134 | |
| Net income (loss) available for Dow Inc. common stockholders | $ | 1,225 | | $ | (1,359) | | $ | 4,641 | |
| | | |
| | | |
| Per common share data: | | | |
| Earnings (loss) per common share from continuing operations - basic | $ | 1.64 | | $ | (2.42) | | $ | 3.80 | |
| Earnings per common share from discontinued operations - basic | 0 | | 0.58 | | 2.41 | |
| Earnings (loss) per common share - basic | $ | 1.64 | | $ | (1.84) | | $ | 6.21 | |
| Earnings (loss) per common share from continuing operations - diluted | $ | 1.64 | | $ | (2.42) | | $ | 3.80 | |
| Earnings per common share from discontinued operations - diluted | 0 | | 0.58 | | 2.41 | |
| Earnings (loss) per common share - diluted | $ | 1.64 | | $ | (1.84) | | $ | 6.21 | |
| | | |
| Weighted-average common shares outstanding - basic | 740.5 | | 742.5 | | 747.2 | |
| Weighted-average common shares outstanding - diluted | 742.3 | | 742.5 | | 747.2 | |
See Notes to the Consolidated Financial Statements.
Dow Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | |
| (In millions) For the years ended Dec 31, | 2020 | 2019 | 2018 |
| Net income (loss) | $ | 1,294 | | $ | (1,272) | | $ | 4,775 | |
| Other comprehensive income (loss), net of tax | | | |
| Unrealized gains (losses) on investments | 40 | | 115 | | (67) | |
| Cumulative translation adjustments | 205 | | (32) | | (225) | |
| Pension and other postretirement benefit plans | (778) | | (899) | | (40) | |
| Derivative instruments | (76) | | (338) | | 75 | |
| Total other comprehensive loss | (609) | | (1,154) | | (257) | |
| Comprehensive income (loss) | 685 | | (2,426) | | 4,518 | |
| Comprehensive income attributable to noncontrolling interests, net of tax | 69 | | 99 | | 97 | |
| Comprehensive income (loss) attributable to Dow Inc. | $ | 616 | | $ | (2,525) | | $ | 4,421 | |
See Notes to the Consolidated Financial Statements.
Dow Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | |
| (In millions, except share amounts) At Dec 31, | 2020 | 2019 |
| Assets | | |
| Current Assets | | |
| Cash and cash equivalents (variable interest entities restricted - 2020: $26; 2019: $37) | $ | 5,104 | | $ | 2,367 | |
| | |
| Accounts and notes receivable: | | |
| Trade (net of allowance for doubtful receivables - 2020: $51; 2019: $45) | 4,839 | | 4,844 | |
| Other | 2,551 | | 2,711 | |
| Inventories | 5,701 | | 6,214 | |
| Other current assets | 889 | | 679 | |
| | |
| Total current assets | 19,084 | | 16,815 | |
| Investments | | |
| Investment in nonconsolidated affiliates | 1,327 | | 1,404 | |
| Other investments (investments carried at fair value - 2020: $1,674; 2019: $1,584) | 2,775 | | 2,588 | |
| Noncurrent receivables | 465 | | 1,063 | |
| Total investments | 4,567 | | 5,055 | |
| Property | | |
| Property | 56,325 | | 54,910 | |
| Less: Accumulated depreciation | 36,086 | | 33,914 | |
| Net property (variable interest entities restricted - 2020: $232; 2019: $330) | 20,239 | | 20,996 | |
| Other Assets | | |
| Goodwill | 8,908 | | 8,796 | |
| Other intangible assets (net of accumulated amortization - 2020: $4,428; 2019: $3,886) | 3,352 | | 3,759 | |
| Operating lease right-of-use assets | 1,856 | | 2,072 | |
| Deferred income tax assets | 2,215 | | 2,213 | |
| Deferred charges and other assets | 1,249 | | 818 | |
| Total other assets | 17,580 | | 17,658 | |
| Total Assets | $ | 61,470 | | $ | 60,524 | |
| Liabilities and Equity | | |
| Current Liabilities | | |
| Notes payable | $ | 156 | | $ | 586 | |
| Long-term debt due within one year | 460 | | 435 | |
| Accounts payable: | | |
| Trade | 3,763 | | 3,889 | |
| Other | 2,126 | | 2,064 | |
| Operating lease liabilities - current | 416 | | 421 | |
| Income taxes payable | 397 | | 522 | |
| | |
| Accrued and other current liabilities | 3,790 | | 2,762 | |
| | |
| Total current liabilities | 11,108 | | 10,679 | |
| Long-Term Debt (variable interest entities nonrecourse - 2020: $6; 2019: $34) | 16,491 | | 15,975 | |
| Other Noncurrent Liabilities | | |
| Deferred income tax liabilities | 405 | | 347 | |
| Pension and other postretirement benefits - noncurrent | 11,648 | | 10,083 | |
| Asbestos-related liabilities - noncurrent | 1,013 | | 1,060 | |
| Operating lease liabilities - noncurrent | 1,521 | | 1,739 | |
| Other noncurrent obligations | 6,279 | | 6,547 | |
| Total other noncurrent liabilities | 20,866 | | 19,776 | |
| Stockholders’ Equity | | |
Common stock (authorized 5,000,000,000 shares of $0.01 par value each; issued 2020: 755,993,198 shares; 2019: 751,228,644 shares) | 8 | | 8 | |
| Additional paid-in capital | 7,595 | | 7,325 | |
| Retained earnings | 16,361 | | 17,045 | |
| Accumulated other comprehensive loss | (10,855) | | (10,246) | |
| Unearned ESOP shares | (49) | | (91) | |
| Treasury stock at cost (2020: 12,803,303 shares; 2019: 9,729,834 shares) | (625) | | (500) | |
| Dow Inc.’s stockholders’ equity | 12,435 | | 13,541 | |
| Noncontrolling interests | 570 | | 553 | |
| Total equity | 13,005 | | 14,094 | |
| Total Liabilities and Equity | $ | 61,470 | | $ | 60,524 | |
See Notes to the Consolidated Financial Statements.
Dow Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | |
(In millions) For the years ended Dec 31, | 2020 | 2019 | 2018 |
| Operating Activities | | | |
| Net income (loss) | $ | 1,294 | | $ | (1,272) | | $ | 4,775 | |
| Less: Income from discontinued operations, net of tax | 0 | | 445 | | 1,835 | |
| Income (loss) from continuing operations, net of tax | 1,294 | | (1,717) | | 2,940 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
| Depreciation and amortization | 2,874 | | 2,938 | | 2,909 | |
| Provision (credit) for deferred income tax | 258 | | (228) | | (429) | |
| Earnings of nonconsolidated affiliates less than dividends received | 443 | | 1,114 | | 108 | |
| Net periodic pension benefit cost | 266 | | 144 | | 279 | |
| Pension contributions | (299) | | (261) | | (1,651) | |
| Net gain on sales of assets, businesses and investments | (802) | | (81) | | (38) | |
| | | |
| | | |
| Restructuring, goodwill impairment and asset related charges - net | 708 | | 3,219 | | 221 | |
| | | |
| Other net loss | 318 | | 198 | | 415 | |
| Changes in assets and liabilities, net of effects of acquired and divested companies: | | | |
| Accounts and notes receivable | 171 | | 1,253 | | (855) | |
| Inventories | 515 | | 668 | | (859) | |
| Accounts payable | (84) | | (948) | | 787 | |
| Other assets and liabilities, net | 590 | | (586) | | (731) | |
| Cash provided by operating activities - continuing operations | 6,252 | | 5,713 | | 3,096 | |
| Cash provided by (used for) operating activities - discontinued operations | (26) | | 217 | | 1,158 | |
| Cash provided by operating activities | 6,226 | | 5,930 | | 4,254 | |
| Investing Activities | | | |
| Capital expenditures | (1,252) | | (1,961) | | (2,091) | |
| Investment in gas field developments | (5) | | (76) | | (114) | |
| | | |
| | | |
| Purchases of previously leased assets | (5) | | (9) | | (26) | |
| Proceeds from sales of property and businesses, net of cash divested | 929 | | 84 | | 47 | |
| Acquisitions of property and businesses, net of cash acquired | (130) | | 0 | | (20) | |
| | | |
| Investments in and loans to nonconsolidated affiliates | (333) | | (638) | | (18) | |
| Distributions and loan repayments from nonconsolidated affiliates | 7 | | 89 | | 55 | |
| | | |
| Purchases of investments | (1,203) | | (899) | | (1,530) | |
| Proceeds from sales and maturities of investments | 1,122 | | 1,252 | | 1,214 | |
| Proceeds from interests in trade accounts receivable conduits | 0 | | 0 | | 657 | |
| Other investing activities, net | 29 | | 0 | | 0 | |
| Cash used for investing activities - continuing operations | (841) | | (2,158) | | (1,826) | |
| Cash used for investing activities - discontinued operations | 0 | | (34) | | (369) | |
| Cash used for investing activities | (841) | | (2,192) | | (2,195) | |
| Financing Activities | | | |
| Changes in short-term notes payable | (431) | | 307 | | (178) | |
| Proceeds from issuance of short-term debt greater than three months | 163 | | 0 | | 0 | |
| Payments on short-term debt greater than three months | (163) | | 0 | | 0 | |
| Proceeds from issuance of long-term debt | 4,672 | | 2,287 | | 1,999 | |
| Payments on long-term debt | (4,653) | | (5,561) | | (3,054) | |
| Purchases of treasury stock | (125) | | (500) | | 0 | |
| Proceeds from issuance of stock | 108 | | 93 | | 112 | |
| | | |
| Transaction financing, debt issuance and other costs | (175) | | (119) | | (70) | |
| Employee taxes paid for share-based payment arrangements | (27) | | (60) | | (77) | |
| | | |
| Distributions to noncontrolling interests | (62) | | (77) | | (135) | |
| Purchases of noncontrolling interests | 0 | | (297) | | 0 | |
| | | |
| Dividends paid to stockholders | (2,071) | | (1,550) | | 0 | |
| Dividends paid to DowDuPont Inc. | 0 | | (535) | | (3,711) | |
| Settlements and transfers related to separation from DowDuPont Inc. | 0 | | 1,935 | | (240) | |
| Other financing activities, net | 0 | | 0 | | 3 | |
| Cash used for financing activities - continuing operations | (2,764) | | (4,077) | | (5,351) | |
| Cash used for financing activities - discontinued operations | 0 | | (18) | | (53) | |
| Cash used for financing activities | (2,764) | | (4,095) | | (5,404) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 107 | | (27) | | (99) | |
| Summary | | | |
| Increase (decrease) in cash, cash equivalents and restricted cash | 2,728 | | (384) | | (3,444) | |
| Cash, cash equivalents and restricted cash at beginning of year | 2,380 | | 2,764 | | 6,208 | |
| Cash, cash equivalents and restricted cash at end of year | $ | 5,108 | | $ | 2,380 | | $ | 2,764 | |
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 4 | | 13 | | 40 | |
| Cash and cash equivalents at end of year | $ | 5,104 | | $ | 2,367 | | $ | 2,724 | |
See Notes to the Consolidated Financial Statements.
Dow Inc. and Subsidiaries
Consolidated Statements of Equity
| | | | | | | | | | | |
| (In millions, except per share amounts) For the years ended Dec 31, | 2020 | 2019 | 2018 |
| | | |
| | | |
| | | |
| | | |
| Common Stock | | | |
| Balance at beginning of year | $ | 8 | | $ | 0 | | $ | 0 | |
| | | |
| Common stock issued | 0 | | 8 | | 0 | |
| Balance at end of year | 8 | | 8 | | 0 | |
| Additional Paid-in Capital | | | |
| Balance at beginning of year | 7,325 | | 7,042 | | 6,553 | |
| Common stock issued / sold | 108 | | 57 | | 0 | |
| Issuance of parent company stock - DowDuPont Inc. | 0 | | 28 | | 112 | |
| Stock-based compensation and allocation of ESOP shares | 162 | | 235 | | 377 | |
| | | |
| | | |
| Other | 0 | | (37) | | 0 | |
| Balance at end of year | 7,595 | | 7,325 | | 7,042 | |
| Retained Earnings | | | |
| Balance at beginning of year | 17,045 | | 35,460 | | 33,742 | |
| Net income (loss) available for Dow Inc.'s common stockholders | 1,225 | | (1,359) | | 4,641 | |
| Dividends to stockholders | (2,071) | | (1,550) | | 0 | |
| Dividends to DowDuPont Inc. | 0 | | (535) | | (3,711) | |
| Common control transaction | 177 | | (14,806) | | (182) | |
| Adoption of accounting standards (Note 1) | 0 | | (151) | | 989 | |
| Other | (15) | | (14) | | (19) | |
| Balance at end of year | 16,361 | | 17,045 | | 35,460 | |
| Accumulated Other Comprehensive Loss | | | |
| Balance at beginning of year | (10,246) | | (9,885) | | (8,591) | |
| Other comprehensive loss | (609) | | (1,154) | | (257) | |
| Common control transaction | 0 | | 793 | | 0 | |
| Adoption of accounting standards (Note 1) | 0 | | 0 | | (1,037) | |
| Balance at end of year | (10,855) | | (10,246) | | (9,885) | |
| Unearned ESOP Shares | | | |
| Balance at beginning of year | (91) | | (134) | | (189) | |
| Stock-based compensation and allocation of ESOP shares | 42 | | 45 | | 55 | |
| ESOP shares acquired | 0 | | (2) | | 0 | |
| Balance at end of year | (49) | | (91) | | (134) | |
| Treasury Stock | | | |
| Balance at beginning of year | (500) | | 0 | | 0 | |
| | | |
| Treasury stock purchases | (125) | | (500) | | 0 | |
| | | |
| | | |
| Balance at end of year | (625) | | (500) | | 0 | |
| Dow Inc.'s stockholders' equity | 12,435 | | 13,541 | | 32,483 | |
| Noncontrolling Interests | 570 | | 553 | | 1,138 | |
| Total Equity | $ | 13,005 | | $ | 14,094 | | $ | 33,621 | |
| | | |
| Dividends declared per share of common stock | $ | 2.80 | | $ | 2.10 | | $ | 0 | |
See Notes to the Consolidated Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
| | | (In millions) For the years ended Dec 31, | 2018 | 2017 | 2016 | (In millions) For the years ended Dec 31, | 2020 | 2019 | 2018 |
| Net sales | $ | 60,278 |
| $ | 55,508 |
| $ | 48,158 |
| Net sales | $ | 38,542 | | $ | 42,951 | | $ | 49,604 | |
| Cost of sales | 47,705 |
| 43,612 |
| 37,668 |
| Cost of sales | 33,343 | | 36,657 | | 41,074 | |
| Research and development expenses | 1,536 |
| 1,648 |
| 1,593 |
| Research and development expenses | 768 | | 765 | | 800 | |
| Selling, general and administrative expenses | 2,846 |
| 2,920 |
| 2,953 |
| Selling, general and administrative expenses | 1,471 | | 1,585 | | 1,782 | |
| Amortization of intangibles | 622 |
| 624 |
| 544 |
| Amortization of intangibles | 401 | | 419 | | 469 | |
| Restructuring, goodwill impairment and asset related charges - net | 620 |
| 3,100 |
| 595 |
| Restructuring, goodwill impairment and asset related charges - net | 708 | | 3,219 | | 221 | |
| Integration and separation costs | 1,044 |
| 786 |
| 349 |
| Integration and separation costs | 239 | | 1,039 | | 1,179 | |
| Asbestos-related charge | — |
| — |
| 1,113 |
| |
| Equity in earnings of nonconsolidated affiliates | 950 |
| 762 |
| 442 |
| |
| | Equity in earnings (losses) of nonconsolidated affiliates | | Equity in earnings (losses) of nonconsolidated affiliates | (18) | | (94) | | 555 | |
| Sundry income (expense) - net | 181 |
| 195 |
| 1,486 |
| Sundry income (expense) - net | 1,274 | | 573 | | 96 | |
| Interest income | | Interest income | 40 | | 81 | | 82 | |
| Interest expense and amortization of debt discount | 1,118 |
| 976 |
| 858 |
| Interest expense and amortization of debt discount | 827 | | 952 | | 1,063 | |
| Income before income taxes | 5,918 |
| 2,799 |
| 4,413 |
| |
| Provision for income taxes | 1,285 |
| 2,204 |
| 9 |
| |
| Net income | 4,633 |
| 595 |
| 4,404 |
| |
| Income (loss) from continuing operations before income taxes | | Income (loss) from continuing operations before income taxes | 2,081 | | (1,125) | | 3,749 | |
| Provision for income taxes on continuing operations | | Provision for income taxes on continuing operations | 777 | | 470 | | 809 | |
| Income (loss) from continuing operations, net of tax | | Income (loss) from continuing operations, net of tax | 1,304 | | (1,595) | | 2,940 | |
| Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | 0 | | 445 | | 1,835 | |
| Net income (loss) | | Net income (loss) | 1,304 | | (1,150) | | 4,775 | |
| Net income attributable to noncontrolling interests | 134 |
| 129 |
| 86 |
| Net income attributable to noncontrolling interests | 69 | | 87 | | 134 | |
| Net income attributable to The Dow Chemical Company | 4,499 |
| 466 |
| 4,318 |
| |
| Preferred stock dividends | — |
| — |
| 340 |
| |
| Net income available for The Dow Chemical Company common stockholder | $ | 4,499 |
| $ | 466 |
| $ | 3,978 |
| |
| | Net income (loss) available for The Dow Chemical Company common stockholder | | Net income (loss) available for The Dow Chemical Company common stockholder | $ | 1,235 | | $ | (1,237) | | $ | 4,641 | |
See Notes to the Consolidated Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | (In millions) For the years ended Dec 31, | 2018 | 2017 | 2016 | (In millions) For the years ended Dec 31, | 2020 | 2019 | 2018 |
| Net income | $ | 4,633 |
| $ | 595 |
| $ | 4,404 |
| |
| Net income (loss) | | Net income (loss) | $ | 1,304 | | $ | (1,150) | | $ | 4,775 | |
| Other comprehensive income (loss), net of tax | | | | Other comprehensive income (loss), net of tax | | |
| Unrealized losses on investments | (67 | ) | (46 | ) | (4 | ) | |
| Unrealized gains (losses) on investments | | Unrealized gains (losses) on investments | 40 | | 115 | | (67) | |
| Cumulative translation adjustments | (225 | ) | 900 |
| (644 | ) | Cumulative translation adjustments | 205 | | (32) | | (225) | |
| Pension and other postretirement benefit plans | (40 | ) | 391 |
| (620 | ) | Pension and other postretirement benefit plans | (778) | | (899) | | (40) | |
| Derivative instruments | 75 |
| (14 | ) | 113 |
| Derivative instruments | (76) | | (338) | | 75 | |
| Total other comprehensive income (loss) | (257 | ) | 1,231 |
| (1,155 | ) | |
| Comprehensive income | 4,376 |
| 1,826 |
| 3,249 |
| |
| Total other comprehensive loss | | Total other comprehensive loss | (609) | | (1,154) | | (257) | |
| Comprehensive income (loss) | | Comprehensive income (loss) | 695 | | (2,304) | | 4,518 | |
| Comprehensive income attributable to noncontrolling interests, net of tax | 97 |
| 172 |
| 83 |
| Comprehensive income attributable to noncontrolling interests, net of tax | 69 | | 99 | | 97 | |
| Comprehensive income attributable to The Dow Chemical Company | $ | 4,279 |
| $ | 1,654 |
| $ | 3,166 |
| |
| Comprehensive income (loss) attributable to The Dow Chemical Company | | Comprehensive income (loss) attributable to The Dow Chemical Company | $ | 626 | | $ | (2,403) | | $ | 4,421 | |
See Notes to the Consolidated Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
| | | (In millions, except share amounts) At Dec 31, | 2018 | 2017 | (In millions, except share amounts) At Dec 31, | 2020 | 2019 |
| Assets | | | Assets | | |
| Current Assets | | | Current Assets | | |
| Cash and cash equivalents (variable interest entities restricted - 2018: $82; 2017: $107) | $ | 2,669 |
| $ | 6,188 |
| |
| Marketable securities | 100 |
| 4 |
| |
| Cash and cash equivalents (variable interest entities restricted - 2020: $26; 2019: $37) | | Cash and cash equivalents (variable interest entities restricted - 2020: $26; 2019: $37) | $ | 5,104 | | $ | 2,367 | |
| | Accounts and notes receivable: | | | Accounts and notes receivable: | | |
| Trade (net of allowance for doubtful receivables - 2018: $106; 2017: $117) | 8,246 |
| 7,338 |
| |
| Trade (net of allowance for doubtful receivables - 2020: $51; 2019: $45) | | Trade (net of allowance for doubtful receivables - 2020: $51; 2019: $45) | 4,839 | | 4,844 | |
| Other | 4,136 |
| 4,711 |
| Other | 2,553 | | 2,716 | |
| Inventories | 9,260 |
| 8,376 |
| Inventories | 5,701 | | 6,214 | |
| Other current assets | 852 |
| 627 |
| Other current assets | 801 | | 592 | |
| | Total current assets | 25,263 |
| 27,244 |
| Total current assets | 18,998 | | 16,733 | |
| Investments | | | Investments | | |
| Investment in nonconsolidated affiliates | 3,823 |
| 3,742 |
| Investment in nonconsolidated affiliates | 1,327 | | 1,404 | |
| Other investments (investments carried at fair value - 2018: $1,699; 2017: $1,512) | 2,648 |
| 2,510 |
| |
| Other investments (investments carried at fair value - 2020: $1,674; 2019: $1,584) | | Other investments (investments carried at fair value - 2020: $1,674; 2019: $1,584) | 2,775 | | 2,588 | |
| Noncurrent receivables | 394 |
| 594 |
| Noncurrent receivables | 426 | | 1,011 | |
| Total investments | 6,865 |
| 6,846 |
| Total investments | 4,528 | | 5,003 | |
| Property | | | Property | | |
| Property | 61,437 |
| 60,426 |
| Property | 56,325 | | 54,910 | |
| Less accumulated depreciation | 37,775 |
| 36,614 |
| |
| Net property (variable interest entities restricted - 2018: $734; 2017: $907) | 23,662 |
| 23,812 |
| |
| Less: Accumulated depreciation | | Less: Accumulated depreciation | 36,086 | | 33,914 | |
| Net property (variable interest entities restricted - 2020: $232; 2019: $330) | | Net property (variable interest entities restricted - 2020: $232; 2019: $330) | 20,239 | | 20,996 | |
| Other Assets | | | Other Assets | | |
| Goodwill | 13,848 |
| 13,938 |
| Goodwill | 8,908 | | 8,796 | |
| Other intangible assets (net of accumulated amortization - 2018: $5,762; 2017: $5,161) | 4,913 |
| 5,549 |
| |
| Other intangible assets (net of accumulated amortization - 2020: $4,428; 2019: $3,886) | | Other intangible assets (net of accumulated amortization - 2020: $4,428; 2019: $3,886) | 3,352 | | 3,759 | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | 1,856 | | 2,072 | |
| Deferred income tax assets | 2,031 |
| 1,722 |
| Deferred income tax assets | 2,215 | | 2,213 | |
| | Deferred charges and other assets | 796 |
| 829 |
| Deferred charges and other assets | 1,249 | | 818 | |
| | Total other assets | 21,588 |
| 22,038 |
| Total other assets | 17,580 | | 17,658 | |
| Total Assets | $ | 77,378 |
| $ | 79,940 |
| Total Assets | $ | 61,345 | | $ | 60,390 | |
| Liabilities and Equity | | | Liabilities and Equity | | |
| Current Liabilities | | | Current Liabilities | | |
| Notes payable | $ | 305 |
| $ | 484 |
| Notes payable | $ | 156 | | $ | 586 | |
| Long-term debt due within one year | 340 |
| 752 |
| Long-term debt due within one year | 460 | | 435 | |
| Accounts payable: | | | Accounts payable: | | |
| Trade | 5,378 |
| 5,360 |
| Trade | 3,763 | | 3,889 | |
| Other | 3,330 |
| 3,062 |
| Other | 2,126 | | 2,064 | |
| Operating lease liabilities - current | | Operating lease liabilities - current | 416 | | 421 | |
| Income taxes payable | 791 |
| 694 |
| Income taxes payable | 397 | | 522 | |
| Accrued and other current liabilities | 3,611 |
| 4,025 |
| Accrued and other current liabilities | 3,256 | | 2,233 | |
| | Total current liabilities | 13,755 |
| 14,377 |
| Total current liabilities | 10,574 | | 10,150 | |
| Long-Term Debt (variable interest entities nonrecourse - 2018: $75; 2017: $249) | 19,254 |
| 19,765 |
| |
| Long-Term Debt (variable interest entities nonrecourse - 2020: $6; 2019: $34) | | Long-Term Debt (variable interest entities nonrecourse - 2020: $6; 2019: $34) | 16,491 | | 15,975 | |
| Other Noncurrent Liabilities | | | Other Noncurrent Liabilities | | |
| Deferred income tax liabilities | 664 |
| 764 |
| Deferred income tax liabilities | 405 | | 347 | |
| Pension and other postretirement benefits - noncurrent | 9,226 |
| 10,794 |
| Pension and other postretirement benefits - noncurrent | 11,648 | | 10,083 | |
| Asbestos-related liabilities - noncurrent | 1,142 |
| 1,237 |
| Asbestos-related liabilities - noncurrent | 1,013 | | 1,060 | |
| Operating lease liabilities - noncurrent | | Operating lease liabilities - noncurrent | 1,521 | | 1,739 | |
| Other noncurrent obligations | 5,368 |
| 5,994 |
| Other noncurrent obligations | 6,124 | | 6,174 | |
| | Total other noncurrent liabilities | 16,400 |
| 18,789 |
| Total other noncurrent liabilities | 20,711 | | 19,403 | |
| Stockholders’ Equity | | | |
| | Stockholder's Equity | | Stockholder's Equity | | |
| Common stock (authorized and issued 100 shares of $0.01 par value each) | — |
| — |
| Common stock (authorized and issued 100 shares of $0.01 par value each) | 0 | | 0 | |
| Additional paid-in capital | 7,042 |
| 6,553 |
| Additional paid-in capital | 7,603 | | 7,333 | |
| Retained earnings | 29,808 |
| 28,050 |
| Retained earnings | 16,300 | | 17,313 | |
| Accumulated other comprehensive loss | (9,885 | ) | (8,591 | ) | Accumulated other comprehensive loss | (10,855) | | (10,246) | |
| Unearned ESOP shares | (134 | ) | (189 | ) | Unearned ESOP shares | (49) | | (91) | |
| The Dow Chemical Company’s stockholders’ equity | 26,831 |
| 25,823 |
| |
| | The Dow Chemical Company’s stockholder's equity | | The Dow Chemical Company’s stockholder's equity | 12,999 | | 14,309 | |
| Noncontrolling interests | 1,138 |
| 1,186 |
| Noncontrolling interests | 570 | | 553 | |
| Total equity | 27,969 |
| 27,009 |
| Total equity | 13,569 | | 14,862 | |
| Total Liabilities and Equity | $ | 77,378 |
| $ | 79,940 |
| Total Liabilities and Equity | $ | 61,345 | | $ | 60,390 | |
See Notes to the Consolidated Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
| | | (In millions) For the years ended Dec 31, | 2018 | 2017 | 2016 | (In millions) For the years ended Dec 31, | 2020 | 2019 | 2018 |
| Operating Activities | | | Operating Activities | | |
| Net income | $ | 4,633 |
| $ | 595 |
| $ | 4,404 |
| |
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | |
| Net income (loss) | | Net income (loss) | $ | 1,304 | | $ | (1,150) | | $ | 4,775 | |
| Less: Income from discontinued operations, net of tax | | Less: Income from discontinued operations, net of tax | 0 | | 445 | | 1,835 | |
| Income (loss) from continuing operations, net of tax | | Income (loss) from continuing operations, net of tax | 1,304 | | (1,595) | | 2,940 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| Depreciation and amortization | 3,329 |
| 3,155 |
| 2,862 |
| Depreciation and amortization | 2,874 | | 2,938 | | 2,909 | |
| Provision (Credit) for deferred income tax | (530 | ) | 933 |
| (1,259 | ) | |
| Earnings of nonconsolidated affiliates less than (in excess of) dividends received | (42 | ) | 95 |
| 243 |
| |
| Provision (credit) for deferred income tax | | Provision (credit) for deferred income tax | 258 | | (228) | | (429) | |
| Earnings of nonconsolidated affiliates less than dividends received | | Earnings of nonconsolidated affiliates less than dividends received | 443 | | 1,114 | | 108 | |
| Net periodic pension benefit cost | 380 |
| 1,137 |
| 389 |
| Net periodic pension benefit cost | 266 | | 144 | | 279 | |
| Pension contributions | (1,656 | ) | (1,676 | ) | (629 | ) | Pension contributions | (299) | | (261) | | (1,651) | |
| Net gain on sales of assets, businesses and investments | (67 | ) | (1,156 | ) | (214 | ) | Net gain on sales of assets, businesses and investments | (802) | | (81) | | (38) | |
| Net (gain) loss on step acquisition of nonconsolidated affiliate | 47 |
| — |
| (2,445 | ) | |
| | Restructuring, goodwill impairment and asset related charges - net | 620 |
| 3,100 |
| 595 |
| Restructuring, goodwill impairment and asset related charges - net | 708 | | 3,219 | | 221 | |
| Asbestos-related charge | — |
| — |
| 1,113 |
| |
| | Other net loss | 426 |
| 378 |
| 361 |
| Other net loss | 320 | | 213 | | 415 | |
| Changes in assets and liabilities, net of effects of acquired and divested companies: | | | Changes in assets and liabilities, net of effects of acquired and divested companies: | | |
| Accounts and notes receivable | (1,532 | ) | (11,927 | ) | (8,833 | ) | Accounts and notes receivable | 171 | | 1,253 | | (855) | |
| Inventories | (983 | ) | (1,225 | ) | 610 |
| Inventories | 515 | | 668 | | (859) | |
| Accounts payable | 359 |
| 1,735 |
| 569 |
| Accounts payable | (84) | | (948) | | 787 | |
| Other assets and liabilities, net | (1,090 | ) | (102 | ) | (723 | ) | Other assets and liabilities, net | 589 | | (730) | | (731) | |
| Cash provided by (used for) operating activities | 3,894 |
| (4,958 | ) | (2,957 | ) | |
| Cash provided by operating activities - continuing operations | | Cash provided by operating activities - continuing operations | 6,263 | | 5,706 | | 3,096 | |
| Cash provided by operating activities - discontinued operations | | Cash provided by operating activities - discontinued operations | 0 | | 371 | | 1,158 | |
| Cash provided by operating activities | | Cash provided by operating activities | 6,263 | | 6,077 | | 4,254 | |
| Investing Activities | | | Investing Activities | | |
| Capital expenditures | (2,538 | ) | (3,144 | ) | (3,804 | ) | Capital expenditures | (1,252) | | (1,961) | | (2,091) | |
| Investment in gas field developments | (114 | ) | (121 | ) | (113 | ) | Investment in gas field developments | (5) | | (76) | | (114) | |
| | Purchases of previously leased assets | (26 | ) | (187 | ) | — |
| Purchases of previously leased assets | (5) | | (9) | | (26) | |
| Proceeds from sales of property and businesses, net of cash divested | 155 |
| 1,691 |
| 284 |
| Proceeds from sales of property and businesses, net of cash divested | 929 | | 84 | | 47 | |
| Acquisitions of property and businesses, net of cash acquired | (20 | ) | 47 |
| (187 | ) | Acquisitions of property and businesses, net of cash acquired | (130) | | 0 | | (20) | |
| Cash acquired in step acquisition of nonconsolidated affiliate | — |
| — |
| 1,070 |
| |
| | Investments in and loans to nonconsolidated affiliates | (18 | ) | (749 | ) | (1,020 | ) | Investments in and loans to nonconsolidated affiliates | (333) | | (638) | | (18) | |
| Distributions and loan repayments from nonconsolidated affiliates | 55 |
| 69 |
| 109 |
| Distributions and loan repayments from nonconsolidated affiliates | 7 | | 89 | | 55 | |
| Proceeds from sales of ownership interests in nonconsolidated affiliates | 4 |
| 64 |
| 22 |
| |
| | Purchases of investments | (1,530 | ) | (643 | ) | (577 | ) | Purchases of investments | (1,203) | | (899) | | (1,530) | |
| Proceeds from sales and maturities of investments | 1,216 |
| 1,163 |
| 733 |
| Proceeds from sales and maturities of investments | 1,122 | | 1,252 | | 1,214 | |
| Proceeds from interests in trade accounts receivable conduits | 657 |
| 9,462 |
| 8,551 |
| Proceeds from interests in trade accounts receivable conduits | 0 | | 0 | | 657 | |
| Other investing activities, net | 31 |
| (100 | ) | 24 |
| Other investing activities, net | 29 | | 0 | | 0 | |
| Cash provided by (used for) investing activities | (2,128 | ) | 7,552 |
| 5,092 |
| |
| Cash used for investing activities - continuing operations | | Cash used for investing activities - continuing operations | (841) | | (2,158) | | (1,826) | |
| Cash used for investing activities - discontinued operations | | Cash used for investing activities - discontinued operations | 0 | | (34) | | (369) | |
| Cash used for investing activities | | Cash used for investing activities | (841) | | (2,192) | | (2,195) | |
| Financing Activities | | | Financing Activities | | |
| Changes in short-term notes payable | (176 | ) | 293 |
| (33 | ) | Changes in short-term notes payable | (431) | | 307 | | (178) | |
| Proceeds from issuance of short-term debt greater than three months | | Proceeds from issuance of short-term debt greater than three months | 163 | | 0 | | 0 | |
| Payments on short-term debt greater than three months | | Payments on short-term debt greater than three months | (163) | | 0 | | 0 | |
| Proceeds from issuance of long-term debt | 2,000 |
| — |
| 32 |
| Proceeds from issuance of long-term debt | 4,672 | | 2,287 | | 1,999 | |
| Payments on long-term debt | (3,058 | ) | (621 | ) | (588 | ) | Payments on long-term debt | (4,653) | | (5,561) | | (3,054) | |
| Purchases of treasury stock | — |
| — |
| (916 | ) | |
| Proceeds from issuance of parent company stock | 112 |
| 66 |
| — |
| |
| Proceeds from sales of common stock | — |
| 423 |
| 398 |
| |
| | Proceeds from issuance of stock | | Proceeds from issuance of stock | 108 | | 93 | | 112 | |
| | Transaction financing, debt issuance and other costs | | Transaction financing, debt issuance and other costs | (175) | | (119) | | (70) | |
| Employee taxes paid for share-based payment arrangements | (92 | ) | (93 | ) | (65 | ) | Employee taxes paid for share-based payment arrangements | (27) | | (60) | | (77) | |
| | Distributions to noncontrolling interests | (172 | ) | (129 | ) | (176 | ) | Distributions to noncontrolling interests | (62) | | (77) | | (135) | |
| Purchases of noncontrolling interests | — |
| — |
| (202 | ) | Purchases of noncontrolling interests | 0 | | (297) | | 0 | |
| Dividends paid to stockholders | — |
| (2,179 | ) | (2,462 | ) | |
| Dividends paid to parent | (3,711 | ) | (1,056 | ) | — |
| |
| | Dividends paid to DowDuPont Inc. | | Dividends paid to DowDuPont Inc. | 0 | | (535) | | (3,711) | |
| Dividends paid to Dow Inc. | | Dividends paid to Dow Inc. | (2,233) | | (201) | | 0 | |
| Settlements and transfers related to separation from DowDuPont Inc. | | Settlements and transfers related to separation from DowDuPont Inc. | 0 | | (61) | | (240) | |
| Other financing activities, net | (67 | ) | (35 | ) | (2 | ) | Other financing activities, net | 0 | | 0 | | 3 | |
| Cash used for financing activities - continuing operations | | Cash used for financing activities - continuing operations | (2,801) | | (4,224) | | (5,351) | |
| Cash used for financing activities - discontinued operations | | Cash used for financing activities - discontinued operations | 0 | | (18) | | (53) | |
| Cash used for financing activities | (5,164 | ) | (3,331 | ) | (4,014 | ) | Cash used for financing activities | (2,801) | | (4,242) | | (5,404) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (100 | ) | 320 |
| (77 | ) | Effect of exchange rate changes on cash, cash equivalents and restricted cash | 107 | | (27) | | (99) | |
| Summary | | | Summary | | |
| Decrease in cash, cash equivalents and restricted cash | (3,498 | ) | (417 | ) | (1,956 | ) | |
| Increase (decrease) in cash, cash equivalents and restricted cash | | Increase (decrease) in cash, cash equivalents and restricted cash | 2,728 | | (384) | | (3,444) | |
| Cash, cash equivalents and restricted cash at beginning of year | 6,207 |
| 6,624 |
| 8,580 |
| Cash, cash equivalents and restricted cash at beginning of year | 2,380 | | 2,764 | | 6,208 | |
| Cash, cash equivalents and restricted cash at end of year | $ | 2,709 |
| $ | 6,207 |
| $ | 6,624 |
| Cash, cash equivalents and restricted cash at end of year | $ | 5,108 | | $ | 2,380 | | $ | 2,764 | |
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 40 |
| 19 |
| 17 |
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 4 | | 13 | | 40 | |
| Cash and cash equivalents at end of year | $ | 2,669 |
| $ | 6,188 |
| $ | 6,607 |
| Cash and cash equivalents at end of year | $ | 5,104 | | $ | 2,367 | | $ | 2,724 | |
| Supplemental cash flow information | | | |
| Cash paid during year for: | | | |
| Interest, net of amounts capitalized | $ | 1,198 |
| $ | 1,178 |
| $ | 1,192 |
| |
| Income taxes | $ | 1,419 |
| $ | 1,805 |
| $ | 1,592 |
| |
See Notes to the Consolidated Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Preferred Stock | Common Stock | Add'l Paid in Capital | Retained Earnings | Accum Other Comp Loss | Unearned ESOP | Treasury Stock | Non-controlling Interests | Total Equity |
| 2016 | | | | | | | | | |
| Balance at Jan 1, 2016 | $ | 4,000 |
| $ | 3,107 |
| $ | 4,936 |
| $ | 28,425 |
| $ | (8,667 | ) | $ | (272 | ) | $ | (6,155 | ) | $ | 809 |
| $ | 26,183 |
|
| Net income available for The Dow Chemical Company common stockholders | — |
| — |
| — |
| 3,978 |
| — |
| — |
| — |
| — |
| 3,978 |
|
| Other comprehensive loss | — |
| — |
| — |
| — |
| (1,155 | ) | — |
| — |
| — |
| (1,155 | ) |
| Dividends to stockholders | — |
| — |
| — |
| (2,037 | ) | — |
| — |
| — |
| — |
| (2,037 | ) |
| Common stock issued/sold | — |
| — |
| 398 |
| — |
| — |
| — |
| 717 |
| — |
| 1,115 |
|
| Stock-based compensation and allocation of ESOP shares | — |
| — |
| (376 | ) | — |
| — |
| 51 |
| — |
| — |
| (325 | ) |
| ESOP shares acquired | — |
| — |
| — |
| — |
| — |
| (18 | ) | — |
| — |
| (18 | ) |
| Impact of noncontrolling interests | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 433 |
| 433 |
|
| Treasury stock purchases | — |
| — |
| — |
| — |
| — |
| — |
| (916 | ) | — |
| (916 | ) |
| Preferred stock converted to common stock | (4,000 | ) | — |
| (695 | ) | — |
| — |
| — |
| 4,695 |
| — |
| — |
|
| Other | — |
| — |
| (1 | ) | (28 | ) | — |
| — |
| — |
| — |
| (29 | ) |
| Balance at Dec 31, 2016 | $ | — |
| $ | 3,107 |
| $ | 4,262 |
| $ | 30,338 |
| $ | (9,822 | ) | $ | (239 | ) | $ | (1,659 | ) | $ | 1,242 |
| $ | 27,229 |
|
| 2017 | | | | | | | | | |
| Net income available for The Dow Chemical Company common stockholder | — |
| — |
| — |
| 466 |
| — |
| — |
| — |
| — |
| 466 |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 1,231 |
| — |
| — |
| — |
| 1,231 |
|
| Dividends to stockholders | — |
| — |
| — |
| (1,673 | ) | — |
| — |
| — |
| — |
| (1,673 | ) |
| Dividends to parent | — |
| — |
| — |
| (1,056 | ) | — |
| — |
| — |
| — |
| (1,056 | ) |
| Common stock issued/sold | — |
| — |
| 423 |
| — |
| — |
| — |
| 724 |
| — |
| 1,147 |
|
| Issuance of parent company stock | — |
| — |
| 66 |
| — |
| — |
| — |
| — |
| — |
| 66 |
|
| Stock-based compensation and allocation of ESOP shares | — |
| — |
| (368 | ) | — |
| — |
| 50 |
| — |
| — |
| (318 | ) |
| Impact of noncontrolling interests | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (56 | ) | (56 | ) |
| Merger impact | — |
| (3,107 | ) | 2,172 |
| — |
| — |
| — |
| 935 |
| — |
| — |
|
| Other | — |
| — |
| (2 | ) | (25 | ) | — |
| — |
| — |
| — |
| (27 | ) |
| Balance at Dec 31, 2017 | $ | — |
| $ | — |
| $ | 6,553 |
| $ | 28,050 |
| $ | (8,591 | ) | $ | (189 | ) | $ | — |
| $ | 1,186 |
| $ | 27,009 |
|
| 2018 | | | | | | | | | |
| Adoption of accounting standards (Note 1) | — |
| — |
| — |
| 989 |
| (1,037 | ) | — |
| — |
| — |
| (48 | ) |
| Net income available for The Dow Chemical Company common stockholder | — |
| — |
| — |
| 4,499 |
| — |
| — |
| — |
| — |
| 4,499 |
|
| Other comprehensive loss | — |
| — |
| — |
| — |
| (257 | ) | — |
| — |
| — |
| (257 | ) |
| Dividends to parent | — |
| — |
| — |
| (3,711 | ) | — |
| — |
| — |
| — |
| (3,711 | ) |
| Issuance of parent company stock | — |
| — |
| 112 |
| — |
| — |
| — |
| — |
| — |
| 112 |
|
| Stock-based compensation and allocation of ESOP shares | — |
| — |
| 377 |
| — |
| — |
| 55 |
| — |
| — |
| 432 |
|
| Impact of noncontrolling interests | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (48 | ) | (48 | ) |
| Other | — |
| — |
| — |
| (19 | ) | — |
| — |
| — |
| — |
| (19 | ) |
| Balance at Dec 31, 2018 | $ | — |
| $ | — |
| $ | 7,042 |
| $ | 29,808 |
| $ | (9,885 | ) | $ | (134 | ) | $ | — |
| $ | 1,138 |
| $ | 27,969 |
|
| | | | | | | | | | | |
| (In millions, except per share amounts) For the years ended Dec 31, | 2020 | 2019 | 2018 |
| | | |
| | | |
| | | |
| | | |
| Common Stock | | | |
| Balance at beginning and end of year | $ | 0 | | $ | 0 | | $ | 0 | |
| | | |
| | | |
| Additional Paid-in Capital | | | |
| Balance at beginning of year | 7,333 | | 7,042 | | 6,553 | |
| | | |
| Issuance of parent company stock - Dow Inc. | 108 | | 65 | | 0 | |
| Issuance of parent company stock - DowDuPont Inc. | 0 | | 28 | | 112 | |
| Stock-based compensation and allocation of ESOP shares | 162 | | 235 | | 377 | |
| | | |
| | | |
| Other | 0 | | (37) | | 0 | |
| Balance at end of year | 7,603 | | 7,333 | | 7,042 | |
| Retained Earnings | | | |
| Balance at beginning of year | 17,313 | | 35,460 | | 33,742 | |
| Net income (loss) available for The Dow Chemical Company's common stockholder | 1,235 | | (1,237) | | 4,641 | |
| | | |
| Dividends to Dow Inc. | (2,233) | | (201) | | 0 | |
| Dividends to DowDuPont Inc. | 0 | | (535) | | (3,711) | |
| Common control transaction | 0 | | (16,009) | | (182) | |
| Adoption of accounting standards (Note 1) | 0 | | (151) | | 989 | |
| Other | (15) | | (14) | | (19) | |
| Balance at end of year | 16,300 | | 17,313 | | 35,460 | |
| Accumulated Other Comprehensive Loss | | | |
| Balance at beginning of year | (10,246) | | (9,885) | | (8,591) | |
| Other comprehensive loss | (609) | | (1,154) | | (257) | |
| Common control transaction | 0 | | 793 | | 0 | |
| Adoption of accounting standards (Note 1) | 0 | | 0 | | (1,037) | |
| Balance at end of year | (10,855) | | (10,246) | | (9,885) | |
| Unearned ESOP Shares | | | |
| Balance at beginning of year | (91) | | (134) | | (189) | |
| Stock-based compensation and allocation of ESOP shares | 42 | | 45 | | 55 | |
| ESOP shares acquired | 0 | | (2) | | 0 | |
| Balance at end of year | (49) | | (91) | | (134) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| The Dow Chemical Company's stockholder's equity | 12,999 | | 14,309 | | 32,483 | |
| Noncontrolling Interests | 570 | | 553 | | 1,138 | |
| Total Equity | $ | 13,569 | | $ | 14,862 | | $ | 33,621 | |
See Notes to the Consolidated Financial Statements.
|
| |
Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries |
| Notes to the Consolidated Financial Statements |
Table of Contents
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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merger and Separation
On April 1, 2019, DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc. or "DuPont") completed the separation of its materials science business and Dow Inc. became the direct parent company of The Dow Chemical Company and its consolidated subsidiaries (“TDCC” and together with Dow Inc., “Dow” or the “Company”). The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017 (the "Merger Agreement"). TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries (“Historical DuPont”) each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business. See Note 3 for additional information.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements of The Dow Chemical CompanyInc. and its subsidiaries (“Dow” or the “Company”)TDCC were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the CompanyDow exercises control and, when applicable, entities for which the CompanyDow has a controlling financial interest or is the primary beneficiary. Intercompany transactions and balances are eliminated in consolidation. Investments in nonconsolidated affiliates (20-50 percent owned companies or less than 20 percent owned companies over which significant influence is exercised) are accounted for using the equity method.
Effective April 1, 2019, Dow Inc. owns all of the outstanding common shares of TDCC. TDCC is deemed the predecessor to Dow Inc. and the historical results of TDCC are deemed the historical results of Dow Inc. for periods prior to and including March 31, 2019. As a result of the parent/subsidiary relationship between Dow Inc. and TDCC, and considering that the financial statements and disclosures of each company are substantially similar, the companies are filing a combined report for this Annual Report on Form 10-K. The information reflected in the report is equally applicable to both Dow Inc. and TDCC, except where otherwise noted.
As of the effective date and time of the distribution, DowDuPont no longer beneficially owned any equity interest in Dow and no longer consolidated Dow and its consolidated subsidiaries into its financial results. The consolidated financial results of Dow for all periods presented reflect the distribution of TDCC’s agricultural sciences business (“AgCo”) and specialty products business (“SpecCo”) as discontinued operations, as well as the receipt of Historical DuPont’s ethylene and ethylene copolymers businesses (other than its ethylene acrylic elastomers business) (“ECP”) as a common control transaction from the closing of the Merger on August 31, 2017 pursuant to the merger of equals transaction contemplated by the Agreement and Plan of ("Merger dated as of December 11, 2015, as amended on March 31, 2017, Dow and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, as a result, Dow and DuPont became subsidiaries of DowDuPont (the "Merger"Date"). In accordance with the accounting guidance for earnings per share, the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries. See Note 3 for additional information oninformation.
The Company conducts its worldwide operations through six global businesses which are organized into the Merger.following operating segments: Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure and Performance Materials & Coatings. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. See Note 26 for additional information.
Beginning September 1, 2017,From the Merger Date through the separation, transactions between DowDuPont, DowTDCC and Historical DuPont and their affiliates are reflected in these consolidated financial statements and will be disclosedwere treated as related party transactions, when material.transactions. Transactions between DowTDCC and Historical DuPont primarily consistconsisted of the sale and procurement of certain feedstocks, energy and raw materials that arewere consumed in each company's manufacturing process. Transactions between TDCC and Dow Inc. are treated as related party transactions for TDCC. See Note 2425 for additional information.
Effective with the Merger, Dow’s business activities are components of its parent company’s business operations. Dow’s business activities, including the assessment of performance and allocation of resources, are reviewed and managed by DowDuPont. Information used by the chief operating decision maker of Dow relates to the Company in its entirety. Accordingly, there are no separate reportable business segments for the Company under Accounting Standards Codification ("ASC") Topic 280 “Segment Reporting” and the Company’s business results are reported inThroughout this Annual Report on Form 10-K, asunless otherwise indicated, amounts and activity are presented on a single operating segment.continuing operations basis.
Except as otherwise indicated by the context, the term "Union Carbide" means Union Carbide Corporation, a wholly owned subsidiary of Dow,the Company, and "Dow Silicones" means Dow Silicones Corporation, (formerly known as Dow Corning Corporation, which changed its name effective as of February 1, 2018), a wholly owned subsidiary of Dow.the Company.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.
Significant Accounting Policies
Asbestos-Related Matters
Accruals for asbestos-related matters, including defense and processing costs, are recorded based on an analysis of claim and resolution activity, defense spending, and pending and future claims. These accruals are assessed at each balance sheet date to determine if the asbestos-related liability remains appropriate. Accruals for asbestos-related matters are included in the consolidated balance sheets in “Accrued and other current liabilities” and “Asbestos-related liabilities - noncurrent.” See Note 16 for additional information.
Legal Costs
The Company expenses legal costs as incurred, with the exception of defense and processing costs associated with asbestos-related matters.
Foreign Currency Translation
The local currency has been primarily used as the functional currency throughout the world. Translation gains and losses of those operations that use local currency as the functional currency are included in the consolidated balance sheets in "Accumulated other comprehensive loss" ("AOCL"). For certain subsidiaries, the U.S. dollar is used as the functional currency. This occurs when the subsidiary operates in an economic environment where the products produced and sold are tied to U.S. dollar-denominated markets, or when the foreign subsidiary operates in a hyper-inflationary environment. Where the U.S. dollar is used as the functional currency, foreign currency translation gains and losses are reflected in income.
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the consolidated balance sheets in “Accrued and other current liabilities” and “Other noncurrent obligations” at undiscounted amounts. Accruals for related insurance or other third-party recoveries for environmental liabilities are recorded when it is probable that a recovery will be realized and are included in the consolidated balance sheets in “Accounts and notes receivable - Other.”Other” or "Noncurrent receivables."
Environmental costs are capitalized if the costs extend the life of the property, increase its capacity and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and investments with maturities of three months or less at the time of purchase.
Financial Instruments
The Company calculates the fair value of financial instruments using quoted market prices when available. When quoted market prices are not available for financial instruments, the Company uses standard pricing models with market-based inputs that take into account the present value of estimated future cash flows.
The Company utilizes derivatives to manage exposures to foreign currency exchange rates, commodity prices and interest rate risk. The fair values of all derivatives are recognized as assets or liabilities at the balance sheet date. Changes in the fair values of these instruments are reported in income or AOCL, depending on the use of the derivative and whether the Company has elected hedge accounting treatment.
Gains and losses on derivatives that are designated and qualify as cash flow hedging instruments are recorded in AOCL until the underlying transactions are recognized in income. Gains and losses on derivative and non-derivative instruments used as hedges of the Company’s net investment in foreign operations are recorded in AOCL as part of the cumulative translation adjustment. Prior to the adoption of Accounting Standards Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" in 2018, the ineffective portions of hedges, if any, were recognized in income immediately. See Note 2 for additional information.
Gains and losses on derivatives designated and qualifying as fair value hedging instruments, as well as the offsetting losses and gains on the hedged items, are reported in income in the same accounting period. Derivatives not designated as hedging instruments are marked-to-market at the end of each accounting period with the results included in income.
Inventories
Inventories are stated at the lower of cost or net realizable value. The method of determining cost for each subsidiary varies among last-in, first-out (“LIFO”); first-in, first-out (“FIFO”); and average cost, and is used consistently from year to year. At December 31, 2018,2020, approximately 2430 percent, 7058 percent and 612 percent of the Company's inventories were accounted for under the LIFO, FIFO and average cost methods, respectively. At December 31, 2017,2019, approximately 2432 percent, 6758 percent and 910 percent of the Company's inventories were accounted for under the LIFO, FIFO and average cost methods, respectively.
The Company routinely exchanges and swaps raw materials and finished goods with other companies to reduce delivery time, freight and other transportation costs. These transactions are treated as non-monetary exchanges and are valued at cost.
Property
Land, buildings and equipment including property under capital lease agreements, are carried at cost less accumulated depreciation.depreciation or amortization. Property under finance lease agreements is carried at the present value of lease payments over the lease term less accumulated amortization. Depreciation is based on the estimated service lives of depreciable assets and is calculated using the straight-line method, unless the asset was capitalized before 1997 when the declining balance method was used.method. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.
Impairment and Disposal of Long-Lived Assets
The Company evaluates long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value based on bids received from third parties or a discounted cash flow analysis based on market participant assumptions.
Long-lived assets to be disposed of by sale, if material, are classified as held for sale and reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of other than by sale are classified as held and used until they are disposed of and reported at the lower of carrying amount or fair value, and depreciation is recognized over the remaining useful life of the assets.
Goodwill and Other Intangible Assets
The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the reporting unit level annually in the fourth quarter, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial qualitative assessment identifies that it is more likely than not that the fair value of a reporting unit is less than its carrying value, additional quantitative testing is performed. The Company may also elect to skip the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, an impairment charge is recognized based on the difference between the reporting unit's carrying value and its fair value. The Company primarily utilizes a discounted cash flow methodology to calculate the fair value of its reporting units.
Finite-lived intangible assets such as purchased customer lists, developed technology, patents,customer-related, trademarks, tradenames and software, are amortized over their estimated useful lives, generally on a straight-line basis for periods ranging primarily from 3 to 20 years. Indefinite-lived intangible assets are reviewed for impairment or obsolescence annually, or more frequently when events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows.
Asset Retirement Obligations
The Company records asset retirement obligations as incurred and reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. The fair values of obligations are recorded as liabilities on a discounted basis and are accreted over time for the change in present value. Costs associated with the liabilities are capitalized and amortized over the estimated remaining useful life of the asset, generally for periods of 10 years or less.
Investments
Investments in debt securities, primarily held by the Company’sCompany's insurance operations, are classified as trading, available-for-sale or held-to-maturity. Investments classified as trading are reported at fair value with unrealized gains and losses related to mark-to-market adjustments included in income. Those classified as available-for-sale are reported at fair value with unrealized gains and losses recorded in AOCL. Those classified as held-to-maturity are recorded at amortized cost. The cost of investments sold is determined by FIFO or specific identification.
Investments in equity securities primarily held by the Company’s insurance operations, with a readily determinable fair value are reported at fair value with unrealized gains and losses related to mark-to-market adjustments included in income. Equity securities without a readily determinable fair value are accounted for at cost, adjusted for impairments and observable price changes in orderly transactions.
The Company routinely reviews its investments for declines in fair value below the cost basis. When events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the security is written down, to fair value, establishing a new cost basis.
Leases
The Company determines whether a contract contains a lease at contract inception. A contract contains a lease if there is an identified asset and the Company has the right to control the asset.
Operating lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses the incremental borrowing rate in determining the present value of lease payments, unless the implicit rate is readily determinable. If lease terms include options to extend or terminate the lease, the ROU asset and lease liability are measured based on the reasonably certain decision. Leases with a term of 12 months or less at the commencement date are not recognized on the balance sheet and are expensed as incurred.
The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component for nearly all classes of leased assets for which the Company is the lessee. Additionally, for certain equipment leases, the portfolio approach is applied to account for the operating lease ROU assets and lease liabilities. In the consolidated statements of income, lease expense for operating lease payments is recognized on a straight-line basis over the lease term. For finance leases, interest expense is recognized on the lease liability and the ROU asset is amortized over the lease term.
Some leasing arrangements require variable payments that are dependent upon usage or output, or may vary for other reasons, such as insurance or tax payments. Variable lease payments are recognized as incurred and are not presented as part of the ROU asset or lease liability. See Note 17 for additional information.
Revenue
Effective with the January 1, 2018 adoption of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," and the associated ASUs (collectively, "Topic 606"), theThe 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.
Revenue related to the Company's insurance operations includes third-party insurance premiums, which are earned over the terms of the related insurance policies and reinsurance contracts.
In periods prior to the adoption of Topic 606, the Company's accounting policy was to recognize revenue when it was realized or realizable, and the earnings process was complete. Revenue for product sales was recognized as risk and title to the product transferred to the customer, which usually occurred at the time shipment was made. As such, title to the product passed when the product was delivered to the freight carrier. The Company’s standard terms of delivery were included in its contracts of sale, order confirmation documents and invoices. Revenue related to the initial licensing of patent and technology was recognized when earned; revenue related to running royalties was recognized according to licensee production levels.
Severance Costs
The Company routinely reviews its operations around the world in an effort to ensure competitiveness across its businesses and geographic regions. When the reviews result in a workforce reduction related to the shutdown of facilities or other optimization activities, severance benefits are provided to employees primarily under Dow’sthe Company’s ongoing benefit arrangements. These severance costs are accrued once management commits to a plan of termination and it becomes probable that employees will be entitled to benefits at amounts that can be reasonably estimated.
Integration and Separation Costs
The Company classifies expenses related to the Merger and separation and the ownership restructure of Dow Silicones as "Integration and separation costs" in the consolidated statements of income. Merger-relatedMerger and separation related costs include: costs incurred to prepare for and close the Merger, post-Merger integration expenses, and costs incurred to prepare for the separation of AgCo and SpecCo and costs related to the agriculture business, materials science business and specialty products business.integration of ECP. The Dow Silicones-related costs include costsintegration expenses incurred to prepare for andafter the close of the ownership restructure, as well as integration expenses. Theserestructure. Integration and separation costs primarily consist of financial advisor,adviser, information technology, legal, accounting, consulting and other professional advisory fees associated with preparation and execution of these activities. Integration and separation costs related to the Dow Silicones ownership restructure were completed as of May 31, 2018. Integration and separation costs related to the Merger and separation were completed as of December 31, 2020.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted tax rates. The effect of a change in tax rates on deferred tax assets or liabilities is recognized in income in the period that includes the enactment date. The Company uses the portfolio approach for releasing income tax effects from AOCL.
Effective with the Merger, the CompanyTDCC and Historical DuPont arewere subsidiaries of DowDuPont. The Company isPrior to the separation, TDCC was included in DowDuPont's consolidated tax groups and related income tax returns within certain jurisdictions. The Company will continue to recordrecorded a separate tax liability for its share of the taxable income and tax attributes and obligations on DowDuPont’s consolidated income tax returns following a formula consistent with the economic sharing of tax attributes and obligations. DowThe Company and Historical DuPont computecomputed the amount due to DowDuPont for their share of taxable income and tax attributes and obligations on DowDuPont’s consolidated tax return. The amounts reported as income tax payable or receivable represent the Company’s payment obligation (or refundable amount) to DowDuPont based on a theoretical tax liability calculated based on the methodologies agreed, elected or required in each combined or consolidated filing jurisdiction. Since April 1, 2019, the Company no longer has consolidated income tax return filings with Historical DuPont entities.
The Company recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company accrues for other tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. The current portion of uncertain income tax positions is included in “Income taxes payable” and the long-term portion is included in “Other noncurrent obligations” in the consolidated balance sheets.
Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.
See Note 9 for further information relating toEarnings per Common Share
The calculation of earnings per common share is based on the enactmentweighted-average number of the Tax Cuts and Jobs Act ("Company's common shares outstanding for the applicable period. The Act").calculation of diluted earnings per common share reflects the effect of all potential common shares that were outstanding during the respective periods, unless the effect of doing so is antidilutive.
Changes to Prior Period Consolidated Financial StatementsAdoption of Accounting Standards
In the first quarter of 2018,2019
Effective January 1, 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02, “Leases (Topic 842),” and the associated ASUs (collectively, "Topic 842") and added the accounting policy on leases discussed in the section above. Adoption of the new standard resulted in the recording of operating lease ROU assets and lease liabilities of $2.3 billion at January 1, 2019. The net impact to “Retained earnings” was an increase of $32 million and was primarily a result of the recognition of a deferred gain associated with a prior sale-leaseback transaction. The impact is reflected in the "Adoption of accounting standards that required retrospective application. The Company updatedstandards" line in the consolidated statements of income as a resultequity of adopting ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costboth Dow Inc. 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."TDCC. See Note 217 for additional information oninformation.
In addition, the ASUs. Inconsolidated financial statements reflect the third quarter of 2018, the U.S. Securities and Exchange Commission's ("SEC") Officeimpact of the Chief Accountant provided additional guidance relatedadoption of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," and the associated ASUs (collectively, "Topic 606") at January 1, 2019 by certain nonconsolidated affiliates of the Company, which were subsequently distributed as part of the separation from DowDuPont. The net impact was reflected in assets and liabilities of discontinued operations with a corresponding reduction to ASU 2016-15 that indicated an entity must evaluate daily transaction activity to calculate"Retained earnings" of $183 million in the valueconsolidated balance sheets at January 1, 2019. The impact is reflected in the "Adoption of cash received from beneficial interestsaccounting standards" line in conduits, resulting in additional retrospective updates to the consolidated statements of cash flows.equity of both Dow Inc. and TDCC.
2018
Changes to the consolidated financial statements as a result of the retrospective application of the new accounting standards are summarized as follows:
|
| | | | | | | | | | | | |
| Summary of Changes to the Consolidated Statements of Income | 2017 | 2016 |
| In millions | As Filed | Updated 1 | As Filed | Updated 1 |
| Cost of sales | $ | 44,308 |
| $ | 43,612 |
| $ | 37,640 |
| $ | 37,668 |
|
| Research and development expenses | $ | 1,637 |
| $ | 1,648 |
| $ | 1,584 |
| $ | 1,593 |
|
| Selling, general and administrative expenses | $ | 2,917 |
| $ | 2,920 |
| $ | 2,956 |
| $ | 2,953 |
|
| Sundry income (expense) - net | $ | 877 |
| $ | 195 |
| $ | 1,452 |
| $ | 1,486 |
|
| |
1. | Reflects changes resulting from theThe adoption of ASU 2017-07. See Note 2 for additional information. |
|
| | | | | | | | | | | | |
| Summary of Changes to the Consolidated Statements of Cash Flows | 2017 | 2016 |
| In millions | As Filed | Updated 1 | As Filed | Updated 1 |
| Operating Activities | | | | |
| Accounts and notes receivable | $ | (4,734 | ) | $ | (11,927 | ) | $ | (1,539 | ) | $ | (8,833 | ) |
| Proceeds from interests in trade accounts receivable conduits | $ | 2,269 |
| $ | — |
| $ | 1,257 |
| $ | — |
|
| Other assets and liabilities, net | $ | (104 | ) | $ | (102 | ) | $ | (717 | ) | $ | (723 | ) |
| Cash provided by (used for) operating activities | $ | 4,502 |
| $ | (4,958 | ) | $ | 5,600 |
| $ | (2,957 | ) |
| Investing Activities | | | | |
| Payment into escrow account | $ | (130 | ) | $ | — |
| $ | (835 | ) | $ | — |
|
| Distribution from escrow account | $ | 130 |
| $ | — |
| $ | 835 |
| $ | — |
|
| Acquisitions of property and businesses, net of cash acquired | $ | 16 |
| $ | 47 |
| $ | (187 | ) | $ | (187 | ) |
| Cash acquired in step acquisition of nonconsolidated affiliate | $ | — |
| $ | — |
| $ | 1,050 |
| $ | 1,070 |
|
| Proceeds from interests in trade accounts receivable conduits | $ | — |
| $ | 9,462 |
| $ | — |
| $ | 8,551 |
|
| Cash provided by (used for) investing activities | $ | (1,941 | ) | $ | 7,552 |
| $ | (3,479 | ) | $ | 5,092 |
|
| Financing Activities | | | | |
| Other financing activities, net | $ | (4 | ) | $ | (35 | ) | $ | (2 | ) | $ | (2 | ) |
| Cash used for financing activities | $ | (3,300 | ) | $ | (3,331 | ) | $ | (4,014 | ) | $ | (4,014 | ) |
| Summary | | | | |
| Decrease in cash, cash equivalents and restricted cash | $ | (419 | ) | $ | (417 | ) | $ | (1,970 | ) | $ | (1,956 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | $ | 6,607 |
| $ | 6,624 |
| $ | 8,577 |
| $ | 8,580 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 6,188 |
| $ | 6,207 |
| $ | 6,607 |
| $ | 6,624 |
|
| |
1. | Reflects the adoption of ASU 2016-15 and ASU 2016-18. In connection with the review and implementation of ASU 2016-15, the Company also changed the value of “Proceeds from interests in trade accounts receivable conduits” due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits, including additional guidance from the SEC's Office of the Chief Accountant issued in the third quarter of 2018. |
Opening Balance Sheet Impact of Accounting Standards Adoption
In the first quarter of 2018, the Company adopted Topic 606, ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" and ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." See Note 2 for additional information 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 summarizedInventory" in the following table:
|
| | | | | | | | | | | | | | | |
| Summary of Impacts to the Consolidated Balance Sheet | Dec 31, 2017 | Adjustments due to: | Jan 1, 2018 |
| In millions | As Filed | Topic 606 | ASU 2016-01 | ASU 2016-16 | Updated |
| Assets | | | | | |
| Inventories | $ | 8,376 |
| $ | (11 | ) | $ | — |
| $ | — |
| $ | 8,365 |
|
| Other current assets | $ | 627 |
| $ | 29 |
| $ | — |
| $ | 31 |
| $ | 687 |
|
| Total current assets | $ | 27,244 |
| $ | 18 |
| $ | — |
| $ | 31 |
| $ | 27,293 |
|
| Deferred income tax assets | $ | 1,722 |
| $ | 25 |
| $ | — |
| $ | 10 |
| $ | 1,757 |
|
| Deferred charges and other assets | $ | 829 |
| $ | 43 |
| $ | — |
| $ | — |
| $ | 872 |
|
| Total other assets | $ | 22,038 |
| $ | 68 |
| $ | — |
| $ | 10 |
| $ | 22,116 |
|
| Total Assets | $ | 79,940 |
| $ | 86 |
| $ | — |
| $ | 41 |
| $ | 80,067 |
|
| Liabilities | | | | | |
| Accounts payable - Other | $ | 3,062 |
| $ | 10 |
| $ | — |
| $ | — |
| $ | 3,072 |
|
| Income taxes payable | $ | 694 |
| $ | (2 | ) | $ | — |
| $ | — |
| $ | 692 |
|
| Accrued and other current liabilities | $ | 4,025 |
| $ | 50 |
| $ | — |
| $ | — |
| $ | 4,075 |
|
| Total current liabilities | $ | 14,377 |
| $ | 58 |
| $ | — |
| $ | — |
| $ | 14,435 |
|
| Other noncurrent obligations | $ | 5,994 |
| $ | 117 |
| $ | — |
| $ | — |
| $ | 6,111 |
|
| Total other noncurrent liabilities | $ | 18,789 |
| $ | 117 |
| $ | — |
| $ | — |
| $ | 18,906 |
|
| Stockholders' Equity | | | | | |
| Retained earnings | $ | 28,050 |
| $ | (89 | ) | $ | (20 | ) | $ | 41 |
| $ | 27,982 |
|
| Accumulated other comprehensive loss | $ | (8,591 | ) | $ | — |
| $ | 20 |
| $ | — |
| $ | (8,571 | ) |
| The Dow Chemical Company's stockholders' equity | $ | 25,823 |
| $ | (89 | ) | $ | — |
| $ | 41 |
| $ | 25,775 |
|
| Total equity | $ | 27,009 |
| $ | (89 | ) | $ | — |
| $ | 41 |
| $ | 26,961 |
|
| Total Liabilities and Equity | $ | 79,940 |
| $ | 86 |
| $ | — |
| $ | 41 |
| $ | 80,067 |
|
The most significant changes asfirst quarter of 2018 resulted in a resultnet decrease of adopting Topic 606 relate$68 million to the Company's contract liabilities which include payments received in advance"Retained earnings" and a decrease of performance. Contract liabilities, which are included in "Accrued and other current liabilities" and "Other noncurrent obligations"$20 million to AOCL in the consolidated balance sheets, increased as certain performance obligations, which were previously recognized over time and related to the licensingstatements of certain rights to patents and technology, as well as other performance obligations, are now recognizedequity at a point in time as none of the three criteria for 'over time' recognition under Topic 606 are met.
January 1, 2018. In the second quarter of 2018, the Company early adopted ASU 2018-02. This2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02")." The adoption of this standard was adopted on April 1, 2018, and resulted in a $1,057 million increase to retained earnings"Retained earnings" due to the reclassification from accumulated other comprehensive loss. The reclassification was primarily related to the changeAOCL in the federal corporate tax rate and the effectconsolidated statements of equity at April 1, 2018. The Act on the Company's pension plans, derivative instruments, available-for-sale securities and cumulative translation adjustments. This reclassification isimpacts are reflected in the "Adoption of accounting standards" line in the consolidated statements of equity. See Note 2 for additional information.
Change in Financial Statement Presentation
Consolidated Balance Sheets
Current Period Impact of Topic 606
The following table summarizesIn 2020, the effects of adopting Topic 606 onCompany elected to reclassify "Marketable securities" to "Other current assets" in the Company's consolidated balance sheets which was applied prospectivelyand, as a result, the prior period amounts have been reclassified to contracts not completed at January 1, 2018. The effect of adopting Topic 606 did not have a material impact onconform to current year presentation. Changes made to the consolidated statements of income and the consolidated statements of cash flows.balance sheets were as follows:
| | | | | | | | | | | | | | |
| Changes to the Consolidated Balance Sheets | Dec 31, 2019 |
| Dow Inc. | TDCC |
| In millions | As Filed | Updated | As Filed | Updated |
| Marketable securities | $ | 21 | $ | 0 | $ | 21 | $ | 0 |
| Other current assets | $ | 658 | $ | 679 | $ | 571 | $ | 592 |
|
| | | | | | | | | |
Summary of Impacts to the Consolidated Balance Sheets
| As Reported at Dec 31, 2018 | Adjustments | Balance at Dec 31, 2018 Excluding Adoption of Topic 606 |
| In millions |
| Assets | | | |
| Inventories | $ | 9,260 |
| $ | 6 |
| $ | 9,266 |
|
| Other current assets | $ | 852 |
| $ | (16 | ) | $ | 836 |
|
| Total current assets | $ | 25,263 |
| $ | (10 | ) | $ | 25,253 |
|
| Deferred income tax assets | $ | 2,031 |
| $ | (26 | ) | $ | 2,005 |
|
| Deferred charges and other assets | $ | 796 |
| $ | (43 | ) | $ | 753 |
|
| Total other assets | $ | 21,588 |
| $ | (69 | ) | $ | 21,519 |
|
| Total Assets | $ | 77,378 |
| $ | (79 | ) | $ | 77,299 |
|
| Liabilities | | | |
| Accounts payable - Other | $ | 3,330 |
| $ | (10 | ) | $ | 3,320 |
|
| Income taxes payable | $ | 791 |
| $ | 2 |
| $ | 793 |
|
| Accrued and other current liabilities | $ | 3,611 |
| $ | (15 | ) | $ | 3,596 |
|
| Total current liabilities | $ | 13,755 |
| $ | (23 | ) | $ | 13,732 |
|
| Other noncurrent obligations | $ | 5,368 |
| $ | (140 | ) | $ | 5,228 |
|
| Total other noncurrent liabilities | $ | 16,400 |
| $ | (140 | ) | $ | 16,260 |
|
| Stockholders' Equity | | | |
| Retained earnings | $ | 29,808 |
| $ | 84 |
| $ | 29,892 |
|
| The Dow Chemical Company's stockholders' equity | $ | 26,831 |
| $ | 84 |
| $ | 26,915 |
|
| Total equity | $ | 27,969 |
| $ | 84 |
| $ | 28,053 |
|
| Total Liabilities and Equity | $ | 77,378 |
| $ | (79 | ) | $ | 77,299 |
|
TDCC Dividends
Prior to the Merger, the Company declared dividends of $1.38 per share in 2017 ($1.84 per share in 2016). Effective with the Merger, DowTDCC no longer hashad publicly traded common stock. Dow'sTDCC's common shares arewere owned solely by its parent company, DowDuPont. As a result, the Company’sDowDuPont, prior to separation, and TDCC's Board of Directors ("Board") determined whether or not there would be a dividend distribution to DowDuPont. Effective with the separation from DowDuPont, TDCC became a wholly owned subsidiary of Dow Inc. and TDCC's Board determines whether or not there will be a dividend distribution to DowDuPont.Dow Inc. See Note 24Notes 18 and 25 for additional information.
NOTE 2 – RECENT ACCOUNTING GUIDANCE
In the fourth quarter of 2018, the Company early adopted ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans," which, as part of the FinancialRecently Adopted Accounting Standards Board ("FASB") disclosure framework project, removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of certain disclosures and adds new disclosure requirements that are considered relevant for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The new standard is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The new guidance should be applied on a retrospective basis for all periods presented. See Note 19 for updated disclosures for defined benefit pension and other postretirement benefit plans.
In the second quarter of 2018, the Company early adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends the hedge accounting recognition and presentation under Topic 815, with the objectives of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities and simplifying the application of hedge accounting by preparers. The new standard expands the strategies eligible for hedge accounting, relaxes the timing requirements of hedge documentation and effectiveness assessments, and permits, in certain cases, the use of qualitative assessments on an ongoing basis to assess hedge effectiveness. The new guidance also requires new disclosures and presentation. The new standard is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. Early adoption is permitted in any interim or annual period after issuance of the ASU. Entities must adopt the new guidance by applying a modified retrospective approach to hedging relationships existing as of the adoption date. The adoption of the new guidance did not have a material impact on the consolidated financial statements.
In the second quarter of 2018, the Company early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from The Act, which was enacted on December 22, 2017, and requires certain disclosures about stranded tax effects. An entity has the option of applying the new guidance at the beginning of the period of adoption or retrospectively to each period (or periods) in which the tax effects related to items remaining in accumulated other comprehensive income are recognized. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period for reporting periods in which the financial statements have not yet been issued. The Company's adoption of the new standard was applied prospectively at the beginning of the second quarter of 2018, with a reclassification of the stranded tax effects as a result of the The Act from accumulated other comprehensive loss to retained earnings. See Note 1 for additional information.
Guidance
In the first quarter of 2018,2020, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition," and most industry specific guidance. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In 2015 and 2016, the FASB issued additional ASUs related to Topic 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance obligations, and accounting for licenses, and included other improvements and practical expedients. The new guidance was effective for annual and interim periods beginning after December 15, 2017. The Company elected to adopt the new guidance using the modified retrospective transition method for all contracts not completed as of the date of adoption. The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of the first quarter of 2018. The comparative periods have not been restated and continue to be accounted for under Topic 605. The adoption of the new guidance did not have a material impact on the consolidated financial statements. See Notes 1 and 4 for additional disclosures regarding the Company's contracts with customers as well as the impact of adopting Topic 606.
In the first quarter of 2018, the Company adopted ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company applied the amendments in the new guidance by means of a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the first quarter of 2018. The adoption of the new guidance did not have a material impact on the consolidated financial statements. See Notes 1 and 21 for additional information.
In the first quarter of 2018, the Company adopted ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statements of cash flows and addresses eight specific cash flow issues. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A key provision in the new guidance impacted the presentation of proceeds from interests in certain trade accounts receivable conduits, which were retrospectively reclassified from "Operating Activities" to "Investing Activities" in the consolidated statements of cash flows. See Note 1 for additional information.
In the first quarter of 2018, the Company adopted ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The new guidance was applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the first quarter of 2018. The adoption of this guidance did not have a material impact on the consolidated financial statements. See Note 1 for additional information.
In the first quarter of 2018, the Company adopted ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which clarifies how entities should present restricted cash and restricted cash equivalents in the statements of cash flows, and as a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statements of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The new guidance changed the presentation of restricted cash in the consolidated statements of cash flows and was implemented on a retrospective basis in the first quarter of 2018. See Note 1 for additional information.
In the first quarter of 2018, the Company adopted ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost must be presented separately from the line items that includes the service cost. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Entities were required to use a retrospective transition method to adopt the requirement for separate income statement presentation of the service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. Accordingly, in the first quarter of 2018, the Company used a retrospective transition method to reclassify net periodic benefit cost, other than the service component, from "Cost of sales," "Research and development expenses" and "Selling, general and administrative expenses" to "Sundry income (expense) - net" in the consolidated statements of income. See Note 1 for additional information.
Accounting Guidance Issued But Not Adopted at December 31, 2018
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," and associated ASUs related to Topic 842, which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognize assets and liabilities for leases, and recognition, presentation and measurement in the financial statements will depend on its classification as a finance or operating lease. In addition, the new guidance will 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 (Topic 606). 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.
The Company has a cross-functional team in place to evaluate and implement the new guidance and the Company has substantially completed the implementation of a third-party software solution to facilitate compliance with accounting and reporting requirements. The team continues to review existing lease arrangements and has collected and loaded a significant portion of the lease portfolio into the software. The Company continues to enhance accounting systems and update business processes and controls related to the new guidance for leases. Collectively, these activities are expected to enable the Company to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019.
The ASU requires a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial adoption. An entity may choose to use either (1) the effective date or (2) the beginning of the earliest comparative period presented in the financial statements at the date of initial application. The Company has elected to apply the transition requirements at the January 1, 2019, effective date rather than at the beginning of the earliest comparative period presented. This approach allows for a cumulative effect adjustment in the period of adoption, and prior periods will not be restated. In addition, the Company has elected the package of practical expedients permitted under the transition guidance, which does not require reassessment of prior conclusions related to contracts containing a lease, lease classification and initial direct lease costs. As an accounting policy election, the Company will exclude short-term leases (term of 12 months or less) from the balance sheet presentation and will account for non-lease and lease components in a contract as a single lease component for all asset classes. The Company is finalizing the evaluation of the January 1, 2019, impact and estimates a material increase of lease-related assets and liabilities, ranging from $2.4 billion to $2.8 billion in the consolidated balance sheets. The impact to the Company'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 FASBFinancial Accounting Standards Board's ("FASB") disclosure framework project to improve the effectiveness of disclosures in the notes to the financial statements. The amendments in the new guidance remove, modify and
add certain disclosure requirements related to fair value measurements covered in Topic 820, "Fair Value Measurement.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.retrospectively. The Company is currently evaluatingadoption of this guidance did not have a material impact on the impact of adopting this guidance.consolidated financial statements. See Note 23 for additional information.
In August 2018, the FASB issuedfirst quarter of 2020, the Company adopted 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 Thatthat is a Service Contract," which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Topic 350, "Intangibles - Goodwill and Other" to determine which implementation costs to capitalize as assets or expense as incurred. The Company elected to apply the standard prospectively and the adoption of this guidance did not have a material impact on the consolidated financial statements.
In the first quarter of 2020, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and the associated ASUs. The amendments replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Accordingly, companies are required to consider forward-looking information to estimate credit losses expected to occur over the estimated life of an asset, including losses that may be incurred in future periods. The amendments in the standard required application through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The adoption of this guidance did not have a material impact on the consolidated financial statements.
In the third quarter of 2020, the Company adopted ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The new standard is effective March 12, 2020 through December 31, 2022, with the adoption date dependent upon the Company’s election. The Company has elected to apply the optional expedients and exceptions provided by the new guidance as modifications are made to relevant contracts, hedging relationships and other transactions during the reference rate reform transition period. As the amendments are intended to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting, the application of this guidance has not and will not have a material impact on the consolidated financial statements.
Accounting Guidance Issued But Not Adopted at December 31, 2020
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, "Income Taxes" and also improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.2020. Early adoption is permitted, and an entity can electwith the amendments to applybe applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company will adopt the new guidance in the first quarter of 2021 and the adoption of this guidance is not expected to have a material impact on a prospective or retrospective basis. The Company is currently evaluating the impact of adopting this guidance.consolidated financial statements.
NOTE 3 – MERGER WITH DUPONTSEPARATION FROM DOWDUPONT
Effective August 31, 2017, DowTDCC and Historical DuPont completed the merger of equals transaction contemplated by the Agreement and Plan of Merger dated as of December 11, 2015, as amended on March 31, 2017 (the "Merger Agreement"),Agreement, by and among the Company,TDCC, Historical DuPont, DowDuPont, Diamond Merger Sub, Inc. and Orion Merger Sub, Inc. Pursuant to the Merger Agreement, (i) Diamond Merger Sub, Inc. was merged with and into Dow,TDCC, with DowTDCC surviving the merger as a subsidiary of DowDuPont (the "Diamond Merger") and (ii) Orion Merger Sub, Inc. was merged with and into Historical DuPont, with Historical DuPont surviving the merger as a subsidiary of DowDuPont (the "Orion Merger" and, together with the Diamond Merger, the "Mergers"). Following the consummation of the Mergers, each of DowTDCC and Historical DuPont became subsidiaries of DowDuPont (collectively, the "Merger"). FollowingDowDuPont. Subsequent to the Merger, DowTDCC and Historical DuPont intend to pursue, subject to certain customary conditions, including, among others, the effectiveness of registration statements filed with the SEC and approval by the board of directors of DowDuPont ("DowDuPont Board"), the separation of the combined company's agriculture, materials science and specialty products businesses through one or more tax-efficient transactions ("Intended Business Separations"). Additional information about the Merger is included in Current Reports on Form 8-K filed with the SEC on December 11, 2015, March 31, 2017, August 4, 2017 and September 1, 2017.
Upon completion of the Diamond 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 Diamond 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"). As provided in the Merger Agreement, at the effective time of the Mergers, (i) all options, deferred stock, performance deferred stock and other equity awards relating to shares of Dow Common Stock outstanding immediately prior to the effective time of the Mergers were generally automatically converted into options and deferred stock and other equity awards relating to shares of DowDuPont Common Stock after giving effect to appropriate adjustments to reflect the Mergers and otherwise generally on the same terms and conditions as applied under the applicable plans and award agreements immediately prior to the effective time of the Mergers. See Note 20 for additional information on the conversion of the equity awards.
In the third quarter of 2017, as a result of the Diamond Merger and the Merger, the Company recorded a reduction in "Treasury stock" of $935 million, a reduction in "Common stock" of $3,107 million and an increase in "Additional paid in capital" of $2,172 million. At September 1, 2017, the Company has 100 shares of common stock issued and outstanding, par value $0.01 per share, owned solely by its parent, DowDuPont.
On August 31, 2017, following the Diamond Merger, Dow requested that the New York Stock Exchange ("NYSE") withdraw the shares of Dow Common Stock from listing on the NYSE and filed a Form 25 with the SEC to report that the shares of Dow Common Stock are no longer listed on the NYSE. The shares of Dow Common Stock were suspended from trading on the NYSE prior to the open of trading on September 1, 2017.
As a condition of the regulatory approval of the Merger, Dow and DuPont agreed to certain closing conditions, which are as follows:
Dow divested its global Ethylene Acrylic Acid copolymers and ionomers business ("EAA Business") to SK Global Chemical Co., Ltd., on September 1, 2017, as part of a divestiture commitment given to the European Commission ("EC") in connection with the EC's conditional approval of the Merger granted on March 27, 2017. See Note 6 for additional information on this transaction.
DuPont divested its Cereal Broadleaf Herbicides and Chewing Insecticides portfolios as well as its Crop Protection research and development ("R&D") pipeline and organization (excluding seed treatment, nematicides, late-stage R&D programs and certain personnel needed to support marketed products and R&D programs that will remain with DuPont) (collectively, the "DuPont Divested Assets") to FMC Corporation ("FMC") on November 1, 2017, as part of the EC's conditional approval granted on March 27, 2017. Also on November 1, 2017, DuPont completed its acquisition of FMC's Health and Nutrition business, excluding its Omega-3 products.
On May 2, 2017, Dow and DuPont announced that China's Ministry of Commerce ("MOFCOM") granted conditional regulatory approval for the companies' proposed merger of equals which included commitments already made to the EC including DuPont's divestiture of the DuPont Divested Assets and Dow's divestiture of the EAA Business. In addition, Dow and DuPont made commitments related to the supply and distribution in China of certain herbicide and insecticide ingredients and formulations for rice crops for five years after the closing of the Merger.
Dow divested a select portion of Dow AgroSciences' corn seed business in Brazil ("DAS Divested Ag Business") to CITIC Agri Fund on November 30, 2017. The divestiture was part of the commitment given to Brazil's Administrative Council for Economic Defense ("CADE") in connection with the CADE's conditional approval of the Merger granted on May 17, 2017, which was incremental to commitments already made to the EC, China and regulatory agencies in other jurisdictions. See Note 6 for additional information on this transaction.
On June 15, 2017, Dow and DuPont announced that a proposed agreement had been reached with the Antitrust Division of the United States Department of Justice that permitted the companies to proceed with the proposed merger of equals transaction. The proposed agreement was consistent with commitments already made to the EC.
Intended Business Separations
In furtherance of the Intended Business Separations, Dow and DuPont are engaged in a series of internal reorganization and realignment steps (the “Internal Reorganization”) to realign their businesses into three subgroups: agriculture, materials science and specialty products. DowDuPont has alsoDow Inc. was formed twoas a wholly owned subsidiaries: Dow Holdings Inc. (“DHI”),subsidiary of DowDuPont to serve as athe holding company for itsthe materials science business, and Corteva, Inc. (“Corteva”), to serve as a holding company for its agriculture business. Following the separation and distribution of DHI, which is targeted to occur by
On April 1, 2019, DowDuPont completed the previously announced separation of its materials science business. The separation was effected by way of a pro rata distribution of all of the then-issued and outstanding shares of Dow Inc. common stock to DowDuPont stockholders of record as of the remainingclose of business, Eastern Time, on March 21, 2019 (the “Record Date”). The shareholders of record of DowDuPont received one share of Dow Inc. common stock, par value $0.01 per share, for every three shares of DowDuPont common stock, par value $0.01 per share, held as of the Record Date ("Distribution Ratio"). No fractional shares of Dow Inc. common stock were issued. Instead, cash in lieu of any fractional shares was paid to DowDuPont registered shareholders. The number of shares of Dow Inc. common stock issued on April 1, 2019 was 748.8 million shares. Dow Inc. is now an independent, publicly traded company whichand Dow Inc. common stock is referredlisted on the NYSE under the symbol “DOW.” Dow Inc. common stock began regular-way trading on April 2, 2019, the first day following the distribution.
Effective April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. As of the effective date and time of the distribution, DowDuPont did not beneficially own any equity interest in Dow and no longer consolidated Dow and its consolidated subsidiaries into its financial results. Beginning in the second quarter of 2019, Dow’s consolidated financial results reflect the results of Dow Inc. and its consolidated subsidiaries - that is, TDCC after giving effect to hereinthe distribution of AgCo and SpecCo and the receipt of ECP. The consolidated financial results of Dow for periods prior to April 1, 2019, reflect the distribution of AgCo and SpecCo as “Newdiscontinued operations for each period presented as well as reflect the receipt of ECP as a common control transaction from the closing of the Merger on August 31, 2017.
On April 1, 2019, Dow Inc. received a cash contribution of $2,024 million from DowDuPont as part of the internal reorganization and business realignment steps between Dow Inc., TDCC and DowDuPont. Dow Inc. recognized a reduction to "Retained earnings" of $14,806 million in 2019 as a result of the cash contribution, the distribution of AgCo and SpecCo, and other separation related adjustments. TDCC recognized a reduction to "Retained earnings" of $16,009 million in 2019 as a result of the distribution of AgCo and SpecCo.
Receipt of ECP
As the receipt of ECP was accounted for as a transfer between entities under common control, the consolidated financial statements have been retrospectively adjusted to reflect the receipt of ECP from the closing of the Merger on August 31, 2017. All intercompany transactions have been eliminated in consolidation.
Distribution of AgCo and SpecCo
Upon distribution, the Company retrospectively adjusted the previously issued consolidated financial statements and presented AgCo and SpecCo as discontinued operations based on the guidance in ASC 205-20 “Discontinued Operations” (“ASC 205-20”). The results of operations of AgCo and SpecCo are presented as discontinued operations in the consolidated statements of income and are summarized in the following table:
| | | | | | | | |
| Results of Operations of AgCo and SpecCo | 2019 1 | 2018 |
| In millions |
| Net sales | $ | 2,953 | | $ | 12,187 | |
| Cost of sales | 1,804 | | 7,668 | |
| Research and development expenses | 175 | | 761 | |
| Selling, general and administrative expenses | 262 | | 1,108 | |
| Amortization of intangibles | 61 | | 249 | |
| Restructuring and asset related charges - net | 78 | | 411 | |
| | |
| Equity in earnings of nonconsolidated affiliates | 28 | | 400 | |
| Sundry income (expense) - net | (18) | | (13) | |
| Interest income | 3 | | 26 | |
| Interest expense and amortization of debt discount | 7 | | 56 | |
| Income from discontinued operations before income taxes | $ | 579 | | $ | 2,347 | |
| Provision for income taxes | 134 | | 512 | |
| Income from discontinued operations, net of tax | $ | 445 | | $ | 1,835 | |
1. Results through March 31, 2019.
Agreements Related to the Separation and Distribution
In connection with the separation, Dow Inc. entered into certain agreements with DuPont” will continue and/or Corteva, Inc. ("Corteva"), including the following: Separation and Distribution Agreement, Tax Matters Agreement and Employee Matters Agreement (collectively, the "Agreements"). In addition to holdestablishing the agricultureterms of the separation, the Agreements provide a framework for Dow’s interaction with DuPont and specialty products businesses. New DuPont is then targeted to completeCorteva after the separation and distributionalso provide for the allocation among Dow, DuPont and Corteva of Corteva on June 1, 2019, resultingassets, liabilities and obligations attributable to periods prior to, at and after the completion of the separation. The Agreements also contain certain indemnity and/or cross-indemnity provisions that are intended to set forth each party’s respective rights, responsibilities and obligations for matters subject to indemnification. Except in New DuPont holdingcertain instances, the specialty products businesses of DowDuPont. Following the distributions, DowDuPontparties’ indemnification obligations are uncapped. Certain indemnification obligations will be known as DuPont.
As partsubject to reduction by insurance proceeds or other third-party proceeds of the Internal Reorganization, 1)indemnified party that reduces the amount of the loss. In addition, indemnifiable losses will be subject to, in certain cases, “de minimis” threshold amounts and, in certain cases, deductible amounts.
The impacts of indemnifications and other post-separation matters relating to the Agreements are primarily reflected in the consolidated financial statements of Dow Inc. In 2019, the Company recorded pretax charges related to the Agreements of $24 million in "Integration and separation costs" and $69 million in "Sundry income (expense) - net" in the consolidated statements of income of Dow Inc., related to Corporate.
At December 31, 2020, the Company had assets of $77 million ($58 million at December 31, 2019) included in "Other current assets" and $33 million ($52 million at December 31, 2019) included in "Noncurrent receivables" and liabilities of $412 million ($352 million at December 31, 2019) included in "Accrued and other current liabilities" and $46 million ($96 million at December 31, 2019) included in "Other noncurrent obligations" in the consolidated balance sheets of Dow Inc. related to the Agreements. Any adjustments to these assets and liabilities in subsequent periods will be recorded in Dow Inc.'s results of operations.
In addition, the Company deferred approximately $400 million of the materials science businesscash distribution received from DowDuPont at separation and recorded an associated liability with an offset to "Retained earnings" in the consolidated balance sheets of Dow Inc. At December 31, 2020, $103 million ($130 million at December 31, 2019) of this liability was recorded in "Accrued and other current liabilities" and $96 million ($270 million at December 31, 2019) was recorded in "Other noncurrent obligations" in the consolidated balance sheets of Dow Inc. Based on notices received in the fourth quarter of 2020, Dow Inc. reversed $177 million of the liability and the impact is reflected in the "Common control transaction" line in the consolidated statements of equity of Dow Inc. The final resolution of the remaining liability is uncertain and any subsequent adjustments to the carrying value of this liability will be transferred or conveyedreflected in equity of Dow Inc.
In 2020, Dow Inc. made net cash payments of $18 million ($215 million in 2019) related to legal entities that then will be aligned under DHI, 2) the Agreements, recorded in "Cash flows from operating activities - discontinued operations" in the Dow Inc. consolidated statements of cash flows. The Company also received $98 million in 2019 related to the Agreements, recorded in "Other assets and liabilities, net" within "Cash flows from operating activities - continuing operations" in the Dow Inc. consolidated statements of cash flows.
Continuing Involvement
The Company has certain product and service agreements with DuPont and Corteva that were considered intercompany transactions prior to the separation, but are trade transactions subsequent to the separation. These transactions have been retrospectively reclassified as trade transactions in the consolidated financial statements. Based on the Company’s assessment of the agriculturespecific factors identified in ASC Topic 205, “Presentation of Financial Statements,” the Company concluded that these agreements do not constitute significant continuing involvement in AgCo or SpecCo.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to post-Merger integration and business will be transferred or conveyedseparation activities, as well as the ownership restructure of Dow Silicones (through May 31, 2018), were $239 million in 2020, compared with $1,063 million and $1,039 million for Dow Inc. and TDCC, respectively, in 2019 and $1,179 million in 2018. Integration and separation costs related to legal entities that then will be aligned under Corteva,post-Merger integration and 3) the assets and liabilitiesbusiness separation activities were completed as of the specialty products business will be transferred or conveyed to legal entities that then will be aligned with New DuPont. Following the Internal Reorganization, DowDuPont expects to distribute DHI and Corteva through separate, pro rata U.S. federal tax-free spin-offs in which DowDuPont stockholders, at such time, would receive shares of common stock of DHI and of Corteva.December 31, 2020.
Additional information is included in the Form 10 registration statements for the separation of DowDuPont's materials science business (filed as Dow Holdings Inc.) filed with the SEC on September 7, 2018, as amended on October 19, 2018 and November 19, 2018, and the agriculture business (filed as Corteva, Inc.) filed with the SEC on October 18, 2018, as amended on December 19, 2018.
NOTE 4 – REVENUE
Revenue Recognition
The majority of the Company's revenue is derived from product sales. In 2018,2020, 99 percent of the Company's salesrevenue related to product sales (98 percent in 20172019 and 99 percent in 2016)2018). The remaining sales were primarily related to Dow'sthe Company's insurance operations and licensing of patents and technologies. As of January 1, 2018, the Company accounts for revenue in accordance with Topic 606, "Revenue from Contracts with Customers," except for revenue from Dow's insurance operations, which is accounted for in accordance with Topic 944, "Financial Services - Insurance."
Product Sales
Product sales consist of sales of the Company's products to manufacturers and distributors. The Company considers order confirmations or purchase orders, which in some cases are governed by master supply agreements, to be contracts with a customer.
Product sale contracts are generally short-term contracts where the time between order confirmation and satisfaction of all performance obligations is less than one year. However, the Company has some long-term contracts which can span multiple years.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, usually upon shipment, with payment terms typically in the range of 30 to 60 days after invoicing, depending on business and geographic region. When the Company performs shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to shipment), these are considered fulfillment activities, and accordingly, the costs are accrued when the related revenue is recognized. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. The Company elected to use the practical expedient to expense cash and non-cash sales incentives, as the amortization period for the costs to obtain the contract would have been one year or less.
Certain long-term contracts include a series of distinct goods that are delivered continuously to the customer through a pipeline (e.g., feedstocks). For these types of product sales, the Company invoices the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date. As a result, the Company recognizes revenue based on the amount billable to the customer in accordance with the right to invoice practical expedient.
The transaction price includes estimates for reductions in revenue from customer rebates and right of returns on product sales. These amounts are estimated based upon the most likely amount of consideration to which the customer will be entitled. The Company’s obligation for right of returns is limited primarily to the Seed principal product group. All estimates are based on historical experience, anticipated performance and the Company’s best judgment at the time to the extent it is probable that a significant reversal of revenue recognized will not occur. All estimates for variable consideration are reassessed periodically. The Company elected the practical expedient to not adjust the amount of consideration for the effects of a significant financing component for all instances in which the period between payment and transfer of the goods will be one year or less.
For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative standalone selling price. The standalone selling price is the observable price which depicts the price as if sold to a similar customer in similar circumstances.
Patents, Trademarks and Licenses
The Company enters into licensing arrangements in which it licenses certain rights of its patents and technology to customers. Revenue from the majority of the Company’s licenses for patents and technology is derived from sales-based royalties. The Company estimates the amount of sales-based royalties it expects to be entitled to based on historical sales to the customer. For the remaining revenue from licensing arrangements, payments are typically received from the Company’sCompany's licensees based on billing schedules established in each contract. Revenue is recognized by the Company when the performance obligation is satisfied.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. At December 31, 2018,2020, the Company had remaining performance obligations related to material rights granted to customers for contract renewal options of $102 million and unfulfilled performance obligations forof $977 million ($826 million at December 31, 2019) related to the licensing of technology of $407 million. The Companyand expects revenue to be recognized for the remaining performance obligations over the next one to sixseven years.
The remaining performance obligations are for product sales that have expected durations of one year or less, product sales of materials delivered through a pipeline for which the Company has elected the right to invoice practical expedient, or variable consideration attributable to royalties for licenses of patents and technology. The Company has received advance payments from customers related to long-term supply agreements that are deferred and recognized over the life of the contract, with remaining contract terms that range up to 2221 years. The Company will have rights to future consideration for revenue recognized when product is delivered to the customer. These payments are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets.
Disaggregation of Revenue
The CompanyDow disaggregates its revenue from contracts with customers by principal product groupoperating segment and geographic region,business, as the Company believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash flows. See Note 25 for net trade revenue by principal product groupdetails in the tables below:
| | | | | | | | | | | |
| Net Trade Sales by Segment and Business | 2020 | 2019 | 2018 |
| In millions |
| Hydrocarbons & Energy | $ | 4,271 | | $ | 5,357 | | $ | 7,587 | |
| Packaging and Specialty Plastics | 14,030 | | 14,888 | | 16,608 | |
| Packaging & Specialty Plastics | $ | 18,301 | | $ | 20,245 | | $ | 24,195 | |
| Industrial Solutions | $ | 3,929 | | $ | 4,310 | | $ | 4,812 | |
| Polyurethanes & Construction Chemicals | 8,080 | | 9,117 | | 10,615 | |
| Others | 12 | | 13 | | 20 | |
| Industrial Intermediates & Infrastructure | $ | 12,021 | | $ | 13,440 | | $ | 15,447 | |
| Coatings & Performance Monomers | $ | 3,258 | | $ | 3,517 | | $ | 3,979 | |
| Consumer Solutions | 4,693 | | 5,406 | | 5,698 | |
| Performance Materials & Coatings | $ | 7,951 | | $ | 8,923 | | $ | 9,677 | |
| Corporate | $ | 269 | | $ | 343 | | $ | 285 | |
| Total | $ | 38,542 | | $ | 42,951 | | $ | 49,604 | |
| | | | | | | | | | | |
| Net Trade Sales by Geographic Region | 2020 | 2019 | 2018 |
| In millions |
| U.S. & Canada | $ | 13,582 | | $ | 15,549 | | $ | 17,809 | |
EMEAI 1 | 12,969 | | 14,612 | | 17,406 | |
| Asia Pacific | 8,165 | | 8,676 | | 9,404 | |
| Latin America | 3,826 | | 4,114 | | 4,985 | |
| Total | $ | 38,542 | | $ | 42,951 | | $ | 49,604 | |
1.Europe, Middle East, Africa and geographic region for 2018.India.
Contract BalancesAssets and Liabilities
The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Contract liabilities include payments received in advance of performance under the contract and are realizedrecognized in revenue when the associated revenue is recognized under the contract.performance obligations are met. "Contract liabilities - current" primarily reflects deferred revenue from prepayments from customers for product to be delivered in a time period of 12 months or less. "Contract liabilities - noncurrent" includes advance payments that the Company has received from customers related to long-term supply agreements and royalty payments that are deferred and recognized over the life of the contract.
Revenue recognized in 20182020 from amounts included in contract liabilities at the beginning of the period was approximately $240 million.$145 million (approximately $145 million in 2019 and $205 million in 2018). In 2018,2020, the amount of contract assets reclassified to receivables as a result of the right to the transaction consideration becoming unconditional was approximately $12 million.$25 million (approximately $15 million in 2019). The Company did not recognize any asset impairment charges related to contract assets in 2020, 2019, or 2018.
The following table summarizes the contract balancesassets and liabilities at December 31, 20182020 and 2017:2019:
| | | | | | | | | |
| Contract Assets and Liabilities at Dec 31 | 2020 | 2019 | |
| In millions |
| Accounts and notes receivable - Trade | $ | 4,839 | | $ | 4,844 | | |
Contract assets - current 1 | $ | 58 | | $ | 41 | | |
Contract assets - noncurrent 2 | $ | 11 | | $ | 4 | | |
Contract liabilities - current 3 | $ | 349 | | $ | 193 | | |
Contract liabilities - noncurrent 4 | $ | 1,915 | | $ | 1,607 | | |
|
| | | | | | | | | |
| Contract Balances | Dec 31, 2018 | Topic 606 Adjustments Jan 1, 2018 | Dec 31, 2017 |
| In millions |
| Accounts and notes receivable - Trade | $ | 8,246 |
| $ | — |
| $ | 7,338 |
|
Contract assets - current 1 | $ | 37 |
| $ | 18 |
| $ | — |
|
Contract assets - noncurrent 2 | $ | 47 |
| $ | 43 |
| $ | — |
|
Contract liabilities - current 3 | $ | 165 |
| $ | 50 |
| $ | 117 |
|
Contract liabilities - noncurrent 4 | $ | 1,390 |
| $ | 117 |
| $ | 1,365 |
|
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. The increase from December 31, 2019 to December 31, 2020 was primarily due to advance payments from customers related to royalty agreements.
4.Included in "Other noncurrent obligations" in the consolidated balance sheets. The increase from December 31, 2019 to December 31, 2020 was due to an advance payment from a customer related to a long-term product supply agreement.
NOTE 5 – ACQUISITIONSDIVESTITURES
Ownership RestructureDivestiture of Dow SiliconesRail Infrastructure Operations and Assets
On June 1, 2016,September 30, 2020, TDCCsold its rail infrastructure operations and assets, including existing agreements to provide rail services to unrelated third parties, at six sites in the Company announced the closingU.S. & Canada to an affiliate of Watco Companies, L.L.C. for cash proceeds of $303 million, net of costs to sell and other adjustments and subject to customary post-closing adjustments. These assets are located at TDCC’s sites in Plaquemine and St. Charles, Louisiana; Freeport and Seadrift, Texas; and Fort Saskatchewan and Prentiss, Alberta, Canada. Divested operations included property with a net book value of $68 million and goodwill of $2 million ($16 million related to Packaging & Specialty Plastics and $54 million related to Corporate). TDCC retained ownership of the transaction with Corning Incorporated ("Corning"), Dow Siliconessites and HS Upstate Inc., (“Splitco”), pursuantunderlying real property where the divested operations are located. TDCC and the buyer entered into mutual long-term service agreements designed to which Corning exchanged with Dow Silicones its 50 percent equity interest in Dow Siliconesensure the continuation of rail services for 100 percentTDCC's existing operations at each site. The rail-service agreements include variable fees that have an initial term of the stock of Splitco which held Corning's historical proportional interest in the Hemlock Semiconductor Group ("HSC Group") and approximately $4.8 billion in cash. As a result, Dow Silicones, previously a 50:50 joint venture between Dow and Corning, became a wholly owned subsidiary of Dow. In connection with the ownership restructure, on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness in order to fund the contribution of cash to Splitco. See Notes 12, 15 and 23 for additional information.
At June 1, 2016, the Company's equity interest in Dow Silicones, excluding the HSC Group, was $1,968 million. This equity interest was remeasured to fair value. As a result, the Company25 years. TDCC recognized a non-taxablepretax gain of $2,445$233 million inon the second quarter of 2016, net of closing costs and other comprehensive losssale ($48 million related to the Company's interest in Dow Silicones. The gain wasPackaging & Specialty Plastics and $185 million related to Corporate), included in "Sundry income (expense) - net" in the consolidated statements of income. The Company recognized a tax benefit of $141 million on the ownership restructure in the second quarter of 2016, primarily due to the reassessment of a previously recognized deferred tax liability related to the basis difference in the Company’s investment in Dow Silicones. In addition, the fair value step-up of "Inventories" acquired was an increase of $317 million, which was expensed to "Cost of sales" over a three-month period beginning on June 1, 2016. In 2018, the Company recorded a pretax loss of $47 million for post-closing adjustments related to the Dow Silicones ownership restructure, included in "Sundry income (expense) - net" in the consolidated statements of income.
The ownership restructure resulted in the recognition of $3,229 million of "Goodwill" which was not deductible for tax purposes. Goodwill largely consisted of expected synergies resulting from the ownership restructure. Cost synergies were achieved through a combination of workforce consolidation and savings from actions such as harmonizing energy contracts at large sites, optimizing warehouse and logistics footprints, implementing materials and maintenance best practices, combining information technology service structures and leveraging existing R&D knowledge management systems.
The Company evaluated the disclosure requirements under ASC 805 "Business Combinations" and determined the ownership restructure was not considered a material business combination for purposes of disclosing the revenue and earnings of Dow Silicones since the date of the ownership restructure as well as supplemental pro forma information.
Beginning in June 2016, the results of Dow Silicones, excluding the HSC Group, were fully consolidated in the Company’s consolidated statements of income. Prior to June 2016, the Company’s 50 percent share of Dow Silicones’ results of operations was reported in “Equity in earnings of nonconsolidated affiliates” in the consolidated statements of income. The results of the HSC Group continue to be treated as an equity method investment and reported as “Equity in earnings of nonconsolidated affiliates” in the consolidated statements of income.
NOTE 6 – DIVESTITURES
Merger Remedy - Divestiture of the Global Ethylene Acrylic Acid Copolymers and Ionomers Business
On February 2, 2017, as a condition of regulatory approval of the Merger, Dow announced it would divest the EAA Business to SK Global Chemical Co., Ltd. The divestiture included production assets located in Freeport, Texas, and Tarragona, Spain, along with associated intellectual property and product trademarks. Under terms of the purchase agreement, SK Global Chemical Co., Ltd will honor certain customer and supplier contracts and other agreements. On September 1, 2017, the sale was completed for $296 million, net of working capital adjustments, costs to sell and other adjustments, with proceeds subject to customary post-closing adjustments. As a result, in 2017, the Company recognized a pretax gain of $227 million on the sale, included in "Sundry income (expense) - net" in the consolidated statements of income.
Merger Remedy - Divestiture of a Portion of Dow AgroSciences' Brazil Corn Seed Business
On July 11, 2017, as a condition of regulatory approval of the Merger, Dow announced it had entered into a definitive agreement with CITIC Agri Fund to sell a select portion of Dow AgroSciences' corn seed business in Brazil, including some seed processing plants and seed research centers, a copy of Dow AgroSciences' Brazilian corn germplasm bank, the MORGAN™ brand and a license for the use of the DOW SEMENTES™ brand for a certain period of time. On November 30, 2017, the sale was completed for $1,093 million, net of working capital adjustments, costs to sell and other adjustments, with proceeds subject to customary post-closing adjustments. As a result, in 2017, the Company recognized a pretax gain of $635 million on the sale, included in "Sundry income (expense) - net" in the consolidated statements of income.
The Company evaluated the divestiture of the EAA Businessrail infrastructure operations and assets 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. As a result, the divestiture is not reported as discontinued operations.
Divestiture of Marine and Terminal Operations and Assets
On December 1, 2020, TDCC sold certain U.S. Gulf Coast marine and terminal operations and assets, including existing agreements to provide marine and terminal services to unrelated third parties, at three U.S. sites to an affiliate of Royal Vopak for cash proceeds of $600 million, net of costs to sell and other adjustments and subject to customary post-closing adjustments. These assets are located at TDCC's sites in Plaquemine and St. Charles, Louisiana, and Freeport, Texas. Divested operations included property with a net book value of $93 million and goodwill of $8 million ($7 million related to Packaging & Specialty Plastics, $17 million related to Industrial Intermediates & Infrastructure and $77 million related to Corporate). TDCC retained ownership of the sites and the underlying real property where the divested operations are located. TDCC and the buyer entered into mutual long-term service agreements designed to ensure the continuation of marine and terminal services for TDCC's existing operations at each site. The marine and terminal service agreements include fixed and variable fees that have initial terms of up to 25 years. In the fourth quarter of 2020, TDCC recognized a pretax gain of $499 million on the sale ($17 million related to Packaging & Specialty Plastics, $61 million related to Industrial Intermediates & Infrastructure and $421 million related to Corporate), included in "Sundry income (expense) - net" in the consolidated statements of income.
The Company evaluated the divestiture of the marine and terminal operations and assets and determined it did not represent a portion of Dow AgroSciences' corn seed businessstrategic shift that had a major effect on the Company’s operations and financial results and did not qualify as aan individually significant component of the Company. As a result, these divestitures werethe divestiture is not reported as discontinued operations.
NOTE 76 – RESTRUCTURING, GOODWILL IMPAIRMENT AND ASSET RELATED CHARGES - NET
The "Restructuring, goodwill impairment and asset related charges - net" line in the consolidated statements of income is used to record charges for restructuring programs, goodwill impairments, and other asset related charges, which includes other asset impairments.
DowDuPont Agriculture DivisionRestructuring Programs
2020 Restructuring Program
DuringOn September 29, 2020, the fourth quarterBoard of 2018 and in connection with the ongoing integration activities, DowDuPontDow Inc. approved restructuring actions to simplifyachieve the Company's structural cost improvement initiatives in response to the continued economic impact from the coronavirus disease 2019 ("COVID-19") pandemic. The restructuring program is designed to reduce structural costs and optimize certain organizational structures withinenable the Agriculture division in preparation for its intended separation asCompany to further enhance competitiveness while the COVID-19 economic recovery gains traction. This program includes a standalone companyglobal workforce cost reduction of approximately 6 percent and actions to rationalize the Company's manufacturing assets, which include asset write-down and write-off charges, related contract termination fees and environmental remediation costs ("Agriculture Division2020 Restructuring Program"). These actions are expected to be substantially complete by the end of 2021.
As a result of these actions, in the Company expects to record total pretax restructuring chargesthird quarter of $31 million, comprised of $28 million of severance and related benefit costs and $3 million of asset write-downs and write-offs. For the year ended December 31, 2018,2020 the Company recorded pretax restructuring charges of $25$575 million, consisting of severance and related benefit costs of $24$297 million, and asset write-downs and write-offs of $1$197 million and costs associated with exit and disposal activities of $81 million. The impact of these charges is shown as "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. TheIn the fourth quarter of 2020, the Company expects actionsrecorded net favorable pretax restructuring credits of $1 million related to the Agriculture Division Programasset write-downs and write-offs and $1 million related to be substantially complete by mid 2019.
costs associated with exit and disposal activities (related to Performance Materials & Coatings and Corporate). The adjustment to costs associated with exit and disposal activities included curtailment costs associated with a defined benefit pension plan. See Note 20 for additional information. The following table summarizes the activities related to the Agriculture Division Program. 2020 Restructuring Program:
| | | | | | | | | | | | | | |
| 2020 Restructuring Program | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Costs Associated with Exit and Disposal Activities | Total |
| In millions |
| Packaging & Specialty Plastics | $ | 0 | | $ | 11 | | $ | 0 | | $ | 11 | |
| Industrial Intermediates & Infrastructure | 0 | | 22 | | 0 | | 22 | |
| Performance Materials & Coatings | 0 | | 116 | | 61 | | 177 | |
| Corporate | 297 | | 47 | | 19 | | 363 | |
| Total restructuring charges | $ | 297 | | $ | 196 | | $ | 80 | | $ | 573 | |
| Charges against the reserve | 0 | | (196) | | (5) | | (201) | |
| Cash payments | (8) | | 0 | | 0 | | (8) | |
| Reserve balance at Dec 31, 2020 | $ | 289 | | $ | 0 | | $ | 75 | | $ | 364 | |
At December 31, 2018, $232020, $227 million of the reserve balance was included in "Accrued and other current liabilities" and $137 million was included in "Other noncurrent obligations" in the consolidated balance sheets.
Severance and Related Benefit Costs
Severance benefits are provided to employees primarily under Dow's ongoing benefit arrangements and are accrued against the Corporate segment once management commits to a plan of termination. The 2020 Restructuring Program included a charge for severance and related benefit costs of $297 million for a global workforce cost reduction of approximately 6 percent, with separations occurring primarily through the end of 2021, and impacting Corporate. At December 31, 2020, $8 million in severance payments had been made.
|
| | | | | | | | | |
| DowDuPont Agriculture Division Program | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Total |
| In millions |
| 2018 restructuring charges | $ | 24 |
| $ | 1 |
| $ | 25 |
|
| Charges against the reserve | — |
| (1 | ) | (1 | ) |
| Cash payments | (1 | ) | — |
| (1 | ) |
| Reserve balance at Dec 31, 2018 | $ | 23 |
| $ | — |
| $ | 23 |
|
The 2020 Restructuring Program included charges related to the write-down and write-off of assets totaling $196 million. Details regarding the asset write-downs and write-offs are as follows:
•Packaging & Specialty Plastics recorded a charge of $11 million to rationalize its production capacity by shutting down a small-scale production unit. The production unit will be shut down by the end of the third quarter of 2022.
•Industrial Intermediates & Infrastructure recorded a charge of $22 million to rationalize its asset footprint by shutting down certain amines and solvents facilities in the United States and Europe as well as select, small-scale downstream polyurethanes manufacturing facilities. The facilities will be shut down by the end of 2021.
•Performance Materials & Coatings recorded a charge of $116 million to shut down manufacturing assets, primarily related to small-scale coatings reactors, and will also rationalize its upstream asset footprint in Europe and the U.S. & Canada by adjusting the supply of siloxane and silicon metal to balance to regional needs. The impacted facilities will be shut down by the end of 2021.
•Corporate recorded a charge of $47 million related to the write-down of leased, non-manufacturing facilities and the write-down of miscellaneous assets.
Costs Associated with Exit and Disposal Activities
The 2020 Restructuring Program included charges of $80 million for costs associated with exit and disposal activities, which included $19 million for contract termination fees related to the asset actions listed above, impacting Performance Materials & Coatings ($9 million) and Corporate ($10 million), as well as $56 million for environmental remediation, impacting Performance Materials & Coatings ($52 million) and Corporate ($4 million) and $5 million related to curtailment costs associated with a defined benefit pension plan, impacting Corporate.
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont approved post-mergerpost-Merger restructuring actions under the DowDuPont Cost Synergy Program (the "Synergy Program") which iswas designed to integrate and optimize the organization following the Merger and in preparation for the Intended Business Separations.business separations. The Company expectsexpected (prior to the impact of any discontinued operations) to record total pretax restructuring charges of approximately $1.3 billion, which included initial estimates of approximately $525 million to $575 million of severance and related benefit costs;costs, $400 million to $440 million of asset write-downs and write-offs, and $290 million to $310 million of costs associated with exit and disposal activities.
As a result The restructuring charges below reflect charges from continuing operations. The impact of the Synergy Program,charges are shown as "Restructuring, goodwill impairment and asset related charges ‑ net" in the consolidated statements of income.
The Company recorded pretax restructuring charges of $687$184 million in 2017,2018, consisting of severance and related benefit costs of $357$137 million, asset write-downs and write-offs of $287$33 million and costs associated with exit and disposal activities of $43$14 million. For the year ended December 31, 2018, the
The Company recorded pretax restructuring charges of $551$292 million in 2019, consisting of severance and related benefit costs of $204$123 million, assetassets write-downs and write-offs of $226$143 million and costs associated with exit and disposal activities of $121$26 million. The impact of these charges is shown as "Restructuring, goodwill impairment and asset related charges - net" in
For the consolidated statements of income. Theyear ended December 31, 2020, the Company expects to record additionalrecorded pretax restructuring charges during 2019of $86 million for severance and substantially completerelated benefit costs. Cash expenditures related to the Synergy Program by the endwere substantially complete at December 31, 2020.
The following table summarizes the activities related to the Synergy Program. At December 31, 2018, $2722020, $21 million was included in "Accrued and other current liabilities" ($23152 million at December 31, 2017)2019) and $55$13 million ($19 million at December 31, 2019) was included in "Other noncurrent obligations" ($118 million at December 31, 2017) in the consolidated balance sheets.
| | | | | | | | | | | | | | |
| DowDuPont Synergy Program | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Costs Associated with Exit and Disposal Activities | Total |
| In millions |
| Reserve balance at Dec 31, 2017 | $ | 270 | | $ | 0 | | $ | 5 | | 275 |
| 2018 restructuring charges | | | | |
| Packaging & Specialty Plastics | $ | 0 | | $ | 10 | | $ | 3 | | $ | 13 | |
| Industrial Intermediates & Infrastructure | 0 | | 0 | | 11 | | 11 | |
| Performance Materials & Coatings | 0 | | 7 | | 0 | | 7 | |
| Corporate | 137 | | 16 | | 0 | | 153 | |
| Total 2018 restructuring charges | $ | 137 | | $ | 33 | | $ | 14 | | $ | 184 | |
| Charges against the reserve | 0 | | (33) | | 0 | | (33) | |
| Cash payments | (197) | | 0 | | (12) | | (209) | |
| Reserve balance at Dec 31, 2018 | $ | 210 | | $ | 0 | | $ | 7 | | $ | 217 | |
| 2019 restructuring charges | | | | |
| Packaging & Specialty Plastics | $ | 0 | | $ | 0 | | $ | 1 | | $ | 1 | |
| Industrial Intermediates & Infrastructure | 0 | | 2 | | 5 | | 7 | |
| Performance Materials & Coatings | 0 | | 28 | | 0 | | 28 | |
| Corporate | 123 | | 113 | | 20 | | 256 | |
| Total 2019 restructuring charges | $ | 123 | | $ | 143 | | $ | 26 | | $ | 292 | |
| Charges against the reserve | 0 | | (143) | | 0 | | (143) | |
| Cash payments | (279) | | 0 | | (16) | | (295) | |
| Reserve balance at Dec 31, 2019 | $ | 54 | | $ | 0 | | $ | 17 | | $ | 71 | |
| 2020 restructuring charges | | | | |
| | | | |
| | | | |
| | | | |
| Corporate | 90 | | 0 | | 0 | | 90 | |
| Total 2020 restructuring charges | $ | 90 | | $ | 0 | | $ | 0 | | $ | 90 | |
| Charges against the reserve | (4) | | 0 | | 0 | | (4) | |
| Cash payments | (121) | | 0 | | (2) | | (123) | |
| Reserve balance at Dec 31, 2020 | $ | 19 | | $ | 0 | | $ | 15 | | $ | 34 | |
|
| | | | | | | | | | | | |
| DowDuPont Synergy Program | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Costs Associated with Exit and Disposal Activities | Total |
| In millions |
| 2017 restructuring charges | $ | 357 |
| $ | 287 |
| $ | 43 |
| $ | 687 |
|
| Charges against the reserve | — |
| (287 | ) | — |
| (287 | ) |
| Cash payments | (51 | ) | — |
| — |
| (51 | ) |
| Reserve balance at Dec 31, 2017 | $ | 306 |
| $ | — |
| $ | 43 |
| $ | 349 |
|
| 2018 restructuring charges | 204 |
| 226 |
| 121 |
| 551 |
|
| Charges against the reserve | — |
| (226 | ) | — |
| (226 | ) |
| Cash payments | (248 | ) | — |
| (99 | ) | (347 | ) |
| Reserve balance at Dec 31, 2018 | $ | 262 |
| $ | — |
| $ | 65 |
| $ | 327 |
|
The Company recorded pretax restructuring charges of $961 million inception-to-date under the Synergy Program on a continuing operations basis, consisting of severance and related benefit costs of $653 million, asset write-downs and write-offs of $263 million and costs associated with exit and disposal activities of $45 million.
Asset Write-downs and Write-offs
The restructuring charges related to the write-down and write-off of assets in 2017 totaled $287 million. Details regarding2018 under the write-downs and write-offs areSynergy Program were as follows:
The Company will close or consolidate several manufacturing, R&D and administrative facilities around the world aligned with seed and crop protection activities, including the write-down of other non-manufacturing assets. As a result, the Company recorded a charge of $94 million. These facilities will be shut down or consolidated by the end of 2019.
•The Company recorded a charge of $83 million for asset write-downs and write-offs aligned with electronics and imaging product lines, including the shutdown of a metalorganic manufacturing facility in Cheonan, South Korea, the write-off of in-process research and development and other intangible assets, and the consolidation of certain R&D facilities. The South Korean facility was shut down in the second quarter of 2018.
The Company recorded a charge of $22 million for asset write-downs and write-offs aligned with an energy project, including the write-off of capital projects and other non-manufacturing assets.
The Company wrote-off $21 million of assets aligned with safety and construction products, including intangible assets as a result of the Clean Filtration Technologies plant shutdown in the fourth quarter of 2017.
The Company recorded a charge of $67$33 million for other miscellaneous asset write-downs and write-offs, including the shutdown of several small manufacturing facilities and the write-off of leased, non-manufacturing assets and certain corporate facilitiesfacilities. The charge related to Packaging & Specialty Plastics ($10 million), Performance Materials & Coatings ($7 million) and data centers.Corporate ($16 million). These manufacturing facilities will bewere shut down primarily by the end of 2019.
The restructuring charges related to the write-down and write-off of assets in 2018 totaled $226 million. Details regarding2019 under the write-downs and write-offs areSynergy Program were as follows:
•The Company recorded a charge of $171 million related primarily to the consolidation or shutdown of manufacturing, R&D and other non-manufacturing facilities and the write-down of inventory aligned with seed and crop protection activities. These facilities will be shut down primarily by the end of the third quarter of 2019.
The Company recorded a charge of $27 million for asset write-downs and write-offs aligned with industrial biosciences product lines, including the shutdown of a microbial control manufacturing facility. The manufacturing facility will be shut down by the end of 2019.
The Company recorded a charge of $28$143 million for other miscellaneous asset write-downs and write-offs, including the shutdown of several small manufacturing facilities and the write-off of non-manufacturing assets and certain corporate facilities. The charge related to Industrial Intermediates & Infrastructure ($2 million), Performance Materials & Coatings ($28 million) and Corporate ($113 million). These manufacturing facilities will bewere substantially shut down by the end of 2020.
There were no restructuring charges related to the third quarterwrite-down and write-off of 2019.assets in 2020 under the Synergy Program.
Costs Associated with Exit and Disposal Activities
The restructuring charges for costs associated with exit and disposal activities, including contract cancellation penalties and environmental remediation liabilities, totaled $43$14 million in 2017 and $1212018, $26 million in 2018.2019 and 0 in 2020.
2016 Restructuring
On June 27, 2016, Dow's Board approved a restructuring plan that incorporated actions related to the ownership restructure of Dow Silicones. These actions, aligned with Dow’s value growth and synergy targets, resulted in a global workforce reduction of approximately 2,500 positions, with most of these positions resulting from synergies related to the ownership restructure of Dow Silicones.
As a result of these actions, the Company recorded pretax restructuring charges of $449 million in the second quarter of 2016, consisting of severance and related benefit costs of $268 million, asset write-downs and write-offs of $153 million and costs associated with exit and disposal activities of $28 million. The impact of these charges is shown as "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. The 2016 restructuring activities were substantially complete at June 30, 2018, with remaining liabilities for severance and related benefit costs and costs associated with exit and disposal activities to be settled over time.
The following table summarizes the activities related to the Company's 2016 restructuring reserve.
|
| | | | | | | | | | | | |
| 2016 Restructuring Charges | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Costs Associated with Exit and Disposal Activities | Total |
| In millions |
| 2016 restructuring charges | $ | 268 |
| $ | 153 |
| $ | 28 |
| $ | 449 |
|
| Charges against the reserve | — |
| (153 | ) | — |
| (153 | ) |
| Cash payments | (67 | ) | — |
| (1 | ) | (68 | ) |
| Reserve balance at Dec 31, 2016 | $ | 201 |
| $ | — |
| $ | 27 |
| $ | 228 |
|
Adjustments to the reserve 1 | — |
| — |
| (7 | ) | (7 | ) |
| Cash payments | (150 | ) | — |
| (3 | ) | (153 | ) |
| Reserve balance at Dec 31, 2017 | $ | 51 |
| $ | — |
| $ | 17 |
| $ | 68 |
|
Adjustments to the reserve 1 | (8 | ) | — |
| 14 |
| 6 |
|
| Cash payments | (37 | ) | — |
| (4 | ) | (41 | ) |
| Reserve balance at Jun 30, 2018 | $ | 6 |
| $ | — |
| $ | 27 |
| $ | 33 |
|
| |
1. | Included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. |
Asset Write-downs and Write-offs
The restructuring charges related to the write-down and write-off of assets in the second quarter of 2016 totaled $153 million. Details regarding the write-downs and write-offs are as follows:
The Company recorded a charge of $70 million for asset write-downs and write-offs including the shutdown of a solar manufacturing facility in Midland, Michigan; the write-down of a solar facility in Milpitas, California; and, the write-off of capital projects and in-process research and development. The Midland facility was shut down in the third quarter of 2016.
To enhance competitiveness and streamline costs associated with the ownership restructure of Dow Silicones, a silicones manufacturing facility in Yamakita, Japan, was shut down in the fourth quarter of 2018. In addition, an idled facility was shut down in the second quarter of 2016. As a result, the Company recorded a charge of $25 million.
The Company recorded a charge of $25 million to close and/or consolidate certain corporate facilities and data centers.
A decision was made to shut down a small manufacturing facility and to write-down other non-manufacturing assets, including a cost method investment and certain aircraft. As a result, the Company recorded a charge of $33 million. The manufacturing facility was shut down in the second quarter of 2016.
Costs Associated with Exit and Disposal Activities
The restructuring charges for costs associated with exit and disposal activities, including contract cancellation penalties, environmental remediation and warranty liabilities, were $28 million in the second quarter of 2016.
Dow expects to incur additional costs in the future related to its restructuring activities. Future costs are expected to include demolition costs related to closed facilities and restructuring plan implementation costs; thesecosts. 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.
2019 Goodwill Impairment
Upon completion of the goodwill impairment testing in the fourth quarter of 2017,2019, the Company determined the fair value of the Coatings & Performance Monomers reporting unit was lower than its carrying amount. As a result, the Company recorded an impairment charge of $1,491$1,039 million in the fourth quarter of 2019, included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Performance Materials & Coatings. See Note 13 for additional information.
Asset Related Charges
2020 Charges
In 2020, the Company recognized pretax impairment charges of $49 million, including additional pretax impairment charges for capital additions made to a bio-ethanol manufacturing facility in Santa Vitoria, Minas Gerais, Brazil ("Santa Vitoria"), which was impaired in 2017 and divested in 2020, as well as charges for miscellaneous write-offs and write-downs of non-manufacturing assets and the write-down of certain corporate leased equipment. The impairment charges were included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.income and related to Packaging & Specialty Plastics ($19 million), Performance Materials & Coatings ($15 million) and Corporate ($15 million). See Note 1323 for additional informationinformation.
2019 Charges
On August 13, 2019, the Company entered into a definitive agreement to sell its acetone derivatives business to ALTIVIA Ketones & Additives, LLC. The transaction closed on November 1, 2019 and included the Company's acetone derivatives related inventory and production assets, located in Institute, West Virginia, in addition to the site infrastructure, land, utilities and certain railcars. The Company remains at the Institute site as a tenant. As a result of the planned transaction, the Company recognized a pretax impairment charge of $75 million in the third quarter of 2019, included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Packaging & Specialty Plastics ($24 million) and Corporate ($51 million). See Note 23 for additional information.
In the fourth quarter of 2019, upon completion of an evaluation of its equity method investment in Sadara Chemical Company ("Sadara") for other-than-temporary impairment, the Company determined that its investment in Sadara was other-than-temporarily impaired and it was written down to zero. Additionally, as part of Dow's evaluation of Sadara, the Company reserved certain of its notes and accounts receivable with Sadara due to uncertainty on the timing of collection. As a result, the Company recorded a $1,755 million charge related to Sadara, included in “Restructuring, goodwill impairment charge.and asset related charges - net" in the consolidated statements of income and related to Packaging & Specialty Plastics ($370 million), Industrial Intermediates & Infrastructure ($1,168 million) and Corporate ($217 million). See Notes 12 and 23 for additional information.
Asset Related ChargesIn 2019, the Company recognized additional pretax impairment charges of $58 million related primarily to capital additions at Santa Vitoria. The impairment charges were included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Packaging & Specialty Plastics ($44 million), Performance Materials & Coatings ($9 million) and Corporate ($5 million). See Note 23 for additional information.
2018 Charges
In 2018, the Company recognized an additional pretax impairment charge of $34 million related primarily to capital additions made to a biopolymers manufacturing facility inat Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017.Vitoria. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.
2017 Charges
In the fourth quarter of 2017, the Company recognized a $622 million pretax impairment chargeincome and related to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil. The Company determined it would not pursue an expansion of the facility’s ethanol mill into downstream derivative products, primarily as a result of cheaper ethane-based production as well as the Company’s new assets coming online on the U.S. Gulf Coast which can be used to meet growing market demands in Brazil. As a result of this decision, cash flow analysis indicated the carrying amount of the impacted assets was not recoverable. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.Packaging & Specialty Plastics segment. See Notes 22 andNote 23 for additional information.
The Company also recognized other pretax impairment charges of $317 million in the fourth quarter of 2017, including charges related to manufacturing assets of $230 million, an equity method investment of $81 million and other assets of $6 million. The impairment charges were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note 22 for additional information.
2016 Charges
In the fourth quarter of 2016, the Company recognized a $143 million pretax impairment charge related to its equity interest in AgroFresh Solutions, Inc. (“AFSI”) due to a decline in the market value of AFSI. The impairment charge was included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Notes 12, 22 and 23 for additional information.
NOTE 87 – SUPPLEMENTARY INFORMATION
| | | | | | | | | | | | | | | | | | | | |
Sundry Income (Expense) – Net 1 | Dow Inc. | TDCC |
| In millions | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 |
Non-operating pension and other postretirement benefit plan net credits 2 | $ | 103 | | $ | 205 | | $ | 123 | | $ | 103 | | $ | 205 | | $ | 123 | |
| Foreign exchange gains (losses) | (62) | | 91 | | (119) | | (65) | | 77 | | (119) | |
Gain on divestiture of marine and terminal operations and assets 3 | 233 | | 0 | | 0 | | 233 | | 0 | | 0 | |
Gain on divestiture of rail infrastructure operations and assets 3 | 499 | | 0 | | 0 | | 499 | | 0 | | 0 | |
Loss on early extinguishment of debt 4 | (149) | | (102) | | (54) | | (149) | | (102) | | (54) | |
Gain (loss) on divestitures and asset sale 5 | (15) | | (49) | | 0 | | (15) | | 2 | | 0 | |
Gain related to Nova ethylene asset matter 6 | 544 | | 170 | | 0 | | 544 | | 170 | | 0 | |
| Gain on sales of other assets and investments | 48 | | 67 | | 18 | | 48 | | 67 | | 18 | |
Dow Silicones breast implant liability adjustment 6 | 5 | | 85 | | 0 | | 5 | | 85 | | 0 | |
Indemnification and other transaction related credits (costs) 7 | (21) | | (69) | | 0 | | (11) | | 6 | | 0 | |
Loss on Dow Silicones commercial creditor matters 6 | 0 | | (50) | | 0 | | 0 | | (50) | | 0 | |
| Post-closing adjustments related to Dow Silicones ownership restructure | 0 | | 0 | | (20) | | 0 | | 0 | | (20) | |
| Post-closing adjustments on divestiture of MEGlobal | 0 | | 0 | | 20 | | 0 | | 0 | | 20 | |
| Other - net | 84 | | 113 | | 128 | | 82 | | 113 | | 128 | |
| Total sundry income (expense) – net | $ | 1,269 | | $ | 461 | | $ | 96 | | $ | 1,274 | | $ | 573 | | $ | 96 | |
1.Prior period amounts were updated to conform with the current year presentation.
2.See Note 20 for additional information.
3.See Note 5 for additional information.
4.See Note 15 for additional information.
5.The year ended December 31, 2020 primarily relates to a loss on the divestiture of a bio-ethanol manufacturing facility in Brazil, related to Packaging & Specialty Plastics. The year ended December 31, 2019 includes post-closing adjustments on previous divestitures, related to Corporate.
6.See Note 16 for additional information.
7.See Note 3 for additional information.
|
| | | | | | | | | |
| Sundry Income (Expense) – Net | | | |
| In millions | 2018 | 2017 | 2016 |
Non-operating pension and other postretirement benefit plan net credits (costs) 1 | $ | 119 |
| $ | (682 | ) | $ | 34 |
|
| Gain on sales of other assets and investments | 59 |
| 182 |
| 170 |
|
| Interest income | 109 |
| 106 |
| 107 |
|
| Foreign exchange losses | (119 | ) | (72 | ) | (126 | ) |
| Post-closing adjustments on divestiture of MEGlobal | 20 |
| — |
| (1 | ) |
Gain and post-closing adjustments related to Dow Silicones ownership restructure 2 | (47 | ) | — |
| 2,445 |
|
Loss on early extinguishment of debt 3 | (54 | ) | — |
| — |
|
| Loss on divestitures | (14 | ) | — |
| (25 | ) |
Gain on divestiture of DAS Divested Ag Business 4 | — |
| 635 |
| — |
|
Gain on divestiture of the EAA Business 4 | — |
| 227 |
| — |
|
Gain related to Nova patent infringement award 5 | — |
| 137 |
| — |
|
Loss related to Bayer CropScience arbitration matter 5 | — |
| (469 | ) | — |
|
| Impact of split-off of chlorine value chain | — |
| 7 |
| 6 |
|
Settlement of the urethane matters class action lawsuit and opt-out cases 5 | — |
| — |
| (1,235 | ) |
| Costs associated with transactions and productivity actions | — |
| — |
| (41 | ) |
Implant liability adjustment 5 | — |
| — |
| 27 |
|
| Reclassification of cumulative translation adjustments | 4 |
| 8 |
| — |
|
| Other - net | 104 |
| 116 |
| 125 |
|
| Total sundry income (expense) – net | $ | 181 |
| $ | 195 |
| $ | 1,486 |
|
| |
1. | Presented in accordance with ASU 2017-07. See Notes 1, 2 and 19 for additional information. |
| |
2. | See Note 5 for additional information. |
| |
3. | See Note 15 for additional information. |
| |
4. | See Note 6 for additional information. |
| |
5. | See Note 16 for additional information. |
Accrued and Other Current Liabilities
“Accrued and other current liabilities” were $3,611$3,790 million and $3,256 million at December 31, 20182020 and $4,025$2,762 million and $2,233 million at December 31, 2017.2019, for Dow Inc. and TDCC, respectively. Accrued payroll, which is a component of "Accrued and other current liabilities" and includes liabilities" related to payroll, incentive compensation and severance, was $926$866 million at December 31, 20182020 and $1,109$284 million at December 31, 2017.2019. No other components of "Accrued and other current liabilities" were more than 5 percent of total current liabilities.
Other Investments
The Company has investments in company-owned life insurance policies ("COLI"), which are recorded at their cash surrender value as of each balance sheet date, as provided below:
| | | | | | | | |
| Investments in Company-Owned Life Insurance | Dec 31, 2020 | Dec 31, 2019 |
| In millions |
| Gross cash value | $ | 807 | | $ | 820 | |
Less: Existing drawdowns 1 | 0 | | 85 | |
Investments in company-owned life insurance 2 | $ | 807 | | $ | 735 | |
1.Classified as "Proceeds from sales and maturities of investments" in the consolidated statements of cash flows.
2.Classified as "Other investments" in the consolidated balance sheets.
The Company has the ability to monetize its investment in its COLI policies as an additional source of liquidity. At December 31, 2019, the Company had monetized $85 million of its existing COLI policies' value. In the first nine months of 2020, the Company monetized an additional $211 million. In the fourth quarter of 2020, the Company repaid all existing drawdowns against the cash surrender value, which resulted in no monetization of its existing COLI policies' value at December 31, 2020. The repayment was reflected in "Purchases of investments" in the consolidated statements of cash flows.
Supplemental Cash Flow Information
The following table shows cash paid for interest and income taxes for the years ended December 31, 2020, 2019 and 2018:
| | | | | | | | | | | |
| Supplemental Cash Flow Information | 2020 | 2019 | 2018 |
| In millions |
| Cash paid during year for: | | | |
| Interest | $ | 842 | | $ | 993 | | $ | 1,143 | |
| Income taxes | $ | 518 | | $ | 881 | | $ | 1,193 | |
NOTE 98 – INCOME TAXES
The financial statements for Dow Inc. and TDCC are substantially similar, including the reporting of current and deferred tax expense (benefit), provision for income taxes on continuing operations, and deferred tax asset and liability balances. As a result, the following income tax discussion pertains to Dow Inc. only.
| | | | | | | | | | | |
| Geographic Allocation of Income and Provision for Income Taxes on Continuing Operations | | | |
| In millions | 2020 | 2019 | 2018 |
| Income (loss) from continuing operations before income taxes | | | |
Domestic 1 | $ | (681) | | $ | (1,196) | | $ | 745 | |
Foreign 2 | 2,752 | | (51) | | 3,004 | |
| Income (loss) from continuing operations before income taxes | $ | 2,071 | | $ | (1,247) | | $ | 3,749 | |
| Current tax expense (benefit) | | | |
| Federal | $ | (176) | | $ | (287) | | $ | 324 | |
| State and local | 4 | | 25 | | 13 | |
| Foreign | 691 | | 960 | | 901 | |
| Total current tax expense | $ | 519 | | $ | 698 | | $ | 1,238 | |
| Deferred tax expense (benefit) | | | |
Federal 3 | $ | 184 | | $ | 52 | | $ | (318) | |
| State and local | 19 | | 19 | | (32) | |
| Foreign | 55 | | (299) | | (79) | |
| Total deferred tax expense (benefit) | $ | 258 | | $ | (228) | | $ | (429) | |
| Provision for income taxes on continuing operations | $ | 777 | | $ | 470 | | $ | 809 | |
| Income (loss) from continuing operations, net of tax | $ | 1,294 | | $ | (1,717) | | $ | 2,940 | |
1.The 2019 amount includes approximately $1.4 billion of expense related to goodwill impairment and environmental matters. See Notes 13 and 16 for additional information.
2.The 2019 amount includes approximately $1.8 billion of expense for Sadara related charges. See Note 12 for additional information.
3.The 2018 amount reflects the tax impact of the Tax Cuts and Jobs Act which accelerated the utilization of tax credits and required remeasurement of all U.S. deferred tax assets and liabilities.
| | | | | | | | | | | |
| Reconciliation to U.S. Statutory Rate | 2020 | 2019 | 2018 |
| Statutory U.S. federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % |
| Equity earnings effect | 0.2 | | (3.2) | | (3.3) | |
Foreign income taxed at rates other than the statutory U.S. federal income tax rate 1 | 1.7 | | (14.8) | | 6.7 | |
| U.S. tax effect of foreign earnings and dividends | 3.9 | | 1.9 | | (0.7) | |
| Unrecognized tax benefits | 3.3 | | 1.0 | | 0.2 | |
Divestitures 2 | (5.1) | | 0 | | 0.8 | |
| Changes in valuation allowances | 12.6 | | 0 | | 0 | |
Impact of tax reform 3 | 0 | | 11.1 | | (3.4) | |
Federal tax accrual adjustment 4 | 0 | | 10.4 | | 0 | |
| State and local income taxes | 0.3 | | (4.4) | | 0.4 | |
Sadara related charges 5 | 0 | | (29.5) | | 0 | |
Goodwill impairment 6 | 0 | | (17.5) | | 0 | |
| | | |
| Other - net | (0.4) | | (13.7) | | (0.1) | |
| Effective tax rate | 37.5 | % | (37.7) | % | 21.6 | % |
1.Includes the impact of valuation allowances and interest and penalties associated with uncertain tax positions in foreign jurisdictions. The 2020 impact from interest and penalties increased the effective tax rate by approximately 4 percent.
2.The 2020 impact relates to the divestiture of a bio-ethanol manufacturing facility in Brazil. See Note 6 for additional information.
3.Includes the impact of tax reform in Switzerland and the United States.
4.Primarily related to the favorable impact of the restoration of tax basis in assets, driven by a court judgment that did not involve the Company.
5.See Note 12 for additional information.
6.See Note 13 for additional information.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. While the CARES Act has had no significant impact on the Company's provision for income taxes on continuing operations in 2020, the Company filed a tax loss carryback claim for $291 million in accordance with the provisions of the CARES Act. This resulted in an increase in "Accounts and notes receivable - other" and a decrease in "Deferred income tax assets" in the consolidated balance sheets.
In the fourth quarter of 2020, a valuation allowance of $260 million was recorded in the United States, primarily due to filing of the final combined Dow and DuPont tax return and related unutilized foreign tax credits. The Company projects it is more likely than not that a portion of these foreign tax credits and other tax attributes will remain unutilized prior to their expiration.
On December 22, 2017, the Tax Cuts and Jobs Act ("The ActAct") was enacted. The Act reducesreduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, requiresrequired companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, createscreated new provisions related to foreign sourced earnings, eliminateseliminated the domestic manufacturing deduction and movesmoved to a hybrid territorial system. At December 31, 2017, the Company had not completed its accounting for the tax effects of The Act; however,While the Company made a reasonable estimate of the effects of The Act on its existing deferred tax balances and the one-time transition tax. Intax at December 31, 2017, in accordance with Staff Accounting Bulletin 118, ("SAB 118"),the income tax effects of The Act were refined upon obtaining, preparing and analyzing additional information during the measurement period. At December 31,period as follows:
•In 2018, the Company had completed its accounting for the tax effectsremeasurement of The Act.
As a result of The Act, the Company remeasured its U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. The Companypercent, and recorded a cumulative benefit of $29$79 million ($79 million benefit in 2018 and $50 million charge in 2017) to “Provision for income taxes”taxes on continuing operations” in the consolidated statements of income with respect to the remeasurement of the Company's deferred tax balances.
•The Act requires aCompany adjusted the impact of the mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits, which resultsresulted in a one-time transition tax. The Companytax, and recorded a cumulative charge of $780 million ($85 million benefit in 2018 and $865of $85 million charge in 2017) to "Provision for income taxes"taxes on continuing operations" in the consolidated statements of income with respect to the one-time transition tax. The Company had sufficient tax credits to offset the tax liability associated with the one-time transition tax.
•In 2018, the Company recorded an indirect impact of The Act related to prepaid tax on the intercompany sale of inventory. The amount recorded related to inventory was a charge of $38 million to "Provision for income taxes"taxes on continuing operations" in the consolidated statements of income.
For tax years beginning after December 31, 2017, The Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). The Company has made the policy election to record any liability associated with GILTI in the period in which it is incurred. | | | | | | | | | | | | | | |
| Deferred Tax Balances at Dec 31 | 2020 | 2019 |
| In millions | Assets | Liabilities | Assets | Liabilities |
| Property | $ | 499 | | $ | 3,388 | | $ | 494 | | $ | 3,177 | |
| Tax loss and credit carryforwards | 2,004 | | — | | 1,920 | | — | |
| Postretirement benefit obligations | 2,712 | | 250 | | 2,432 | | 210 | |
| Other accruals and reserves | 1,507 | | 43 | | 1,678 | | 43 | |
| Intangibles | 124 | | 638 | | 120 | | 688 | |
| Inventory | 30 | | 198 | | 28 | | 234 | |
| | | | |
| Investments | 142 | | 51 | | 125 | | 48 | |
| | | | |
| Other – net | 858 | | 196 | | 851 | | 120 | |
| Subtotal | $ | 7,876 | | $ | 4,764 | | $ | 7,648 | | $ | 4,520 | |
| Valuation allowances | (1,302) | | — | | (1,262) | | — | |
| Total | $ | 6,574 | | $ | 4,764 | | $ | 6,386 | | $ | 4,520 | |
|
| | | | | | | | | |
| Geographic Allocation of Income and Provision for Income Taxes | | | |
| In millions | 2018 | 2017 | 2016 |
| Income (Loss) before income taxes | | | |
Domestic 1, 2 | $ | 1,668 |
| $ | (1,973 | ) | $ | 485 |
|
Foreign 1 | 4,250 |
| 4,772 |
| 3,928 |
|
| Income before income taxes | $ | 5,918 |
| $ | 2,799 |
| $ | 4,413 |
|
| Current tax expense (benefit) | | | |
| Federal | $ | 290 |
| $ | (308 | ) | $ | 91 |
|
| State and local | 8 |
| — |
| 21 |
|
| Foreign | 1,517 |
| 1,579 |
| 1,156 |
|
| Total current tax expense | $ | 1,815 |
| $ | 1,271 |
| $ | 1,268 |
|
| Deferred tax expense (benefit) | | | |
Federal 3 | $ | (323 | ) | $ | 1,027 |
| $ | (1,255 | ) |
| State and local | (7 | ) | 56 |
| (10 | ) |
| Foreign | (200 | ) | (150 | ) | 6 |
|
| Total deferred tax expense (benefit) | $ | (530 | ) | $ | 933 |
| $ | (1,259 | ) |
| Provision for income taxes | $ | 1,285 |
| $ | 2,204 |
| $ | 9 |
|
| Net income | $ | 4,633 |
| $ | 595 |
| $ | 4,404 |
|
| |
1. | In 2017, the domestic component of "Income before income taxes" included approximately $308 million ($2.1 billion in 2016) and the foreign component contained $562 million (zero in 2016) of income from portfolio actions. See Notes 5 and 6 for additional information. |
| |
2. | In 2017, the domestic component of "Income before income taxes" included approximately $2.7 billion of expense related to a goodwill impairment, non-qualified pension plan change in control charges and litigation settlements. In 2016, the domestic component of "Income before income taxes" included approximately $2.6 billion of expenses related to the urethane matters class action lawsuit and opt-out cases settlements, asbestos-related charge and charges for environmental matters. See Notes 13, 16 and 19 for additional information. |
| |
3. | The 2018 and 2017 amounts reflect the tax impact of The Act which accelerated the utilization of tax credits and required remeasurement of all U.S. deferred tax assets and liabilities. The 2016 amount reflects the tax impact of accrued one-time items and reduced domestic income which limited the utilization of tax credits. |
| | | | | | | | |
| Operating Loss and Tax Credit Carryforwards at Dec 31 | 2020 | 2019 |
| In millions | Assets | Assets |
| Operating loss carryforwards | | |
| Expire within 5 years | $ | 274 | | $ | 263 | |
| Expire after 5 years or indefinite expiration | 1,031 | | 1,133 | |
| Total operating loss carryforwards | $ | 1,305 | | $ | 1,396 | |
| Tax credit carryforwards | | |
| Expire within 5 years | $ | 434 | | $ | 32 | |
| Expire after 5 years or indefinite expiration | 265 | | 492 | |
| Total tax credit carryforwards | $ | 699 | | $ | 524 | |
| Total operating loss and tax credit carryforwards | $ | 2,004 | | $ | 1,920 | |
In 2017, as a result of the Merger and subsequent change in the Company's ownership, certain net operating loss carryforwards available for the Company’s consolidated German tax group were derecognized. In addition, the sale of stock between two consolidated subsidiaries in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the Intended Business Separations. As a result, in 2017, the Company recorded a charge of $267 million to “Provision for income taxes” in the consolidated statements of income.
|
| | | | | | |
| Reconciliation to U.S. Statutory Rate | 2018 | 2017 | 2016 |
| Statutory U.S. federal income tax rate | 21.0 | % | 35.0 | % | 35.0 | % |
| Equity earnings effect | (2.1 | ) | (4.2 | ) | (1.2 | ) |
Foreign income taxed at rates other than the statutory U.S. federal income tax rate 1 | 5.2 |
| (15.9 | ) | (7.0 | ) |
| U.S. tax effect of foreign earnings and dividends | (0.5 | ) | (1.6 | ) | (4.6 | ) |
| Unrecognized tax benefits | 0.1 |
| 1.1 |
| (0.8 | ) |
Acquisitions, divestitures and ownership restructuring activities 2 | 0.3 |
| 11.7 |
| (21.2 | ) |
| Impact of U.S. tax reform | (2.1 | ) | 32.7 |
| — |
|
| State and local income taxes | 0.4 |
| 3.2 |
| 0.2 |
|
| Goodwill impairment | — |
| 19.2 |
| — |
|
Excess tax benefits from stock-based compensation 3 | (0.9 | ) | (3.5 | ) | — |
|
| Other - net | 0.3 |
| 1.0 |
| (0.2 | ) |
| Effective Tax Rate | 21.7 | % | 78.7 | % | 0.2 | % |
| |
1. | Includes the impact of valuation allowances in foreign jurisdictions. |
| |
2. | See Notes 5 and 6 for additional information. |
| |
3. | Reflects the impact of the adoption of ASU 2016-09, "Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting," which was adopted January 1, 2017, and resulted in the recognition of excess tax benefits related to stock-based compensation in "Provision for income taxes." |
|
| | | | | | | | | | | | |
| Deferred Tax Balances at Dec 31 | 2018 | 2017 |
| In millions | Assets | Liabilities | Assets | Liabilities |
| Property | $ | 460 |
| $ | 2,550 |
| $ | 508 |
| $ | 2,474 |
|
| Tax loss and credit carryforwards | 2,244 |
| — |
| 1,734 |
| — |
|
| Postretirement benefit obligations | 2,226 |
| 213 |
| 2,442 |
| 136 |
|
| Other accruals and reserves | 1,250 |
| 110 |
| 1,251 |
| 146 |
|
| Intangibles | 151 |
| 942 |
| 176 |
| 1,010 |
|
| Inventory | 68 |
| 163 |
| 35 |
| 171 |
|
| Investments | 181 |
| 60 |
| 272 |
| 158 |
|
| Other – net | 587 |
| 442 |
| 420 |
| 414 |
|
| Subtotal | $ | 7,167 |
| $ | 4,480 |
| $ | 6,838 |
| $ | 4,509 |
|
| Valuation allowances | (1,320 | ) | — |
| (1,371 | ) | — |
|
| Total | $ | 5,847 |
| $ | 4,480 |
| $ | 5,467 |
| $ | 4,509 |
|
|
| | | | | | |
| Operating Loss and Tax Credit Carryforwards at Dec 31 | 2018 | 2017 |
| In millions | Assets | Assets |
| Operating loss carryforwards | | |
| Expire within 5 years | $ | 268 |
| $ | 246 |
|
| Expire after 5 years or indefinite expiration | 1,319 |
| 1,305 |
|
| Total operating loss carryforwards | $ | 1,587 |
| $ | 1,551 |
|
| Tax credit carryforwards | | |
| Expire within 5 years | $ | 32 |
| $ | 39 |
|
| Expire after 5 years or indefinite expiration | 625 |
| 144 |
|
| Total tax credit carryforwards | $ | 657 |
| $ | 183 |
|
| Total operating loss and tax credit carryforwards | $ | 2,244 |
| $ | 1,734 |
|
Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $6,800$7,401 million at December 31, 20182020 and $7,052$6,851 million at December 31, 2017. The Act imposed U.S. tax on all post-1986 foreign unrepatriated2019. Undistributed earnings accumulated through December 31, 2017. Unrepatriated earnings generated after December 31, 2017, are now subject to tax in the current year. All undistributed earnings are still subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply. It is not practicable to calculate the unrecognized deferred tax liability on undistributed earnings.
The following table provides a reconciliation of the Company's unrecognized tax benefits:
| | | | | | | | | | | |
| Total Gross Unrecognized Tax Benefits | | | |
| In millions | 2020 | 2019 | 2018 |
| Total unrecognized tax benefits at Jan 1 | $ | 319 | | $ | 314 | | $ | 255 | |
| Decreases related to positions taken on items from prior years | (1) | | (1) | | (8) | |
| Increases related to positions taken on items from prior years | 52 | | 16 | | 68 | |
| Increases related to positions taken in the current year | 18 | | 10 | | 2 | |
| Settlement of uncertain tax positions with tax authorities | (14) | | (19) | | 0 | |
| Decreases due to expiration of statutes of limitations | (1) | | 0 | | (1) | |
| Foreign exchange gain | 0 | | (1) | | (2) | |
| Total unrecognized tax benefits at Dec 31 | $ | 373 | | $ | 319 | | $ | 314 | |
| Total unrecognized tax benefits that, if recognized, would impact the effective tax rate | $ | 285 | | $ | 234 | | $ | 235 | |
| Total amount of interest and penalties expense (benefit) recognized in "Provision for income taxes on continuing operations" | $ | 84 | | $ | (11) | | $ | (12) | |
| Total accrual for interest and penalties recognized in the consolidated balance sheets | $ | 144 | | $ | 100 | | $ | 109 | |
|
| | | | | | | | | |
| Total Gross Unrecognized Tax Benefits | | | |
| In millions | 2018 | 2017 | 2016 |
| Total unrecognized tax benefits at Jan 1 | $ | 253 |
| $ | 231 |
| $ | 280 |
|
| Decreases related to positions taken on items from prior years | (7 | ) | (4 | ) | (12 | ) |
Increases related to positions taken on items from prior years 1 | 68 |
| 37 |
| 153 |
|
Increases related to positions taken in the current year 2 | 2 |
| 10 |
| 135 |
|
Settlement of uncertain tax positions with tax authorities 1 | — |
| (12 | ) | (325 | ) |
| Decreases due to expiration of statutes of limitations | (1 | ) | (9 | ) | — |
|
| Foreign exchange gain | (2 | ) | — |
| — |
|
| Total unrecognized tax benefits at Dec 31 | $ | 313 |
| $ | 253 |
| $ | 231 |
|
| Total unrecognized tax benefits that, if recognized, would impact the effective tax rate | $ | 236 |
| $ | 243 |
| $ | 223 |
|
| Total amount of interest and penalties (benefit) recognized in "Provision for income taxes" | $ | (12 | ) | $ | 2 |
| $ | (55 | ) |
| Total accrual for interest and penalties recognized in the consolidated balance sheets | $ | 109 |
| $ | 110 |
| $ | 89 |
|
| |
1. | The 2016 balance includes the impact of a settlement agreement related to a historical change in the legal ownership structure of a nonconsolidated affiliate discussed below. |
| |
2. | The 2016 balance includes $126 million assumed in the Dow Silicones ownership restructure. |
On January 9, 2017,Prior to the U.S. Supreme Court denied certiorari in the Company’s tax treatment of partnerships and transactions associated with Chemtech, a wholly owned subsidiary. The Company has fully accrued the position and does not expect a future impact to “Provision for income taxes” in the consolidated statements of income as a result of the ruling.
In the fourth quarter of 2016, a settlement of $206 million was reached on a tax matter associated with a historical change in the legal ownership structure of a nonconsolidated affiliate. As a result of the settlement, the Company recorded a charge of $13 million to “Provision for income taxes” in the consolidated statements of income.
Dowseparation, TDCC and its consolidated subsidiaries arewere included in DowDuPont's consolidated federal income tax group and consolidated tax return. Generally, the consolidated tax liability of the DowDuPont U.S. tax group for each year will bewas apportioned among the members of the consolidated group based on each member’s separate taxable income. DowTDCC and DuPont intend that, to the extent federal and/or state corporate income tax liabilities are reduced through the utilization of tax attributes of the other, settlement of any receivable and payable generated from the use of the other party’s sub-group attributes will be in accordance with a tax sharing agreement and/or tax matters agreement. At December 31, 2020, the Company had a receivable of $261 million related to the tax sharing agreement, which is included in "Other current assets" in the consolidated balance sheets ($312 million included in "Noncurrent receivables" at December 31, 2019).
Each year, the Company files tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. The ultimate resolution of such uncertainties is not expected to have a material impact on the Company's results of operations.
Tax years that remain subject to examination for the Company’s major tax jurisdictions are shown below:
|
| | | | |
Tax Years Subject to Examination by Major Tax Jurisdiction at Dec 31, 20182020 | Earliest Open Year |
| Jurisdiction |
| Argentina | 20112014 |
| Brazil | 20062015 |
| Canada | 2012 |
| China | 20082010 |
| Germany | 20092014 |
| Italy | 20132016 |
| The Netherlands | 2016 |
| Switzerland | 20122016 |
| United States: | |
| Federal income tax | 2004 |
| State and local income tax | 2004 |
The reserve for non-income tax contingencies related to issues in the United States and foreign locations was $91$33 million at December 31, 2018 and $1102020 ($44 million at December 31, 2017.2019). This is management’s best estimate of the potential liability for non-income tax contingencies. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law, both legislated and concluded through the various jurisdictions’ tax court systems. It is the opinion of the Company’s management that the possibility is remote that costs in excess of those accrued will have a material impact on the Company’s consolidated financial statements.
NOTE 9 - EARNINGS PER SHARE CALCULATIONS
The following tables provide earnings per share calculations of Dow Inc. for the years ended December 31, 2020, 2019, and 2018. In accordance with the accounting guidance for earnings per share, earnings per share of TDCC is not presented as this information is not required in financial statements of wholly owned subsidiaries.
| | | | | | | | | | | |
| Net Income (Loss) for Earnings Per Share Calculations | 2020 | 2019 | 2018 |
| In millions |
| Income (loss) from continuing operations, net of tax | $ | 1,294 | | $ | (1,717) | | $ | 2,940 | |
| Net income attributable to noncontrolling interests - continuing operations | (69) | | (74) | | (102) | |
| | | |
Net income attributable to participating securities - continuing operations 1 | (9) | | (6) | | 0 | |
| Income (loss) from continuing operations attributable to common stockholders | $ | 1,216 | | $ | (1,797) | | $ | 2,838 | |
| Income from discontinued operations, net of tax | $ | 0 | | $ | 445 | | $ | 1,835 | |
| Net income attributable to noncontrolling interests - discontinued operations | 0 | | (13) | | (32) | |
| | | |
| Income from discontinued operations attributable to common stockholders | $ | 0 | | $ | 432 | | $ | 1,803 | |
| Net income (loss) attributable to common stockholders | $ | 1,216 | | $ | (1,365) | | $ | 4,641 | |
| | | | | | | | | | | |
| Earnings (Loss) Per Share Calculations - Basic | 2020 | 2019 | 2018 |
| Dollars per share |
| Income (loss) from continuing operations attributable to common stockholders | $ | 1.64 | | $ | (2.42) | | $ | 3.80 | |
| Income from discontinued operations, net of tax | 0 | | 0.58 | | 2.41 | |
| Net income (loss) attributable to common stockholders | $ | 1.64 | | $ | (1.84) | | $ | 6.21 | |
| | | | | | | | | | | |
| Earnings (Loss) Per Share Calculations - Diluted | 2020 | 2019 | 2018 |
| Dollars per share |
| Income (loss) from continuing operations attributable to common stockholders | $ | 1.64 | | $ | (2.42) | | $ | 3.80 | |
| Income from discontinued operations, net of tax | 0 | | 0.58 | | 2.41 | |
| Net income (loss) attributable to common stockholders | $ | 1.64 | | $ | (1.84) | | $ | 6.21 | |
| | | | | | | | | | | |
| Share Count Information | 2020 | 2019 | 2018 |
| Shares in millions |
Weighted-average common shares outstanding - basic 2 | 740.5 | | 742.5 | | 747.2 | |
Plus dilutive effect of equity compensation plans 3 | 1.8 | | 0 | | 0 | |
Weighted-average common shares outstanding - diluted 2, 3 | 742.3 | | 742.5 | | 747.2 | |
Stock options and restricted stock units excluded from EPS calculations 4 | 14.2 | | 20.8 | | 0 | |
1.Restricted stock units are considered participating securities due to the Company's practice of paying dividend equivalents on unvested shares.
2.Share amounts for the year ended December 31, 2018 were based on 2,246.3 million DowDuPont common shares outstanding as of the Record Date for the April 1, 2019 distribution, less 4.6 million Employee Stock Ownership Plan ("ESOP") shares that had not been released and were not considered outstanding, adjusted for the Distribution Ratio. There was no dilutive effect for the year ended December 31, 2018 as the Company did not engage in activities giving rise to dilution.
3.The year ended December 31, 2019 reflected a loss from continuing operations, and as such, the basic share count was used for purposes of calculating earnings per share on a diluted basis.
4.These outstanding options to purchase shares of common stock and restricted stock units were excluded from the calculation of diluted earnings per share because the effect of including them would have been antidilutive. For the year ended December 31, 2018, the Company did not engage in activities giving rise to dilution.
NOTE 10 – INVENTORIES
The following table provides a breakdown of inventories:
| | | | | | | | |
| Inventories at Dec 31 | | |
| In millions | 2020 | 2019 |
| Finished goods | $ | 3,140 | | $ | 3,505 | |
| Work in process | 996 | | 1,122 | |
| Raw materials | 598 | | 628 | |
| Supplies | 933 | | 845 | |
| Total | $ | 5,667 | | $ | 6,100 | |
| Adjustment of inventories to the LIFO basis | 34 | | 114 | |
| Total inventories | $ | 5,701 | | $ | 6,214 | |
|
| | | | | | |
| Inventories at Dec 31 | | |
| In millions | 2018 | 2017 |
| Finished goods | $ | 5,640 |
| $ | 5,213 |
|
| Work in process | 2,214 |
| 1,747 |
|
| Raw materials | 941 |
| 898 |
|
| Supplies | 880 |
| 848 |
|
| Total | $ | 9,675 |
| $ | 8,706 |
|
| Adjustment of inventories to a LIFO basis | (415 | ) | (330 | ) |
| Total inventories | $ | 9,260 |
| $ | 8,376 |
|
Inventories valued on the LIFO basis represented 30 percent of the total inventories at December 31, 2020 and 32 percent of the total inventories at December 31, 2019.
NOTE 11 – PROPERTY
The following table provides a breakdown of property:
| | | | | | | | | | | |
| Property at Dec 31 | Estimated Useful
Lives (Years) | 2020 | 2019 |
| In millions |
| Land and land improvements | 0-25 | $ | 2,011 | | $ | 2,177 | |
| Buildings | 5-50 | 4,976 | | 4,742 | |
| Machinery and equipment | 3-25 | 42,108 | | 40,651 | |
| Other property | 3-50 | 5,626 | | 5,354 | |
Construction in progress 1 | — | | 1,604 | | 1,986 | |
| Total property | | $ | 56,325 | | $ | 54,910 | |
1.The decrease is primarily related to the Company proactively reducing capital spending in 2020 to focus on cash and maintaining financial strength during the COVID-19 pandemic.
| | | | | | | | | | | |
| In millions | 2020 | 2019 | 2018 |
| Depreciation expense | $ | 2,092 | | $ | 2,156 | | $ | 2,174 | |
| Capitalized interest | $ | 64 | | $ | 80 | | $ | 88 | |
|
| | | | | | | | |
| Property at Dec 31 | Estimated Useful Lives (Years) | 2018 | 2017 |
| In millions |
| Land and land improvements | 0-25 |
| $ | 2,557 |
| $ | 2,535 |
|
| Buildings | 5-50 |
| 6,067 |
| 5,920 |
|
| Machinery and equipment | 3-25 |
| 45,133 |
| 43,208 |
|
| Other property | 3-50 |
| 5,414 |
| 5,277 |
|
| Construction in progress | — |
| 2,266 |
| 3,486 |
|
| Total property | | $ | 61,437 |
| $ | 60,426 |
|
|
| | | | | | | | | |
| In millions | 2018 | 2017 | 2016 |
| Depreciation expense | $ | 2,432 |
| $ | 2,329 |
| $ | 2,130 |
|
| Capitalized interest | $ | 88 |
| $ | 240 |
| $ | 243 |
|
NOTE 12 – NONCONSOLIDATED AFFILIATES
The Company’s investments in companies accounted for using the equity method (“nonconsolidated affiliates”), by classification in the consolidated balance sheets, and dividends received from nonconsolidated affiliates are shown in the following tables:
| | | | | | | | |
| Investments in Nonconsolidated Affiliates at Dec 31 | 2020 1 | 2019 1 |
| In millions |
| Investment in nonconsolidated affiliates | $ | 1,327 | | $ | 1,404 | |
| Other noncurrent obligations | (169) | | (80) | |
| Net investment in nonconsolidated affiliates | $ | 1,158 | | $ | 1,324 | |
|
| | | | | | |
| Investments in Nonconsolidated Affiliates at Dec 31 | 2018 1 | 2017 1 |
| In millions |
| Investment in nonconsolidated affiliates | $ | 3,823 |
| $ | 3,742 |
|
| Other noncurrent obligations | (495 | ) | (752 | ) |
| Net investment in nonconsolidated affiliates | $ | 3,328 |
| $ | 2,990 |
|
| |
1. | The carrying amount of the Company’s investments in nonconsolidated affiliates at December 31, 2018, was $10 million less than its share of the investees’ net assets, ($32 million less at December 31, 2017), exclusive of additional differences relating to EQUATE Petrochemical Company K.S.C.C. ("EQUATE") and AFSI, which are discussed separately in the disclosures that follow. |
1.The carrying amount of the Company’s investments in nonconsolidated affiliates at December 31, 2020, was $55 million less than its share of the investees’ net assets, ($51 million less at December 31, 2019), exclusive of additional differences relating to Sadara, EQUATE Petrochemical Company K.S.C.C. ("EQUATE") and AgroFresh Solutions Inc. ("AFSI"), which are discussed separately in the disclosures that follow.
| | | Dividends Received from Nonconsolidated Affiliates | 2018 | 2017 1 | 2016 | Dividends Received from Nonconsolidated Affiliates | 2020 | 2019 | 2018 |
| In millions | In millions |
| Dividends from nonconsolidated affiliates | $ | 908 |
| $ | 865 |
| $ | 685 |
| Dividends from nonconsolidated affiliates | $ | 425 | | $ | 1,020 | | $ | 663 | |
| |
1. | Includes a non-cash dividend of $8 million. |
Except for AFSI, the nonconsolidated affiliates in which the Company has investments are privately held companies; therefore, quoted market prices are not available.
Dow SiliconesSadara
In 2011, the Company and the HSC Group
AsSaudi Arabian Oil Company formed Sadara - a result of the Dow Silicones ownership restructure, Dow Silicones, previously a 50:50 joint venture between Dowthe two companies that subsequently constructed and Corning, becamenow operates a wholly owned subsidiaryworld-scale, fully integrated chemicals complex in Jubail Industrial City, Kingdom of Dow as of June 1, 2016.Saudi Arabia. The Company'sCompany has a 35 percent equity interest in this joint venture and has been, and continues to be, responsible for marketing the majority of Sadara’s products through the Company’s established sales channels.
The Company’s investment in Sadara was $1,618 million less than Dow’s proportionate share of the carrying value of the underlying net assets held by Sadara at December 31, 2020 ($1,705 million less at December 31, 2019). This basis difference is primarily attributed to the long-lived assets of Sadara and is being amortized over the remaining useful lives of the assets. At December 31, 2020, the Company had a negative investment balance in Sadara of $22 million (0 at December 31, 2019) classified as “Other noncurrent obligations” in the Company’s consolidated balance sheets, related to the Company’s share of Sadara’s AOCL in 2020 offset by the basis difference amortization. The Company expects to continue to recognize its share of potential future losses reported by Sadara. See Note 16 for additional information related to guarantees.
In 2019, the Company recorded impairment charges related to its investment in Sadara. The joint venture achieved full commercial operations of all its facilities in 2017. In December 2018, the joint venture successfully completed its Creditors Reliability Test, an extensive operational testing program designed to demonstrate the reliability of the joint venture’s full chemical complex by operating at high rates for an extended period of time. While Sadara had reached these operational milestones and had been generating positive EBITDA (a non-GAAP measure defined as earnings before interest, taxes, depreciation and amortization), the joint venture had yet to report positive net income. During the fourth quarter of 2019, Sadara tested its long-lived assets for impairment using long-term cash flow projections. Sadara’s U.S. GAAP impairment test utilized an undiscounted cash flow methodology, under which Sadara concluded its long-lived assets were recoverable. Due to Sadara's financial condition and its long-lived asset impairment test, Dow Silicones,evaluated its equity method investment in Sadara for other-than-temporary impairment. The Company utilized a discounted cash flow methodology to measure the estimated fair value of its investment in Sadara, which was previouslyestimated to be zero (see Note 23 for additional information on the fair value measurement). The Company determined the decline in value of its investment in Sadara was other-than-temporary due to Sadara’s financial performance since becoming commercially operational in 2017 and uncertainty around prospects for recovery in Sadara’s financial condition. In addition, the Company reserved certain accounts and notes receivable and accrued interest balances associated with Sadara due to uncertainty around the timing of collection. In total, the Company recorded a $1,755 million pretax charge in the fourth quarter of 2019 related to Sadara, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Packaging & Specialty Plastics ($370 million), Industrial Intermediates & Infrastructure ($1,168 million) and Corporate ($217 million).
In 2020, the Company loaned $333 million to Sadara that was accounted for as in substance common stock and classified as "Investment in nonconsolidated affiliates" in the Company's consolidated balance sheets, was remeasuredsheets. The Company loaned $473 million to fair value. See Note 5 for additional information onSadara and converted $380 million of the Dow Silicones ownership restructure. Dow Silicones continuesnotes and accounts receivable into equity during 2019. In 2018, the Company converted $382 million of outstanding notes and accounts receivable with Sadara into equity, primarily due to maintain equity interests in the HSC Group, which includes Hemlock Semiconductor L.L.C. and DC HSC Holdings LLC. The negative investment balance in Hemlock Semiconductor L.L.C. was $495 million at December 31, 2018 ($752 million at December 31, 2017).
EQUATE
a shareholder loan reduction agreement with Sadara. At December 31, 2018,2020 and 2019, the Company's note receivable with Sadara was 0.
EQUATE
The Company had ana negative investment balance in EQUATE of $131 million ($42$147 million at December 31, 2017)2020 (negative $80 million at December 31, 2019), which is classified as "Investment in nonconsolidated affiliates""Other noncurrent obligations" in the consolidated balance sheets. The Company's investment in EQUATE was $502$475 million less than the Company's proportionate share of EQUATE's underlying net assets at December 31, 20182020 ($516489 million less at December 31, 2017)2019), which represents the difference between the fair values of certain MEGlobal assets acquired by EQUATE and the Company's related valuation on a U.S. GAAP basis. A basis difference of $184$155 million at December 31, 20182020 ($200169 million at December 31, 2017)2019) is being amortized over the remaining useful lives of the assets and the remainder is considered a permanent difference.
AFSI
On JulyAt December 31, 2015,2020, the Company sold its AgroFresh business to AFSI. Proceeds received on the divestiturehad an investment in AFSI of AgroFresh included 17.50 ($35 million common shares of AFSI, which were valued at $210 million and represented an approximate 35 percent ownership interest in AFSI. Based on the December 31, 2016 closing stock price of AFSI, the value of this investment would have been lower than the carrying value by $143 million. In the fourth quarter of 2016, the Company determined the decline2019), classified as "Investment in market value of AFSI was other-than-temporary and recognized a $143 million pretax impairment charge related to its equity interest in AFSI. The impairment charge was included in "Restructuring, goodwill impairment and asset related charges - net"nonconsolidated affiliates" in the consolidated statements of income.balance sheets. At December 31, 2018,2020, the Company's investment in AFSI was $101$108 million less than the Company's proportionate share of AFSI's underlying net assets ($92102 million less at December 31, 2017)2019). This amount primarily relates to thean other-than-temporary decline in the Company's investment in AFSI.
On April 4, 2017, the Company and AFSI revised certain agreements related to the divestiture of the AgroFresh business and Dow entered into a stock purchase agreement to purchase up to 5,070,358 shares of AFSI's common stock, which represented approximately 10 percent of AFSI's common stock outstanding at signing of the agreement, subject to certain terms and conditions. On November 19, 2018, the stock purchase agreement concluded. At December 31, 2018,2020, the Company held a 4240 percent ownership interest in AFSI (36(41 percent at December 31, 2017)2019). See Notes 22 and 23 for further information on this investment.
Sadara
The Company and Saudi Arabian Oil Company formed Sadara Chemical Company ("Sadara") to build and operate a world-scale, fully integrated chemicals complex in Jubail Industrial City, Kingdom of Saudi Arabia. Sadara achieved its first polyethylene production in December 2015 and announced the start-up of its mixed feed cracker and a third polyethylene train (which added to the two polyethylene trains already in operation) in August 2016. Sadara achieved successful startup of its remaining production units in 2017. In 2018, the Company entered into a shareholder loan reduction agreement with Sadara and converted $312 million of the remaining loan and accrued interest balance into equity. At December 31, 2018, the Company's note receivable with Sadara was zero. In addition, in the fourth quarter of 2018, the Company waived $70 million of accounts receivable with Sadara, which was converted into equity. In 2017, the Company loaned $735 million to Sadara and converted $718 million into equity, and had a note receivable from Sadara of $275 million at December 31, 2017, included in "Noncurrent receivables" in the consolidated balance sheets.
Transactions with Nonconsolidated Affiliates
The Company has service agreements with certain nonconsolidated affiliates, including contracts to manage the operations of manufacturing sites and the construction of new facilities; licensing and technology agreements; and marketing, sales, purchase, lease and sublease agreements.
The Company sells excess ethylene glycol produced at Dow's manufacturing facilities in the United States and Europe to MEGlobal, a subsidiary of EQUATE. The Company also sells ethylene to MEGlobal as a raw material for its ethylene glycol plants in Canada. Sales of these products to MEGlobal represented 1 percent of total net sales in 2018, 20172020, 2019 and 2016.
Dow Silicones supplies trichlorosilane, a raw material used2018. Sales of ethylene to MEGlobal are reflected in the productionPackaging & Specialty Plastics segment and represented 2 percent of polycrystalline silicon, to the HSC Group.segment's sales in 2020 (1 percent in 2019 and 2018). Sales of this materialethylene glycol to MEGlobal are reflected in the HSC GroupIndustrial Intermediates & Infrastructure segment and represented less than 1 percent of total netthe segment's sales in 20182020 (1 percent in 2019 and 2017. Sales of this material to the HSC Group for the period of June 1, 2016 through December 31, 2016 represented less than 12 percent of total net sales in 2016.2018).
DowThe Company is responsible for marketing the majority of Sadara products outside of the Middle East zone through the Company’s established sales channels. Under this arrangement, the Company purchases and sells Sadara products for a marketing fee. Purchases of Sadara products represented 8 percent of "Cost of sales" in 2018 (32020 (8 percent in 20172019 and not material9 percent in 2016)2018).
DowThe Company purchases products from The SCG-Dow Group, primarily for marketing and distribution in Asia Pacific. Purchases of products from The SCG-Dow Group represented 23 percent of "Cost of sales" in 20182020 (2 percent in 20172019 and 3 percent in 2016)2018).
Sales to and purchases from other nonconsolidated affiliates were not material to the consolidated financial statements.
Balances due to or due from nonconsolidated affiliates at December 31, 20182020 and 20172019 were as follows:
| | | | | | | | |
| Balances Due To or Due From Nonconsolidated Affiliates at Dec 31 | 2020 | 2019 |
| In millions |
| Accounts and notes receivable - Other | $ | 229 | | $ | 211 | |
| | |
| | |
| | |
| Accounts payable - Other | $ | 1,075 | | $ | 1,092 | |
| | |
|
| | | | | | |
| Balances Due To or Due From Nonconsolidated Affiliates at Dec 31 | 2018 | 2017 |
| In millions |
| Accounts and notes receivable - Other | $ | 562 |
| $ | 474 |
|
| Noncurrent receivables | 8 |
| 283 |
|
| Total assets | $ | 570 |
| $ | 757 |
|
| Accounts payable - Other | $ | 1,328 |
| $ | 1,260 |
|
Principal Nonconsolidated Affiliates
DowThe Company had an ownership interest in 5135 nonconsolidated affiliates at December 31, 2018 (532020 (37 at December 31, 2017)2019). The Company's principal nonconsolidated affiliates and its ownership interest (direct and indirect) for each at December 31, 2018, 20172020, 2019 and 20162018 are as follows:
| | | | | | | | | | | | | | |
| Principal Nonconsolidated Affiliates at Dec 31 | Country | Ownership Interest |
| | 2020 | 2019 | 2018 |
| EQUATE Petrochemical Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| The Kuwait Olefins Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| The Kuwait Styrene Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
Map Ta Phut Olefins Company Limited 1 | Thailand | 32.77 | % | 32.77 | % | 32.77 | % |
| | | | |
| Sadara Chemical Company | Saudi Arabia | 35 | % | 35 | % | 35 | % |
| The SCG-Dow Group: | | | | |
| Siam Polyethylene Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Polystyrene Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Styrene Monomer Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Synthetic Latex Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| | | | |
|
| | | | | | | |
| Principal Nonconsolidated Affiliates at Dec 31 | Country | Ownership Interest |
| | 2018 | 2017 | 2016 |
| EQUATE Petrochemical Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| The HSC Group: | | | | |
DC HSC Holdings LLC 1 | United States | 50 | % | 50 | % | 50 | % |
| Hemlock Semiconductor L.L.C. | United States | 50.1 | % | 50.1 | % | 50.1 | % |
| The Kuwait Olefins Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| The Kuwait Styrene Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
Map Ta Phut Olefins Company Limited 2 | Thailand | 32.77 | % | 32.77 | % | 32.77 | % |
| Sadara Chemical Company | Saudi Arabia | 35 | % | 35 | % | 35 | % |
| The SCG-Dow Group: | | | | |
| Siam Polyethylene Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Polystyrene Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Styrene Monomer Co., Ltd. | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Synthetic Latex Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| |
1. | DC HSC Holdings LLC holds an 80.5 percent indirect ownership interest in Hemlock Semiconductor Operations LLC. |
| |
2. | The Company's effective ownership of Map Ta Phut Olefins Company Limited is 32.77 percent, of which the Company directly owns 20.27 percent and indirectly owns 12.5 percent through its equity interest in Siam Polyethylene Company Limited. |
The Company’s investment in and equity earnings from its principal nonconsolidated affiliates are shown in the tables below:
| | | | | | | | |
| Investment in Principal Nonconsolidated Affiliates at Dec 31 | 2020 | 2019 |
| In millions |
| Investment in nonconsolidated affiliates | $ | 922 | | $ | 963 | |
| Other noncurrent obligations | (169) | | (80) | |
| Net investment in principal nonconsolidated affiliates | $ | 753 | | $ | 883 | |
| | | | | | | | | | | |
| Equity in Earnings (Losses) of Principal Nonconsolidated Affiliates | 2020 | 2019 | 2018 |
| In millions |
| Equity in earnings (losses) of principal nonconsolidated affiliates | $ | (16) | | $ | 21 | | $ | 561 | |
|
| | | | | | |
| Investment in Principal Nonconsolidated Affiliates at Dec 31 | 2018 | 2017 |
| In millions |
| Investment in nonconsolidated affiliates | $ | 3,411 |
| $ | 3,323 |
|
| Other noncurrent obligations | (495 | ) | (752 | ) |
| Net investment in principal nonconsolidated affiliates | $ | 2,916 |
| $ | 2,571 |
|
|
| | | | | | | | | |
| Equity Earnings from Principal Nonconsolidated Affiliates | 2018 | 2017 | 2016 1 |
| In millions |
| Equity in earnings of principal nonconsolidated affiliates | $ | 950 |
| $ | 701 |
| $ | 449 |
|
| |
1. | Equity in earnings of principal nonconsolidated affiliates for 2016 includes the results of Dow Silicones through May 31, 2016. |
The summarized financial information that follows represents the combined accounts (at 100 percent) of the principal nonconsolidated affiliates.
| | | | | | | | |
| Summarized Balance Sheet Information at Dec 31 | 2020 | 2019 |
| In millions |
| Current assets | $ | 5,044 | | $ | 5,302 | |
| Noncurrent assets | 25,298 | | 26,477 | |
| Total assets | $ | 30,342 | | $ | 31,779 | |
| Current liabilities | $ | 3,942 | | $ | 3,743 | |
| Noncurrent liabilities | 20,144 | | 20,271 | |
| Total liabilities | $ | 24,086 | | $ | 24,014 | |
| Noncontrolling interests | $ | 132 | | $ | 110 | |
| | | | | | | | | | | |
Summarized Income Statement Information 1 | 2020 | 2019 | 2018 |
| In millions |
| Sales | $ | 9,470 | | $ | 10,905 | | $ | 14,461 | |
| Gross profit | $ | 619 | | $ | 644 | | $ | 2,320 | |
| Income (loss) from continuing operations, net of tax | $ | (461) | | $ | (277) | | $ | 1,173 | |
1.The results in this table reflect purchase and sale activity between certain principal nonconsolidated affiliates and the Company, as previously discussed in the "Transactions with Nonconsolidated Affiliates" section.
|
| | | | | | |
| Summarized Balance Sheet Information at Dec 31 | 2018 | 2017 |
| In millions |
| Current assets | $ | 8,741 |
| $ | 8,039 |
|
| Noncurrent assets | 27,385 |
| 28,300 |
|
| Total assets | $ | 36,126 |
| $ | 36,339 |
|
| Current liabilities | $ | 5,706 |
| $ | 5,164 |
|
| Noncurrent liabilities | 20,807 |
| 22,240 |
|
| Total liabilities | $ | 26,513 |
| $ | 27,404 |
|
| Noncontrolling interests | $ | 332 |
| $ | 304 |
|
|
| | | | | | | | | |
Summarized Income Statement Information 1 | 2018 | 2017 | 2016 2 |
| In millions |
| Sales | $ | 15,619 |
| $ | 13,345 |
| $ | 12,003 |
|
| Gross profit | $ | 3,130 |
| $ | 2,461 |
| $ | 2,518 |
|
| Net income | $ | 1,943 |
| $ | 1,401 |
| $ | 831 |
|
| |
1. | The results in this table reflect purchase and sale activity between certain principal nonconsolidated affiliates and the Company, as previously discussed in the "Transactions with Nonconsolidated Affiliates" section. |
| |
2. | The summarized income statement information for 2016 includes the results of Dow Silicones through May 31, 2016. |
NOTE 13 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows changes in the carrying amountamounts of goodwill by reportable segment for the years ended December 31, 20182020 and 2017:2019:
| | | | | | | | | | | | | | |
| Goodwill | Packaging & Specialty Plastics | Industrial Intermediates & Infrastructure | Performance Materials & Coatings | Total |
| In millions |
| Balance at Jan 1, 2019 | $ | 5,101 | | $ | 1,095 | | $ | 3,650 | | $ | 9,846 | |
| Foreign currency impact | 8 | | 6 | | (24) | | (10) | |
| | | | |
| Goodwill Impairment | 0 | | 0 | | (1,039) | | (1,039) | |
| Other | 0 | | (1) | | 0 | | (1) | |
| Balance at Dec 31, 2019 | $ | 5,109 | | $ | 1,100 | | $ | 2,587 | | $ | 8,796 | |
| Foreign currency impact | 12 | | 4 | | 106 | | 122 | |
| Sale of rail infrastructure | (2) | | 0 | | 0 | | (2) | |
| Sale of marine and terminal infrastructure | (4) | | (4) | | 0 | | (8) | |
| | | | |
| Balance at Dec 31, 2020 | $ | 5,115 | | $ | 1,100 | | $ | 2,693 | | $ | 8,908 | |
|
| | | |
| Goodwill |
| In millions |
| Balance at Jan 1, 2017 | $ | 15,272 |
|
Sale of SKC Haas Display Films 1 | (34 | ) |
Divestiture of the EAA Business 2 | (23 | ) |
Divestiture of the DAS Divested Ag Business 3 | (128 | ) |
Dissolution of joint venture 4 | 48 |
|
| Goodwill impairment | (1,491 | ) |
| Foreign currency impact | 299 |
|
| Other | (5 | ) |
| Balance at Dec 31, 2017 | $ | 13,938 |
|
| Foreign currency impact | (80 | ) |
| Other | (10 | ) |
| Balance at Dec 31, 2018 | $ | 13,848 |
|
| |
1. | On June 30, 2017, the Company sold its ownership interest in the SKC Haas Display Films group of companies. See Note 18 for additional information. |
| |
2. | On September 1, 2017, the Company divested its EAA Business to SK Global Chemical Co., Ltd. See Note 6 for additional information. |
| |
3. | On November 30, 2017, the Company divested the DAS Divested Ag Business to CITIC Agri Fund. See Note 6 for additional information. |
| |
4. | On December 31, 2017, the Company dissolved a crude acrylic acid joint venture. See Note 23 for additional information. |
Effective with the Merger, the Company updated its reporting units to align with the level at which discrete financial information is available for review by management. A relative fair value method was used to reallocate goodwill for reporting units of whichThe separation from DowDuPont did not impact the composition had changed. The newof the Company's six reporting units are: Agriculture,units: Coatings & Performance Monomers, Construction Chemicals, Consumer Solutions, Electronics & Imaging, Energy Solutions, Hydrocarbons & Energy, Industrial Biosciences, Industrial Solutions, Nutrition & Health, Packaging and Specialty Plastics and Polyurethanes & CAV, SafetyConstruction Chemicals. The ECP businesses received as part of the separation from DowDuPont are included in the Hydrocarbons & ConstructionEnergy and Transportation & Advanced Polymers.Packaging and Specialty Plastics reporting units. At December 31, 2017, goodwill was carried by all of these reporting units.
In 2018, the Energy Solutions and Construction Chemicals reporting units were combined into Industrial Solutions and Polyurethanes & CAV, respectively. At December 31, 2018,2020, goodwill was carried by all reporting units.units except Coatings & Performance Monomers (“C&PM”).
Goodwill Impairments
The carrying amounts of goodwill at December 31, 20182020 and 2017,2019 were net of accumulated impairments of $1,920 million.$309 million in Industrial Intermediates & Infrastructure and $2,530 million in Performance Materials & Coatings.
Goodwill Impairment Testing
The Company performs an impairment test of goodwill annually in the fourth quarter. In 2018,2020, the Company performed qualitative assessments for all reporting units that carried goodwill. Based on the results of the qualitative assessments, the Company performed quantitative testing for 21 reporting units (11unit (2 in 20172019 and 31 in 2016) and a2018). The qualitative assessment was performed forassessments on the remaining reporting units. The qualitative assessmentsunits indicated that it was not more likely than not that fair value was less than the carrying value for those reporting units included in the qualitative test.units.
The quantitative testing conducted in 20182020 and 20162018 concluded that no goodwill impairments existed.
Upon completion of the quantitative testing in the fourth quarter of 2017,2019, the Company determined the Coatings & Performance MonomersC&PM reporting unit was impaired. Throughout 2017,During 2019, the Coatings & Performance MonomersC&PM reporting unit did not consistently meet expected financial performance targets, primarily due to increasing commoditizationthe industry’s increased captive use of coatings products, which led to volume reductions; reduced margins for products across the portfolio due to changes in coatings marketscustomer buying patterns and competition,supply and demand balances; as well as a continuous trend of customer consolidation in end marketsend-markets, which reduced growth opportunities. As a result, the Coatings & Performance MonomersC&PM reporting unit lowered its future revenue and profitability expectations.projections. The fair value of the Coatings & Performance MonomersC&PM reporting unit was determined using a discounted cash flow methodology that reflected reductions in projected revenue growth rates primarily driven by modifieddue to lower sales volume and pricingprice assumptions, as well as revised expectations forreductions to future growth rates. These discounted cash flows did not support the carrying value of the Coatings & Performance MonomersC&PM reporting unit. As a result, the Company recorded a goodwill impairment charge for the Coatings & Performance Monomers reporting unit of $1,491$1,039 million in the fourth quarter of 2017,2019, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.income and related to the Performance Materials & Coatings segment. The Coatings & Performance Monomerscarrying value of the C&PM reporting unit carried $1,071 million ofunit's goodwill was 0 at December 31, 2017.2019. No other goodwill impairments were identified as a result of the 20172019 testing.
Other Intangible Assets
The following table provides information regarding the Company’s other intangible assets:
| | | | | | | | | | | | | | | | | | | | |
| Other Intangible Assets at Dec 31 | 2020 | 2019 |
| In millions | Gross
Carrying
Amount | Accum Amort | Net | Gross
Carrying
Amount | Accum Amort | Net |
| Intangible assets with finite lives: | | | | | | |
| Developed technology | $ | 2,638 | | $ | (1,677) | | $ | 961 | | $ | 2,634 | | $ | (1,467) | | $ | 1,167 | |
| Software | 1,489 | | (989) | | 500 | | 1,449 | | (893) | | 556 | |
| Trademarks/tradenames | 352 | | (343) | | 9 | | 352 | | (342) | | 10 | |
| Customer-related | 3,301 | | (1,419) | | 1,882 | | 3,207 | | (1,184) | | 2,023 | |
| | | | | | |
| Total other intangible assets, finite lives | $ | 7,780 | | $ | (4,428) | | $ | 3,352 | | $ | 7,642 | | $ | (3,886) | | $ | 3,756 | |
| In-process research and development | 0 | | 0 | | 0 | | 3 | | 0 | | 3 | |
| Total other intangible assets | $ | 7,780 | | $ | (4,428) | | $ | 3,352 | | $ | 7,645 | | $ | (3,886) | | $ | 3,759 | |
|
| | | | | | | | | | | | | | | | | | |
| Other Intangible Assets at Dec 31 | 2018 | 2017 |
| In millions | Gross Carrying Amount | Accum Amort | Net | Gross Carrying Amount | Accum Amort | Net |
| Intangible assets with finite lives: | | | | | | |
| Developed technology | $ | 3,255 |
| $ | (1,934 | ) | $ | 1,321 |
| $ | 3,263 |
| $ | (1,690 | ) | $ | 1,573 |
|
| Software | 1,529 |
| (876 | ) | 653 |
| 1,420 |
| (780 | ) | 640 |
|
| Trademarks/tradenames | 688 |
| (631 | ) | 57 |
| 697 |
| (570 | ) | 127 |
|
| Customer-related | 4,911 |
| (2,151 | ) | 2,760 |
| 5,035 |
| (1,965 | ) | 3,070 |
|
| Other | 243 |
| (170 | ) | 73 |
| 245 |
| (156 | ) | 89 |
|
| Total other intangible assets, finite lives | $ | 10,626 |
| $ | (5,762 | ) | $ | 4,864 |
| $ | 10,660 |
| $ | (5,161 | ) | $ | 5,499 |
|
| In-process research and development ("IPR&D") | 49 |
| — |
| 49 |
| 50 |
| — |
| 50 |
|
| Total other intangible assets | $ | 10,675 |
| $ | (5,762 | ) | $ | 4,913 |
| $ | 10,710 |
| $ | (5,161 | ) | $ | 5,549 |
|
The following table provides information regarding amortization expense from continuing operations related to intangible assets:
| | | | | | | | | | | |
| Amortization Expense from Continuing Operations | 2020 | 2019 | 2018 |
| In millions |
| Other intangible assets, excluding software | $ | 401 | | $ | 419 | | $ | 469 | |
| Software, included in "Cost of sales" | $ | 96 | | $ | 96 | | $ | 93 | |
|
| | | | | | | | | |
| Amortization Expense | 2018 | 2017 | 2016 |
| In millions |
| Other intangible assets, excluding software | $ | 622 |
| $ | 624 |
| $ | 544 |
|
| Software, included in “Cost of sales” | $ | 100 |
| $ | 87 |
| $ | 73 |
|
In the fourth quarter of 2017, the Company wrote-off $69 million of intangible assets (including $11 million of IPR&D) as part of the Synergy Program. In the second quarter of 2016, the Company wrote-off $11 million of IPR&D as part of the 2016 restructuring charge. These charges were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note 7 for additional information.
Total estimated amortization expense from continuing operations for the next five fiscal years, including amounts expected to be capitalized, is as follows:
| | | | | |
| Estimated Amortization Expense for Next Five Years |
| In millions |
| 2021 | $ | 477 | |
| 2022 | $ | 415 | |
| 2023 | $ | 384 | |
| 2024 | $ | 366 | |
| 2025 | $ | 275 | |
|
| | | |
| Estimated Amortization Expense for Next Five Years |
| In millions |
| 2019 | $ | 648 |
|
| 2020 | $ | 614 |
|
| 2021 | $ | 585 |
|
| 2022 | $ | 516 |
|
| 2023 | $ | 488 |
|
NOTE 14 – TRANSFERS OF FINANCIAL ASSETS
Accounts Receivable Programs
The Company hasmaintains committed accounts receivable facilities with various financial institutions, including in the United States, which expires in November 2022 (“U.S. A/R Program”) and in Europe, which expires in July 2023 (“Europe A/R Program” and together with the U.S. A/R Program, "the Programs"). Under the terms of the Programs, the Company may sell certain eligible trade accounts receivable at any point in time, up to $900 million for the U.S. A/R Program and up to €400 million for the Europe A/R Program. Under the terms of the Programs, the Company continues to service the receivables from the customer, but retains no interest in the receivables, and remits payment to the financial institutions. The Company also provides a guarantee to the financial institutions for the creditworthiness and collection of the receivables in satisfaction of the facility. See Note 16 for additional information related to guarantees. There were 0 receivables sold under the Programs during the years ended December 31, 2020 and 2019.
Accounts Receivable Securitization Facilities
The Company historically sold trade accounts receivable of select North American entities and qualifying trade accounts receivable of select European entities on a revolving basis to certain multi-seller commercial paper conduit entities ("conduits"). The proceeds received arewere comprised of cash and interests in specified assets of the conduits (the receivables sold by the Company) that entitleentitled the Company to the residual cash flows of such specified assets in the conduits after the commercial paper hashad been repaid. Neither the conduits nor the investors in those entities havehad recourse to other assets of the Company in the event of nonpayment by the debtors.
In the fourth quarter of 2017, the Company suspended further sales of trade accounts receivable through these facilities and began reducing outstanding balances through collections of trade accounts receivable previously sold to such conduits. In 2018, the Company recognized a loss of $7 million on the sale of these receivables, which is included in “Interest expense and amortization of debt discount” in the consolidated statements of income. The Company's interests in the conduits were reflected in "Investing Activities" in the consolidated statements of cash flows and were $657 million in 2018. 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. In November 2019 and July 2020, the North American and European facilities, respectively, were amended and are no longer secured borrowing arrangements. These facilities were not drawn upon during the period they were secured borrowing arrangements. See Note 15 for additional information on the secured borrowing arrangements.
For the year ended December 31, 2018, the Company recognized a loss of $7 million on the sale of these receivables ($25 million loss for the year ended December 31, 2017 and $20 million loss for the year ended December 31, 2016), which is included in “Interest expense and amortization of debt discount” in the consolidated statements of income.
The following table summarizes the carrying value of interests held, which represents the Company's maximum exposure to loss related to the receivables sold, and the percentage of anticipated credit losses related to the trade accounts receivable sold. Also provided is the sensitivity of the fair value of the interests held to hypothetical adverse changes in the anticipated credit losses; amounts shown below are the corresponding hypothetical decreases in the carrying value of interests.
|
| | | | | | |
| Interests Held at Dec 31 | | |
| In millions | 2018 | 2017 |
Carrying value of interests held 1 | $ | — |
| $ | 677 |
|
| Percentage of anticipated credit losses | — | % | 2.64 | % |
| Impact to carrying value - 10% adverse change | $ | — |
| $ | — |
|
| Impact to carrying value - 20% adverse change | $ | — |
| $ | 1 |
|
| |
1. | Included in "Accounts and notes receivable - other" in the consolidated balance sheets. |
Credit losses, net of any recoveries, on receivables sold were insignificant for the years ended December 31, 2018, 2017 and 2016.
Following is an analysis of certain cash flows between the Company and the conduits:
|
| | | | | | | | | |
| Cash Proceeds | | | |
| In millions | 2018 | 2017 | 2016 |
| Sale of receivables | $ | — |
| $ | 1 |
| $ | 1 |
|
| Collections reinvested in revolving receivables | $ | — |
| $ | 21,293 |
| $ | 21,652 |
|
Interests in conduits 1 | $ | 657 |
| $ | 9,462 |
| $ | 8,551 |
|
| |
1. | Presented in "Investing Activities" in the consolidated statements of cash flows in accordance with ASU 2016-15. See Notes 1 and 2 for additional information. In connection with the review and implementation of ASU 2016-15, the Company also changed the prior year value of “Interests in conduits” due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits, including additional guidance from the SEC's Office of the Chief Accountant issued in the third quarter of 2018 that indicated an entity must evaluate daily transaction activity to calculate the value of cash received from beneficial interests in conduits. |
Following is additional information related to the sale of receivables under these facilities:
|
| | | | | | |
| Trade Accounts Receivable Sold at Dec 31 | | |
| In millions | 2018 | 2017 |
| Delinquencies on sold receivables still outstanding | $ | — |
| $ | 82 |
|
| Trade accounts receivable outstanding and derecognized | $ | — |
| $ | 612 |
|
In 2017, the Company repurchased $5 million of previously sold receivables.
NOTE 15 – NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
| | | | | | | | |
| Notes Payable at Dec 31 | | |
| In millions | 2020 | 2019 |
| Commercial paper | $ | 0 | | $ | 151 | |
| Notes payable to banks and other lenders | 156 | | 435 | |
| | |
| | |
| Total notes payable | $ | 156 | | $ | 586 | |
| Year-end average interest rates | 3.89 | % | 6.30 | % |
|
| | | | | | |
| Notes Payable at Dec 31 | | |
| In millions | 2018 | 2017 |
| Commercial paper | $ | 10 |
| $ | 231 |
|
| Notes payable to banks and other lenders | 295 |
| 253 |
|
| Total notes payable | $ | 305 |
| $ | 484 |
|
| Year-end average interest rates | 8.61 | % | 4.42 | % |
| | | | | | | | | | | | | | |
| Long-Term Debt at Dec 31 | 2020 Average Rate | 2020 | 2019
Average
Rate | 2019 |
| In millions |
| Promissory notes and debentures: | | | | |
| Final maturity 2020 | 0 | % | $ | 0 | | 8.44 | % | $ | 76 | |
| Final maturity 2021 | 8.95 | % | 173 | | 8.95 | % | 174 | |
| Final maturity 2022 | 8.64 | % | 121 | | 3.50 | % | 1,372 | |
| Final maturity 2023 | 7.63 | % | 250 | | 7.64 | % | 325 | |
Final maturity 2024 1 | 3.43 | % | 1,017 | | 3.37 | % | 1,397 | |
| Final maturity 2025 | 5.13 | % | 625 | | 5.26 | % | 662 | |
Final maturity 2026 and thereafter 1 | 5.22 | % | 10,888 | | 5.73 | % | 8,820 | |
| Other facilities: | | | | |
| U.S. dollar loans | 0 | % | 0 | | 2.55 | % | 2,000 | |
| Foreign currency notes and loans, various rates and maturities | 1.41 | % | 3,189 | | 3.26 | % | 592 | |
| InterNotes®, varying maturities through 2050 | 3.56 | % | 535 | | 3.44 | % | 928 | |
| | | | |
Finance lease obligations 2 | | 518 | | | 395 | |
| Unamortized debt discount and issuance costs | | (365) | | | (331) | |
Long-term debt due within one year 3 | | (460) | | | (435) | |
| Long-term debt | | $ | 16,491 | | | $ | 15,975 | |
1.Cost includes net fair value hedge adjustment gains of $69 million at December 31, 2020 ($1 million at December 31, 2019). See Note 22 for additional information.
2.See Note 17 for additional information.
3.Presented net of current portion of unamortized debt issuance costs.
| | | | | |
| Maturities of Long-Term Debt for Next Five Years at Dec 31, 2020 |
| In millions |
| 2021 | $ | 460 | |
| 2022 | $ | 236 | |
| 2023 | $ | 381 | |
| 2024 | $ | 1,079 | |
| 2025 | $ | 717 | |
2020 Activity
In February 2020, the Company issued €2.25 billion aggregate principal amount of notes (“Euro Notes”). The Euro Notes included €1 billion aggregate principal amount of 0.50 percent notes due 2027, €750 million aggregate principal amount of 1.125 percent notes due 2032 and €500 million aggregate principal amount of 1.875 percent notes due 2040. The Euro Notes have a weighted average coupon rate of approximately 1.0 percent. With the net proceeds from the issuance of the Euro Notes, Dow Silicones voluntarily repaid $750 million of principal under a certain third party credit agreement, ("Term Loan Facility”). In addition, the Company redeemed $1.25 billion of 3.0 percent notes issued by the Company with maturity in 2022. As a result, the Company recognized a pretax loss of $85 million on the early extinguishment of debt, included in “Sundry income (expense) – net” in the consolidated statements of income and related to Corporate.
|
| | | | | | | | | | |
| Long-Term Debt at Dec 31 | 2018 Average Rate | 2018 | 2017 Average Rate | 2017 |
| In millions |
| Promissory notes and debentures: | | | | |
| Final maturity 2018 | — | % | $ | — |
| 5.78 | % | $ | 339 |
|
| Final maturity 2019 | 9.80 | % | 7 |
| 8.55 | % | 2,122 |
|
| Final maturity 2020 | 4.46 | % | 1,547 |
| 4.46 | % | 1,547 |
|
| Final maturity 2021 | 4.71 | % | 1,424 |
| 4.71 | % | 1,424 |
|
| Final maturity 2022 | 3.50 | % | 1,373 |
| 3.50 | % | 1,373 |
|
| Final maturity 2023 | 7.64 | % | 325 |
| 7.64 | % | 325 |
|
| Final maturity 2024 and thereafter | 5.73 | % | 8,859 |
| 5.92 | % | 6,857 |
|
| Other facilities: | | | | |
| U.S. dollar loans, various rates and maturities | 3.59 | % | 4,533 |
| 2.44 | % | 4,564 |
|
| Foreign currency loans, various rates and maturities | 3.21 | % | 713 |
| 3.00 | % | 814 |
|
| Medium-term notes, varying maturities through 2025 | 3.26 | % | 778 |
| 3.20 | % | 873 |
|
| Tax-exempt bonds | — | % | — |
| 5.66 | % | 343 |
|
| Capital lease obligations | | 369 |
| | 282 |
|
| Unamortized debt discount and issuance costs | | (334 | ) | | (346 | ) |
Long-term debt due within one year 1 | | (340 | ) | | (752 | ) |
| Long-term debt |
|
| $ | 19,254 |
|
|
| $ | 19,765 |
|
| |
1. | Presented net of current portion of unamortized debt issuance costs. |
|
| | | |
Maturities of Long-Term Debt for Next Five Years at Dec 31, 2018 1 |
| In millions |
| 2019 | $ | 340 |
|
| 2020 | $ | 1,833 |
|
| 2021 | $ | 6,247 |
|
| 2022 | $ | 1,510 |
|
| 2023 | $ | 480 |
|
| |
1. | Assumes the option to extend a term loan facility related to the Dow Silicones ownership restructure will be exercised. |
In the first quarter of 2020, the Company withdrew $800 million under various uncommitted bilateral credit arrangements, which were subsequently repaid in the second quarter of 2020.
In August 2020, the Company issued $2 billion aggregate principal amount of notes. The notes included $850 million aggregate principal amount of 2.1 percent notes due 2030 and $1.15 billion aggregate principal amount of 3.6 percent notes due 2050 (together, the "Notes"). With the net proceeds from the issuance of the Notes, Dow Silicones voluntarily repaid the remaining $1.25 billion outstanding principal balance under the Term Loan Facility. In September 2020, the Company also used $556 million of aggregate proceeds from the Notes to fund cash tender offers for certain of its debt securities and certain debt securities of Union Carbide. In total, $493 million aggregate principal amount was tendered and retired. These actions resulted in a pretax loss of $62 million on the early extinguishment of debt included in "Sundry income (expense) – net" in the consolidated statements of income and related to Corporate.
In 2020, the Company also issued an aggregate principal amount of $190 million of InterNotes®, and redeemed an aggregate principal amount of $180 million at maturity. In addition, the Company voluntarily repaid an aggregate principal amount of $400 million of InterNotes® with various maturities. As a result, the Company recognized a pretax loss on the early extinguishment of debt of $2 million, included in “Sundry income (expense) – net” in the consolidated statements of income and related to Corporate. Additionally, the Company repaid $134 million of long-term debt at maturity and approximately $29 million of long-term debt was repaid by consolidated variable interest entities.
Subsequent Event
On January 15, 2021, the Company announced a call for $118 million of InterNotes® with various maturities, which will settle on February 15, 2021.
2019 Activity
In 2019, the Company issued $2 billion of senior unsecured notes in an offering under Rule 144A of the Securities Act of 1933. The offering included $750 million aggregate principal amount of 4.80 percent notes due 2049; $750 million aggregate principal amount of 3.625 percent notes due 2026; and $500 million aggregate principal amount of 3.15 percent notes due 2024. In addition, the Company redeemed $1.5 billion of 4.25 percent notes with maturity in 2020 and $1.25 billion of 4.125 percent notes with maturity in 2021. As a result, the Company recognized a pretax loss of $100 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income and related to Corporate. The Company also issued an aggregate principal amount of $277 million of InterNotes®, and redeemed an aggregate principal amount of $122 million at maturity. Approximately $149 million of long-term debt (net of $16 million of issuances) was repaid by consolidated variable interest entities.
In 2019, Dow Silicones voluntarily repaid $2.5 billion of principal under the Term Loan Facility. As a result, Dow Silicones recognized a pretax loss of $2 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income and related to Corporate.
In October 2019, TDCC launched exchange offers for $4 billion of all the outstanding, unregistered senior notes that were issued in private offerings on November 30, 2018 and May 20, 2019, for identical, registered notes under the Securities Act of 1933 (the “Exchange Offers”). The Exchange Offers were with respect to the Company’s 3.15 percent notes due 2024, 4.55 percent notes due 2025, 3.625 percent notes due 2026, 4.80 percent notes due 2028, 5.55 percent notes due 2048 and 4.80 percent notes due 2049, and fulfilled the Company’s obligations contained in the registration rights agreements entered into in connection with the issuance of the aforementioned notes.
2018 Activity
In 2018, the Company redeemed $333 million of 5.70 percent notes at maturity and an aggregate principal amount of $91 million of International Notes ("InterNotes")InterNotes® at maturity. In addition, approximately $138 million of long-term debt was repaid by consolidated variable interest entities. The Company also called an aggregate principal amount of $343 million tax-exempt bonds of various interest rates and maturities in 2029, 2033 and 2038. As a result of these redemptions, the Company recognized a pretax loss of $6 million on the early extinguishment of debt, included in “Sundry income (expense) - net” in the consolidated statements of income.income and related to Corporate.
In November 2018, the Company issued $2.0$2 billion of senior unsecured notes in an offering under Rule 144A of the Securities Act of 1933. The offering included $900 million aggregate principal amount of 5.55 percent notes due
2048; $600 million aggregate principal amount of 4.80 percent notes due 2028; and $500 million aggregate principal amount of 4.55 percent notes due 2025.
In December 2018, the Company tendered and redeemed $2.1 billion of 8.55 percent notes issued by the Company with maturity in 2019. As a result, the Company recognized a pretax loss of $48 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income.income and related to Corporate.
2017 Activity
In 2017, the Company redeemed $436 million of 6.00 percent notes that matured on September 15, 2017, and $32 million aggregate principal amount of InterNotes at maturity. In addition, approximately $119 million of long-term debt was repaid by consolidated variable interest entities.
2016 Activity
In 2016, the Company redeemed $349 million of 2.50 percent notes that matured on February 15, 2016, and $52 million aggregate principal amount of InterNotes at maturity. In addition, approximately $128 million of long-term debt (net of $28 million of additional borrowings) was repaid by consolidated variable interest entities.
As part of the Dow Silicones ownership restructure, the fair value of debt assumed by Dow was $4,672 million and is reflected in the long-term debt table above.
Available Credit Facilities
The following table summarizes the Company's credit facilities:
| | | | | | | | | | | | | | | |
| Committed and Available Credit Facilities at Dec 31, 2020 |
| In millions | | Committed Credit | Credit Available | Maturity Date | Interest |
| Five Year Competitive Advance and Revolving Credit Facility | | $ | 5,000 | | $ | 5,000 | | October 2024 | Floating rate |
| Bilateral Revolving Credit Facility | | 200 | | 200 | | November 2021 | Floating rate |
| Bilateral Revolving Credit Facility | | 300 | | 300 | | December 2021 | Floating rate |
| Bilateral Revolving Credit Facility | | 300 | | 300 | | December 2021 | Floating rate |
| Bilateral Revolving Credit Facility | | 150 | | 150 | | March 2022 | Floating rate |
| Bilateral Revolving Credit Facility | | 100 | | 100 | | June 2022 | Floating rate |
| Bilateral Revolving Credit Facility | | 200 | | 200 | | September 2022 | Floating rate |
| Bilateral Revolving Credit Facility | | 200 | | 200 | | September 2023 | Floating rate |
| Bilateral Revolving Credit Facility | | 250 | | 250 | | September 2023 | Floating rate |
| Bilateral Revolving Credit Facility | | 300 | | 300 | | September 2023 | Floating rate |
| Bilateral Revolving Credit Facility | | 100 | | 100 | | October 2024 | Floating rate |
| Bilateral Revolving Credit Facility | | 100 | | 100 | | October 2024 | Floating rate |
| Bilateral Revolving Credit Facility | | 200 | | 200 | | November 2024 | Floating rate |
| Bilateral Revolving Credit Facility | | 100 | | 100 | | March 2025 | Floating rate |
| Bilateral Revolving Credit Facility | | 250 | | 250 | | March 2025 | Floating rate |
| Bilateral Revolving Credit Facility | | 350 | | 350 | | March 2025 | Floating rate |
| Total Committed and Available Credit Facilities | | $ | 8,100 | | $ | 8,100 | | | |
|
| | | | | | | | | |
| Committed and Available Credit Facilities at Dec 31, 2018 |
| In millions | Effective Date | Committed Credit | Credit Available | Maturity Date | Interest |
| Five Year Competitive Advance and Revolving Credit Facility | October 2018 | $ | 5,000 |
| $ | 5,000 |
| October 2023 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 100 |
| 100 |
| March 2019 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 100 |
| 100 |
| October 2019 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 100 |
| 100 |
| March 2020 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 280 |
| 280 |
| March 2020 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 100 |
| 100 |
| March 2020 | Floating rate |
| Bilateral Revolving Credit Facility | August 2015 | 200 |
| 200 |
| March 2020 | Floating rate |
| Term Loan Facility | February 2016 | 4,500 |
| — |
| December 2021 | Floating rate |
| Bilateral Revolving Credit Facility | May 2016 | 200 |
| 200 |
| May 2020 | Floating rate |
| Bilateral Revolving Credit Facility | July 2016 | 200 |
| 200 |
| July 2020 | Floating rate |
| Bilateral Revolving Credit Facility | August 2016 | 100 |
| 100 |
| August 2020 | Floating rate |
| North American Securitization Facility | September 2018 | 800 |
| 800 |
| September 2019 | Floating rate |
European Securitization Facility 1 | October 2018 | 457 |
| 457 |
| October 2020 | Floating rate |
| Total Committed and Available Credit Facilities |
| $ | 12,137 |
| $ | 7,637 |
|
|
|
| |
1. | Equivalent to Euro 400 million. |
Term Loan Facility
In connection with the ownership restructure of Dow Silicones on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness under a certain third party credit agreement ("Term Loan Facility"). The Company subsequently guaranteed the obligations of Dow Silicones under the Term Loan Facility and, as a result, the covenants and events of default applicable to the Term Loan Facility are substantially similar to the covenants and events of default set forth in the Company's Five Year Competitive Advance and Revolving Credit Facility. In the second quarter of 2018, Dow Silicones exercised the 19-month extension option making amounts borrowed under the Term Loan Facility repayable on December 30, 2019. In addition, Dow Silicones amended the Term Loan Facility to include an additional 2-year extension option, at Dow Silicones' election, upon satisfaction of certain customary conditions precedent. Dow Silicones intends to exercise the 2-year extension option on the Term Loan Facility.
Secured Borrowings
In September 2018, the Company renewed its North American accounts receivable securitization facility for a one year term and amended the terms of the agreement from an off-balance sheet arrangement to a secured borrowing arrangement, with a borrowing capacity up to $800 million. Under the structure of the amended agreement, the Company willhad the option to use select trade accounts receivable to collateralize the credit facility with certain lenders. At December 31, 2018,In November 2019, the facility hadwas amended and is no longer a secured borrowing arrangement. It was not been drawn upon.upon during its term as a secured borrowing arrangement.
In October 2018, the Company renewed its European accounts receivable securitization facility for a two year term and amended the terms of the agreement from an off-balance sheet arrangement to a secured borrowing arrangement, with a borrowing capacity up to Euro 400€400 million. Under the structure of the amended agreement, the Company willhad the option to use select trade accounts receivable to collateralize the credit facility with certain lenders. At December 31, 2018,In July 2020, the facility hadwas amended and is no longer a secured borrowing arrangement. It was not been drawn upon.upon during its term as a secured borrowing arrangement. See Note 14 for additional information related to the accounts receivable programs.
Uncommitted Credit Facilities and Outstanding Letters of Credit
The Company had uncommitted credit facilities in the form of unused bank credit lines of approximately $3,480 million at December 31, 2018. These lines can be used to support short-term liquidity needs and general purposes, including letters of credit. Outstandingutilizes letters of credit were $439 million at December 31, 2018 ($433 million at December 31, 2017). These letters of creditto support commitments made in the ordinary course of business. While the terms and amounts of letters of credit change, the Company generally has approximately $400 million of outstanding letters of credit at any given time. In addition, at December 31, 2020, the Company had a $220 million outstanding letter of credit related to a guarantee of the Company’s share of one future debt service schedule payment for Sadara. See Note 16 for additional information related to guarantees.
Debt Covenants and Default Provisions
The Company’sTDCC’s outstanding long-term debt has been issued primarily under indentures which contain, among other provisions, certain customary restrictive covenants with which the CompanyTDCC must comply while the underlying notes are outstanding. Failure of the CompanyTDCC to comply with any of its covenants, could result in a default under the applicable indenture and allow the note holders to accelerate the due date of the outstanding principal and accrued interest on the underlying notes.
The Company'sTDCC's indenture covenants include obligations to not allow liens on principal U.S. manufacturing facilities, enter into sale and lease-back transactions with respect to principal U.S. manufacturing facilities, merge or consolidate with any other corporation, or sell, lease or convey, directly or indirectly, all or substantially all of the Company’sTDCC’s assets. The outstanding debt also contains customary default provisions. The CompanyTDCC remains in compliance with these covenants after the Merger.covenants.
The Company’sTDCC’s primary, private credit agreements also contain certain customary restrictive covenant and default provisions in addition to the covenants set forth above with respect to the Company’sTDCC’s debt. Significant other restrictive covenants and default provisions related to these agreements include:
| |
(a) | the obligation to maintain the ratio of the Company’s consolidated indebtedness to consolidated capitalization at no greater than 0.65 to 1.00 at any time the aggregate outstanding amount of loans under the Five Year Competitive Advance and Revolving Credit Facility Agreement dated October 30, 2018, equals or exceeds $500 million, |
(a) the obligation to maintain the ratio of TDCC’s consolidated indebtedness to consolidated capitalization at no greater than 0.65 to 1.00 at any time the aggregate outstanding amount of loans under the Five Year Competitive Advance and Revolving Credit Facility Agreement ("Revolving Credit Agreement") dated October 30, 2018, equals or exceeds $500 million,
| |
(b) | a default if the Company or an applicable subsidiary fails to make any payment, including principal, premium or interest, under the applicable agreement on other indebtedness of, or guaranteed by, the Company or such applicable subsidiary in an aggregate amount of $100 million or more when due, or any other default or other event under the applicable agreement with respect to such indebtedness occurs which permits or results in the acceleration of $400 million or more in the aggregate of principal, and |
| |
(c) | a default if the Company or any applicable subsidiary fails to discharge or stay within 60 days after the entry of a final judgment against the Company or such applicable subsidiary of more than $400 million. |
(b) a default if TDCC or an applicable subsidiary fails to make any payment, including principal, premium or interest, under the applicable agreement on other indebtedness of, or guaranteed by, TDCC or such applicable subsidiary in an aggregate amount of $100 million or more when due, or any other default or other event under the applicable agreement with respect to such indebtedness occurs which permits or results in the acceleration of $400 million or more in the aggregate of principal, and
(c) a default if TDCC or any applicable subsidiary fails to discharge or stay within 60 days after the entry of a final judgment against TDCC or such applicable subsidiary of more than $400 million.
Failure of the CompanyTDCC to comply with any of the covenants or default provisions could result in a default under the applicable credit agreement which would allow the lenders to not fund future loan requests and to accelerate the due date of the outstanding principal and accrued interest on any outstanding indebtedness.
On April 1, 2019, DowDuPont completed the separation of its materials science business and Dow Inc. became the direct parent company of TDCC. In conjunction with the separation, Dow Inc. is obligated, substantially concurrently with the issuance of any guarantee in respect of outstanding or committed indebtedness under TDCC's Revolving Credit Agreement, to enter into a supplemental indenture with TDCC and the trustee under TDCC’s existing 2008 base indenture governing certain notes issued by TDCC. Under such supplemental indenture, Dow Inc. will guarantee all outstanding debt securities and all amounts due under such existing base indenture and will become subject to certain covenants and events of default under the existing base indenture.
In addition, the Revolving Credit Agreement includes an event of default which would be triggered in the event Dow Inc. incurs or guarantees third party indebtedness for borrowed money in excess of $250 million or engages in any material activity or directly owns any material assets, in each case, subject to certain conditions and exceptions. Dow Inc. may, at its option, cure the event of default by delivering an unconditional and irrevocable guarantee to the administrative agent within thirty days of the event or events giving rise to such event of default.
No such events have occurred or have been triggered at the time of the filing of this Annual Report on Form 10-K.
NOTE 16 – COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
Introduction
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. At December 31, 2018,2020, the Company had accrued obligations of $820$1,244 million for probable environmental remediation and restoration costs, including $156$248 million for the remediation of Superfund sites. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately twoone and a half times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s results of operations, financial condition or cash flows. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. As new or additional information becomes available and/or certain spending trends become known, management will evaluate such information in determination of the current estimate of the environmental liability. At December 31, 2017,2019, the Company had accrued obligations of $878$1,155 million for probable environmental remediation and restoration costs, including $152$207 million for the remediation of Superfund sites.
InAs part of the fourthCompany's 2020 Restructuring Program, in the third quarter of 2016,2020, the Company recorded a pretax charge of $295 million forrelated to environmental remediation at a number of historical locations, including the Midland manufacturing site/off-site matters and the Wood-Ridge sites, primarily resultingmatters. This charge resulted from the culminationCompany's evaluation of negotiations with regulators and/or final agency approval. These charges werethe costs required to manage remediation activities at sites Dow will permanently shut down as part of its 2020 Restructuring Program. In addition, the Company recorded indemnification assets of $50 million related to Dow Silicones' environmental matters. The Company recognized a pretax charge, net of indemnifications, of $56 million, included in "Cost of sales""Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income.income and related to Performance Materials & Coatings ($52 million) and Corporate ($4 million). See Note 6 for additional information.
In the third quarter of 2019, the Company recorded a pretax charge related to environmental remediation matters at a number of current and historical locations. The charge primarily resulted from: the culmination of long-standing negotiations and discussions with regulators and agencies, including technical studies supporting higher cost estimates for final or staged remediation plans; the Company’s evaluation of the cost required to manage remediation activities at sites affected by Dow’s separation from DowDuPont and related agreements with Corteva and DuPont; and, the Company’s review of its closure strategies and obligations to monitor ongoing operations and maintenance activities. In addition, the Company recorded indemnification assets of $48 million related to Dow Silicones’ environmental matters. The Company recognized a pretax charge, net of indemnifications, of $399 million related to these environmental matters, included in “Cost of sales” in the consolidated statements of income and related to Packaging & Specialty Plastics ($5 million), Industrial Intermediates & Infrastructure ($8 million), Performance Materials & Coatings ($50 million) and Corporate ($336 million).
The following table summarizes the activity in the Company's accrued obligations for environmental matters for the years ended December 31, 20182020 and 2017:2019:
| | | | | | | | |
| Accrued Obligations for Environmental Matters | 2020 | 2019 |
| In millions |
| Balance at Jan 1 | $ | 1,155 | | $ | 810 | |
| Accrual adjustment | 285 | | 590 | |
| Payments against reserve | (198) | | (241) | |
| Foreign currency impact | 2 | | (4) | |
| Balance at Dec 31 | $ | 1,244 | | $ | 1,155 | |
|
| | | | | | |
| Accrued Obligations for Environmental Matters | 2018 | 2017 |
| In millions |
| Balance at Jan 1 | $ | 878 |
| $ | 909 |
|
| Accrual adjustment | 175 |
| 172 |
|
| Payments against reserve | (209 | ) | (220 | ) |
| Foreign currency impact | (24 | ) | 17 |
|
| Balance at Dec 31 | $ | 820 |
| $ | 878 |
|
The amounts charged to income on a pretax basis related to environmental remediation totaled $174$234 million in 2018, $1712020, $588 million in 20172019 and $504$176 million in 2016.2018. Capital expenditures for environmental protection were $76$80 million in 2018, $792020, $83 million in 20172019 and $66$55 million in 2016.2018.
Midland Off-Site Environmental Matters
On June 12, 2003, the Michigan Department of Environmental Quality ("MDEQ") issued a Hazardous Waste Operating License (the "License") to the Company’s Midland, Michigan, manufacturing site (the “Midland site”Site”), which was renewed and replaced by the MDEQ on September 25, 2015, and included provisions requiring the Company to conduct an investigation to determine the nature and extent of off-site contamination in the City of Midland soils, the Tittabawassee River and Saginaw River sediment and floodplain soils, and the Saginaw Bay, and, if necessary, undertake remedial action. In 2016, final regulatory approval was received from the MDEQ for the City of Midland and Dowthe Company is continuing the long term monitoring requirements of the Remedial Action Plan.
Tittabawassee and Saginaw Rivers, Saginaw Bay
The Company, the U.S. Environmental Protection Agency (“EPA”) and the State of Michigan ("State") entered into an administrative order on consent (“AOC”), effective January 21, 2010, that requires the Company to conduct a remedial investigation, a feasibility study and a remedial design for the Tittabawassee River, the Saginaw River and the Saginaw Bay, and pay the oversight costs of the EPA and the State under the authority of the Comprehensive Environmental Response, Compensation, and Liability Act. These actions, to be conducted under the lead oversight of the EPA, will build upon the investigative work completed under the State Resource Conservation Recovery Act program from 2005 through 2009.
The Tittabawassee River, beginning at the Midland Site and extending down to the first six miles of the Saginaw River, are designated as the first Operable Unit for purposes of conducting the remedial investigation, feasibility study and remedial design work. This work will be performed in a largely upriver to downriver sequence for eight geographic segments of the Tittabawassee and upper Saginaw Rivers. In the first quarter of 2012, the EPA requested the Company address the Tittabawassee River floodplain ("Floodplain") as an additional segment. In January 2015, the Company and the EPA entered into an order to address remediation of the Floodplain. The remedial work is expected to take placecontinue over the next threetwo years. The remainder of the Saginaw River and the Saginaw Bay are designated as a second Operable Unit and the work associated with that unit may also be geographically segmented. The AOC does not obligate the Company to perform removal or remedial action; that action can only be required by a separate order. The Company and the EPA have been negotiating orders separate from the AOC that obligate the Company to perform remedial actions under the scope of work of the AOC. The Company and the EPA have entered into foursix separate orders to perform limited remedial actions in fiveseven of the eight geographic segments in the first Operable Unit, including the Floodplain. Dow has received from the EPA a Notice of Completion of Work for three of these six orders and the Company continues the long-term monitoring requirements. Dow also has entered into a separate order to addressperform a limited remedial action for certain properties located within the Floodplain.second Operable Unit.
Alternative Dispute Resolution Process
The Company, the EPA, the U.S. Department of Justice ("DOJ"), and the natural resource damage trustees (which include the Michigan Office of the Attorney General, the MDEQ,Michigan Department of Environment, Great Lakes and Energy, the Michigan Department of Natural Resources, the U.S. Fish and Wildlife Service, the U.S. Bureau of Indian Affairs and the Saginaw-Chippewa tribe)Indian Tribe of Michigan) have been engaged in negotiations to seek to resolve potential governmental claims against the Company for natural resource damages related to historical off-site contamination associated with the City of Midland, the Tittabawassee and Saginaw Rivers and the Saginaw Bay. The Company and the governmental parties started meeting in the fall of 2005 and entered into a Confidentiality Agreement in December 2005. The Company continues to conduct negotiations under the Federal Alternative Dispute Resolution Act with all of the governmental parties, except the EPA which withdrew from the alternative dispute resolution process on September 12, 2007.
On September 28, 2007,July 20, 2020, the U.S. District Court for the Eastern District of Michigan ("District Court") entered a final consent decree in Civil Action No. 1:19-cv-13292 between the Company and thefederal, state and tribal trustees to resolve allegations of natural resource damage trustees entered into a Funding and Participation Agreement that addresseddamages arising from the historic operations of the Company’s payment of past costs incurred by the natural resource damage trustees, payment of the costs of a trustee coordinator and a process to review additional cooperative studies that the Company might agree to fund or conduct with the natural resource damage trustees. On March 18, 2008, the Company and the natural resource damage trustees entered into a Memorandum of Understanding ("MOU") to provide a mechanism forMidland Site. The consent decree required the Company to fund cooperative studies relatedpay a $15 million cash settlement to be used for long-term maintenance and trustee-selected remediation projects with an additional $7 million to specified local projects managed by third parties. These funds were paid in December 2020. The consent decree further requires the assessment of natural resource damages. This MOU was amended and funding of cooperative studies was extended until March 2014. All cooperative studies have been completed. On April 7, 2008,Company to complete 13 additional environmental restoration projects which are valued by the natural resource damage trustees released their “Natural Resource Damage Assessment Plan forat approximately $77 million, to be conducted over the Tittabawassee River System Assessment Area.”next several years.
At December 31, 2018,2020, the accrual for these off-site matters was $95$107 million (included in the total accrued obligation of $820$1,244 million). At December 31, 2017,2019, the Company had an accrual for these off-site matters of $83$135 million (included in the total accrued obligation of $878$1,155 million).
Environmental Matters Summary
It is the opinion of the Company’s management that the possibility is remote that costs in excess of those disclosed will have a material impact on the Company’s results of operations, financial condition or cash flows.
Litigation
Asbestos-Related Matters of Union Carbide Corporation
Introduction
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.
Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
Estimating the Asbestos-Related Liability
Based on a study completed in January 2003 by Ankura Consulting Group, LLC ("Ankura"), in January 2003, Union Carbide increased its December 31, 2002, asbestos-related liability for pending and future claims for a 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then,In subsequent years, Union Carbide has compared current asbestos claim and resolution activity to the results of the most recent Ankura study at each balance sheet date to determine whether the accrual continuescontinued to be appropriate.
appropriate. In addition, Union Carbide has requested Ankura to review Union Carbide’s historical asbestos claim and resolution activity each year since 2004 to determine the appropriateness of updating the most recent Ankura study.
In October 2016, Union Carbide requested Ankura completed a study to review its historical asbestos claim and resolution activity and determine the appropriateness of updating its December 2014 study. In response to the request, Ankura reviewed and analyzed asbestos-related claim and resolution data through September 30, 2016. The resulting study, completed by Ankura in December 2016, providedprovide estimates for the undiscounted cost of disposing of pending and future claims against Union Carbide and Amchem excluding future defense and processing costs, for both a 15-year period and through the terminal year of 2049.
2049, including a reasonable forecast of future defense and processing costs. Based on the study completed in December 2016 by Ankura, and Union Carbide's ownCarbide’s internal review it was determined that an adjustment to the accrual was necessary.of asbestos claim and resolution activity, Union Carbide determined that usingestimating the estimateliability through the terminal year of 2049 was more appropriate due to increasingincreased knowledge and data about the costs to resolve claims and diminished volatility in filing rates. Using the range in the Ankura December 2016 study, which was estimated to be between $502 million and $565 million for the undiscounted cost of disposing of pending and future claims, Union Carbide increased its asbestos-relatedand the Company also determined that estimating and accruing a liability for pending and future claims through the terminal year of 2049 by $104 million, included in "Asbestos-related charge" in the consolidated statements of income.
In September 2014, Union Carbide began to implement a strategy designed to reduce and to ultimately stabilize and forecast defense costs associated with asbestos-related matters. The strategy included a number of important changes including: invoicing protocols including capturing costs by plaintiff; review of existing counsel roles, work processes and workflow; and the utilization of enterprise legal management software, which enabled claim-specific tracking of asbestos-related defense and processing costs. Union Carbide reviewed the information generated from this new strategy and determined that it now had the ability to reasonably estimate asbestos-related defense and processing costs for the same periods that it estimates its asbestos-related liability for pending and future claims. Union Carbide believes that including estimates of the liability for asbestos-related defense and processing costs provides awas more complete assessment and measure of the liability associated with resolving asbestos-related matters, which Union Carbide and the Company believe is preferable in these circumstances.
In October 2016, in addition to the study for asbestos claim and resolution activity, Union Carbide requested Ankura to review asbestos-related defense and processing costs and provide an estimate of defense and processing costs associated with resolving pending and future asbestos-related claims facing Union Carbide and Amchem for the same periods of time that Union Carbide uses for estimating resolution costs. In December 2016, Ankura conducted the study and provided Union Carbide with an estimate of future defense and processing costs for both a 15-year period and through the terminal year of 2049. The resulting study estimated asbestos-related defense and processing costs for pending and future asbestos claims to be between $1,009 million and $1,081 million through the terminal year of 2049.
In the fourth quarter of 2016, Union Carbide and the Company elected to change their method of accounting for asbestos-related defense and processing costs from expensingappropriate as incurred to estimating and accruing a liability. This change is believed to be preferable as asbestos-related defense and processingsuch costs represent expenditures related to legacy activities that do not contribute to current or future revenue generating activities of Union Carbide and the Company. The changeCompany and is also reflective of the manner in which Union Carbide manages its asbestos-related exposure, including careful monitoring of the correlation between defense spending and resolution costs. Together, these two sources of cost more accurately represent the “total cost” of resolving asbestos-related claims now and in the future.
This accounting policy change was reflected as a change in accounting estimate effected by a change in accounting principle. As a result, of this accounting policy change and based on the December 2016 Ankura study of asbestos-related defense and processing costs and Union Carbide's own review of the data, Union Carbide recorded a pretax charge for asbestos-related defense and processing costs of $1,009 million in the fourth quarter of 2016, included in “Asbestos-related charge” in the consolidated statements of income.
In October 2017, Union Carbide requestedrecorded a $1,113 million increase in its asbestos-related liability for pending and future claims, including future defense and processing costs. Each October, Union Carbide requests Ankura to review its historical asbestos claim and resolution activity (includingthrough the third quarter of the current year, including asbestos-related defense and processing costs) andcosts, to determine the appropriateness of updating itsthe most recent study.
In December 2016 study. In response to that request,2018, Ankura reviewedcompleted a study of Union Carbide's historical asbestos claim and analyzed dataresolution activity through September 30, 2017. 2018, including asbestos-related defense and processing costs, and provided estimates for the undiscounted cost of disposing of pending and future claims against Union Carbide and Amchem through the terminal year of 2049. Based on the study and Union Carbide's internal review process, it was determined that no adjustment to the accrual was required.
In December 2017,2019, Ankura stated that an update of its December 20162018 study would not provide a more likely estimate of future events than the estimate reflected in the study and, therefore, the estimate in thatthe study remained applicable. Based on Union Carbide's owninternal review of the asbestos claim and resolution activity (including asbestos-related defense and processing costs)process and Ankura's response, Union Carbide determined that no change to the accrual was required. At December 31, 2017,2019, the asbestos-related liability for pending and future claims against Union Carbide and Amchem, including future asbestos-related defense and processing costs, was $1,369$1,165 million, and approximately 1618 percent of the recorded liability related to pending claims and approximately 8482 percent related to future claims.
In October 2018,December 2020, Ankura completed a study of Union Carbide requested Ankura to review itsCarbide's historical asbestos claim and resolution activity (includingthrough September 30, 2020, including asbestos-related defense and processing costs)costs, and determine the appropriateness of updating its December 2016 study. In response to that request, Ankura reviewed and analyzed data through September 30, 2018. The resulting study, completed by Ankura in December 2018, provided estimates for the undiscounted cost of disposing of pending and future claims against Union Carbide and Amchem including future defense and processing costs, through the terminal year of 2049. Based on the study completed in December 2018 by Ankura, and Union Carbide's owninternal review process, it was determined that no adjustment to the accrual was required. At December 31, 2018, Union Carbide's2020, the asbestos-related liability for pending and future claims against Union Carbide and Amchem, including future asbestos-related defense and processing costs, was $1,260$1,098 million, and approximately 1622 percent of the recorded liability related to pending claims and approximately 8478 percent related to future claims.
Summary
The Company's management believes the amounts recorded by Union Carbide for the asbestos-related liability, (includingincluding defense and processing costs)costs, reflect reasonable and probable estimates of the liability based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of defending and disposing of each such claim, as well as the numerous uncertainties surrounding asbestos litigation in the United States over a significant period of time, could cause the actual costs for Union Carbide to be higher or lower than those projected or those recorded. Any such events could result in an increase or decrease in the recorded liability.
Because of the uncertainties described above, Union Carbide cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing Union Carbide and Amchem. As a result, it is reasonably possible that an additional cost of disposing of Union Carbide's asbestos-related claims, including future defense and processing costs, could have a material impact on the Company's results of operations and cash flows for a particular period and on the consolidated financial position.
Urethane Matters
Class Action Lawsuit
On February 16, 2006, the Company, among others, received a subpoena from the DOJ as part of a previously announced antitrust investigation of manufacturers of polyurethane chemicals, including methylene diphenyl diisocyanate, toluene diisocyanate, polyether polyols and system house products. The Company cooperated with the DOJ and, following an extensive investigation, on December 10, 2007, the Company received notice from the DOJ that it had closed its investigation of potential antitrust violations involving these products without indictments or pleas.
In 2005, the Company, among others, was named as a defendant in multiple civil class action lawsuits alleging a conspiracy to fix the price of various urethane chemical products, namely the products that were the subject of the above described DOJ antitrust investigation. On July 29, 2008, a Kansas City federal district court (the "district court") certified a class of purchasers of the products for the six-year period from 1999 through 2004 ("plaintiff class"). In January 2013, the class action lawsuit went to trial with the Company as the sole remaining defendant, the other defendants having previously settled. On February 20, 2013, the federal jury returned a damages verdict of approximately $400 million against the Company, which ultimately was trebled under applicable antitrust laws, less offsets from other settling defendants, resulting in a judgment entered in July 2013 in the amount of $1.06 billion. The Company appealed this judgment to the U.S. Tenth Circuit Court of Appeals ("Court of Appeals"), and on September 29, 2014, the Court of Appeals issued an opinion affirming the district court judgment.
On March 9, 2015, the Company filed a petition for writ of certiorari ("Writ Petition") with the United States Supreme Court, seeking judicial review and requesting that it correct fundamental errors in the Court of Appeals decision. In the first quarter of 2016, the Company changed its risk assessment on this matter as a result of growing political uncertainties due to events within the Supreme Court, including Justice Scalia's death, and the increased likelihood for unfavorable outcomes for businesses involved in class action lawsuits. On February 26, 2016, the Company announced a proposed settlement under which the Company would pay the plaintiff class $835 million, which included damages, class attorney fees and post-judgment interest. On July 29, 2016, the U.S. District Court for the District of Kansas granted final approval of the settlement. The settlement resolved the $1.06 billion judgment and any subsequent claim for attorneys' fees, costs and post-judgment interest against the Company. As a result, in the first quarter of 2016, the Company recorded a loss of $835 million, included in "Sundry income (expense) - net" in the consolidated statements of income. The Company continues to believe that it was not part of any conspiracy and the judgment was fundamentally flawed as a matter of class action law. The case is now concluded.
Opt-Out Cases
Shortly after the July 2008 class certification ruling, a series of "opt-out" cases were filed by a number of large volume purchasers who elected not to be class members in the district court case. These opt-out cases were substantively identical to the class action lawsuit, but expanded the period of time to include 1994 through 1998. A consolidated jury trial of the opt-out cases began on March 8, 2016. Prior to a jury verdict, on April 5, 2016, the Company entered into a binding settlement for the opt-out cases under which the Company would pay the named plaintiffs $400 million, inclusive of damages and attorney fees. Payment of this settlement occurred on May 4, 2016. The Company changed its risk assessment on this matter as a result of the class settlement and the uncertainty of a jury trial outcome along with the automatic trebling of an adverse verdict. As a result, the Company recorded a loss of $400 million in the first quarter of 2016, included in "Sundry income (expense) - net" in the consolidated statements of income. As with the class action case, the Company continues to deny allegations of price fixing and maintains that it was not part of any conspiracy. The case is now concluded.
Bayer CropScience v. Dow AgroSciences ICC Arbitration
On August 13, 2012, Bayer CropScience AG and Bayer CropScience NV (together, “Bayer”) filed a request for arbitration with the International Chamber of Commerce ("ICC") International Court of Arbitration against Dow AgroSciences LLC, a wholly owned subsidiary of the Company, and other subsidiaries of the Company (collectively, “DAS”) under a 1992 license agreement executed by predecessors of the parties (the “License Agreement”). In its request for arbitration, Bayer alleged that (i) DAS breached the License Agreement, (ii) the License Agreement was properly terminated with no ongoing rights to DAS, (iii) DAS infringed its patent rights related to the use of the pat gene in certain soybean and cotton seed products, and (iv) Bayer was entitled to monetary damages and injunctive relief. DAS denied that it breached the License Agreement and asserted that the License Agreement remained in effect because it was not properly terminated. DAS also asserted that all of Bayer’s patents at issue are invalid and/or not infringed, and, therefore, for these reasons (and others), a license was not required. During the pendency of the arbitration proceeding, DAS filed six re-examination petitions with the United States Patent & Trademark Office (“USPTO”) against the Bayer patents, asserting that each patent is invalid based on the doctrine against double-patenting and/or prior art. The USPTO granted all six petitions, and, on February 26, 2015, the USPTO issued an office action rejecting the patentability of the sole Bayer patent claim in the only asserted Bayer patent that has not expired and that forms the basis for the vast majority of the damages in the arbitral award discussed below.
A three-member arbitration tribunal presided over the arbitration proceeding (the “tribunal”). In a decision dated October 9, 2015, the tribunal determined that (i) DAS breached the License Agreement, (ii) Bayer properly terminated the License Agreement, (iii) all of the patents remaining in the proceeding are valid and infringed, and (iv) that Bayer is entitled to monetary damages in the amount of $455 million inclusive of pre-judgment interest and costs (the “arbitral award”). One of the arbitrators, however, issued a partial dissent finding that all of the patents are invalid based on the double-patenting doctrine. The tribunal also denied Bayer’s request for injunctive relief.
On October 16, 2015, Bayer filed a motion in U.S. District Court for the Eastern District of Virginia ("Federal District Court") seeking to confirm the arbitral award. DAS opposed the motion and filed separate motions to vacate the award, or in the alternative, to stay enforcement of the award until the USPTO issued final office actions with respect to the re-examination proceedings. On January 15, 2016, the Federal District Court denied DAS's motions and confirmed the award. DAS appealed the Federal District Court's decision. On March 1, 2017, the U.S. Court of Appeals for the Federal Circuit ("Federal Circuit") affirmed the arbitral award. As a result of this action, in the first quarter of 2017, the Company recorded a loss of $469 million, inclusive of the arbitral award and post-judgment interest, which was included in "Sundry income (expense) - net" in the consolidated statements of income. On May 19, 2017, the Federal Circuit issued a mandate denying DAS's request to stay the arbitral award pending judicial review by the United States Supreme Court. On May 26, 2017, the Company paid the $469 million arbitral award to Bayer as a result of that decision. On September 11, 2017, DAS filed a petition for writ of certiorari with the United States Supreme Court to review the case, but the Court denied DAS’s petition.
The litigation is now concluded with no risk of further liability. The Company continues to believe that the arbitral award is fundamentally flawed because, among other things, it allowed for the enforcement of invalid patents. The arbitral award and subsequent related judicial decisions will not impact DAS’s commercialization of its soybean and cotton seed products, including those containing the ENLIST™ technologies.
Rocky Flats Matter
The Company and Rockwell International Corporation ("Rockwell") (collectively, the "defendants") were defendants in a class action lawsuit filed in 1990 on behalf of property owners ("plaintiffs") in Rocky Flats, Colorado, who asserted claims for nuisance and trespass based on alleged property damage caused by plutonium releases from a nuclear weapons facility owned by the U.S. Department of Energy ("DOE") (the "facility"). Dow and Rockwell were both DOE contractors that operated the facility - Dow from 1952 to 1975 and Rockwell from 1975 to 1989. The facility was permanently shut down in 1989.
In 1993, the United States District Court for the District of Colorado ("District Court") certified the class of property owners. The plaintiffs tried their case as a public liability action under the Price Anderson Act ("PAA"). In 2005, the jury returned a damages verdict of $926 million. Dow and Rockwell appealed the jury award to the U.S. Tenth Circuit Court of Appeals ("Court of Appeals") which concluded the PAA had its own injury requirements, on which the jury had not been instructed, and also vacated the District Court's class certification ruling, reversed and remanded the case, and vacated the District Court's judgment. The plaintiffs argued on remand to the District Court that they were entitled to reinstate the judgment as a state law nuisance claim, independent of the PAA. The District Court rejected that argument and entered judgment in favor of the defendants. The plaintiffs appealed to the Court of Appeals, which reversed the District Court's ruling, holding that the PAA did not preempt the plaintiffs' nuisance claim under Colorado law and that the plaintiffs could seek reinstatement of the prior nuisance verdict under Colorado law.
Dow and Rockwell continued to litigate this matter in the District Court and in the United States Supreme Court following the appellate court decision. On May 18, 2016, Dow, Rockwell and the plaintiffs entered into a settlement agreement for $375 million, of which $131 million was paid by Dow. The DOE authorized the settlement pursuant to the PAA and the nuclear hazards indemnity provisions contained in Dow's and Rockwell's contracts. The District Court granted preliminary approval to the class settlement on August 5, 2016. On April 28, 2017, the District Court conducted a fairness hearing and granted final judgment approving the class settlement and dismissed class claims against the defendants ("final judgment order").
On December 13, 2016, the United States Civil Board of Contract Appeals unanimously ordered the United States government to pay the amounts stipulated in the settlement agreement. On January 17, 2017, the Company received a full indemnity payment of $131 million from the United States government for Dow's share of the class settlement. On January 26, 2017, the Company placed $130 million in an escrow account for the settlement payment owed to the plaintiffs. The funds were subsequently released from escrow as a result of the final judgment order. The litigation is now concluded.
Dow Silicones Chapter 11 Related Matters
Introduction
In 1995, Dow Silicones, then a 50:50 joint venture between Dowthe Company and Corning Incorporated ("Corning"), voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code in order to resolve Dow Silicones’ breast implant liabilities and related matters (the “Chapter 11 Proceeding”). Dow Silicones emerged from the Chapter 11 Proceeding on June 1, 2004 (the “Effective Date”) and is implementing the Joint Plan of Reorganization (the “Plan”). The Plan provides funding for the resolution of breast implant and other product liability litigation covered by the Chapter 11 Proceeding and provides a process for the satisfaction of commercial creditor claims in the Chapter 11 Proceeding. As of June 1, 2016, Dow Silicones is a wholly owned subsidiary of Dow.the Company.
Breast Implant and Other Product Liability Claims
Under the Plan, a product liability settlement program administered by an independent claims office (the “Settlement Facility”) was created to resolve breast implant and other product liability claims. Product liability claimants rejecting the settlement program in favor of pursuing litigation must bring suit against a litigation facility (the “Litigation Facility”). Under the Plan, total payments committed by Dow Silicones to resolving product liability claims are capped at a maximum $2,350 million net present value (“NPV”) determined as of the Effective Date using a discount rate of seven7 percent (approximately $3,876$4,081 million undiscounted at December 31, 2018)2020). Of this amount, no more than $400 million NPV determined as of the Effective Date can be used to fund the Litigation Facility.
Dow Silicones hashad an obligation to fund the Settlement Facility and the Litigation Facility over a 16-year period, commencing at the Effective Date. At December 31, 2018,2020, Dow Silicones and its insurers have made life-to-date payments of $1,762 million to the Settlement Facility and the Settlement Facility reported an unexpended balance of $118$58 million.
On June 1, 2016, as part of the ownership restructure of Dow Silicones and inIn accordance with ASC Topic 450 "Accounting for Contingencies," the Company recordedrecords a liability of $290 million for breast implant and other product liability claims (“Implant Liability”), which reflectedreflects the estimated impact of the settlement of future claims primarily based on reportedpending claims. The claim filing levelsdeadline passed in the Revised Settlement Program (the “RSP”)June 2019. All claims have been received and on the resolution of almost all cases pending against the Litigation Facility. The RSP was a program sponsored by certain other breast implant manufacturers in the context of multi-district, coordinated federal breast implant cases and was open from 1995 through 2010. The RSP was also a revised successor to an earlier settlement plan involving Dow Silicones (prior to its bankruptcy filing). While Dow Silicones withdrew from the RSP, many of the benefit categories and payment levels in Dow Silicones settlement program were drawn from the RSP.are being processed. Based on the comparability in designclaims filed at and actual claim experience of both plans, management concludedbefore the deadline, Dow Silicones estimates that claim information from the RSP provides a reasonable basisit will be obligated to estimate future claim filing levels forcontribute an additional $160 million after the Settlement Facility.Facility balance is exhausted.
In the fourththird quarter of 2016,2019, with the assistance of a third party consultant ("consultant"Consultant"), Dow Silicones updated its estimate of its Implant Liability to $263 million,estimate, primarily reflecting a decrease in Class 7 costs (claimants who have breast implants made by certain other manufacturers using primarily Dow Silicones silicone gel),16 claims, a decrease resulting from the passage of time, decreased
claim filing activity and administrative costs compared with the previous estimate, and an increase in investment income resulting from insurance proceeds. Based on the consultant'sConsultant's updated estimate and Dow Silicones own review of claim filing activity, Dow Silicones determined that an adjustment to the Implant Liability was required. Accordingly, in the third quarter of 2019, Dow Silicones decreased its Implant Liability in the fourth quarter of 2016 by $27$98 million which wasand decreased its corresponding Class 16 receivable $13 million, both included in "Sundry“Sundry income (expense) - net"net” in the consolidated statements of income. At December 31, 2018,income and related to Corporate. The estimate was updated again in the second quarter of 2020 with the assistance of the Consultant, which primarily reflected decreased administrative costs compared with the previous estimate and an increase in investment income resulting from insurance proceeds.
Dow Silicones' Implant Liability was $263$160 million at December 31, 2020 ($165 million at December 31, 2019), of which $111$46 million ($20 million at December 31, 2019) was included in “Accrued and other current liabilities” and $152$114 million was included in "Other noncurrent obligations" in the consolidated balance sheets. At($145 million at December 31, 2017, the Implant Liability was $263 million, which2019) was included in "Other noncurrent obligations" in the consolidated balance sheets.
Dow Silicones is not aware of circumstances that would change the factors used in estimating the Implant Liability and believes the recorded liability reflects the best estimate of the remaining funding obligations under the Plan; however, the estimate relies upon a number of significant assumptions, including: future claim filing levels in the Settlement Facility will be similar to those in the revised settlement program, which management uses to estimate future claim filing levels for the Settlement Facility; future acceptance rates, disease mix, and payment values will be materially consistent with historical experience; no material negative outcomes in future controversies or disputes over Plan interpretation will occur; and the Plan will not be modified. If actual outcomes related to any of these assumptions prove to be materially different, the future liability to fund the Plan may be materially different than the amount estimated. If Dow Silicones was ultimately required to fund the full liability up to the maximum capped value, the liability would be $2,114 million at December 31, 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.
In 2006, the U.S. Court of Appeals for the Sixth Circuit concluded that there is On August 19, 2019, Dow Silicones entered into a general presumption that contractually specified default interest should be paid by a solvent debtor to unsecured creditors (the “Interest Rate Presumption”) and permittingsettlement agreement with the Commercial Creditors to recover fees, costs, and expenses where allowed by relevant loan agreements. The matter was remandedrelated to the U.S. District Court for the Eastern District of Michigan ("District Court") for further proceedings, including rulings on the facts surrounding specific claims and consideration of any equitable factors that would preclude the applicationremaining, disputed portion, obligating Dow Silicones to pay $172 million, inclusive of the Interest Rate Presumption. On May 10, 2017,Commercial Creditors' legal costs. The settlement was approved by the District Court entered a stipulated order resolving pending discovery motions and established a discovery schedule for the Commercial Creditors matter.Court. As a result Dow Silicones and its third party consultants conducted further analysis of the Commercial Creditors claims and defenses. This analysis indicated the estimated remaining liability to the Commercial Creditors to be within a range of $77 million to $260 million. No single amount within the range appears to be a better estimate than any other amount within the range. Therefore, Dow Siliconesrecorded the minimum liability within the range, which resulted in a decrease to the Commercial Creditor liability of $33 millionsettlement agreement, in the secondthird quarter of 2017, which was2019, the Company recorded a pretax charge of $50 million, net of indemnifications of $37 million, included in "Sundry incomeIncome (expense) - net" in the consolidated statements of income. At December 31, 2018, the liabilityincome and related to Dow Silicones' potential obligation to pay additional interestCorporate. The settlement was paid to the Commercial Creditors in the Chapter 11 Proceeding was $82 million ($78 million at December 31, 2017) and included in "Accrued and other current liabilities" in the consolidated balance sheets.fourth quarter of 2019. The actual amount of interest that will be paid to these creditorslitigation is uncertain and will ultimately be resolved through continued proceedings in the District Court.now concluded.
Indemnifications
In connection with the June 1, 2016 ownership restructure of Dow Silicones, the Company 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. Indemnified losses are capped at (1) $1 billion between May 31, 2018 and May 31, 2023, and (2) no recoveries are permitted after May 31, 2023. No indemnification assets were recorded at December 31, 2018 or 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.
Other Litigation Matters
In addition to the specific matters described above, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to product liability, patent infringement, employment matters, governmental tax and regulation disputes, contract and commercial litigation, and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. DowThe Company has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies may provide coverage that could be utilized to minimize the financial impact, if any, of certain contingencies described above. It is the opinion of the Company’s management that the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, financial condition and cash flows of the Company.
Indemnifications with Corning
In connection with the June 1, 2016 ownership restructure of Dow Silicones, the Company is indemnified by Corning for at least 50 percent of future losses associated with certain pre-closing liabilities, including the Implant Liability, Commercial Creditors issues and certain environmental matters described in the preceding sections, subject to certain conditions and limits. The maximum amount of indemnified losses which may be recovered are subject to a cap that declines over time. Indemnified losses are capped at $1 billion between May 31, 2018 and May 31, 2023, and 0 recoveries are permitted after May 31, 2023. The Company had indemnification assets of $115 million at December 31, 2020 ($100 million at December 31, 2019), of which 0 ($37 million at December 31, 2019) was included in "Other current assets" and $115 million ($63 million at December 31, 2019) was included in "Noncurrent receivables" in the consolidated balance sheets.
Gain Contingency - Dow v. Nova Chemicals Corporation Patent Infringement Matter
OnIn December 9, 2010, Dow filed suit in the Federal Court in Ontario, Canada ("Federal Court") alleging that Nova Chemicals Corporation ("Nova") was infringing the Company's Canadian polyethylene patent 2,106,705 (the "'705 Patent"). Nova counterclaimed on the grounds of invalidity and non-infringement. In accordance with Canadian practice, the suit was bifurcated into a merits phase, followed by a damages phase. Following trial in the merits phase, in May 2014 the Federal Court ruled that the Company's '705 Patent was valid and infringed by Nova. Nova appealed to the Canadian Federal Court of Appeal, which affirmed the Federal Court decision in August 2016. Nova then sought leave to appeal its loss to the Supreme Court of Canada ("Court"), which dismissed Nova’s petition in April 2017. As a result, Nova has exhausted all appeal rights on the merits, and it is undisputed that Nova owes Dowthe Company the profits it earned from its infringing sales as determined in the trial for the damages phase.
OnIn April 19, 2017, the Federal Court issued a Public Judgment in the damages phase, which detailed its conclusions on how to calculate the profits to be awarded to Dow. Dow and Nova submitted their respective calculations of the damages to the Federal Court in May 2017. OnCompany. In June 29, 2017, the Federal Court issued a Confidential Supplemental Judgment, concluding thatordered Nova mustto pay $645 million Canadian dollars (equivalent to $495 million U.S. dollars) to Dow,the Company, plus pre- and post-judgment interest, for which Dowthe Company received payment of $501 million from Nova onin July 6, 2017. Although Nova is appealing portions of the damages judgment, certain portions of it are indisputable and willcan be owed to Dowretained by the Company regardless of the outcome of any further appeals by Nova. As a result of these actions and in accordance with ASC Topic 450-30 "Gain Contingencies," the Company recorded a $160 million pretax gain in the second quarter of 20172017.
On September 15, 2020, the Canadian Federal Court of Appeal dismissed Nova's appeal of the damages judgment, thus affirming the trial court's decision in its entirety. In November 2020, Nova filed an application for leave to appeal this decision to the Court. Briefing is expected to be completed in early 2021 and the Company anticipates a decision in the first half of 2021 as to whether the Court will accept the appeal. The Court has complete discretion on whether to grant leave applications. At December 31, 2020, the Company had $341 million (0 at December 31, 2019) included in "Accrued and other current liabilities" and 0 ($341 million at December 31, 2019) included in "Other noncurrent obligations" related to the disputed portion of the damages judgment. The Company is confident of its chances to continue to defend the entire judgment if the Court agrees to review it, particularly the trial and appellate courts' determinations on important factual issues, which will be accorded deferential review on appeal.
Gain Contingency - Dow v. Nova Chemicals Corporation Ethylene Asset Matter
On September 18, 2019, the Court of the Queen’s Bench in Alberta, Canada, signed a judgment ordering Nova to pay the Company $1.43 billion Canadian dollars (equivalent to approximately $1.08 billion U.S. dollars) by October 11, 2019, for damages the Company incurred through 2012 related to the companies’ jointly-owned ethylene asset in Joffre, Alberta, Canada. The Court of the Queen's Bench in Alberta, Canada, which initially ruled in June 2018, found that Nova failed to operate the ethylene asset at full capacity for more than ten years, and furthermore, that Nova violated several contractual agreements related to the Company receiving its share of the asset’s ethylene production. These actions resulted in reduced productivity and sales for the Company. Nova has appealed the judgment, however, certain portions of it are not in dispute and are owed to the Company regardless of the outcome of Nova's appeal. As a result of these actions and in accordance with ASC Topic 450-30 “Gain Contingencies,” the Company recorded a $186 million pretax gain in the third quarter of 2019, of which $137$170 million was included in "Sundry income (expense) - net" and $23$16 million was included in "Selling, general and administrative expenses" in the consolidated statements of income.income and related to Packaging & Specialty Plastics. In October 2019, Nova paid $1.08 billion Canadian dollars (equivalent to approximately $0.8 billion U.S. dollars) directly to the Company, and remitted $347 million Canadian dollars to the Canada Revenue Agency ("CRA") for the tax account of one of the Company's subsidiaries. The Company sought a refund of the entire amount remitted to CRA. On March 31, 2020, the Company received the full refund from CRA, equivalent to $259 million U.S. dollars.
In preparation for the June 2020 appellate hearing on the case, Nova provided the Court of the Queen's Bench in Alberta, Canada, an updated schedule of the financial impact of the issues on appeal, which explained that even if Nova prevails on all appeal issues, the Company would still be entitled to retain an amount in excess of the gain recognized in 2019. As a result, the Company recorded an $18 million pretax gain in the second quarter of 2020, of which $12 million was included in "Selling, general and administrative expenses" and $6 million was included in "Sundry income (expense) - net" in the consolidated statements of income and related to Packaging & Specialty Plastics. On September 16, 2020, the Court of Appeal of Alberta issued its decision, affirming the trial court's liability finding, upholding the majority of Dow's damages and requiring the trial court to recalculate a portion of damages. In the fourth quarter of 2020, Nova chose not to petition the Court to review the appellate court decision, making additional portions of the ruling in Dow’s favor final and no longer subject to dispute. As a result, the Company recorded a $552 million pretax gain in the fourth quarter of 2020, of which $538 million was included in "Sundry income (expense) - net" and $14 million was included in "Selling, general and administrative expenses" in the consolidated statements of income and related to Packaging & Specialty Plastics. At December 31, 2018, the Company had $3412020, $323 million ($341893 million at December 31, 2017)2019) was included in "Other noncurrent obligations" in the Company's consolidated balance sheets related to the disputed portion of the damages judgment. Dow is confidentcontinues to seek an award of its chances of defendingadditional damages for the entire judgment on appeal, particularly the trial court's determinations on important factual issues, which will be accorded deferential review on appeal.period from 2013 through 2018.
Purchase Commitments
The Company has outstanding purchase commitments and various commitments for take-or-pay or throughput agreements. The Company was not aware of any purchase commitments that were negotiated as part of a financing arrangement for the facilities that will provide the contracted goods or services or for the costs related to those goods or services at December 31, 20182020 and 2017.2019.
Guarantees
The following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for each type of guarantee:guarantees:
| | | | | | | | | | | | | | | | | | | | |
| Guarantees | Dec 31, 2020 | Dec 31, 2019 |
| In millions | Final
Expiration | Maximum Future Payments | Recorded Liability | Final
Expiration | Maximum Future Payments | Recorded Liability |
| Guarantees | 2023 | $ | 251 | | $ | 2 | | 2023 | $ | 3,952 | | $ | 10 | |
| | | | | | |
|
| | | | | | | | | | | | | | |
| Guarantees | Dec 31, 2018 | Dec 31, 2017 |
| In millions | Final Expiration | Maximum Future Payments | Recorded Liability | Final Expiration | Maximum Future Payments | Recorded Liability |
| Guarantees | 2023 | $ | 4,523 |
| $ | 25 |
| 2023 | $ | 4,774 |
| $ | 49 |
|
| Residual value guarantees | 2028 | 885 |
| 130 |
| 2027 | 889 |
| 135 |
|
| Total guarantees | | $ | 5,408 |
| $ | 155 |
| | $ | 5,663 |
| $ | 184 |
|
Guarantees
Guarantees arise during the ordinary course of business from relationships with customers, committed accounts receivable facilities and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others (via delivery of cash or other assets) if specified triggering events occur. With guarantees, such as commercial or financial contracts, non-performance by the guaranteed party triggers the obligation of the Company to make payments to the beneficiary of the guarantee. The majority of the Company’s guarantees relate to debt of nonconsolidated affiliates, which have expiration dates ranging from less than one year to less than
five years, and trade financing transactions in Latin America, which typically expire within one year of inception. three years. The Company’s current expectation is that future payment or performance related to the non-performance of others is considered remote.
The Company has entered into guarantee agreements (“Guarantees”) related to project financing for Sadara, a nonconsolidated affiliate. The total of an Islamic bond and additional project financing (collectively “Total Project Financing”) obtained by Sadara iswas approximately $12.5 billion. Sadara had $11.7$10.8 billion of Total Project Financing debt outstanding at December 31, 2018 ($12.4 billion at December 31, 2017). The Company's guarantee of2019. In November 2020, the remaining project completion conditions related to the Total Project Financing guarantees were fulfilled and the Company's guarantee obligations terminated. Subsequently, the Company provided a new guarantee in the form of a letter of credit for its share of one future debt service schedule payment up to $220 million. The guarantee is in proportion to the Company'sCompany’s 35 percent ownership interest in Sadara or upand is expected to approximately $4.2 billion whenremain in effect until the project financingre-profiling of Sadara’s debt is fully drawn. Sadara successfully completed an extensive operational testing program in December 2018, however, the Guarantees will be released upon the satisfactory fulfillment of certain project completion conditions, which is expected in the first quarter of 2021. See Note 12 for additional information.
In January 2021, Sadara reached an agreement in principle with its lenders to re-profile Sadara's outstanding project financing debt. In conjunction with completion of the Sadara debt re-profiling, the Company expects to guarantee approximately $1.3 billion of Sadara’s debt. The debt re-profiling is expected to include a grace period until June 2026, during which Sadara is obligated to make interest-only payments. Dow will also provide guarantees for its portion of all Sadara interest payments due during the grace period. Dow's pro-rata share of any potential shortfall during the grace period will be funded by a new $500 million revolving credit facility guaranteed by Dow,
which is expected to be established by Sadara in the middlefirst quarter of 2019, and must occur no later than December 2020.
Residual Value Guarantees
The Company provides2021. Dow's existing $220 million letter of credit related to the guarantee of one future Sadara debt service schedule payment will be cancelled upon completion of the full re-profiling of Sadara's debt. All guarantees related to leased assets specifying the residual value that will be availabledebt re-profile and revolving credit facility are in proportion to the lessor at lease termination through saleDow’s 35 percent ownership interest in Sadara. As a result of the assets to the lessee or third parties.
Operating Leases
The Company routinely leases premises for use as sales and administrative offices, warehouses and tanks for product storage, motor vehicles, railcars, computers, office machines and equipment. In addition,these actions, the Company leases aircraftdoes not expect to provide any shareholder loans or equity contributions to Sadara in the United States. The terms for these leased assets vary depending on the lease agreement. Some leases contain renewal provisions, purchase options and escalation clauses.2021.
Rental expenses under leases, net of sublease rental income, were $771 million in 2018, $757 million in 2017 and $661 million in 2016. Future minimum payments under leases with remaining non-cancelable terms in excess of one year are as follows:
|
| | | |
| Minimum Lease Commitments at Dec 31, 2018 |
| In millions |
| 2019 | $ | 412 |
|
| 2020 | 369 |
|
| 2021 | 328 |
|
| 2022 | 297 |
|
| 2023 | 253 |
|
| 2024 and thereafter | 978 |
|
| Total | $ | 2,637 |
|
Asset Retirement Obligations
DowThe Company has 164106 manufacturing sites in 3531 countries. Most of these sites contain numerous individual manufacturing operations, particularly at the Company’s larger sites. Asset retirement obligations are recorded as incurred and reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. The retirement of assets may involve such efforts as remediation and treatment of asbestos, contractually required demolition, and other related activities, depending on the nature and location of the assets; and retirement obligations are typically realized only upon demolition of those facilities. In identifying asset retirement obligations, the Company considers identification of legally enforceable obligations, changes in existing law, estimates of potential settlement dates and the calculation of an appropriate discount rate to be used in calculating the fair value of the obligations. DowThe Company has a well-established global process to identify, approve and track the demolition of retired or to-be-retired facilities; and no assets are retired from service until this process has been followed. DowThe Company typically forecasts demolition projects based on the usefulness of the assets; environmental, health and safety concerns; and other similar considerations. Under this process, as demolition projects are identified and approved, reasonable estimates are determined for the time frames during which any related asset retirement obligations are expected to be settled. For those assets where a range of potential settlement dates may be reasonably estimated, obligations are recorded. DowThe Company routinely reviews all changes to items under consideration for demolition to determine if an adjustment to the value of the asset retirement obligation is required.
The Company has recognized asset retirement obligations for the following activities: demolition and remediation activities at manufacturing sites primarily in theEurope, United States, Canada, Brazil, Argentina, Columbia, China, Japan, United Arab Emirates, Canada and Europe;Argentina; and capping activities at landfill sites in the United States, CanadaBrazil and Brazil.Canada. The Company has also recognized conditional asset retirement obligations related to asbestos encapsulation as a result of planned demolition and remediation activities at manufacturing and administrative sites primarily in the United States, Canada,Europe, Argentina Columbia, China and Europe.Japan. The aggregate carrying amount of conditional asset retirement obligations recognized by the Company (included in the asset retirement obligations balance shown below) was $24$14 million at December 31, 20182020 ($2019 million at December 31, 2017)2019).
The following table shows changes in the aggregate carrying amount of the Company’s asset retirement obligations for the years ended December 31, 20182020 and 2017:2019:
| | | | | | | | |
| Asset Retirement Obligations | 2020 | 2019 |
| In millions |
| Balance at Jan 1 | $ | 104 | | $ | 109 | |
| Additional accruals | 6 | | 10 | |
| Liabilities settled | (3) | | (7) | |
| Accretion expense | 3 | | 2 | |
| Revisions in estimated cash flows | 7 | | 3 | |
| Other | (5) | | (13) | |
| Balance at Dec 31 | $ | 112 | | $ | 104 | |
|
| | | | | | |
| Asset Retirement Obligations | 2018 | 2017 |
| In millions |
| Balance at Jan 1 | $ | 104 |
| $ | 110 |
|
| Additional accruals | 10 |
| 3 |
|
| Liabilities settled | (4 | ) | (9 | ) |
| Accretion expense | 3 |
| 5 |
|
| Revisions in estimated cash flows | — |
| (9 | ) |
| Other | 1 |
| 4 |
|
| Balance at Dec 31 | $ | 114 |
| $ | 104 |
|
The discount rate used to calculate the Company’s asset retirement obligations at December 31, 2018,2020, was 3.540.42 percent (2.04(2.12 percent at December 31, 2017)2019). These obligations are included in the consolidated balance sheets as "Accrued and other current liabilities" and "Other noncurrent obligations."
The Company has not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in its consolidated financial statements. Assets that have not been submitted/reviewed for potential demolition activities are considered to have continued usefulness and are generally still operating normally. Therefore, without a plan to demolish the assets or the expectation of a plan, such as shortening the useful life of assets for depreciation purposes in accordance with the accounting guidance related to property, plant and equipment, the Company is unable to reasonably forecast a time frame to use for present value calculations. As such, the Company has not recognized obligations for individual plants/buildings at its manufacturing sites where
estimates of potential settlement dates cannot be reasonably made. In addition, the Company has not recognized conditional asset retirement obligations for the capping of its approximately 3736 underground storage wells and 128129 underground brine mining and other wells at Dow-ownedCompany-owned sites when there are no plans or expectations of plans to exit the sites. It is the opinion of the Company’s management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material impact on the Company’s consolidated financial statements based on current costs.
NOTE 17 - LEASES
Operating lease ROU assets are included in "Operating lease right-of-use assets" while finance lease ROU assets are included in "Net property" in the consolidated balance sheets. With respect to lease liabilities, operating lease liabilities are included in "Operating lease liabilities - current" and "Operating lease liabilities - noncurrent," and finance lease liabilities are included in "Long-term debt due within one year" and "Long-Term Debt" in the consolidated balance sheets.
Dow routinely leases sales and administrative offices, power plants, production facilities, warehouses and tanks for product storage, aircraft, motor vehicles, railcars, computers, office machines and equipment. Some leases contain renewal provisions, purchase options and escalation clauses and the terms for these leased assets vary depending on the lease agreement. These leased assets have remaining lease terms of up to 55 years. See Note 1 for additional information on leases.
The components of lease cost for operating and finance leases for the years ended December 31, 2020 and 2019 were as follows:
| | | | | | | | |
| Lease Cost | 2020 | 2019 |
| In millions |
| Operating lease cost | $ | 484 | | $ | 532 | |
| Finance lease cost | | |
| Amortization of right-of-use assets - finance | $ | 58 | | $ | 39 | |
| Interest on lease liabilities - finance | 25 | | 25 | |
| Total finance lease cost | $ | 83 | | $ | 64 | |
| Short-term lease cost | $ | 213 | | $ | 204 | |
| Variable lease cost | 199 | | 198 | |
| Sublease income | (5) | | (4) | |
| Total lease cost | $ | 974 | | $ | 994 | |
The following table provides supplemental cash flow information related to leases:
| | | | | | | | |
| Other Lease Information | 2020 | 2019 |
| In millions |
| | |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows for operating leases | $ | 482 | | $ | 544 | |
| Operating cash flows for finance leases | $ | 25 | | $ | 25 | |
| Financing cash flows for finance leases | $ | 58 | | $ | 34 | |
| | |
The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at December 31, 2020 and 2019.
| | | | | | | | | | | |
| Lease Position | Balance Sheet Classification | Dec 31, 2020 | Dec 31, 2019 |
| In millions |
| Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases 1 | | $ | 185 | | $ | 2,476 | |
| Finance leases | | $ | 178 | | $ | 89 | |
| Assets | | | |
| Operating lease assets | Operating lease right-of-use assets | $ | 1,856 | | $ | 2,072 | |
| Finance lease assets | Property | 665 | | 486 | |
| Finance lease amortization | Accumulated depreciation | (216) | | (167) | |
| Total lease assets | | $ | 2,305 | | $ | 2,391 | |
| Liabilities | | | |
| Current | | | |
| Operating | Operating lease liabilities - current | $ | 416 | | $ | 421 | |
| Finance | Long-term debt due within one year | 54 | | 32 | |
| Noncurrent | | | |
| Operating | Operating lease liabilities - noncurrent | 1,521 | | 1,739 | |
| Finance | Long-Term Debt | 464 | | 363 | |
| Total lease liabilities | | $ | 2,455 | | $ | 2,555 | |
1.Includes $2.3 billion for the period ended December 31, 2019 related to the adoption of Topic 842. See Note 1 for additional information.
The weighted-average remaining lease term and discount rate for leases recorded in the consolidated balance sheets at December 31, 2020 and 2019 are provided below:
| | | | | | | | |
| Lease Term and Discount Rate | Dec 31, 2020 | Dec 31, 2019 |
| Weighted-average remaining lease term | | |
| Operating leases | 7.6 years | 8.0 years |
| Finance leases | 11.6 years | 12.3 years |
| Weighted-average discount rate | | |
| Operating leases | 3.84 | % | 4.09 | % |
| Finance leases | 5.41 | % | 6.28 | % |
The following table provides the maturities of lease liabilities at December 31, 2020:
| | | | | | | | |
| Maturities of Lease Liabilities | Operating Leases | Finance Leases |
| In millions |
| 2021 | $ | 477 | | $ | 78 | |
| 2022 | 387 | | 74 | |
| 2023 | 312 | | 98 | |
| 2024 | 242 | | 45 | |
| 2025 | 164 | | 41 | |
| 2026 and thereafter | 703 | | 373 | |
| Total future undiscounted lease payments | $ | 2,285 | | $ | 709 | |
| Less: Imputed interest | 348 | | 191 | |
| Total present value of lease liabilities | $ | 1,937 | | $ | 518 | |
At December 31, 2020, Dow had additional leases of approximately $56 million, primarily for buildings and equipment, which had not yet commenced. These leases are expected to commence in 2021 and 2022, with lease terms of up to 10 years.
Dow provides guarantees related to certain leased assets, specifying the residual value that will be available to the lessor at lease termination through the sale of the assets to the lessee or third parties. The following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for residual value guarantees at December 31, 2020 and 2019. There was $22 million of recorded liability related to these residual value guarantees at December 31, 2020 (0 at December 31, 2019), as payment of such residual value guarantees was determined to be probable. The lease agreements do not contain any material restrictive covenants.
| | | | | | | | | | | | | | | | | | | | |
| Lease Guarantees | Dec 31, 2020 | Dec 31, 2019 |
| In millions | Final Expiration | Maximum Future Payments | Recorded Liability | Final Expiration | Maximum Future Payments | Recorded Liability |
| Residual value guarantees | 2030 | $ | 818 | | $ | 22 | | 2028 | $ | 792 | | $ | 0 | |
NOTE 1718 – STOCKHOLDERS’ EQUITY
MergerCommon Stock
Dow Inc.
Dow Inc. was incorporated in 2018 with DuPont
Effective with the Merger, each share of Dow Common Stock (excluding any shares of Dow Common Stock that were held in treasury, which were automatically canceled100 authorized and retired for no consideration) was converted into the right to receive one fully paid and non-assessable share of DowDuPont Common Stock. As a result, in the third quarter of 2017, the Company recorded a reduction in "Treasury stock" of $935 million, a reduction in "Common stock" of $3,107 million and an increase in "Additional paid in capital" of $2,172 million in the consolidated balance sheets. The Company has 100issued shares of common stock, issued and outstanding, par value $0.01 per share, owned solely by its parent company, DowDuPont. In the first quarter of 2019, in connection with the separation and distribution of DowDuPont’s materials science business, the number of authorized shares of common stock was increased to 5,000,000,000 shares, par value $0.01 per share, and Dow Inc.'s 100 shares of issued common stock were recapitalized into 748,771,240 shares of common stock. Dow Inc.'s common stock was solely owned by DowDuPont through March 31, 2019, and on April 1, 2019, Dow Inc. became an independent, publicly traded company. Dow Inc. common stock is listed on the NYSE under the symbol “DOW.” See Note 3 for additional information.
Cumulative Convertible Perpetual Preferred Stock, Series A
Equity securities in the form of Cumulative Convertible Perpetual Preferred Stock, Series A (“preferred series A”) were issued on April 1, 2009 to Berkshire Hathaway Inc. in the amount of $3 billion (3 million shares) and the Kuwait Investment Authority in the amount of $1 billion (1 million shares). Shareholders of preferred series A could convert all or any portion of their shares, at their option, at any time, into shares of the Company’s common stock at an initial conversion ratio of 24.2010 shares of common stock for each share of preferred series A. On or after the fifth anniversary of the issuance date, if the common stock price exceeded $53.72 per share for any 20 trading days in a consecutive 30-day window, the Company had the option, at any time, in whole or in part, to convert preferred series A into common stock at the then applicable conversion rate.
On December 15, 2016, the trading price of Dow's common stock closed at $58.35, marking the 20th trading day in the previous 30 trading days that the common stock closed above $53.72, triggering the right of the Company to exercise its conversion right. On December 16, 2016, the Company sent a Notice of Conversion at the Option of the Company (the "Notice") to all holders of its preferred series A. Pursuant to the Notice, on December 30, 2016 (the "Conversion Date") all 4 million outstanding shares of preferred series A (with a carrying value of $4,000 million) were converted into shares of common stock at a conversion ratio of 24.2010 shares of common stock for each share of preferred series A, resulting in the issuance of 96.8 million shares of common stock from treasury stock. The treasury stock issued was carried at an aggregate historical cost of $4,695 million, resulting in a reduction to "Additional paid-in capital" in the consolidated balance sheets of $695 million. From and after the Conversion Date, no shares of the preferred series A are issued or outstanding and all rights of the holders of the preferred series A have terminated. On January 6, 2017, the Company filed an amendment to the Company’s Restated Certificate of Incorporation by way of a certificate of elimination (the “Certificate of Elimination”) with the Secretary of State of the State of Delaware which had the effect of: (a) eliminating the previously designated 4 million shares of the preferred series A, none of which were outstanding at the time of the filing; (b) upon such elimination, causing such preferred series A to resume the status of authorized and unissued shares of preferred stock, par value $1.00 per share, of the Company, without designation as to series; and (c) eliminating from the Company’s Restated Certificate of Incorporation all references to, and all matters set forth in, the certificates of designations for the preferred series A.
The Company paid cumulative dividends on preferred series A at a ratemay issue shares of 8.5 percent per annum, or $85 million per quarter. The final dividend for the preferred series A was declared on December 15, 2016 and payable on the earlier of the Conversion Date (if applicable) or January 3, 2017, to shareholders of record at December 15, 2016. The dividend was paid in full on the Conversion Date.
Common Stock
Prior to the Merger, the Company issuedDow Inc. common stock shares out of treasury stock or as new shares of common stock shares for purchases under the Employee Stock Purchase Plan, for options exercised and for the release of deferred,restricted stock units ("RSUs"), performance deferredstock units ("PSUs") and restricted stock. TheCommon stock shares issued to employees and non-employee directors was approximately 4.8 million in 2020. Subsequent to the separation from DowDuPont, the number of new Dow Inc. common stock shares issued to employees and non-employee directors prior to the Merger was zeroapproximately 2.5 million in 2017 (zero in 2016).2019. See Note 2021 for additional information on changes to Dowthe Company's equity awards in connectionawards.
TDCC
Effective with the Merger.Merger and through March 31, 2019, TDCC had 100 authorized and issued shares of common stock, par value $0.01 per share, owned solely by DowDuPont. Effective with the separation from DowDuPont, TDCC became a wholly owned subsidiary of Dow Inc., which now holds all 100 authorized and issued shares of common stock of TDCC. See Note 3 for additional information.
Retained Earnings
Dow Inc.
There are no significant restrictions limiting the Company’sDow Inc.’s ability to pay dividends. Prior to the Merger, the CompanyDow Inc. declared dividends of $1.38$2.80 per share in 20172020 ($1.842.10 per share in 2016)2019, subsequent to the separation from DowDuPont).
Undistributed earnings of nonconsolidated affiliates included in retained earnings were $716 million at December 31, 2020 and $852 million at December 31, 2019.
TDCC
Effective with the Merger, DowTDCC no longer hashad publicly traded common stock. Dow'sTDCC's common shares arewere owned solely by its parent company,DowDuPont, prior to the separation on April 1, 2019, and TDCC's Board determined whether or not there would be a dividend distribution to DowDuPont. AsEffective with the separation from DowDuPont on April 1, 2019, TDCC became a result, the Company’swholly owned subsidiary of Dow Inc. and TDCC's Board determines whether or not there will be a dividend distribution to DowDuPont. See Note 24 for additional information.Dow Inc. In 2020 and 2019, TDCC declared and paid dividends to Dow Inc. of $2,233 million and $201 million, respectively. In 2019 and 2018, TDCC declared and paid dividends to DowDuPont of $535 million and $3,711 million, respectively.
Employee Stock Ownership Plan
The Dow Employee Stock Ownership Plan (the “ESOP”) is an integral part of The Dow Chemical Company Employees’ Savings Plan (the “Plan”“Savings Plan”). A significant majority of full-time employees in the United States are eligible to participate in the Savings Plan. DowThe Company uses the ESOP to provide the Company’sits matching contribution in the form of stock to Plan participants. Prior to the Merger, contributions were in the form of Dow Common Stock. Effective with the Merger, shares of Dow stockTDCC Common Stock held by the ESOP were converted into shares of DowDuPont Common Stock at a ratio of 1:1. Effective with the separation from DowDuPont, the DowDuPont Common Stock held by the ESOP received a Dow Inc. Common Stock share dividend at a ratio of 3:1, resulting in the ESOP holding both DowDuPont and Dow Inc. shares. Subsequent to the separation from DowDuPont, the ESOP independent fiduciary sold the DowDuPont shares and purchased additional Dow Inc. shares with the proceeds.
In connection with the acquisition of Rohm and Haas on April 1, 2009, the Rohm and Haas Employee Stock Ownership Plan (the "Rohm and Haas ESOP") was merged into the Savings Plan, and the Company assumed the $78 million balance of debt at 9.8 percent interest with final maturity in 2020 that was used to finance share purchases by the Rohm and Haas ESOP in 1990. The debt was fully repaid in 2020 which resulted in an outstanding balance of the debt was $100 at December 31, 2020 ($3 million at December 31, 2018 and $17 million at December 31, 2017.2019).
Dividends on unallocated shares held by the ESOP are used by the ESOP to make debt service payments and to purchase additional shares if dividends exceed the debt service payments. Dividends on allocated shares are used by the ESOP to make debt service payments to the extent needed; otherwise, they are paid to the Savings Plan participants. Shares are released for allocation to participants based on the ratio of the current year’s debt service to the sum of the principal and interest payments over the life of the loan. The shares are allocated to Plan participants in accordance with the terms of the Savings Plan. The unallocated shares are excluded from the Company's earnings per share calculation.
Compensation expense for allocated shares is recorded at the fair value of the shares on the date of allocation. Compensation expense reflected in income from continuing operations for ESOP shares was $175$72 million in 2018, $2482020, $77 million in 20172019 and $192$144 million in 2016.2018. At December 31, 2018, 15.32020, 4.4 million shares out of a total 21.86.1 million shares held by the ESOP had been allocated to participants’ accounts; 1.5 million shares were released but unallocated;accounts and 5.01.7 million shares, at a fair value of $267$93 million, were considered unearned.
Treasury Stock
Dow Inc.
On April 1, 2019, Dow Inc.'s Board ratified the share repurchase program originally approved on March 15, 2019, authorizing up to $3 billion to be spent on the repurchase of the Company's common stock, with no expiration date. In 2013, the Board approved a share buy-back program. As a result2020, Dow Inc. repurchased $125 million of subsequent authorizations approved by the Board, the total authorized amountDow Inc. common stock ($500 million in 2019). At December 31, 2020, $2.4 billion of the share repurchase program was $9.5 billion. Effective with the Merger, the share repurchase program was canceled. Over the duration of the program, a total of $8.1 billion was spent on the repurchase of Dow Common Stock.authorization remained available for repurchases.
The Company historically issuedmay issue shares for purchases under the Employee Stock Purchase Plan, for options exercised as well as for the release of deferred, performance deferred and restrictedDow Inc. common stock out of treasury stock or as new shares of common stock shares.for options exercised and for the release of RSUs, PSUs and restricted stock. The number ofCompany did not issue any treasury shares issued to employees and non-employee directors under the Company’sits stock-based compensation programs are summarized infor the following table.years ended December 31, 2020 and 2019. See Note 2021 for additional information on changes to Dowthe Company's equity awards in connection with the Merger.separation from DowDuPont.
|
| | | | | |
| Treasury Shares Issued Under Stock-Based Compensation Programs | | | |
| In thousands | 2018 | 2017 1 | 2016 |
| To employees and non-employee directors | N/A | 14,195 |
| 14,494 |
|
| |
1. | Reflects activity prior to the Merger. |
The following table provides a reconciliation of Dow Common StockInc. common stock activity prior to the Merger, for the years ended December 31, 20172020 and 2016:2019:
| | | | | | | | |
| Shares of Dow Inc. Common Stock | Issued | Held in Treasury |
|
| Balance at Jan 1, 2019 | 100 | | 0 | |
| Impact of recapitalization | 748,771,140 | | 0 | |
Issued 1 | 2,457,404 | | 0 | |
| Repurchased | — | | 9,729,834 | |
| Balance at Jan 1, 2020 | 751,228,644 | | 9,729,834 | |
| | |
Issued 1 | 4,764,554 | | 0 | |
| Repurchased | — | | 3,073,469 | |
| Balance at Dec 31, 2020 | 755,993,198 | | 12,803,303 | |
1.Shares issued to employees and non-employee directors under the Company's equity compensation plans.
|
| | | | |
| Shares of Dow Common Stock | Issued | Held in Treasury |
| In thousands |
| Balance at Jan 1, 2016 | 1,242,795 |
| 125,853 |
|
Issued 1 | — |
| (14,494 | ) |
| Repurchased | — |
| 17,107 |
|
| Preferred stock converted to common stock | — |
| (96,804 | ) |
| Balance at Dec 31, 2016 | 1,242,795 |
| 31,662 |
|
Issued 1 | — |
| (14,195 | ) |
Converted to DowDuPont shares or canceled on Aug 31, 2017 2 | (1,242,795 | ) | (17,467 | ) |
| Balance at Aug 31, 2017 | — |
| — |
|
| |
1. | Shares issued to employees and non-employee directors under the Company's equity compensation plans. |
| |
2. | Each share of Dow Common Stock issued and outstanding immediately prior to the Merger was converted into one share of DowDuPont Common Stock; treasury shares were canceled as a result of the Merger. |
Accumulated Other Comprehensive Loss
The following table summarizes the changes and after-tax balances ofin each component of AOCL for the years ended December 31, 2018, 20172020, 2019 and 2016:
|
| | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Loss | Unrealized Gains (Losses) on Investments | Cumulative Translation Adj | Pension and Other Postretire Benefits | Derivative Instruments | Total Accum Other Comp Loss |
| In millions |
| 2016 | | | | | |
| Balance at Jan 1, 2016 | $ | 47 |
| $ | (1,737 | ) | $ | (6,769 | ) | $ | (208 | ) | $ | (8,667 | ) |
| Other comprehensive income (loss) before reclassifications | 32 |
| (644 | ) | (1,354 | ) | 84 |
| (1,882 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | (36 | ) | — |
| 734 |
| 29 |
| 727 |
|
| Net other comprehensive income (loss) | $ | (4 | ) | $ | (644 | ) | $ | (620 | ) | $ | 113 |
| $ | (1,155 | ) |
| Balance at Dec 31, 2016 | $ | 43 |
| $ | (2,381 | ) | $ | (7,389 | ) | $ | (95 | ) | $ | (9,822 | ) |
| 2017 | | | | | |
| Other comprehensive income (loss) before reclassifications | 25 |
| 908 |
| (23 | ) | 1 |
| 911 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | (71 | ) | (8 | ) | 414 |
| (15 | ) | 320 |
|
| Net other comprehensive income (loss) | $ | (46 | ) | $ | 900 |
| $ | 391 |
| $ | (14 | ) | $ | 1,231 |
|
| Balance at Dec 31, 2017 | $ | (3 | ) | $ | (1,481 | ) | $ | (6,998 | ) | $ | (109 | ) | $ | (8,591 | ) |
| 2018 | | | | | |
Balance at Jan 1, 2018 1 | $ | 17 |
| $ | (1,481 | ) | $ | (6,998 | ) | $ | (109 | ) | $ | (8,571 | ) |
| Other comprehensive income (loss) before reclassifications | (74 | ) | (221 | ) | (495 | ) | 4 |
| (786 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss) | 7 |
| (4 | ) | 455 |
| 71 |
| 529 |
|
| Net other comprehensive income (loss) | $ | (67 | ) | $ | (225 | ) | $ | (40 | ) | $ | 75 |
| $ | (257 | ) |
Reclassification of stranded tax effects 2 | $ | (1 | ) | $ | (107 | ) | $ | (927 | ) | $ | (22 | ) | $ | (1,057 | ) |
| Balance at Dec 31, 2018 | $ | (51 | ) | $ | (1,813 | ) | $ | (7,965 | ) | $ | (56 | ) | $ | (9,885 | ) |
| |
1. | The beginning balance of "Unrealized gains (losses) on investments" was increased by $20 million to reflect the impact of adoption of ASU 2016-01. See Notes 1 and 2 for additional information. |
| |
2. | Amounts 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 years ended December 31, 2018 2017 and 2016 were as follows:
| | | | | | | | | | | |
| Accumulated Other Comprehensive Loss | 2020 | 2019 | 2018 |
| In millions |
| Unrealized Gains (Losses) on Investments | | | |
| Beginning balance | $ | 64 | | $ | (51) | | $ | 17 | |
| Unrealized gains (losses) on investments | 104 | | 178 | | (93) | |
| Less: Tax (expense) benefit | (23) | | (38) | | 19 | |
| Net unrealized gains (losses) on investments | 81 | | 140 | | (74) | |
(Gains) losses reclassified from AOCL to net income 1 | (54) | | (33) | | 9 | |
Less: Tax expense (benefit) 2 | 13 | | 8 | | (2) | |
| Net (gains) losses reclassified from AOCL to net income | (41) | | (25) | | 7 | |
| Other comprehensive income (loss), net of tax | 40 | | 115 | | (67) | |
Reclassification of stranded tax effects 3 | 0 | | 0 | | (1) | |
| Ending balance | $ | 104 | | $ | 64 | | $ | (51) | |
| Cumulative Translation Adjustment | | | |
| Beginning balance | $ | (1,135) | | $ | (1,813) | | $ | (1,481) | |
| Gains (losses) on foreign currency translation | 227 | | 59 | | (215) | |
| Less: Tax (expense) benefit | 25 | | (2) | | (6) | |
| Net gains (losses) on foreign currency translation | 252 | | 57 | | (221) | |
(Gains) losses reclassified from AOCL to net income 4 | (47) | | (89) | | (4) | |
| Other comprehensive income (loss), net of tax | 205 | | (32) | | (225) | |
Impact of common control transaction 5 | 0 | | 710 | | 0 | |
Reclassification of stranded tax effects 3 | 0 | | 0 | | (107) | |
| Ending balance | $ | (930) | | $ | (1,135) | | $ | (1,813) | |
| Pension and Other Postretirement Benefits | | | |
| Beginning balance | $ | (8,781) | | $ | (7,965) | | $ | (6,998) | |
| Gains (losses) arising during the period | (1,769) | | (1,699) | | (625) | |
| Less: Tax (expense) benefit | 411 | | 413 | | 130 | |
| Net gains (losses) arising during the period | (1,358) | | (1,286) | | (495) | |
Amortization and recognition of net loss and prior service credits 6 | 753 | | 504 | | 594 | |
Less: Tax expense (benefit) 2 | (173) | | (117) | | (139) | |
| Net loss and prior service credits reclassified from AOCL to net income | 580 | | 387 | | 455 | |
| Other comprehensive income (loss), net of tax | (778) | | (899) | | (40) | |
Impact of common control transaction 5 | 0 | | 83 | | 0 | |
Reclassification of stranded tax effects 3 | 0 | | 0 | | (927) | |
| Ending balance | $ | (9,559) | | $ | (8,781) | | $ | (7,965) | |
| Derivative Instruments | | | |
| Beginning balance | $ | (394) | | $ | (56) | | $ | (109) | |
| Gains (losses) on derivative instruments | (96) | | (470) | | 6 | |
| Less: Tax (expense) benefit | (1) | | 101 | | (2) | |
| Net gains (losses) on derivative instruments | (97) | | (369) | | 4 | |
(Gains) losses reclassified from AOCL to net income 7 | 30 | | 44 | | 89 | |
Less: Tax expense (benefit) 2 | (9) | | (13) | | (18) | |
| Net (gains) losses reclassified from AOCL to net income | 21 | | 31 | | 71 | |
| Other comprehensive income (loss), net of tax | (76) | | (338) | | 75 | |
Reclassification of stranded tax effects 3 | 0 | | 0 | | (22) | |
| Ending balance | $ | (470) | | $ | (394) | | $ | (56) | |
| Total AOCL ending balance | $ | (10,855) | | $ | (10,246) | | $ | (9,885) | |
1.Reclassified to "Net sales" and "Sundry income (expense) - net."
2.Reclassified to "Provision for income taxes on continuing operations."
3.Amounts reclassified to "Retained earnings" as a result of the adoption of ASU 2018-02.
4.Reclassified to "Sundry income (expense) - net."
5.Reclassified to "Retained earnings" as a result of the separation from DowDuPont on April 1, 2019. See Note 3 for additional information.
6.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 20 for additional information.
7.Reclassified to "Cost of sales," "Sundry income (expense) - net" and "Interest expense and amortization of debt discount."
|
| | | | | | | | | |
Tax Benefit (Expense) 1 | 2018 | 2017 | 2016 |
| In millions |
| Unrealized gains (losses) on investments | $ | 17 |
| $ | 26 |
| $ | (2 | ) |
| Cumulative translation adjustments | (6 | ) | (98 | ) | (171 | ) |
| Pension and other postretirement benefit plans | (9 | ) | (213 | ) | 438 |
|
| Derivative instruments | (20 | ) | (3 | ) | (32 | ) |
Tax benefit (expense) from income taxes related to other comprehensive income (loss) items | $ | (18 | ) | $ | (288 | ) | $ | 233 |
|
| |
1. | Prior year amounts have been updated to conform with the current year presentation. |
A summary of the reclassifications out of AOCL for the years ended December 31, 2018, 2017 and 2016 is provided as follows:
|
| | | | | | | | | | | |
| | Reclassifications Out of Accumulated Other Comprehensive Loss In millions | 2018 | 2017 | 2016 | Consolidated Statements of Income Classification |
| |
| | Unrealized (gains) losses on investments | $ | 9 |
| $ | (110 | ) | $ | (56 | ) | See (1) below |
| | Tax (benefit) expense | (2 | ) | 39 |
| 20 |
| See (2) below |
| | After tax | $ | 7 |
| $ | (71 | ) | $ | (36 | ) | |
| | Cumulative translation adjustments | $ | (4 | ) | $ | (8 | ) | $ | — |
| See (3) below |
| | Pension and other postretirement benefit plans | $ | 594 |
| $ | 607 |
| $ | 913 |
| See (4) below |
| | Tax benefit | (139 | ) | (193 | ) | (179 | ) | See (2) below |
| | After tax | $ | 455 |
| $ | 414 |
| $ | 734 |
| |
| | Derivative instruments | $ | 89 |
| $ | (13 | ) | $ | 34 |
| See (5) below |
| | Tax benefit | (18 | ) | (2 | ) | (5 | ) | See (2) below |
| | After tax | $ | 71 |
| $ | (15 | ) | $ | 29 |
| |
| | Total reclassifications for the period, after tax | $ | 529 |
| $ | 320 |
| $ | 727 |
| |
| |
1. | "Net sales" and "Sundry income (expense) - net." |
| |
2. | "Provision for income taxes." |
| |
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 19 for additional information. In the year ended December 31, 2016, $360 million was included in “Sundry income (expense) - net” (zero impact to "Provision for income taxes") related to the Dow Silicones ownership restructure. See Note 5 for additional information. |
| |
5. | "Cost of sales," "Sundry income (expense) - net" and "Interest expense and amortization of debt discount." |
NOTE 1819 – NONCONTROLLING INTERESTS
Ownership interests in the Company's subsidiaries held by parties other than the Company are presented separately from the Company's equity in the consolidated balance sheets as "Noncontrolling interests." The amount of consolidated net income attributable to the Company and the noncontrolling interests are both presented on the face of the consolidated statements of income.
The following table summarizes the activity for equity attributable to noncontrolling interests for the years ended December 31, 2018, 20172020, 2019 and 2016:2018:
| | | | | | | | | | | |
| Noncontrolling Interests | | | |
| In millions | 2020 | 2019 | 2018 |
| Balance at Jan 1 | $ | 553 | | $ | 1,138 | | $ | 1,186 | |
| Net income attributable to noncontrolling interests - continuing operations | 69 | | 74 | | 102 | |
| Net income attributable to noncontrolling interests - discontinued operations | 0 | | 13 | | 32 | |
Distributions to noncontrolling interests 1 | (55) | | (77) | | (145) | |
| | | |
| | | |
Impact of common control transaction 2 | 0 | | (353) | | 0 | |
Purchase of noncontrolling interests 3 | 0 | | (254) | | 0 | |
| | | |
| | | |
| | | |
Deconsolidation of noncontrolling interests 4 | (7) | | 0 | | 0 | |
| Cumulative translation adjustments | 9 | | 12 | | (39) | |
| Other | 1 | | 0 | | 2 | |
| Balance at Dec 31 | $ | 570 | | $ | 553 | | $ | 1,138 | |
1.Distributions to noncontrolling interests are net of $7 million in 2020 ($7 million in 2019 and $27 million in 2018) in dividends paid to a joint venture, which were reclassified to "Equity in earnings (losses) of nonconsolidated affiliates" in the consolidated statements of income. Also includes amounts attributable to discontinued operations of $7 million in 2019 and $37 million in 2018.
2.Related to the separation from DowDuPont. See Note 3 for additional information.
3.Related to the acquisition of full ownership in a propylene oxide manufacturing joint venture, which occurred on October 1, 2019. See Note 24 for additional information. As a result of this arrangement, the carrying value of the noncontrolling interest was removed, and “Additional paid-in capital” was adjusted by $38 million.
4.Related to the divestiture of the Company's interest in a cogeneration facility in Brazil in the third quarter of 2020. See Note 24 for additional information.
|
| | | | | | | | | |
| Noncontrolling Interests | | | |
| In millions | 2018 | 2017 | 2016 1 |
| Balance at Jan 1 | $ | 1,186 |
| $ | 1,242 |
| $ | 809 |
|
| Net income attributable to noncontrolling interests | 134 |
| 129 |
| 86 |
|
Distributions to noncontrolling interests 2 | (145 | ) | (109 | ) | (123 | ) |
Acquisition of noncontrolling interests 3 | — |
| — |
| 473 |
|
Deconsolidation of noncontrolling interests 4 | — |
| (119 | ) | — |
|
| Cumulative translation adjustments | (39 | ) | 41 |
| (4 | ) |
| Other | 2 |
| 2 |
| 1 |
|
| Balance at Dec 31 | $ | 1,138 |
| $ | 1,186 |
| $ | 1,242 |
|
| |
1. | The 2016 activity presented in the table excludes a $202 million cash payment for the purchase of a noncontrolling interest, as the noncontrolling interest was classified as "Accrued and other current liabilities" in the consolidated balance sheets. |
| |
2. | Distributions to noncontrolling interests is net of $27 million in 2018 ($20 million in 2017 and $53 million in 2016) in dividends paid to a joint venture, which were reclassified to "Equity in earnings of nonconsolidated affiliates" in the consolidated statements of income. |
| |
3. | Assumed in the ownership restructure of Dow Silicones. See Note 5 for additional information. |
| |
4. | On June 30, 2017, the Company sold its ownership interest in the SKC Haas Display Films group of companies. See Note 13 for additional information. |
NOTE 1920 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Dow and DuPont did not merge their defined benefit pension plans and other postretirement benefit plans as a result of the Merger.
Defined Benefit Pension Plans
The Company has both funded and unfunded defined benefit pension plans that cover employees in the United States and a number of other countries. The U.S. qualified plan covering the parent company is the largest plan. Benefits for employees hired before January 1, 2008, are based on length of service and the employee’s three highest consecutive years of compensation. Employees hired after January 1, 2008, earn benefits that are based on a set percentage of annual pay, plus interest.
The Company's funding policy is to contribute to the plans when pension laws and/or economics either require or encourage funding. In 2018,2020, the Company contributed $1,656$299 million to its pension plans, which included a $1,100 million discretionary contribution to its principal U.S. pension plan in the third quarter of 2018. Total contributions in 2018 also includedincluding contributions to fund benefit payments for the Company's non-qualifiedunfunded pension plans. The Company expects to contribute approximately $240$300 million to its pension plans in 2019.2021.
The provisions of a U.S. non-qualified pension plan require the payment of plan obligations to certain participants upon a change in control of the Company, which occurred at the time of the Merger. Certain participants could elect to receive a lump-sum payment or direct the Company to purchase an annuity on their behalf using the after-tax proceeds of the lump sum. In the fourth quarter of 2017, the Company paid $940 million to plan participants and $230 million to an insurance company for the purchase of annuities, which were included in "Pension contributions" in the consolidated statements of cash flows. The Company also paid $205 million for income and payroll taxes for participants electing the annuity option, of which $201 million was included in "Cost of sales" and $4 million was included in "Selling, general and administrative expenses" in the consolidated statements of income. The Company recorded a settlement charge of $687 million associated with the payout in the fourth quarter of 2017, which was included in "Sundry income (expense) - net" in the consolidated statements of income.
The weighted-average assumptions used to determine pension plan obligations and net periodic benefit costs for all plans are summarized in the table below:
| | | | | | | | | | | | | | | | | |
| Weighted-Average Assumptions for All Pension Plans | Benefit Obligations
at Dec 31 | Net Periodic Costs
for the Year Ended |
| | 2020 | 2019 | 2020 | 2019 | 2018 |
| Discount rate | 2.20 | % | 2.81 | % | 2.81 | % | 3.50 | % | 3.17 | % |
| Interest crediting rate for applicable benefits | 3.55 | % | 3.51 | % | 3.51 | % | 3.72 | % | 3.61 | % |
| Rate of compensation increase | 3.91 | % | 3.92 | % | 3.92 | % | 3.92 | % | 3.88 | % |
| Expected return on plan assets | | | 7.00 | % | 7.11 | % | 7.11 | % |
|
| | | | | | | | | | |
| Weighted-Average Assumptions for All Pension Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended |
| | 2018 | 2017 | 2018 | 2017 | 2016 |
| Discount rate | 3.69 | % | 3.17 | % | 3.17 | % | 3.52 | % | 3.85 | % |
| Interest crediting rate for applicable benefits | 3.72 | % | 3.61 | % | 3.61 | % | 3.45 | % | 4.81 | % |
| Rate of compensation increase | 3.84 | % | 3.88 | % | 3.88 | % | 3.90 | % | 4.04 | % |
| Expected return on plan assets | — |
| — |
| 7.11 | % | 7.16 | % | 7.22 | % |
The weighted-average assumptions used to determine pension plan obligations and net periodic benefit costs for U.S. plans are summarized in the table below:
| | | | | | | | | | | | | | | | | |
| Weighted-Average Assumptions for U.S. Pension Plans | Benefit Obligations
at Dec 31 | Net Periodic Costs
for the Year Ended |
| 2020 | 2019 | 2020 | 2019 | 2018 |
| Discount rate | 2.71 | % | 3.41 | % | 3.41 | % | 4.15 | % | 3.66 | % |
| Interest crediting rate for applicable benefits | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % |
| Rate of compensation increase | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % |
| Expected return on plan assets | | | 7.95 | % | 7.92 | % | 7.92 | % |
|
| | | | | | | | | | |
| Weighted-Average Assumptions for U.S. Pension Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended |
| | 2018 | 2017 | 2018 | 2017 | 2016 |
| Discount rate | 4.39 | % | 3.66 | % | 3.66 | % | 4.11 | % | 4.40 | % |
| Interest crediting rate for applicable benefits | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % |
| Rate of compensation increase | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | 4.50 | % |
| Expected return on plan assets | — |
| — |
| 7.92 | % | 7.91 | % | 7.77 | % |
Other Postretirement Benefit Plans
The Company provides certain health care and life insurance benefits to retired employees and survivors. The Company’s plans outside of the United States are not significant; therefore, this discussion relates to the U.S. plans only. The plans provide health care benefits, including hospital, physicians’ services, drug and major medical expense coverage, and life insurance benefits. In general, for employees hired before January 1, 1993, the plans provide benefits supplemental to Medicare when retirees are eligible for these benefits. The Company and the retiree share the cost of these benefits, with the Company portion increasing as the retiree has increased years of credited service, although there is a cap on the Company portion. The Company has the ability to change these benefits at any time. Employees hired after January 1, 2008, are not covered under the plans.
The Company funds most of the cost of these health care and life insurance benefits as incurred. In 2018, Dow2020, the Company did not make any contributions to its other postretirement benefit plan trusts. The trusts did not hold assets at December 31, 2018.2020. The Company does not expect to contribute assets to its other postretirement benefit plan trusts in 2019.2021.
The weighted-average assumptions used to determine other postretirement benefit plan obligations and net periodic benefit costs for the U.S. plans are provided below:
| | | | | | | | | | | | | | | | | |
| Weighted-Average Assumptions for U.S. Other Postretirement Benefits Plans | Benefit Obligations
at Dec 31 | Net Periodic Costs
for the Year Ended |
| 2020 | 2019 | 2020 | 2019 | 2018 |
| Discount rate | 2.38 | % | 3.19 | % | 3.19 | % | 4.01 | % | 3.51 | % |
| Health care cost trend rate assumed for next year | 6.75 | % | 6.25 | % | 6.25 | % | 6.50 | % | 6.75 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate health care cost trend rate) | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % |
| Year that the rate reaches the ultimate health care cost trend rate | 2028 | 2025 | 2025 | 2025 | 2025 |
|
| | | | | | | | | | |
| Weighted-Average Assumptions for U.S. Other Postretirement Benefits Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended |
| | 2018 | 2017 | 2018 | 2017 | 2016 |
| Discount rate | 4.24 | % | 3.51 | % | 3.51 | % | 3.83 | % | 3.96 | % |
| Health care cost trend rate assumed for next year | 6.50 | % | 6.75 | % | 6.75 | % | 7.00 | % | 7.25 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate health care cost trend rate) | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % |
| Year that the rate reaches the ultimate health care cost trend rate | 2025 |
| 2025 |
| 2025 |
| 2025 |
| 2025 |
|
Assumptions
The Company determines the expected long-term rate of return on plan assets by performing a detailed analysis of key economic and market factors driving historical returns for each asset class and formulating a projected return based on factors in the current environment. Factors considered include, but are not limited to, inflation, real economic growth, interest rate yield, interest rate spreads and other valuation measures and market metrics. The expected long-term rate of return for each asset class is then weighted based on the strategic asset allocation approved by the governing body for each plan. The Company’s historical experience with the pension fund asset performance is also considered.
The Company uses the spot rate approach to determine the discount rate utilized to measure the service cost and interest cost components of net periodic pension and other postretirement benefit costs for the U.S. and other selected countries. Under the spot rate approach, the Company calculates service costscost and interest costscost by applying individual spot rates from the Willis Towers Watson RATE:Link yield curve (based on high-quality corporate bond yields) for each selected country to the separate expected cash flow components of service cost and interest cost. Service cost and interest cost for all other plans are determined on the basis of the single equivalent discount rates derived in determining those plan obligations.
The discount rates utilized to measure the pension and other postretirement obligations of the U.S. qualified plans are based on the yield on high-quality corporate fixed income investments at the measurement date. Future expected actuarially determined cash flows for Dow’sthe Company’s U.S. plans are individually discounted at the spot rates under the Willis Towers Watson U.S. RATE:Link 60-90 corporate yield curve (based on 60th to 90th percentile high-quality corporate bond yields) to arrive at the plan’s obligations as of the measurement date.
The Company utilizes a modified version of the Society of Actuaries’ mortality tables released in 2014 and a modified version of the generational mortality improvement scale released in 2018 for purposes of measuring the U.S. pension and other postretirement obligations, based on an evaluation of the mortality experience of the Company’s pension plans.
Separation from DowDuPont
As a result of the Company’s separation from DowDuPont in 2019, the number of significant defined benefit pension plans administered by the Company decreased from 45 plans to 35 plans, with approximately $270 million of net unfunded pension liabilities transferred to DowDuPont. Plans administered by other subsidiaries of DowDuPont that were transferred to the Company were not significant. There were no changes in the number of significant other postretirement benefit plans administered by the Company as a result of the separation. Existing Company plans that were significantly impacted by the transfer of active plan participants to DowDuPont were remeasured, resulting in curtailment gains and losses and recognition of special termination benefits.
Summarized information on the Company's pension and other postretirement benefit plans is as follows:
| | | | | | | | | | | | | | |
| Change in Projected Benefit Obligations, Plan Assets and Funded Status of All Significant Plans | Defined Benefit Pension Plans | Other Postretirement Benefit Plans |
| In millions | 2020 | 2019 | 2020 | 2019 |
| Change in projected benefit obligations: | | | | |
| Benefit obligations at beginning of year | $ | 32,621 | | $ | 29,600 | | $ | 1,535 | | $ | 1,478 | |
| Impact of plans transferred to DowDuPont at separation | 0 | | (331) | | 0 | | 0 | |
| Service cost | 399 | | 396 | | 7 | | 8 | |
| Interest cost | 767 | | 921 | | 40 | | 49 | |
| Plan participants' contributions | 12 | | 12 | | 0 | | 0 | |
| Actuarial changes in assumptions and experience | 3,021 | | 3,904 | | 7 | | 148 | |
| Benefits paid | (1,569) | | (1,684) | | (132) | | (148) | |
| Plan amendments | 8 | | 0 | | 0 | | 0 | |
Acquisitions/divestitures/other 1 | (692) | | (37) | | 0 | | 0 | |
| Effect of foreign exchange rates | 791 | | 14 | | 7 | | 3 | |
Termination benefits/curtailments/settlements 2 | (49) | | (174) | | 0 | | (3) | |
| Benefit obligations at end of year | $ | 35,309 | | $ | 32,621 | | $ | 1,464 | | $ | 1,535 | |
| | | | |
| Change in plan assets: | | | | |
| Fair value of plan assets at beginning of year | $ | 24,908 | | $ | 22,544 | | $ | 0 | | $ | 0 | |
| Impact of plans transferred to DowDuPont at separation | 0 | | (61) | | 0 | | 0 | |
| Actual return on plan assets | 2,877 | | 3,790 | | 0 | | 0 | |
| Employer contributions | 299 | | 266 | | 0 | | 0 | |
| Plan participants' contributions | 12 | | 12 | | 0 | | 0 | |
| Benefits paid | (1,569) | | (1,684) | | 0 | | 0 | |
Other 3 | (681) | | 0 | | 0 | | 0 | |
| Effect of foreign exchange rates | 571 | | 41 | | 0 | | 0 | |
| Settlements | (11) | | 0 | | 0 | | 0 | |
| Fair value of plan assets at end of year | $ | 26,406 | | $ | 24,908 | | $ | 0 | | $ | 0 | |
| | | | |
| Funded status: | | | | |
| U.S. plans with plan assets | $ | (5,873) | | $ | (4,768) | | $ | — | | $ | — | |
| Non-U.S. plans with plan assets | (2,222) | | (2,207) | | — | | — | |
| All other plans | (808) | | (738) | | (1,464) | | (1,535) | |
| | | | |
| Funded status at end of year | $ | (8,903) | | $ | (7,713) | | $ | (1,464) | | $ | (1,535) | |
| | | | |
| Amounts recognized in the consolidated balance sheets at Dec 31: | | | | |
| Deferred charges and other assets | $ | 1,007 | | $ | 623 | | $ | 0 | | $ | 0 | |
| Accrued and other current liabilities | (54) | | (49) | | (113) | | (128) | |
| Pension and other postretirement benefits - noncurrent | (9,856) | | (8,287) | | (1,351) | | (1,407) | |
| | | | |
| | | | |
| Net amount recognized | $ | (8,903) | | $ | (7,713) | | $ | (1,464) | | $ | (1,535) | |
| | | | |
| Pretax amounts recognized in accumulated other comprehensive loss at Dec 31: | | | | |
| Net loss (gain) | $ | 12,736 | | $ | 11,761 | | $ | (129) | | $ | (147) | |
| Prior service credit | (154) | | (177) | | 0 | | 0 | |
| Pretax balance in accumulated other comprehensive loss at end of year | $ | 12,582 | | $ | 11,584 | | $ | (129) | | $ | (147) | |
|
| | | | | | | | | | | | |
| Change in Projected Benefit Obligations, Plan Assets and Funded Status of All Significant Plans | Defined Benefit Pension Plans | Other Postretirement Benefits |
| In millions | 2018 | 2017 | 2018 | 2017 |
| Change in projected benefit obligations: | | | | |
| Benefit obligations at beginning of year | $ | 31,851 |
| $ | 30,280 |
| $ | 1,567 |
| $ | 1,835 |
|
| Service cost | 520 |
| 506 |
| 12 |
| 14 |
|
| Interest cost | 886 |
| 883 |
| 45 |
| 54 |
|
| Plan participants' contributions | 19 |
| 14 |
| — |
| — |
|
| Actuarial changes in assumptions and experience | (1,754 | ) | 1,804 |
| (13 | ) | (198 | ) |
| Benefits paid | (1,476 | ) | (1,440 | ) | (123 | ) | (151 | ) |
| Plan amendments | 17 |
| 14 |
| — |
| — |
|
Acquisitions/divestitures/other 1 | (45 | ) | 50 |
| — |
| — |
|
| Effect of foreign exchange rates | (418 | ) | 932 |
| (10 | ) | 13 |
|
Termination benefits/curtailment cost/settlements 2 | — |
| (1,192 | ) | — |
| — |
|
| Benefit obligations at end of year | $ | 29,600 |
| $ | 31,851 |
| $ | 1,478 |
| $ | 1,567 |
|
| | | | | |
| Change in plan assets: | | | | |
| Fair value of plan assets at beginning of year | $ | 23,401 |
| $ | 21,208 |
| $ | — |
| $ | — |
|
| Actual return on plan assets | (742 | ) | 2,500 |
| — |
| — |
|
| Employer contributions | 1,656 |
| 1,676 |
| — |
| — |
|
| Plan participants' contributions | 19 |
| 14 |
| — |
| — |
|
| Benefits paid | (1,476 | ) | (1,440 | ) | — |
| — |
|
Acquisitions/divestitures/other 3 | — |
| (15 | ) | — |
| — |
|
| Effect of foreign exchange rates | (314 | ) | 646 |
| — |
| — |
|
Settlements 4 | — |
| (1,188 | ) | — |
| — |
|
| Fair value of plan assets at end of year | $ | 22,544 |
| $ | 23,401 |
| $ | — |
| $ | — |
|
| | | | | |
| Funded status: |
|
|
|
|
| U.S. plans with plan assets | $ | (4,066 | ) | $ | (5,363 | ) | $ | — |
| $ | — |
|
| Non-U.S. plans with plan assets | (2,263 | ) | (2,333 | ) | — |
| — |
|
| All other plans | (727 | ) | (754 | ) | (1,478 | ) | (1,567 | ) |
| Funded status at end of year | $ | (7,056 | ) | $ | (8,450 | ) | $ | (1,478 | ) | $ | (1,567 | ) |
| | | | | |
| Amounts recognized in the consolidated balance sheets at Dec 31: | | | | |
| Deferred charges and other assets | $ | 491 |
| $ | 548 |
| $ | — |
| $ | — |
|
| Accrued and other current liabilities | (52 | ) | (48 | ) | (131 | ) | (125 | ) |
| Pension and other postretirement benefits - noncurrent | (7,495 | ) | (8,950 | ) | (1,347 | ) | (1,442 | ) |
| Net amount recognized | $ | (7,056 | ) | $ | (8,450 | ) | $ | (1,478 | ) | $ | (1,567 | ) |
| | | | | |
| Pretax amounts recognized in accumulated other comprehensive loss at Dec 31: | | | | |
| Net loss (gain) | $ | 10,841 |
| $ | 10,899 |
| $ | (315 | ) | $ | (326 | ) |
| Prior service credit | (224 | ) | (265 | ) | — |
| — |
|
| Pretax balance in accumulated other comprehensive loss at end of year | $ | 10,617 |
| $ | 10,634 |
| $ | (315 | ) | $ | (326 | ) |
| |
1. | The 2018 impact includes the divestiture1.The 2020 impact relates primarily to the transfer of a business with pension benefit obligations of $37 million. The 2017 impact includes the reclassification of a China pension liability of $69 million from "Other noncurrent obligations" to "Pension and other postretirement benefits - noncurrent" and the divestiture of a South Korean company with pension benefit obligations of $25 million. |
| |
2. | The 2017 impact includes the settlement of certain plan obligations for a U.S. non-qualified pension plan of $1,170 million required due to a change in control provision. The 2017 impact also includes the conversion of a South Korean pension plan of $22 million to a defined contribution plan. |
| |
3. | The 2017 impact relates to the divestiture of a South Korean company. |
| |
4. | The 2017 impact includes payments made of $1,170 million to settle certain plan obligations of a U.S. non-qualified pension plan required due to a change in control provision. The 2017 impact also includes payments made of $18 million to convert a South Korean pension plan to a defined contribution plan. |
A significant component of the overall decrease in the Company'sU.S. through the purchase of annuity contracts from an insurance company. The 2019 impact includes the divestiture of a business with pension benefit obligation forobligations of $53 million.
2.The 2020 impact relates to pension plan curtailments of a European plan resulting from the year ended December 31, 2018 was2020 Restructuring Program and the settlement of certain plan obligations of a U.S. non-qualified pension plan resulting from lump-sum payments. The 2019 impact relates to plan curtailments and associated special termination benefits resulting from the reduction in plan participation due to the weighted-average change in discount rates, which increasedseparation from 3.17 percent at December 31, 2017DowDuPont.
3.The 2020 impact relates to 3.69 percent at December 31, 2018. the purchase of annuity contracts associated with the transfer of benefit obligations to an insurance company.
A significant component of the overall increase in the Company's benefit obligation for the year ended December 31, 20172020 was also due to the weighted-average change in weighted-average discount rates, which decreased from 3.522.81 percent at December 31, 20162019 to 3.172.20 percent at December 31, 2017.2020. A significant component of the overall increase in the Company's benefit obligation for the year ended December 31, 2019 was due to the change in weighted-average discount rates, which decreased from 3.69 percent at December 31, 2018 to 2.81 percent at December 31, 2019.
The accumulated benefit obligation for all significant pension plans was $28.3$34.1 billion and $30.4$31.4 billion at December 31, 20182020 and 2017,2019, respectively.
| | | | | | | | |
| Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at Dec 31 | 2020 | 2019 |
| In millions |
| Accumulated benefit obligations | $ | 29,084 | | $ | 26,959 | |
| Fair value of plan assets | $ | 20,130 | | $ | 19,571 | |
|
| | | | | | |
| Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at Dec 31 | 2018 | 2017 |
| In millions |
| Accumulated benefit obligations | $ | 25,392 |
| $ | 27,248 |
|
| Fair value of plan assets | $ | 18,902 |
| $ | 19,515 |
|
| | | | | | | | |
| Pension Plans with Projected Benefit Obligations in Excess of Plan Assets at Dec 31 | 2020 | 2019 |
| In millions |
| Projected benefit obligations | $ | 30,161 | | $ | 28,013 | |
| | |
| Fair value of plan assets | $ | 20,251 | | $ | 19,677 | |
|
| | | | | | |
| Pension Plans with Projected Benefit Obligations in Excess of Plan Assets at Dec 31 | 2018 | 2017 |
| In millions |
| Projected benefit obligations | $ | 26,599 |
| $ | 28,576 |
|
| Fair value of plan assets | $ | 19,051 |
| $ | 19,578 |
|
| | | | | | | | | | | | | | | | | | | | |
| Net Periodic Benefit Costs for All Significant Plans for the Year Ended Dec 31 | Defined Benefit Pension Plans | Other Postretirement Benefit Plans |
| In millions | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 |
| Net Periodic Benefit Costs: | | | | | | |
| Service cost | $ | 399 | | $ | 396 | | $ | 520 | | $ | 7 | | $ | 8 | | $ | 12 | |
| Interest cost | 767 | | 921 | | 886 | | 40 | | 49 | | 45 | |
| Expected return on plan assets | (1,658) | | (1,679) | | (1,644) | | 0 | | 0 | | 0 | |
| Amortization of prior service credit | (19) | | (20) | | (24) | | 0 | | 0 | | 0 | |
| Amortization of unrecognized (gain) loss | 773 | | 574 | | 642 | | (10) | | (20) | | (24) | |
Curtailment/settlement/other 1 | 9 | | (27) | | 0 | | 0 | | (3) | | 0 | |
| Net periodic benefit costs | $ | 271 | | $ | 165 | | $ | 380 | | $ | 37 | | $ | 34 | | $ | 33 | |
| Less: discontinued operations | 0 | | 21 | | 101 | | 0 | | 0 | | 3 | |
| Net periodic benefit costs - continuing operations | $ | 271 | | $ | 144 | | $ | 279 | | $ | 37 | | $ | 34 | | $ | 30 | |
| Changes in plan assets and benefit obligations recognized in other comprehensive (income) loss: | | | | | | |
| Net (gain) loss | $ | 1,753 | | $ | 1,606 | | $ | 584 | | $ | 8 | | $ | 145 | | $ | (13) | |
| Prior service cost | 8 | | 0 | | 17 | | 0 | | 0 | | 0 | |
| Amortization of prior service credit | 19 | | 20 | | 24 | | 0 | | 0 | | 0 | |
| Amortization of unrecognized gain (loss) | (773) | | (574) | | (642) | | 10 | | 20 | | 24 | |
Common control transaction 2 | 0 | | (112) | | 0 | | 0 | | 0 | | 0 | |
Curtailment and settlement gain (loss) 1 | (9) | | 27 | | 0 | | 0 | | 3 | | 0 | |
| Total recognized in other comprehensive (income) loss | $ | 998 | | $ | 967 | | $ | (17) | | $ | 18 | | $ | 168 | | $ | 11 | |
| Total recognized in net periodic benefit cost and other comprehensive (income) loss | $ | 1,269 | | $ | 1,132 | | $ | 363 | | $ | 55 | | $ | 202 | | $ | 44 | |
1.The 2020 impact relates to pension plan curtailments of a European plan resulting from the 2020 Restructuring Program and the settlement of certain plan obligations of a U.S. non-qualified pension plan resulting from lump-sum payments. The 2019 impact relates to plan curtailments and associated special termination benefits resulting from the reduction in plan participation due to the separation from DowDuPont.
|
| | | | | | | | | | | | | | | | | | |
| Net Periodic Benefit Costs for All Significant Plans for the Year Ended Dec 31 | Defined Benefit Pension Plans | Other Postretirement Benefits |
| In millions | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 |
| Net Periodic Benefit Costs: | | | | | | |
| Service cost | $ | 520 |
| $ | 506 |
| $ | 463 |
| $ | 12 |
| $ | 14 |
| $ | 13 |
|
| Interest cost | 886 |
| 883 |
| 846 |
| 45 |
| 54 |
| 52 |
|
| Expected return on plan assets | (1,644 | ) | (1,548 | ) | (1,447 | ) | — |
| — |
| — |
|
| Amortization of prior service credit | (24 | ) | (25 | ) | (24 | ) | — |
| — |
| (3 | ) |
| Amortization of unrecognized (gain) loss | 642 |
| 638 |
| 587 |
| (24 | ) | (6 | ) | (7 | ) |
Curtailment/settlement/other 1 | — |
| 683 |
| (36 | ) | — |
| — |
| — |
|
| Net periodic benefit costs | $ | 380 |
| $ | 1,137 |
| $ | 389 |
| $ | 33 |
| $ | 62 |
| $ | 55 |
|
| Changes in plan assets and benefit obligations recognized in other comprehensive (income) loss: | | | | | | |
| Net (gain) loss | $ | 584 |
| $ | 845 |
| $ | 1,954 |
| $ | (13 | ) | $ | (199 | ) | $ | 14 |
|
| Prior service cost | 17 |
| 14 |
| — |
| — |
| — |
| — |
|
| Amortization of prior service credit | 24 |
| 25 |
| 24 |
| — |
| — |
| 3 |
|
| Amortization of unrecognized gain (loss) | (642 | ) | (638 | ) | (587 | ) | 24 |
| 6 |
| 7 |
|
Settlement loss 2 | — |
| (687 | ) | — |
| — |
| — |
| — |
|
| Total recognized in other comprehensive (income) loss | $ | (17 | ) | $ | (441 | ) | $ | 1,391 |
| $ | 11 |
| $ | (193 | ) | $ | 24 |
|
| Total recognized in net periodic benefit cost and other comprehensive (income) loss | $ | 363 |
| $ | 696 |
| $ | 1,780 |
| $ | 44 |
| $ | (131 | ) | $ | 79 |
|
| |
1. | The 2017 impact relates to the settlement of a U.S. non-qualified plan triggered by a change in control provision. The 2016 impact relates to the curtailment of benefits for certain participants of a Dow Silicones plan in the U.S. |
| |
2. | The 2017 impact relates to the settlement of a U.S. non-qualified plan triggered by a change in control provision. |
On January 1, 2018,2.The 2019 impact is the Company adopted ASU 2017-07, which impacted the presentationresult of the separation from DowDuPont.
Except for plan curtailment costs related to the 2020 Restructuring Program, which are included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income, non-service cost components of net periodic benefit cost in the consolidated statements of income. Net periodic benefit cost, other than the service cost component, is noware included in "Sundry income (expense) - net" in the consolidated statements of income. See Notes 1, 26 and 87 for additional information.
Estimated Future Benefit Payments
The estimated future benefit payments of continuing operations, reflecting expected future service, as appropriate, are presented in the following table:
| | | | | | | | |
| Estimated Future Benefit Payments at Dec 31, 2020 | Defined Benefit Pension Plans | Other Postretirement Benefit Plans |
| In millions |
| 2021 | $ | 1,647 | | $ | 114 | |
| 2022 | 1,595 | | 103 | |
| 2023 | 1,593 | | 102 | |
| 2024 | 1,604 | | 101 | |
| 2025 | 1,641 | | 100 | |
| 2026-2030 | 8,419 | | 449 | |
| Total | $ | 16,499 | | $ | 969 | |
|
| | | | | | |
| Estimated Future Benefit Payments at Dec 31, 2018 | Defined Benefit Pension Plans | Other Postretirement Benefits |
| In millions |
| 2019 | $ | 1,549 |
| $ | 133 |
|
| 2020 | 1,559 |
| 129 |
|
| 2021 | 1,585 |
| 129 |
|
| 2022 | 1,624 |
| 125 |
|
| 2023 | 1,663 |
| 120 |
|
| 2024-2028 | 8,641 |
| 519 |
|
| Total | $ | 16,621 |
| $ | 1,155 |
|
Plan Assets
Plan assets consist primarily of equity and fixed income securities of U.S. and foreign issuers, and include alternative investments, such as real estate, private market securitiesequity and absolute return strategies. AtPlan assets totaled $26.4 billion at December 31, 2018, plan assets totaled $22.52020 and $24.9 billion at December 31, 2019 and included no directly held common stock of DowDuPont. At December 31, 2017, plan assets totaled $23.4 billion and included no directly held common stock of DowDuPont.Dow Inc.
The Company's investment strategy for the plan assets is to manage the assets in relation to the liability in order to pay retirement benefits to plan participants over the life of the plans. This is accomplished by identifying and managing the exposure to various market risks, diversifying investments across various asset classes and earning an acceptable long-term rate of return consistent with an acceptable amount of risk, while considering the liquidity needs of the plans.
The plans are permitted to use derivative instruments for investment purposes, as well as for hedging the underlying asset and liability exposure and rebalancing the asset allocation. The plans use value-at-risk, stress testing, scenario analysis and Monte Carlo simulations to monitor and manage both the risk within the portfolios and the surplus risk of the plans.
Equity securities primarily include investments in large- and small-cap companies located in both developed and emerging markets around the world. Fixed income securities include investment and non-investment grade corporate bonds of companies diversified across industries, U.S. treasuries, non-U.S. developed market securities, U.S. agency mortgage-backed securities, emerging market securities and fixed income related funds. Alternative investments primarily include investments in real estate, private equity limited partnerships and absolute return strategies. Other significant investment types include various insurance contracts and interest rate, equity, commodity and foreign exchange derivative investments and hedges.
The Company mitigates the credit risk of investments by establishing guidelines with investment managers that limit investment in any single issue or issuer to an amount that is not material to the portfolio being managed. These guidelines are monitored for compliance both by the Company and external managers. Credit risk related to derivative activity is mitigated by utilizing multiple counterparties, collateral support agreements and centralized clearing, where appropriate.
The Northern Trust Collective Government Short Term InvestmentA short-term investment money market fund is utilized as the sweep vehicle for the U.S. plans, which from time to time can represent a significant investment. For one U.S. plan, approximately 3531 percent of the liability is covered by a participating group annuity issued by Prudential Insurance Company.
The weighted-average target allocation for plan assets of the Company's pension plans is summarized as follows:
|
| | | | |
Target Allocation for Plan Assets at Dec 31, 20182020 | Target Allocation |
| Asset Category |
| Equity securities | 3635 | % |
| Fixed income securities | 3536 |
|
| Alternative investments | 28 |
|
| Other investments | 1 |
|
| Total | 100 | % |
Fair value calculations may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
For pension plan assets classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For pension plan assets classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance and quality checks. For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources. For other pension plan assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.
For pension plan assets classified as Level 3 measurements, total fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity for the investment.
Certain pension plan assets are held in funds where fair value is based on an estimated net asset value per share (or its equivalent) as of the most recently available fund financial statements which are received on a monthly or quarterly basis. These valuations are reviewed for reasonableness based on applicable sector, benchmark and company performance. Adjustments to valuations are made where appropriate to arrive at an estimated net asset value per share at the measurement date. These funds are not classified within the fair value hierarchy.
The following table summarizes the bases used to measure the Company’s pension plan assets at fair value for the years endedDecember 31, 20182020 and 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basis of Fair Value Measurements | Dec 31, 2020 | Dec 31, 2019 |
| In millions | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 |
| Cash and cash equivalents | $ | 1,298 | | $ | 1,103 | | $ | 195 | | $ | 0 | | $ | 754 | | $ | 675 | | $ | 79 | | $ | 0 | |
| Equity securities: | | | | | | | | |
U.S. equity securities 1 | $ | 3,934 | | $ | 3,911 | | $ | 22 | | $ | 1 | | $ | 3,844 | | $ | 3,752 | | $ | 91 | | $ | 1 | |
| Non - U.S. equity securities | 5,186 | | 4,213 | | 964 | | 9 | | 4,646 | | 3,819 | | 801 | | 26 | |
| Total equity securities | $ | 9,120 | | $ | 8,124 | | $ | 986 | | $ | 10 | | $ | 8,490 | | $ | 7,571 | | $ | 892 | | $ | 27 | |
| Fixed income securities: | | | | | | | | |
| Debt - government-issued | $ | 4,998 | | $ | 128 | | $ | 4,870 | | $ | 0 | | $ | 4,992 | | $ | 197 | | $ | 4,795 | | $ | 0 | |
| Debt - corporate-issued | 3,970 | | 553 | | 3,416 | | 1 | | 3,697 | | 607 | | 3,089 | | 1 | |
| Debt - asset-backed | 103 | | 0 | | 102 | | 1 | | 70 | | 0 | | 69 | | 1 | |
| Total fixed income securities | $ | 9,071 | | $ | 681 | | $ | 8,388 | | $ | 2 | | $ | 8,759 | | $ | 804 | | $ | 7,953 | | $ | 2 | |
| Alternative investments: | | | | | | | | |
| | | | | | | | |
| Private markets | $ | 13 | | $ | 0 | | $ | 0 | | $ | 13 | | $ | 11 | | $ | 0 | | $ | 0 | | $ | 11 | |
| Real estate | 51 | | 51 | | 0 | | 0 | | 25 | | 25 | | 0 | | 0 | |
| Derivatives - asset position | 697 | | 2 | | 695 | | 0 | | 574 | | 2 | | 572 | | 0 | |
| Derivatives - liability position | (594) | | (1) | | (593) | | 0 | | (513) | | (2) | | (511) | | 0 | |
| Total alternative investments | $ | 167 | | $ | 52 | | $ | 102 | | $ | 13 | | $ | 97 | | $ | 25 | | $ | 61 | | $ | 11 | |
| Other investments | $ | 472 | | $ | 22 | | $ | 448 | | $ | 2 | | $ | 411 | | $ | 28 | | $ | 383 | | $ | 0 | |
| Subtotal | $ | 20,128 | | $ | 9,982 | | $ | 10,119 | | $ | 27 | | $ | 18,511 | | $ | 9,103 | | $ | 9,368 | | $ | 40 | |
| Investments measured at net asset value: | | | | | | | | |
| Hedge funds | $ | 1,350 | | | | | $ | 1,595 | | | | |
| Private markets | 3,135 | | | | | 2,794 | | | | |
| Real estate | 1,886 | | | | | 2,110 | | | | |
| Total investments measured at net asset value | $ | 6,371 | | | | | $ | 6,499 | | | | |
| Items to reconcile to fair value of plan assets: | | | | | | | | |
Pension trust receivables 2 | $ | 66 | | | | | $ | 70 | | | | |
Pension trust payables 3 | (159) | | | | | (172) | | | | |
| Total | $ | 26,406 | | | | | $ | 24,908 | | | | |
1.No Dow Inc. common stock was directly held at December 31, 2020 or December 31, 2019.
2.Primarily receivables for investment securities sold.
3.Primarily payables for investment securities purchased.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Basis of Fair Value Measurements | Dec 31, 2018 | Dec 31, 2017 |
| In millions | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 |
| Cash and cash equivalents | $ | 877 |
| $ | 818 |
| $ | 59 |
| $ | — |
| $ | 772 |
| $ | 671 |
| $ | 101 |
| $ | — |
|
| Equity securities: | | | | | | | | |
U.S. equity securities 1 | $ | 3,493 |
| $ | 3,251 |
| $ | 241 |
| $ | 1 |
| $ | 3,755 |
| $ | 3,416 |
| $ | 339 |
| $ | — |
|
| Non - U.S. equity securities | 4,242 |
| 3,497 |
| 707 |
| 38 |
| 5,551 |
| 4,533 |
| 978 |
| 40 |
|
| Total equity securities | $ | 7,735 |
| $ | 6,748 |
| $ | 948 |
| $ | 39 |
| $ | 9,306 |
| $ | 7,949 |
| $ | 1,317 |
| $ | 40 |
|
| Fixed income securities: | | | | | | | | |
| Debt - government-issued | $ | 4,751 |
| $ | 285 |
| $ | 4,466 |
| $ | — |
| $ | 4,596 |
| $ | 158 |
| $ | 4,437 |
| $ | 1 |
|
| Debt - corporate-issued | 2,929 |
| 411 |
| 2,518 |
| — |
| 3,300 |
| 351 |
| 2,935 |
| 14 |
|
| Debt - asset-backed | 90 |
| — |
| 89 |
| 1 |
| 101 |
| — |
| 100 |
| 1 |
|
| Total fixed income securities | $ | 7,770 |
| $ | 696 |
| $ | 7,073 |
| $ | 1 |
| $ | 7,997 |
| $ | 509 |
| $ | 7,472 |
| $ | 16 |
|
Alternative investments: 2 | | | | | | | | |
| Private market securities | $ | 1 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Real estate | 19 |
| 19 |
| — |
| — |
| 21 |
| 21 |
| — |
| — |
|
| Derivatives - asset position | 451 |
| 17 |
| 434 |
| — |
| 261 |
| 2 |
| 259 |
| — |
|
| Derivatives - liability position | (506 | ) | (19 | ) | (487 | ) | — |
| (305 | ) | (2 | ) | (303 | ) | — |
|
| Total alternative investments | $ | (35 | ) | $ | 17 |
| $ | (53 | ) | $ | 1 |
| $ | (23 | ) | $ | 21 |
| $ | (44 | ) | $ | — |
|
Other investments 2 | $ | 380 |
| $ | 47 |
| $ | 333 |
| $ | — |
| $ | 273 |
| $ | 37 |
| $ | 236 |
| $ | — |
|
| Subtotal | $ | 16,727 |
| $ | 8,326 |
| $ | 8,360 |
| $ | 41 |
| $ | 18,325 |
| $ | 9,187 |
| $ | 9,082 |
| $ | 56 |
|
Investments measured at net asset value: 2 | | | | | | | | |
| Hedge funds | $ | 1,637 |
| | | | $ | 1,595 |
| | | |
| Private market securities | 2,196 |
| | | | 1,390 |
| | | |
| Real estate | 2,080 |
| | | | 2,200 |
| | | |
| Total investments measured at net asset value | $ | 5,913 |
| | | | $ | 5,185 |
| | | |
| Items to reconcile to fair value of plan assets: | | | | | | | | |
Pension trust receivables 3 | $ | 29 |
| |
| |
| |
| $ | 27 |
| |
| |
| |
|
Pension trust payables 4 | (125 | ) | |
| |
| |
| (136 | ) | |
| |
| |
|
| Total | $ | 22,544 |
| |
| |
| |
| $ | 23,401 |
| |
| |
| |
|
| |
1. | No DowDuPont common stock was directly held at December 31, 2018 or December 31, 2017. |
| |
2. | The Company reviewed its fair value technique and elected to present assets valued at net asset value per share as a practical expedient outside of the fair value hierarchy. The assets are presented as "Investments measured at net asset value." Prior period amounts were updated to conform with the current year presentation. |
| |
3. | Primarily receivables for investment securities sold. |
| |
4. | Primarily payables for investment securities purchased. |
The following table summarizes the changes in the fair value of Level 3 pension plan assets for the years ended December 31, 20182020 and 2017:2019:
| | | | | | | | | | | | | | | | | |
| Fair Value Measurement of Level 3 Pension Plan Assets | Equity Securities | Fixed Income Securities | Alternative Investments | Other Investments | Total |
| In millions |
| Balance at Jan 1, 2019 | $ | 39 | | $ | 1 | | $ | 1 | | $ | 0 | | $ | 41 | |
| Actual return on assets: | | | | | |
| Relating to assets sold during 2019 | (2) | | 0 | | 0 | | 0 | | (2) | |
| Relating to assets held at Dec 31, 2019 | 1 | | 0 | | (14) | | 0 | | (13) | |
| Purchases, sales and settlements, net | (11) | | 1 | | 24 | | 0 | | 14 | |
| | | | | |
| | | | | |
| Balance at Dec 31, 2019 | $ | 27 | | $ | 2 | | $ | 11 | | $ | 0 | | $ | 40 | |
| Actual return on assets: | | | | | |
| Relating to assets sold during 2020 | 0 | | 0 | | (11) | | 0 | | (11) | |
| Relating to assets held at Dec 31, 2020 | (1) | | 0 | | 8 | | (1) | | 6 | |
| Purchases, sales and settlements, net | (19) | | (1) | | 5 | | 3 | | (12) | |
| Transfers into Level 3, net | 3 | | 1 | | 0 | | 0 | | 4 | |
| | | | | |
| Balance at Dec 31, 2020 | $ | 10 | | $ | 2 | | $ | 13 | | $ | 2 | | $ | 27 | |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurement of Level 3 Pension Plan Assets | Equity Securities | Fixed Income Securities | Alternative Investments | Other Investments | Total |
| In millions |
| Balance at Jan 1, 2017, as previously reported | $ | 33 |
| $ | 17 |
| $ | 4,117 |
| $ | 95 |
| $ | 4,262 |
|
Reclassification of investments measured at net asset value 1 | — |
| — |
| (4,061 | ) | (95 | ) | (4,156 | ) |
| Balance at Jan 1, 2017, as restated | $ | 33 |
| $ | 17 |
| $ | 56 |
| $ | — |
| $ | 106 |
|
| Actual return on assets: | | | | |
|
| Relating to assets sold during 2017 | (1 | ) | — |
| 5 |
| — |
| 4 |
|
| Relating to assets held at Dec 31, 2017 | 5 |
| 1 |
| (1 | ) | — |
| 5 |
|
| Purchases, sales and settlements, net | 3 |
| (2 | ) | (60 | ) | — |
| (59 | ) |
| Balance at Dec 31, 2017 | $ | 40 |
| $ | 16 |
| $ | — |
| $ | — |
| $ | 56 |
|
| Actual return on assets: | | | | | |
| Relating to assets sold during 2018 | — |
| 4 |
| (1 | ) | 1 |
| 4 |
|
| Relating to assets held at Dec 31, 2018 | (3 | ) | (4 | ) | — |
| — |
| (7 | ) |
| Purchases, sales and settlements, net | 2 |
| (15 | ) | 2 |
| (1 | ) | (12 | ) |
| Balance at Dec 31, 2018 | $ | 39 |
| $ | 1 |
| $ | 1 |
| $ | — |
| $ | 41 |
|
| |
1. | The Company reviewed its fair value technique and elected to present assets valued at net asset value per share as a practical expedient outside of the fair value hierarchy, including those classified as Level 3 pension plan assets. The assets are presented as "Investments measured at net asset value." |
Defined Contribution Plans
U.S. employees may participate in defined contribution plans (Employee Savings Plans or 401(k) plans) by contributing a portion of their compensation, which is partially matched by the Company. Defined contribution plans also cover employees in some subsidiaries in other countries, including Australia,China, Brazil, Canada, Italy,Belgium, Spain and the United Kingdom. Expense of continuing operations recognized for all defined contribution plans was $242$156 million in 2018, $3672020, $163 million in 20172019 and $283$186 million in 2016.2018.
NOTE 2021 – STOCK-BASED COMPENSATION
The Company grants stock-based compensation to employees and non-employee directors in the form of stock incentive plans, which include stock options, restricted stock units ("RSUs") (formerly termed deferred stock)appreciation rights, RSUs and restricted stock. The Company also provides stock-based compensation in the form of performance stock units ("PSUs") (formerly termed performance deferred stock) and the Employee Stock Purchase Plan (“ESPP”), which grants eligible employees the right to purchase shares of the Company's common stock at a discounted price.PSUs.
In connection with the Merger, on August 31, 2017 ("Conversion Date"), all outstanding DowTDCC stock options and RSU awards were converted into stock options and RSU awards with respect to DowDuPont common stock. The stock options and RSU awards havehad the same terms and conditions under the applicable plans and award agreements prior to the Merger. All outstanding and nonvested PSU awards were converted into RSU awards with respect to DowDuPont common stock at the greater of the applicable performance target or the actual performance as of the effective time of the Merger. Changes in the fair value of liability instruments are recognized as compensation expense each quarter. DowTDCC and Historical DuPont did not merge their stock-based compensation plans as a result of the Merger. The DowTDCC and Historical DuPont stock-based compensation plans were assumed by DowDuPont and continuecontinued in place with the ability to grant and issue DowDuPont common stock.stock until separation.
In connection with the separation on April 1, 2019, outstanding stock options, RSU and PSU awards were converted to Dow Inc. denominated awards under the “Employer Method,” or DowDuPont denominated awards under the “Shareholder Method,” and adjusted to maintain the intrinsic value of those awards before and after the date of the separation. In connection with the Corteva separation transaction on June 3, 2019, the outstanding DowDuPont denominated stock options, RSU and PSU awards were converted to Corteva and DuPont denominated awards and adjusted to maintain the intrinsic value of those awards before and after the date of the Corteva separation. The awards have the same terms and conditions under the applicable plans and award agreements prior to the separation transactions.
The conversions of stock awards resulted in 0 incremental compensation expense. Approximately 5,000 employees were impacted by the conversion on April 1, 2019 in connection with Dow Inc.'s separation from DowDuPont. Approximately 4,000 employees were impacted by the conversion on June 3, 2019 in connection with the Corteva separation transaction.
The total stock-based compensation expense included in continuing operations in the consolidated statements of income was $224$171 million, $359$158 million and $261$188 million in 2018, 20172020, 2019 and 2016,2018, respectively. The income tax benefits related to stock-based compensation arrangements were $50$39 million, $133$36 million and $97$42 million in 2020, 2019 and 2018, 2017respectively. Amounts disclosed throughout the remainder of this footnote are inclusive of activity attributable to both continuing operations and 2016, respectively.discontinued operations, as the impact of discontinued operations is not significant.
Accounting for Stock-Based Compensation
The Company grants stock-based compensation awards that vest over a specified period or upon employees meeting certain performance and/or retirement eligibility criteria. The fair value of equity instruments issued to employees is measured on the grant date. The fair value of liability instruments (granted to executive employees subject to stock ownership requirements, that provide the recipient the option to elect to receive a cash payment equal to the value of the stock award on the date of delivery) is measured at the end of each quarter. The fair value of equity and liability instruments is expensed over the vesting period or, in the case of retirement, from the grant date to the date on which retirement eligibility provisions have been met and additional service is no longer required. The Company estimates expected forfeitures.
The Company historically used a lattice-based option valuation model to estimate the fair value of stock options and used a Monte Carlo simulation for the market portion of PSU awards. Effective with the first quarter of 2018 grant, the Company began usinguses 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. The Company used the Black-Scholes option valuation model for subscriptions to purchase shares under the ESPP. The weighted-average assumptions used to calculate total stock-based compensation are included in the following table:
| | | | | | | | | | | |
| Weighted-Average Assumptions | 2020 | 2019 | 2018 |
| Dividend yield | 5.80 | % | 5.10 | % | 2.13 | % |
| Expected volatility | 26.70 | % | 26.10 | % | 23.34 | % |
| Risk-free interest rate | 1.49 | % | 2.43 | % | 2.83 | % |
| Expected life of stock options granted during period (years) | 6.1 | 6.1 | 6.2 |
| | | |
|
| | | | | | |
| Weighted-Average Assumptions | 2018 | 2017 | 2016 |
| Dividend yield | 2.13 | % | 3.01 | % | 4.13 | % |
| Expected volatility | 23.34 | % | 23.71 | % | 31.60 | % |
| Risk-free interest rate | 2.83 | % | 1.28 | % | 1.12 | % |
| Expected life of stock options granted during period (years) | 6.2 |
| 7.5 |
| 7.8 |
|
| Life of Employee Stock Purchase Plan (months) | — |
| 3 |
| 4 |
|
The dividend yield assumption was equal to the dividend yield on the grant date, which reflected the most recent DowDuPontCompany's quarterly dividend paymentpayments of $0.70 per share in 2020 on Dow Inc. Common Stock ($0.70 per share in 2019 on Dow Inc. Common Stock and $0.38 per share in 2018 ($0.46 per share in 2017 and 2016 on DowDowDuPont Common Stock). The expected volatility assumptions for the 20162020, 2019 and 2017 stock options and ESPP were based on an equal weighting of the historical daily volatility for the contractual term of the awards and current implied volatility from exchange-traded options. The expected volatility assumptions for the 2018 stock options were based on an equal weighting of the historical daily volatility for the expected term of the awards and current implied volatility from exchange-traded options. The expected volatility assumption for the market portion of the 20162020 and 20172019 PSU awards were based on historical daily volatility for the term of the award. The risk-free interest rate was based on the weighted-average of U.S. Treasury strip rates over the contractual term of the 2016 and 2017 options. The risk-free interest rate was based on the U.S. Treasury strip rates over the expected life of the 2020, 2019 and 2018 options. The expected life of stock options granted was based on an analysis of historical exercise patterns.
Stock Incentive Plan
The Company has historically granted equity awards under various plans (the "Prior Plans"). On February 9, 2012, the Board authorized The Dow Chemical Company 2012 Stock Incentive Plan (the "2012 Plan"), which was approved by stockholders at the Company'sTDCC's annual meeting on May 10, 2012 ("Original2012 Plan Effective Date") and became effective on that date. On February 13, 2014, the Board adopted The Dow Chemical Company Amended and Restated 2012 Stock Incentive Plan (the "2012 Restated Plan"). The 2012 Restated Plan was approved by stockholders at the Company'sTDCC's annual meeting on May 15, 2014, and became effective on that date. The Prior Plans were superseded by the 2012 Plan and the 2012 Restated Plan (collectively, the "2012 Plan"). Under the 2012 Plan, the Company may grant options, RSUs, PSUs, restricted stock, stock appreciation rights and stock units to employees and non-employee directors until the tenth anniversary of the 2012 Plan Effective Date, subject to an aggregate limit and annual individual limits. The terms of the grants are fixed at the grant date. TDCC's stock-based compensation programs were assumed by DowDuPont and continued in place with the ability to grant and issue DowDuPont common stock until separation.
On April 1, 2019 ("Original Effective Date"), in connection with the separation, the Company adopted the 2019 Stock Incentive Plan (the "2019 Plan"). Under the 2019 Plan, the Company may grant stock options, RSUs, PSUs, stock appreciation rights and stock units to employees and non-employee directors until the tenth anniversary of the Original Effective Date, subject to an aggregate limit and annual individual limits. The terms of the grants are fixed at the grant date. Dow's stock-based compensation programs were assumed by DowDuPont and continue in place with the ability to grant and issue DowDuPont common stock. At December 31, 2018,2020, there were approximately 1916 million shares of DowDuPont common stock available for grant under the 20122019 Plan.
Stock Options
The Company grants stock options to certain employees, subject to certain annual and individual limits, with terms of the grants fixed at the grant date. The exercise price of each stock option equals the market price of the common stock on the grant date. Options vest from one to three years and have a maximum term of 10ten years.
The following table summarizes stock option activity for 2018:2020:
| | | | | | | | |
| Stock Options | 2020 |
| Shares in thousands | Shares | Exercise Price 1 |
| Outstanding at Jan 1, 2020 | 21,265 | | $ | 45.96 | |
| Granted | 2,191 | | $ | 48.30 | |
| Exercised | (3,002) | | $ | 36.78 | |
| Forfeited/Expired | (202) | | $ | 59.70 | |
| Outstanding at Dec 31, 2020 | 20,252 | | $ | 47.44 | |
| Remaining contractual life in years | | 4.63 |
| Aggregate intrinsic value in millions | $ | 209 | | |
| Exercisable at Dec 31, 2020 | 16,564 | | $ | 46.11 | |
| Remaining contractual life in years | | 3.76 |
| Aggregate intrinsic value in millions | $ | 192 | | |
|
| | | | | | |
| Stock Options | 2018 |
| Shares in thousands | Shares | Exercise Price 1 |
| Outstanding at Jan 1, 2018 | 26,628 |
| $ | 38.30 |
|
| Granted | 6,571 |
| $ | 71.43 |
|
| Exercised | (4,074 | ) | $ | 30.65 |
|
| Forfeited/Expired | (279 | ) | $ | 61.47 |
|
| Outstanding at Dec 31, 2018 | 28,846 |
| $ | 46.70 |
|
| Remaining contractual life in years |
|
| 5.46 |
|
| Aggregate intrinsic value in millions | $ | 327 |
|
|
|
| Exercisable at Dec 31, 2018 | 21,813 |
| $ | 39.99 |
|
| Remaining contractual life in years |
|
| 4.40 |
|
| Aggregate intrinsic value in millions | $ | 322 |
|
|
|
1.Weighted-average per share.
| | | | | | | | | | | |
| Additional Information about Stock Options | | | |
| In millions, except per share amounts | 2020 | 2019 | 2018 |
| Weighted-average fair value per share of options granted | $ | 5.89 | | $ | 7.99 | | $ | 15.38 | |
| Total compensation expense for stock option plans | $ | 22 | | $ | 23 | | $ | 68 | |
| Related tax benefit | $ | 5 | | $ | 5 | | $ | 15 | |
| Total amount of cash received from the exercise of options | $ | 108 | | $ | 93 | | $ | 112 | |
Total intrinsic value of options exercised 1 | $ | 41 | | $ | 77 | | $ | 160 | |
| Related tax benefit | $ | 9 | | $ | 17 | | $ | 36 | |
|
| | | | | | | | | |
| Additional Information about Stock Options | | | |
| In millions, except per share amounts | 2018 | 2017 | 2016 |
| Weighted-average fair value per share of options granted | $ | 15.38 |
| $ | 14.44 |
| $ | 10.95 |
|
| Total compensation expense for stock option plans | $ | 68 |
| $ | 37 |
| $ | 32 |
|
| Related tax benefit | $ | 15 |
| $ | 14 |
| $ | 12 |
|
| Total amount of cash received from the exercise of options | $ | 112 |
| $ | 310 |
| $ | 312 |
|
Total intrinsic value of options exercised 1 | $ | 160 |
| $ | 286 |
| $ | 153 |
|
| Related tax benefit | $ | 36 |
| $ | 106 |
| $ | 57 |
|
1.Difference between the market price at exercise and the price paid by the employee to exercise the options.
Total unrecognized compensation cost related to unvested stock option awards of $36$8 million at December 31, 2018,2020, is expected to be recognized over a weighted-average period of 1.911.34 years.
Restricted Stock Units
The Company grants restricted stock unitsRSUs to certain employees.employees and non-employee directors. The grants vest after a designated period of time, generally one to five years.three years for employees and two years for non-employee directors. The following table shows changes in nonvested RSUs:
| | | | | | | | |
| RSU Awards | 2020 |
| Shares in thousands | Shares | Grant Date Fair Value 1 |
| Nonvested at Jan 1, 2020 | 2,454 | | $ | 59.98 | |
| Granted | 2,065 | | $ | 47.66 | |
| Vested | (1,422) | | $ | 55.53 | |
| Canceled | (90) | | $ | 54.69 | |
| Nonvested at Dec 31, 2020 | 3,007 | | $ | 53.78 | |
|
| | | | | |
| RSU Awards | 2018 |
| Shares in thousands | Shares | Grant Date Fair Value 1 |
| Nonvested at Jan 1, 2018 | 13,346 |
| $ | 50.71 |
|
| Granted | 2,022 |
| $ | 71.46 |
|
| Vested | (5,409 | ) | $ | 46.04 |
|
| Canceled | (224 | ) | $ | 59.40 |
|
| Nonvested at Dec 31, 2018 | 9,735 |
| $ | 57.41 |
|
1.Weighted-average per share.
| | | | | | | | | | | |
| Additional Information about RSUs | | | |
| In millions, except per share amounts | 2020 | 2019 | 2018 |
| Weighted-average fair value per share of RSUs granted | $ | 47.66 | | $ | 54.78 | | $ | 71.46 | |
Total fair value of RSUs vested 1 | $ | 106 | | $ | 264 | | $ | 382 | |
| Related tax benefit | $ | 24 | | $ | 59 | | $ | 86 | |
| Total compensation expense for RSU awards | $ | 93 | | $ | 110 | | $ | 144 | |
| Related tax benefit | $ | 21 | | $ | 25 | | $ | 32 | |
| | | |
| | | |
|
| | | | | | | | | |
| Additional Information about RSUs | | | |
| In millions, except per share amounts | 2018 | 2017 | 2016 |
| Weighted-average fair value per share of RSUs granted | $ | 71.46 |
| $ | 61.29 |
| $ | 46.25 |
|
| Total fair value of RSUs vested | $ | 382 |
| $ | 179 |
| $ | 166 |
|
| Related tax benefit | $ | 86 |
| $ | 66 |
| $ | 61 |
|
| Total compensation expense for RSU awards | $ | 144 |
| $ | 178 |
| $ | 97 |
|
| Related tax benefit | $ | 32 |
| $ | 66 |
| $ | 36 |
|
In 2018,2020, the Company paid $45$4 million in cash, equal to the value of the stock award on the date of delivery, to certain executive employees to settle approximately 625,00085,000 RSUs (there were no(341,000 RSUs settled in cash for $19 million in 20172019 and 2016)625,000 RSUs settled in cash for $45 million in 2018). Total unrecognized compensation cost related to RSU awards of $126$75 million at December 31, 2018,2020 is expected to be recognized over a weighted-average period of 1.681.69 years. At December 31, 2018,2020, approximately 18,0001.3 million RSUs with a grant date weighted-average fair value per share of $35.12$53.91 had previously vested, but were not issued. These shares are scheduled to be issued to employees within six months to three years or upon retirement.
Total incremental pretax compensation expense resulting from the conversion of PSU awards into RSU awards was $25 million ($20 million was recognized in the second half of 2017 and $5 million to be recognized over the remaining service period). Approximately 5,000 employees were impacted by the conversion.
Performance Stock Units
The Company grants performance stock unitsPSUs to certain employees. The grants vest when the Company attains specified performance targets, such as return on capital and relative total shareholder return, over a predetermined period, generally one to three years. In November 2017, the Company granted PSUs to senior leadership measured on the realization of cost savings in connection with cost synergy commitments, as well as the Company’s ability to complete the Intended Business Separations.business separations. Performance and payouts are determined independently for each metric. Compensation expense related to PSU awards is recognized over the lesser of the service or performance period. Changes in the fair value of liability instruments are recognized as compensation expense each quarter.
The following table shows the PSU awards granted:
| | | | | | | | | | | |
| PSU Awards | Target Shares Granted 1 | Grant Date Fair Value 2 |
| Shares in thousands |
| Year | Performance Period |
| 2020 | Jan 1, 2020 – Dec 31, 2022 | 1,426 | | $ | 48.35 | |
| 2019 | Apr 1, 2019 – Dec 31, 2021 | 1,173 | | $ | 57.58 | |
| 2017 | Sep 1, 2017 – Aug 31, 2019 | 232 | | $ | 71.16 | |
2017 3 | Jan 1, 2017 – Dec 31, 2019 | 1,728 | | $ | 81.99 | |
| | | |
1.At the end of the performance period, the actual number of shares issued can range from 0 to 200 percent of target shares granted.
2.Weighted-average per share.
3.Converted to RSUs as a result of the Merger.
|
| | | | | | |
| PSU Awards | Target Shares Granted 1 | Grant Date Fair Value 2 |
| Shares in thousands |
| Year | Performance Period |
| 2017 | Sep 1, 2017 – Aug 31, 2019 | 232 |
| $ | 71.16 |
|
2017 3 | Jan 1, 2017 – Dec 31, 2019 | 1,728 |
| $ | 81.99 |
|
2016 3 | Jan 1, 2016 – Dec 31, 2018 | 2,283 |
| $ | 52.68 |
|
| |
1. | At the end of the performance period, the actual number of shares issued can range from zero to 200% of target shares granted. |
| |
2. | Weighted-average per share. |
| |
3. | Converted to RSUs as a result of the Merger. |
There was no activityThe following table shows changes in nonvested PSUs in 2018. At January 1, 2018 and December 31, 2018, there were 232,000 target shares of nonvested PSUs outstanding with a grant datePSUs:
| | | | | | | | |
| PSUs | 2020 |
| Shares in thousands | Shares | Grant Date Fair Value 1 |
| Nonvested at Jan 1, 2020 | 1,121 | | $ | 57.58 | |
| Granted | 1,426 | | $ | 48.35 | |
| Vested | 0 | | $ | 0 | |
| Canceled | (59) | | $ | 53.09 | |
| Nonvested at Dec 31, 2020 | 2,488 | | $ | 53.78 | |
1.Weighted-average per share.
| | | | | | | | | | | |
| Additional Information about PSUs | | | |
| In millions, except share amounts | 2020 | 2019 | 2018 |
Total fair value of PSUs vested and delivered 1 | $ | 0 | | $ | 18 | | $ | 0 | |
| Related tax benefit | $ | 0 | | $ | 4 | | $ | 0 | |
| Total compensation expense for PSU awards | $ | 56 | | $ | 25 | | $ | 12 | |
| Related tax benefit | $ | 13 | | $ | 6 | | $ | 3 | |
Shares of PSUs settled in cash (in thousands) 2 | 0 | | 162 | | 0 | |
Total cash paid to settle PSUs 3 | $ | 0 | | $ | 13 | | $ | 0 | |
1.Includes the fair value of $71.16.shares vested in prior years and delivered in the reporting year.
2.PSU awards vested in prior years and delivered in the reporting year.
3.Cash paid to certain executive employees for PSU awards vested in prior periods and delivered in the reporting year, equal to the value of the stock award on the date of delivery. |
| | | | | | | | | |
| Additional Information about PSUs | | | |
| In millions, except share amounts | 2018 | 2017 | 2016 |
Total fair value of PSUs vested and delivered 1 | $ | — |
| $ | 202 |
| $ | 103 |
|
| Related tax benefit | $ | — |
| $ | 75 |
| $ | 38 |
|
| Total compensation expense for PSU awards | $ | 12 |
| $ | 106 |
| $ | 125 |
|
| Related tax benefit | $ | 3 |
| $ | 39 |
| $ | 46 |
|
Shares of PSUs settled in cash (in thousands) 2 | — |
| 616 |
| 861 |
|
Total cash paid to settle PSUs 3 | $ | — |
| $ | 38 |
| $ | 40 |
|
| |
1. | Includes the fair value of shares vested in prior years and delivered in the reporting year. |
| |
2. | PSU awards vested in prior years and delivered in the reporting year. |
| |
3. | Cash paid to certain executive employees for PSU awards vested in prior periods and delivered in the reporting year, equal to the value of the stock award on the date of delivery. |
Total unrecognized compensation cost related to PSU awards of $8$31 million at December 31, 2018,2020, is expected to be recognized over a weighted-average period of 0.671.67 years.
Restricted Stock
Under the 2012 Plan, the Company may grantgranted shares (including options, stock appreciation rights, stock units and restricted stock) to non-employee directors over the 10-year duration of the program, subject to the plan's aggregate limit as well as annual individual limits. The restricted stock issued under this plan cannot be sold, assigned, pledged or otherwise transferred by the non-employee director, until retirement or termination of service to the Company. The following table shows theIn 2018, 36,000 shares of restricted stock with a weighted average fair value of $62.82 were issued under this plan:plan. In 2019 and 2020, there were 0 restricted stock shares issued under this plan.
|
| | | | | |
| Restricted Stock | Shares Issued (in thousands) | Weighted-Average Fair Value |
| Year |
| 2018 | 36 |
| $ | 62.82 |
|
| 2017 | 33 |
| $ | 62.04 |
|
| 2016 | 32 |
| $ | 50.55 |
|
Employee Stock Purchase Plan
On February 9, 2012, the Board authorized The Dow Chemical Company 2012 Employee Stock Purchase Plan (the "2012 ESPP") which was approved by stockholders at the Company’s annual meeting on May 10, 2012. When offered, most employees are eligible to purchase shares of common stock of the Company valued at up to 10 percent of their annual base salary. The value is determined using the plan price multiplied by the number of shares subscribed to by the employee. The plan price of the stock is set at an amount equal to at least 85 percent of the fair market value (closing price) of the common stock on a date during the fourth quarter of the year prior to the offering, or the average fair market value (closing price) of the common stock over a period during the fourth quarter of the year prior to the offering, in each case, specified by the Executive Vice President of Human Resources. The most recent offering of the 2012 ESPP closed on July 15, 2017. The ESPP was not offered in 2018 and no current offerings remain outstanding.
|
| | | | | | | | | |
| Additional Information about Employee Stock Purchase Plan | | | |
| In millions, except per share amounts | 2018 | 2017 | 2016 |
| Weighted-average fair value per share of purchase rights granted | $ | — |
| $ | 10.70 |
| $ | 3.40 |
|
| Total compensation expense for ESPP | $ | — |
| $ | 38 |
| $ | 7 |
|
| Related tax benefit | $ | — |
| $ | 14 |
| $ | 3 |
|
| Total amount of cash received from the exercise of purchase rights | $ | — |
| $ | 179 |
| $ | 86 |
|
Total intrinsic value of purchase rights exercised 1 | $ | — |
| $ | 48 |
| $ | 23 |
|
| Related tax benefit | $ | — |
| $ | 18 |
| $ | 9 |
|
| |
1. | Difference between the market price at exercise and the price paid by the employee to exercise the purchase rights. |
NOTE 2122 – FINANCIAL INSTRUMENTS
The following table summarizes the fair value of financial instruments at December 31, 20182020 and 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Financial Instruments at Dec 31 | 2020 | 2019 |
| In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value |
| Cash equivalents: | | | | | | | | |
Held-to-maturity securities 1 | $ | 980 | | $ | 0 | | $ | 0 | | $ | 980 | | $ | 220 | | $ | 0 | | $ | 0 | | $ | 220 | |
| Money market funds | 484 | | 0 | | 0 | | 484 | | 408 | | 0 | | 0 | | 408 | |
| Total cash equivalents | $ | 1,464 | | $ | 0 | | $ | 0 | | $ | 1,464 | | $ | 628 | | $ | 0 | | $ | 0 | | $ | 628 | |
Marketable securities 2 | $ | 45 | | $ | 0 | | $ | 0 | | $ | 45 | | $ | 21 | | $ | 0 | | $ | 0 | | $ | 21 | |
| Other investments: | | | | | | | | |
| Debt securities: | | | | | | | | |
Government debt 3 | $ | 673 | | $ | 35 | | $ | (10) | | $ | 698 | | $ | 533 | | $ | 33 | | $ | (11) | | $ | 555 | |
| Corporate bonds | 822 | | 119 | | (5) | | 936 | | 944 | | 80 | | (10) | | 1,014 | |
| Total debt securities | $ | 1,495 | | $ | 154 | | $ | (15) | | $ | 1,634 | | $ | 1,477 | | $ | 113 | | $ | (21) | | $ | 1,569 | |
Equity securities 4 | 6 | | 34 | | 0 | | 40 | | 10 | | 6 | | (1) | | 15 | |
| Total other investments | $ | 1,501 | | $ | 188 | | $ | (15) | | $ | 1,674 | | $ | 1,487 | | $ | 119 | | $ | (22) | | $ | 1,584 | |
| Total cash equivalents, marketable securities and other investments | $ | 3,010 | | $ | 188 | | $ | (15) | | $ | 3,183 | | $ | 2,136 | | $ | 119 | | $ | (22) | | $ | 2,233 | |
Long-term debt including debt due within one year 5 | $ | (16,951) | | $ | 6 | | $ | (3,659) | | $ | (20,604) | | $ | (16,410) | | $ | 7 | | $ | (2,258) | | $ | (18,661) | |
| Derivatives relating to: | | | | | | | | |
Interest rates 6 | $ | — | | $ | 41 | | $ | (182) | | $ | (141) | | $ | — | | $ | 8 | | $ | (283) | | $ | (275) | |
| Foreign currency | — | | 69 | | (84) | | (15) | | — | | 101 | | (21) | | 80 | |
Commodities 6 | — | | 63 | | (84) | | (21) | | — | | 59 | | (115) | | (56) | |
| Total derivatives | $ | — | | $ | 173 | | $ | (350) | | $ | (177) | | $ | — | | $ | 168 | | $ | (419) | | $ | (251) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Financial Instruments at Dec 31 | 2018 | 2017 |
| In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value |
Cash equivalents 1 | $ | 566 |
| $ | — |
| $ | — |
| $ | 566 |
| $ | 2,280 |
| $ | — |
| $ | — |
| $ | 2,280 |
|
| Marketable securities | $ | 100 |
| $ | — |
| $ | — |
| $ | 100 |
| $ | 4 |
| $ | — |
| $ | — |
| $ | 4 |
|
| Other investments: | | | | | | | | |
| Debt securities: | | | | | | | | |
Government debt 2 | $ | 714 |
| $ | 9 |
| $ | (23 | ) | $ | 700 |
| $ | 637 |
| $ | 13 |
| $ | (11 | ) | $ | 639 |
|
| Corporate bonds | 1,026 |
| 20 |
| (63 | ) | 983 |
| 704 |
| 32 |
| (3 | ) | 733 |
|
| Total debt securities | $ | 1,740 |
| $ | 29 |
| $ | (86 | ) | $ | 1,683 |
| $ | 1,341 |
| $ | 45 |
| $ | (14 | ) | $ | 1,372 |
|
Equity securities 3 | 16 |
| 1 |
| (1 | ) | 16 |
| 164 |
| 2 |
| (26 | ) | 140 |
|
| Total other investments | $ | 1,756 |
| $ | 30 |
| $ | (87 | ) | $ | 1,699 |
| $ | 1,505 |
| $ | 47 |
| $ | (40 | ) | $ | 1,512 |
|
| Total cash equivalents, marketable securities and other investments | $ | 2,422 |
| $ | 30 |
| $ | (87 | ) | $ | 2,365 |
| $ | 3,789 |
| $ | 47 |
| $ | (40 | ) | $ | 3,796 |
|
Long-term debt including debt due within one year 4 | $ | (19,594 | ) | $ | 351 |
| $ | (971 | ) | $ | (20,214 | ) | $ | (20,517 | ) | $ | 6 |
| $ | (2,104 | ) | $ | (22,615 | ) |
| Derivatives relating to: | | | | | | | | |
| Interest rates | $ | — |
| $ | — |
| $ | (64 | ) | $ | (64 | ) | $ | — |
| $ | — |
| $ | (4 | ) | $ | (4 | ) |
| Foreign currency | — |
| 120 |
| (43 | ) | 77 |
| — |
| 22 |
| (112 | ) | (90 | ) |
Commodities 5 | — |
| 91 |
| (178 | ) | (87 | ) | — |
| 130 |
| (256 | ) | (126 | ) |
| Total derivatives | $ | — |
| $ | 211 |
| $ | (285 | ) | $ | (74 | ) | $ | — |
| $ | 152 |
| $ | (372 | ) | $ | (220 | ) |
| |
1. | Prior period amounts were updated to conform with the current year presentation. |
| |
2. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations. |
| |
3. | Equity securities with a readily determinable fair value. Presented in accordance with ASU 2016-01. See Notes 1 and 2 for additional information. |
| |
4. | Cost includes fair value hedge adjustments of $18 million at December 31, 2018 and $19 million at December 31, 2017 on $2,290 million of debt at December 31, 2018 and $2,390 million of debt at December 31, 2017. |
| |
5. | Presented net of cash collateral where master netting arrangements allow. |
2.The Company's investments in marketable securities are included in "Other current assets" in the consolidated balance sheets.
3.U.S. Treasury obligations, U.S. agency obligations, U.S. agency mortgage-backed securities and other municipalities’ obligations.
4.Equity securities with a readily determinable fair value.
5.Cost includes fair value hedge adjustment gains of $69 million at December 31, 2020 and losses of $1 million at December 31, 2019 on $3,314 million of debt at December 31, 2020 and $3,490 million of debt at December 31, 2019.
6.Presented net of cash collateral where master netting arrangements allow.
Cost approximates fair value for all other financial instruments.
Cash Equivalents
At December 31, 2018, the Company had $410 million ($1,771 million at December 31, 2017) of held-to-maturity securities (primarily treasury bills and time deposits) classified as cash equivalents, as these securities had maturities of three months or less at the time of purchase. The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At December 31, 2018, the Company had investments in money market funds of $156 million classified as cash equivalents ($509 million at December 31, 2017).
Marketable Securities
At December 31, 2018, the Company had $100 million ($4 million at December 31, 2017) of debt securities with maturities of less than one year at the time of purchase.
Debt Securities
The Company’s investments in debt securities are primarily classified as available-for-sale. The following table provides the investing results from available-for-sale securities for the years ended December 31, 2018, 20172020, 2019 and 2016.2018.
| | | | | | | | | | | |
| Investing Results | | | |
| In millions | 2020 | 2019 | 2018 |
| Proceeds from sales of available-for-sale securities | $ | 837 | | $ | 1,138 | | $ | 1,053 | |
| Gross realized gains | $ | 94 | | $ | 51 | | $ | 21 | |
| Gross realized losses | $ | 40 | | $ | 18 | | $ | 30 | |
|
| | | | | | | | | |
Investing Results 1 | | | |
| In millions | 2018 | 2017 | 2016 |
| Proceeds from sales of available-for-sale securities | $ | 1,053 |
| $ | 245 |
| $ | 396 |
|
| Gross realized gains | $ | 21 |
| $ | 5 |
| $ | 15 |
|
| Gross realized losses | $ | 30 |
| $ | — |
| $ | 1 |
|
| |
1. | Prior period amounts were updated to conform with the current year presentation as a result of the adoption of ASU 2016-01. |
The following table summarizes the contractual maturities of the Company’s investments in debt securities:
| | | | | | | | |
Contractual Maturities of Debt Securities at Dec 31, 2020 1 | Cost | Fair
Value |
| In millions |
| Within one year | $ | 25 | | $ | 25 | |
| One to five years | 406 | | 448 | |
| Six to ten years | 649 | | 685 | |
| After ten years | 415 | | 476 | |
| Total | $ | 1,495 | | $ | 1,634 | |
|
| | | | | | |
Contractual Maturities of Debt Securities at Dec 31, 2018 1 | Amortized Cost | Fair Value |
| In millions |
| Within one year | $ | 124 |
| $ | 124 |
|
| One to five years | 455 |
| 444 |
|
| Six to ten years | 717 |
| 683 |
|
| After ten years | 444 |
| 432 |
|
| Total | $ | 1,740 |
| $ | 1,683 |
|
1.Includes marketable securities with maturities of less than one year.
Portfolio managers regularly review the Company’s holdings to determine if any investments in debt securities are other-than-temporarily impaired. The analysis includes reviewing the amount of the impairment, as well as the length of time it has been impaired.
The credit rating of the issuer, current credit rating trends, the trends of the issuer’s overall sector, the ability of the issuer to pay expected cash flows and the length of time the security has been in a loss position are considered in determining whether unrealized losses represent an other-than-temporary impairment. The Company did not have any credit-related losses in 2018, 20172020, 2019 or 2016.2018.
The following tables providetable provides the fair value and gross unrealized losses of the Company’s investments in debt securities that were deemed to be temporarily impaired at December 31, 20182020 and 2017,2019, aggregated by investment category:
| | | | | | | | | | | | | | | | | | | | |
Temporarily Impaired Debt Securities at
Dec 31 | Less than 12 months | 12 months or more | Total |
Fair
Value | Unrealized
Losses | Fair
Value | Unrealized
Losses | Fair Value | Unrealized Losses |
| In millions |
| 2020 | | | | | | |
Government debt 1 | $ | 124 | | $ | (3) | | $ | 7 | | $ | (7) | | $ | 131 | | $ | (10) | |
| Corporate bonds | 55 | | (3) | | 12 | | (2) | | 67 | | (5) | |
| Total temporarily impaired debt securities | $ | 179 | | $ | (6) | | $ | 19 | | $ | (9) | | $ | 198 | | $ | (15) | |
| 2019 | | | | | | |
Government debt 1 | $ | 55 | | $ | (3) | | $ | 23 | | $ | (8) | | $ | 78 | | $ | (11) | |
| Corporate bonds | 79 | | (3) | | 52 | | (7) | | 131 | | (10) | |
| Total temporarily impaired debt securities | $ | 134 | | $ | (6) | | $ | 75 | | $ | (15) | | $ | 209 | | $ | (21) | |
|
| | | | | | | | | | | | | | | | | | |
Temporarily Impaired Debt Securities at Dec 31, 2018 | Less than 12 months | 12 months or more | Total |
Fair Value | Unrealized Losses | Fair
Value | Unrealized
Losses | Fair Value | Unrealized Losses |
| In millions |
Government debt 1 | $ | 287 |
| $ | (17 | ) | $ | 187 |
| $ | (6 | ) | $ | 474 |
| $ | (23 | ) |
| Corporate bonds | 724 |
| (58 | ) | 64 |
| (5 | ) | 788 |
| (63 | ) |
| Total temporarily impaired debt securities | $ | 1,011 |
| $ | (75 | ) | $ | 251 |
| $ | (11 | ) | $ | 1,262 |
| $ | (86 | ) |
| |
1. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities' obligations. |
1.U.S. Treasury obligations, U.S. agency obligations, U.S. agency mortgage-backed securities and other municipalities' obligations.
|
| | | | | | | | | | | | | | | | | | |
Temporarily Impaired Debt Securities at Dec 31, 2017 | Less than 12 months | 12 months or more | Total |
Fair Value | Unrealized Losses | Fair
Value | Unrealized
Losses | Fair Value | Unrealized Losses |
| In millions |
Government debt 1 | $ | 295 |
| $ | (4 | ) | $ | 151 |
| $ | (7 | ) | $ | 446 |
| $ | (11 | ) |
| Corporate bonds | 163 |
| (2 | ) | 19 |
| (1 | ) | 182 |
| (3 | ) |
| Total temporarily impaired debt securities | $ | 458 |
| $ | (6 | ) | $ | 170 |
| $ | (8 | ) | $ | 628 |
| $ | (14 | ) |
| |
1. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities' obligations. |
Equity Securities
The Company’s investments in equity securities with a readily determinable fair value totaled $16 million at December 31, 2018 ($140 million at December 31, 2017). The aggregate carrying value of the Company’s investments in equity securities where fair value is not readily determinable totaled $206 million at December 31, 2018, reflecting the carrying value of the investments. There were no material adjustments to the carrying value of the not readily determinable investments for impairment or observable price changes for the year ended December 31, 2018.2020. The net unrealized gain recognized in earnings on equity securities totaled $7$32 million for the year ended December 31, 2018.
Repurchase and Reverse Repurchase Agreement Transactions
The Company enters into repurchase and reverse repurchase agreements. These transactions are accounted2020 ($5 million net unrealized gain for as collateralized borrowings and lending transactions bearing a specified rate of interest and are short-term in nature with original maturities of 30 days or less. The underlying collateral is typically treasury bills with longer maturities than the repurchase agreement. The impact of these transactions is not material to the Company’s results. There were no repurchase or reverse repurchase agreements outstanding atyear ended December 31, 2018 and 2017.2019).
| | | | | | | | |
| Investments in Equity Securities | Dec 31, 2020 | Dec 31, 2019 |
| In millions |
| Readily determinable fair value | $ | 40 | | $ | 15 | |
| Not readily determinable fair value | $ | 215 | | $ | 189 | |
Risk Management
Dow’sThe Company’s business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies that enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as hedges per
the accounting guidance related to derivatives and hedging activities, where appropriate. A secondary objective is to add value by creating additional non-specific exposure within established limits and policies; derivatives used for this purpose are not designated as hedges. The potential impact of creating such additional exposures is not material to the Company’s results. Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value.
The Company’s risk management program for interest rate, foreign currency and commodity risks is based on fundamental, mathematical and technical models that take into account the implicit cost of hedging. Risks created by derivative instruments and the mark-to-market valuations of positions are strictly monitored at all times, using value-at-risk and stress tests. Counterparty credit risk arising from these contracts is not significant because the Company minimizes counterparty concentration, deals primarily with major financial institutions of solid credit quality, and the majority of its hedging transactions mature in less than three months. In addition, the Company minimizes concentrations of credit risk through its global orientation by transacting with large, internationally diversified financial counterparties. It is the Company’s policy to not have credit risk-related contingent features in its derivative instruments. No significant concentration of counterparty credit risk existed at December 31, 2018.2020. The Company does not anticipate losses from credit risk, and the net cash requirements arising from counterparty risk associated with risk management activities are not expected to be material in 2019.2021.
The Company revises its strategies as market conditions dictate and management reviews its overall financial strategies and the impacts from using derivatives in its risk management program with the Company’s senior leadership who also reviews these strategies with the DowDuPontDow Inc. Board and/or relevant committees thereof.
Derivative Instruments
The notional amounts of the Company's derivative instruments presented on a net basis at December 31, 20182020 and 2017,2019, were as follows:
| | | | | | | | |
| Notional Amounts - Net | Dec 31, 2020 | Dec 31, 2019 |
| In millions |
| Derivatives designated as hedging instruments | | |
| Interest rate contracts | $ | 612 | | $ | 922 | |
| Foreign currency contracts | $ | 3,784 | | $ | 6,253 | |
| Derivatives not designated as hedging instruments | | |
| Interest rate contracts | $ | 94 | | $ | 145 | |
| Foreign currency contracts | $ | 9,187 | | $ | 5,567 | |
|
| | | | | | |
| Notional Amounts - Net | Dec 31, 2018 | Dec 31, 2017 1 |
| In millions |
| Derivatives designated as hedging instruments: | | |
| Interest rate swaps | $ | 2,049 |
| $ | 185 |
|
| Foreign currency contracts | $ | 4,457 |
| $ | 4,343 |
|
| Derivatives not designated as hedging instruments: | | |
| Interest rate swaps | $ | 5 |
| $ | — |
|
| Foreign currency contracts | $ | 19,285 |
| $ | 12,041 |
|
| |
1. | Prior period amounts were previously presented on a gross basis and have been updated to conform with the current year net presentation. |
The notional amounts of the Company's commodity derivatives presented on a net basis at December 31, 20182020 and 2017,2019, were as follows:
| | | | | | | | | | | |
| Commodity Notionals - Net | Dec 31, 2020 | Dec 31, 2019 | Notional Volume Unit |
|
| Derivatives designated as hedging instruments | | | |
| Hydrocarbon derivatives | 10.9 | | 6.1 | | million barrels of oil equivalent |
| | | |
| | | |
| | | |
| | | |
| | | |
| Derivatives not designated as hedging instruments | | | |
| Hydrocarbon derivatives | 0 | | 0.1 | | million barrels of oil equivalent |
| Power derivatives | 0 | | 87.5 | | thousands of megawatt hours |
| | | |
| | | |
| | | |
|
| | | | | |
| Commodity Notionals - Net | Dec 31, 2018 | Dec 31, 2017 1 | Notional Volume Unit |
| |
| Derivatives designated as hedging instruments: | | | |
| Hydrocarbon derivatives | 39.9 |
| 71.3 |
| million barrels of oil equivalent |
| Seed derivatives | — |
| 3.9 |
| million bushels |
| Derivatives not designated as hedging instruments: | | | |
| Hydrocarbon derivatives | 1.2 |
| 4.1 |
| million barrels of oil equivalent |
| Power derivatives | 73.9 |
| — |
| thousands of megawatt hours |
| | | | | |
1.Maturity Dates of Derivatives Designated as Hedging Instruments | Prior period amounts were previously presented on a gross basis and have been updated to conform with the current year net presentation.Year |
| Interest rate contracts | 2021 |
| Foreign currency contracts | 2021 |
| Commodity contracts | 2022 |
Interest Rate Risk Management
The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. To achieve this objective, the Company hedges using interest rate swaps, “swaptions,” and exchange-traded instruments. At December 31, 2018, the Company had open interest rate swaps with maturity dates that extend through 2022.
Foreign Currency Risk Management
The global nature of Dow'sthe Company's business requires active participation in the foreign exchange markets. The Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company's foreign currency risk management is to optimize the U.S. dollar value of net assets and cash flows. To achieve this objective, the Company hedges on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps and nonderivative instruments in foreign currencies. Exposures primarily relate to assets, liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to operating activities. At December 31, 2018, the Company had foreign currency contracts with various expiration dates, through 2019.
Commodity Risk Management
The Company has exposure to the prices of commodities in its procurement of certain raw materials. The primary purpose of commodity hedging activities is to manage the price volatility associated with these forecasted inventory purchases. At December 31, 2018, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements have various expiration dates through 2022.
Derivatives Not Designated in Hedging Relationships
Foreign Currency Contracts
The Company also uses foreign exchange forward contracts, options and cross-currency swaps that are not designated as hedging instruments primarily to manage foreign currency exposure.
Commodity Contracts
The Company utilizes futures, options and swap instruments that are effective as economic hedges of commodity price exposures, but do not meet hedge accounting criteria for derivatives and hedging, to reduce exposure to commodity price fluctuations on purchases of raw materials and inventory.
Interest Rate Contracts
The Company uses swap instruments that are not designated as hedging instruments to manage the interest rate exposures. DowThe Company uses interest rate swaps, "swaptions," and exchange-traded instruments to accomplish this objective.
Accounting for Derivative Instruments and Hedging Activities
Cash Flow Hedges
For derivatives that are designated and qualify as cash flow hedging instruments, the gain or loss on the derivative is recorded in AOCL; it is reclassified to income in the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCL fluctuate based on changes in the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCL and net income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market conditions during any period.
The net gain from interest rate hedges included in AOCL at December 31, 2018 was $23 million after tax (net loss of $3 million after tax at December 31, 2017). These contracts have maturity dates that extend through 2022.
The Company had open foreign currency contracts designated as cash flow hedges of the currency risk associated with forecasted transactions not extending beyond 2019. The portion of the mark-to-market effects of the foreign currency contracts is recorded in AOCL; it is reclassified to income in the same period or periods that the underlying item affects income. The net gain from the foreign currency hedges included in AOCL at December 31, 2018 was $15 million after tax (net loss of $19 million after tax at December 31, 2017).
Commodity swaps, futures and option contracts with maturities of not more than 60 months are utilized and designated as cash flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until December 2022. The designated portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCL; it is reclassified to income in the same period or periods that the underlying commodity purchase affects income. The net loss from commodity hedges included in AOCL at December 31, 2018 was $87 million after tax (net loss of $73 million after tax at December 31, 2017).
Fair Value Hedges
For interest rate swap instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedgedhedge item attributable to the hedged risk are recognized in current period income and reflected as “Interest expense and amortization of debt discount” in the consolidated statements of income. The short-cut method is used whenincome, except for amounts excluded from the criteriaassessment of effectiveness that are met. At December 31, 2018 and 2017, the Company had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations.recognized in earnings through an amortization approach.
Net Foreign Investment Hedges
For derivative instrumentsThe Company designates derivatives that are designated and qualify as effective net foreign investment hedges, the designated portionresults of which are presented in the gain or loss oneffect of derivative instruments table. In addition, the derivative is included in “Cumulative translation adjustments” in AOCL.Company utilizes non-derivative instruments as net foreign investment hedges. The Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $182$194 million at December 31, 20182020 ($177184 million at December 31, 2017). The results of hedges of the Company’s net investment in foreign operations included in “Cumulative translation adjustments” in AOCL was a net gain of $113 million after tax for the year ended December 31, 2018 (net loss of $76 million after tax for the year ended December 31, 2017)2019).
Amounts to be Reclassified within the Next Twelve Months
The net after-tax amounts to be reclassified from AOCL to income within the next 12 months are a $45 million loss for commodity contracts, a $13 million gain for foreign currency contracts and a $1 million gain for interest rate contracts.
The following tables provide the fair value and gross balance sheet classification of derivative instruments at December 31, 20182020 and 2017:2019:
| | | | | | | | | | | | | | |
| Fair Value of Derivative Instruments | Dec 31, 2020 |
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheets |
| Asset derivatives | | | | |
| Derivatives designated as hedging instruments | | | | |
| Interest rate contracts | Other current assets | $ | 3 | | $ | (3) | | $ | 0 | |
| Foreign currency contracts | Other current assets | 39 | | (19) | | 20 | |
| Commodity contracts | Other current assets | 146 | | (109) | | 37 | |
| Commodity contracts | Deferred charges and other assets | 31 | | (8) | | 23 | |
| Total | | $ | 219 | | $ | (139) | | $ | 80 | |
| Derivatives not designated as hedging instruments | | | | |
| Interest rate contracts | Deferred charges and other assets | $ | 41 | | $ | 0 | | $ | 41 | |
| Foreign currency contracts | Other current assets | 74 | | (25) | | 49 | |
| Commodity contracts | Other current assets | 4 | | (1) | | 3 | |
| Total | | $ | 119 | | $ | (26) | | $ | 93 | |
| Total asset derivatives | | $ | 338 | | $ | (165) | | $ | 173 | |
| | | | |
| Liability derivatives | | | | |
| Derivatives designated as hedging instruments | | | | |
| Interest rate contracts | Accrued and other current liabilities | $ | 7 | | $ | (3) | | $ | 4 | |
| Foreign currency contracts | Accrued and other current liabilities | 93 | | (19) | | 74 | |
| Commodity contracts | Accrued and other current liabilities | 151 | | (112) | | 39 | |
| Commodity contracts | Other noncurrent obligations | 48 | | (9) | | 39 | |
| Total | | $ | 299 | | $ | (143) | | $ | 156 | |
| Derivatives not designated as hedging instruments | | | | |
| Interest rate contracts | Other noncurrent obligations | $ | 178 | | $ | 0 | | $ | 178 | |
| Foreign currency contracts | Accrued and other current liabilities | 35 | | (25) | | 10 | |
| Commodity contracts | Accrued and other current liabilities | 9 | | (3) | | 6 | |
| Total | | $ | 222 | | $ | (28) | | $ | 194 | |
| Total liability derivatives | | $ | 521 | | $ | (171) | | $ | 350 | |
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.
|
| | | | | | | | | | |
| Fair Value of Derivative Instruments | Dec 31, 2018 |
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheets |
| Asset derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 98 |
| $ | (42 | ) | $ | 56 |
|
| Commodity contracts | Other current assets | 47 |
| (13 | ) | 34 |
|
| Commodity contracts | Deferred charges and other assets | 18 |
| (3 | ) | 15 |
|
| Total | | $ | 163 |
| $ | (58 | ) | $ | 105 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 128 |
| $ | (64 | ) | $ | 64 |
|
| Commodity contracts | Other current assets | 41 |
| (1 | ) | 40 |
|
| Commodity contracts | Deferred charges and other assets | 4 |
| (2 | ) | 2 |
|
| Total | | $ | 173 |
| $ | (67 | ) | $ | 106 |
|
| Total asset derivatives | | $ | 336 |
| $ | (125 | ) | $ | 211 |
|
| | | | | |
| Liability derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate swaps | Other noncurrent obligations | $ | 64 |
| $ | — |
| $ | 64 |
|
| Foreign currency contracts | Accrued and other current liabilities | 46 |
| (42 | ) | 4 |
|
| Commodity contracts | Accrued and other current liabilities | 111 |
| (18 | ) | 93 |
|
| Commodity contracts | Other noncurrent obligations | 86 |
| (9 | ) | 77 |
|
| Total | | $ | 307 |
| $ | (69 | ) | $ | 238 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Accrued and other current liabilities | $ | 103 |
| $ | (64 | ) | $ | 39 |
|
| Commodity contracts | Accrued and other current liabilities | 7 |
| (4 | ) | 3 |
|
| Commodity contracts | Other noncurrent obligations | 8 |
| (3 | ) | 5 |
|
| Total | | $ | 118 |
| $ | (71 | ) | $ | 47 |
|
| Total liability derivatives | | $ | 425 |
| $ | (140 | ) | $ | 285 |
|
| |
1. | Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between Dow and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
| | | | | | | | | | | | | | |
| Fair Value of Derivative Instruments | Dec 31, 2019 |
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheets |
| Asset derivatives | | | | |
| Derivatives designated as hedging instruments | | | | |
| Interest rate contracts | Other current assets | $ | 21 | | $ | (13) | | $ | 8 | |
| Foreign currency contracts | Other current assets | 105 | | (36) | | 69 | |
| Commodity contracts | Other current assets | 44 | | (25) | | 19 | |
| Commodity contracts | Deferred charges and other assets | 28 | | (3) | | 25 | |
| Total | | $ | 198 | | $ | (77) | | $ | 121 | |
| Derivatives not designated as hedging instruments | | | | |
| Interest rate contracts | Other current assets | $ | 14 | | $ | (14) | | $ | 0 | |
| | | | |
| Foreign currency contracts | Other current assets | 44 | | (12) | | 32 | |
| Commodity contracts | Other current assets | 18 | | (3) | | 15 | |
| | | | |
| Total | | $ | 76 | | $ | (29) | | $ | 47 | |
| Total asset derivatives | | $ | 274 | | $ | (106) | | $ | 168 | |
| | | | |
| Liability derivatives | | | | |
| Derivatives designated as hedging instruments | | | | |
| Interest rate contracts | Accrued and other current liabilities | $ | 23 | | $ | (13) | | $ | 10 | |
| Interest rate contracts | Other noncurrent obligations | 1 | | 0 | | 1 | |
| Foreign currency contracts | Accrued and other current liabilities | 46 | | (36) | | 10 | |
| Commodity contracts | Accrued and other current liabilities | 95 | | (29) | | 66 | |
| Commodity contracts | Other noncurrent obligations | 38 | | (4) | | 34 | |
| Total | | $ | 203 | | $ | (82) | | $ | 121 | |
| Derivatives not designated as hedging instruments | | | | |
| Interest rate contracts | Accrued and other current liabilities | $ | 136 | | $ | (14) | | $ | 122 | |
| Interest rate contracts | Other noncurrent obligations | 150 | | 0 | | 150 | |
| Foreign currency contracts | Accrued and other current liabilities | 23 | | (12) | | 11 | |
| Commodity contracts | Accrued and other current liabilities | 17 | | (3) | | 14 | |
| Commodity contracts | Other noncurrent obligations | 1 | | 0 | | 1 | |
| Total | | $ | 327 | | $ | (29) | | $ | 298 | |
| Total liability derivatives | | $ | 530 | | $ | (111) | | $ | 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. |
| | | | | | | | | | |
| Fair Value of Derivative Instruments | Dec 31, 2017 |
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheets |
| Asset derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 51 |
| $ | (46 | ) | $ | 5 |
|
| Commodity contracts | Other current assets | 20 |
| (4 | ) | 16 |
|
| Commodity contracts | Deferred charges and other assets | 70 |
| (5 | ) | 65 |
|
| Total | | $ | 141 |
| $ | (55 | ) | $ | 86 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 75 |
| $ | (58 | ) | $ | 17 |
|
| Commodity contracts | Other current assets | 50 |
| (5 | ) | 45 |
|
| Commodity contracts | Deferred charges and other assets | 7 |
| (3 | ) | 4 |
|
| Total | | $ | 132 |
| $ | (66 | ) | $ | 66 |
|
| Total asset derivatives | | $ | 273 |
| $ | (121 | ) | $ | 152 |
|
| | | | | |
| Liability derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate swaps | Other noncurrent obligations | $ | 4 |
| $ | — |
| $ | 4 |
|
| Foreign currency contracts | Accrued and other current liabilities | 109 |
| (46 | ) | 63 |
|
| Commodity contracts | Accrued and other current liabilities | 96 |
| (15 | ) | 81 |
|
| Commodity contracts | Other noncurrent obligations | 143 |
| (12 | ) | 131 |
|
| Total | | $ | 352 |
| $ | (73 | ) | $ | 279 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Accrued and other current liabilities | $ | 107 |
| $ | (58 | ) | $ | 49 |
|
| Commodity contracts | Accrued and other current liabilities | 45 |
| (6 | ) | 39 |
|
| Commodity contracts | Other noncurrent obligations | 8 |
| (3 | ) | 5 |
|
| Total | | $ | 160 |
| $ | (67 | ) | $ | 93 |
|
| Total liability derivatives | | $ | 512 |
| $ | (140 | ) | $ | 372 |
|
| |
1. | Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between Dow and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are netted with corresponding assets or liabilities, when applicable. The Company posted cash collateral of $26$7 million at December 31, 20182020 ($215 million at December 31, 2017)2019). Counterparties postedNaN cash collateral of $34 millionwas posted by counterparties with the Company at December 31, 2018 (zero2020 ($3 million at December 31, 2017)2019).
The following table summarizes the gain (loss) of derivative instruments in the consolidated statements of income and comprehensive income for the years ended December 31, 2020, 2019 and 2018:
| | | Effect of Derivative Instruments | Amount of gain (loss) recognized in OCI 1 | Amount of gain (loss) recognized in income 2 | | Effect of Derivative Instruments | Amount of gain (loss) recognized in OCI 1 | Amount of gain (loss) recognized in income 2 | Income Statement Classification |
| In millions | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | Income Statement Classification | In millions | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 |
| Derivatives designated as hedging instruments: | | | | Derivatives designated as hedging instruments: | | |
| Fair value hedges: | | | | Fair value hedges: | | |
| Interest rate swaps | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (2 | ) | $ | — |
| Interest expense and amortization of debt discount 3 | |
| Interest rate contracts | | Interest rate contracts | $ | 0 | | $ | 0 | | $ | 0 | | $ | 69 | | $ | 17 | | $ | 0 | | Interest expense and amortization of debt discount 3 |
Excluded components 4 | | Excluded components 4 | 7 | | (3) | | 0 | | 0 | | 0 | | 0 | | Interest expense and amortization of debt discount |
| Cash flow hedges: | | | | Cash flow hedges: | | |
| Interest rate swaps | 26 |
| 2 |
| 2 |
| (3 | ) | 4 |
| 6 |
| Interest expense and amortization of debt discount | |
| Interest rate contracts | | Interest rate contracts | 0 | | (316) | | 26 | | (2) | | 1 | | (3) | | Interest expense and amortization of debt discount |
| Foreign currency contracts | 19 |
| (30 | ) | 8 |
| (18 | ) | 7 |
| (5 | ) | Cost of sales | Foreign currency contracts | (20) | | 16 | | 19 | | 3 | | 28 | | (18) | | Cost of sales |
| Foreign currency contracts | (3 | ) | (5 | ) | 25 |
| — |
| (17 | ) | (13 | ) | Sundry income (expense) - net | Foreign currency contracts | 0 | | 10 | | (3) | | 0 | | 8 | | 0 | | Sundry income (expense) - net |
| Commodity contracts | (45 | ) | 35 |
| 55 |
| (69 | ) | 7 |
| (28 | ) | Cost of sales | Commodity contracts | (8) | | (6) | | (46) | | (31) | | (81) | | (69) | | Cost of sales |
| Net investment hedges: | | | | |
| Net foreign investment hedges: | | Net foreign investment hedges: | | |
| Foreign currency contracts | 116 |
| (73 | ) | 5 |
| — |
| — |
| — |
| | Foreign currency contracts | (38) | | (52) | | 116 | | 0 | | 0 | | 0 | | |
Excluded components 4 | | Excluded components 4 | 27 | | 162 | | 0 | | 20 | | 99 | | 0 | | Sundry income (expense) - net |
| Total derivatives designated as hedging instruments | $ | 113 |
| $ | (71 | ) | $ | 95 |
| $ | (90 | ) | $ | (1 | ) | $ | (40 | ) | | Total derivatives designated as hedging instruments | $ | (32) | | $ | (189) | | $ | 112 | | $ | 59 | | $ | 72 | | $ | (90) | | |
| Derivatives not designated as hedging instruments: | | | | Derivatives not designated as hedging instruments: | | |
| Interest rate contracts | | Interest rate contracts | $ | 0 | | $ | 0 | | $ | 0 | | $ | (16) | | $ | (4) | | $ | 0 | | Interest expense and amortization of debt discount |
| Foreign currency contracts | $ | — |
| $ | — |
| $ | — |
| $ | 101 |
| $ | (289 | ) | $ | (180 | ) | Sundry income (expense) - net | Foreign currency contracts | 0 | | 0 | | 0 | | 28 | | 45 | | 101 | | Sundry income (expense) - net |
| Commodity contracts | — |
| — |
| — |
| (12 | ) | (9 | ) | 6 |
| Cost of sales | Commodity contracts | 0 | | 0 | | 0 | | 11 | | (28) | | (12) | | Cost of sales |
| Total derivatives not designated as hedging instruments | $ | — |
| $ | — |
| $ | — |
| $ | 89 |
| $ | (298 | ) | $ | (174 | ) | | Total derivatives not designated as hedging instruments | $ | 0 | | $ | 0 | | $ | 0 | | $ | 23 | | $ | 13 | | $ | 89 | | |
| Total derivatives | $ | 113 |
| $ | (71 | ) | $ | 95 |
| $ | (1 | ) | $ | (299 | ) | $ | (214 | ) | | Total derivatives | $ | (32) | | $ | (189) | | $ | 112 | | $ | 82 | | $ | 85 | | $ | (1) | | |
1.OCI is defined as other comprehensive income (loss).
2.Pretax amounts.
3.Gain (loss) recognized in income of derivatives is offset by gain (loss) recognized in income of the hedged item.
4.The excluded components are related to the time value of the derivatives designated as hedges.
The following table provides the net after-tax amounts to be reclassified from AOCL to income within the next 12 months:
| | | | | |
1.Expected Reclassifications from AOCL within the next 12 months | OCI is defined as other comprehensive income (loss).Dec 31,
2020 |
| Cash flow hedges: | |
2.Interest rate contracts | Pretax amounts.$ |
| (8) | |
3.Commodity contracts | Gain (loss) recognized in income of derivatives is offset by gain (loss) recognized in income of the hedged item.$ | (1) | |
| Foreign currency contracts | $ | (18) | |
| Net foreign investment hedges: | |
| Excluded components | $ | 2 | |
NOTE 2223 – FAIR VALUE MEASUREMENTS
Fair Value Measurements on a Recurring Basis
The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | |
| Basis of Fair Value Measurements on a Recurring Basis | Dec 31, 2020 | Dec 31, 2019 |
| In millions | Level 1 | Level 2 | | Total | Level 1 | Level 2 | | Total |
| Assets at fair value: | | | | | | | | |
| Cash equivalents: | | | | | | | | |
Held-to-maturity securities 1 | $ | 0 | | $ | 980 | | | $ | 980 | | $ | 0 | | $ | 220 | | | $ | 220 | |
| Money market funds | 0 | | 484 | | | 484 | | 0 | | 408 | | | 408 | |
Marketable securities 2 | 0 | | 45 | | | 45 | | 0 | | 21 | | | 21 | |
Equity securities 3 | 40 | | 0 | | | 40 | | 15 | | 0 | | | 15 | |
Debt securities: 3 | | | | | | | | |
Government debt 4 | 0 | | 698 | | | 698 | | 0 | | 555 | | | 555 | |
| Corporate bonds | 28 | | 908 | | | 936 | | 22 | | 992 | | | 1,014 | |
Derivatives relating to: 5 | | | | | | | | |
| Interest rates | 0 | | 44 | | | 44 | | 0 | | 35 | | | 35 | |
| Foreign currency | 0 | | 113 | | | 113 | | 0 | | 149 | | | 149 | |
| Commodities | 8 | | 173 | | | 181 | | 23 | | 67 | | | 90 | |
| Total assets at fair value | $ | 76 | | $ | 3,445 | | | $ | 3,521 | | $ | 60 | | $ | 2,447 | | | $ | 2,507 | |
| Liabilities at fair value: | | | | | | | | |
Long-term debt including debt due within one year 6 | $ | 0 | | $ | 20,604 | | | $ | 20,604 | | $ | 0 | | $ | 18,661 | | | $ | 18,661 | |
| | | | | | | | |
Derivatives relating to: 5 | | | | | | | | |
| Interest rates | 0 | | 185 | | | 185 | | 0 | | 310 | | | 310 | |
| Foreign currency | 0 | | 128 | | | 128 | | 0 | | 69 | | | 69 | |
| Commodities | 7 | | 201 | | | 208 | | 14 | | 137 | | | 151 | |
| Total liabilities at fair value | $ | 7 | | $ | 21,118 | | | $ | 21,125 | | $ | 14 | | $ | 19,177 | | | $ | 19,191 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Basis of Fair Value Measurements on a Recurring Basis | Dec 31, 2018 | Dec 31, 2017 |
| In millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total |
| Assets at fair value: | | | | | | | | |
Cash equivalents 1 | $ | — |
| $ | 566 |
| $ | — |
| $ | 566 |
| $ | — |
| $ | 2,280 |
| $ | — |
| $ | 2,280 |
|
| Marketable securities | — |
| 100 |
| — |
| 100 |
| — |
| 4 |
| — |
| 4 |
|
Interests in trade accounts receivable conduits 2 | — |
| — |
| — |
| — |
| — |
| — |
| 677 |
| 677 |
|
Equity securities 3 | 16 |
| — |
| — |
| 16 |
| 88 |
| 52 |
| — |
| 140 |
|
Debt securities: 3 | | | | |
|
|
| |
Government debt 4 | — |
| 700 |
| — |
| 700 |
| — |
| 639 |
| — |
| 639 |
|
| Corporate bonds | — |
| 983 |
| — |
| 983 |
| — |
| 733 |
| — |
| 733 |
|
Derivatives relating to: 5 | | | | |
|
|
| |
| Foreign currency | — |
| 226 |
| — |
| 226 |
| — |
| 126 |
| — |
| 126 |
|
| Commodities | 17 |
| 93 |
| — |
| 110 |
| 47 |
| 100 |
| — |
| 147 |
|
| Total assets at fair value | $ | 33 |
| $ | 2,668 |
| $ | — |
| $ | 2,701 |
| $ | 135 |
| $ | 3,934 |
| $ | 677 |
| $ | 4,746 |
|
| Liabilities at fair value: | | | | | | | | |
Long-term debt including debt due within one year 6 | $ | — |
| $ | 20,214 |
| $ | — |
| $ | 20,214 |
| $ | — |
| $ | 22,615 |
| $ | — |
| $ | 22,615 |
|
Derivatives relating to: 5 | | | | | | | | |
| Interest rates | — |
| 64 |
| — |
| 64 |
| — |
| 4 |
| — |
| 4 |
|
| Foreign currency | — |
| 149 |
| — |
| 149 |
| — |
| 216 |
| — |
| 216 |
|
| Commodities | 23 |
| 189 |
| — |
| 212 |
| 31 |
| 261 |
| — |
| 292 |
|
| Total liabilities at fair value | $ | 23 |
| $ | 20,616 |
| $ | — |
| $ | 20,639 |
| $ | 31 |
| $ | 23,096 |
| $ | — |
| $ | 23,127 |
|
| |
1. | Treasury bills, time deposits, and money market funds included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value. |
2. IncludedThe Company's investments in "Accounts and notes receivable – Other"marketable securities are included in "Other current assets" in the consolidated balance sheets. See Note 14 for additional information on transfers of financial assets.
3.The Company’sCompany's investments in debt securities, which are primarily available-for-sale, and equity securities are included in “Other investments”"Other investments" in the consolidated balance sheets.
4.U.S. Treasury obligations, U.S. agency obligations, U.S. agency mortgage-backed securities and other municipalities’municipalities' obligations.
5.See Note 2122 for the classification of derivatives in the consolidated balance sheets.
6.See Note 2122 for information on fair value measurements of long-term debt.
For assets and liabilities classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For assets and liabilities classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability, or by using observable market data points of similar, more liquid securities to imply the price. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance and quality checks.
For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.
For all other assets and liabilities for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models. See Note 2122 for further information on the types of instruments used by the Company for risk management.
There were no0 transfers between Levels 1 and 2 in the years ended December 31, 20182020 and 2017.2019.
For assets classified as Level 3 measurements, the fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity. The fair value of the Company’s interests held in trade accounts receivable conduits is determined by calculating the expected amount of cash to be received using the key input of anticipated credit losses in the portfolio of receivables sold that have not yet been collected. Given the short-term nature of the underlying receivables, discount rate and prepayments are not factors in determining the fair value of the interests. See Note 14 for further information on assets classified as Level 3 measurements.
For equity securities calculated at net asset value per share (or its equivalent), the Company had $120$111 million in private market securitiesequity and $29$19 million in real estate at December 31, 2018.2020 ($117 million in private equity and $18 million in real estate at December 31, 2019). There are no redemption restrictions and the underfundedunfunded commitments on these investments were $89$63 million at December 31, 2018.2020 ($76 million at December 31, 2019).
The following table summarizes the changes in fair value measurements using Level 3 inputs for the yearsyear ended December 31, 2018 and 2017:2018:
|
| | | | | | |
Fair Value Measurements Using Level 3 Inputs for Interests Held in Trade Accounts Receivable Conduits 1 | 2018 | 2017 |
| In millions |
| Balance at Jan 1 | $ | 677 |
| $ | 1,237 |
|
Gain (loss) included in earnings 2 | 3 |
| (8 | ) |
Purchases 3 | — |
| 8,910 |
|
Settlements 3, 4 | (680 | ) | (9,462 | ) |
| Balance at Dec 31 | $ | — |
| $ | 677 |
|
| | | | | |
| Fair Value Measurements Using Level 3 Inputs for Interests Held in Trade Accounts Receivable Conduits | 2018 |
| In millions |
| Balance at Jan 1 | $ | 677 | |
Gain (loss) included in earnings 1 | 3 | | | | 1.Settlements 2 | Included in "Accounts and notes receivable – Other" in the consolidated balance sheets. |
| (680) | | 2.Balance at Dec 31 | Included in "Selling, general and administrative expenses" in the consolidated statements of income.$ |
| 0 | | 3. | Presented in accordance with ASU 2016-15. See Notes 1 and 2 for additional information. In connection with the review and implementation of ASU 2016-15, the Company also changed the prior year value of “Purchases” and "Settlements" due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits, including additional guidance from the SEC's Office of the Chief Accountant issued in the third quarter of 2018 that indicated an entity must evaluate daily transaction activity to calculate the value of cash received from beneficial interests in conduits. |
| | 4. | Includes noncash transactions of $23 million for the year ended December 31, 2018. |
1.Included in "Selling, general and administrative expenses" in the consolidated statements of income.
2.Includes noncash transactions of $23 million for the year ended December 31, 2018.
Fair Value Measurements on a Nonrecurring Basis The following table summarizes the bases used to measure certain assets at fair value on a nonrecurring basis in the consolidated balance sheets in 2018, 20172020, 2019 and 2016:2018:
| | | | | | | | | | | Basis of Fair Value Measurements on a Nonrecurring Basis at Dec 31 | | (Level 3) | Total Losses | | In millions | | 2020 | | | | | Assets at fair value: | | | | | Long-lived assets and other assets | | $ | 121 | | $ | (245) | | | 2019 | | | | | Assets at fair value: | | | | | Long-lived assets, other assets and equity method investments | | $ | 162 | | $ | (2,031) | | | Goodwill | | $ | 0 | | $ | (1,039) | | | 2018 | | | | | Assets at fair value: | | | | | Long-lived assets and other assets | | $ | 0 | | $ | (67) | | | | | |
| | | | | | | | | | | | Basis of Fair Value Measurements on a Nonrecurring Basis at Dec 31 | (Level 1) | (Level 3) | Total Losses | | In millions | | 2018 | | | | | Assets at fair value: | | | | | Long-lived assets and other assets | $ | — |
| $ | 17 |
| $ | (261 | ) | | 2017 | | | | | Assets at fair value: | | | | | Long-lived assets, intangible assets, other assets and equity method investments | $ | — |
| $ | 61 |
| $ | (1,226 | ) | | Goodwill | $ | — |
| $ | — |
| $ | (1,491 | ) | | 2016 | | | | | Assets at fair value: | | | | | Long-lived assets, other assets and equity method investments | $ | 46 |
| $ | — |
| $ | (296 | ) |
20182020 Fair Value Measurements on a Nonrecurring Basis
TheAs part of the 2020 Restructuring Program, the Company has or will shut down a number ofand write off several small manufacturing R&D, other non-manufacturing facilities and corporate facilitiesmiscellaneous assets around the world as part of its restructuring programs. In 2018, the write-down of inventory, corporate facilities and all but one manufacturing facility and relatedworld. The assets associated with this plan were written down to zero. The remaining manufacturing facility,In addition, impairments of leased, non-manufacturing facilities, which waswere classified as a Level 3 measurement, was written downmeasurements, resulted in a write-down of right-of-use assets to a fair value of $17$110 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets, which included a third party appraisal.inputs. The impairment charges related to the restructuring programs,2020 Restructuring Program, totaling $227$196 million, were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated
statements of income and related to Packaging & Specialty Plastics ($11 million), Industrial Intermediates & Infrastructure ($22 million), Performance Materials & Coatings ($116 million) and Corporate ($47 million).
In 2020, the Company recognized impairment charges of $30 million related to the write-down of a non-manufacturing asset and certain corporate leased equipment and the write-off of a capital project. The assets, classified as Level 3 measurements, were valued at $11 million using unobservable inputs. The impairment charges were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note 7 for additional information on the Company's restructuring activities.income and related to Performance Materials & Coatings ($15 million) and Corporate ($15 million).
In 2018,2020, the Company recognized an additional pretax impairment charge of $34$19 million related primarily to capital additions made to the biopolymersa bio-ethanol manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, thatwhich was impaired in 2017. The assets were written down to zero in 2018.2020. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.income and related to Packaging & Specialty Plastics. On September 29, 2020, the Company divested the bio-ethanol manufacturing facility. See Note 76 for additional information on the Company's restructuring activities.information.
20172019 Fair Value Measurements on a Nonrecurring Basis
TheAs part of the Synergy Program, the Company has or will shut down a number ofand write-off several small manufacturing R&Dfacilities, non-manufacturing assets and certain corporate facilities around the world as part of the Synergy Program. Theworld. In 2019, manufacturing facilities and related assets (including intangible assets), corporate facilities and data centers associated with this plan were written down to zerozero. In addition, impairments of leased, non-manufacturing facilities, which were classified as Level 3 measurements, resulted in the fourth quartera write-down of 2017.right-of-use assets to a fair value of $152 million using unobservable inputs. The impairment charges related to the Synergy Program, totaling $287$143 million, were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note 7 for additional information on the Company's restructuring activities.income and related to Industrial Intermediates & Infrastructure ($2 million), Performance Materials & Coatings ($28 million) and Corporate ($113 million).
In the fourth quarter of 2017,2019, the Company recognized a $622 millionan additional pretax impairment charge of $44 million related to a biopolymers manufacturing facility incapital additions made to Santa Vitoria, Minas Gerais, Brazil.which was impaired in 2017. The Company determined it would not pursue an expansion of the facility’s ethanol mill into downstream derivative products, primarily as a result of cheaper ethane-based production as well as the Company’s new assets coming online on the U.S. Gulf Coast which can be used to meet growing market demands in Brazil. As a result of this decision, cash flow analysis indicated the carrying amount of the impacted assets was not recoverable and the assets were written down to zero in the fourth quarter of 2017.2019. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income. See Notes 7income and 23 for additional information.related to Packaging & Specialty Plastics.
TheIn 2019, the Company also recognized other pretax impairment charges of $317$14 million in the fourth quarter of 2017, including charges related to manufacturing assets of $230 million, an equity method investment of $81 million and other assets of $6 million.non-manufacturing assets. The assets, classified as Level 3 measurements, were valued at $61$10 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets, which included projected cash flows.inputs. The impairment charges were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Notes 7income and 23related to Performance Materials & Coatings ($9 million) and Corporate ($5 million).
In 2019, the Company recognized an impairment charge of $75 million resulting from the planned divestiture of its acetone derivatives business to ALTIVIA Ketones & Additives, LLC. The transaction closed on November 1, 2019 and included the Company's acetone derivatives related inventory and production assets, located in Institute, West Virginia, in addition to the site infrastructure, land and utilities. The assets, classified as Level 3 measurements and valued using unobservable inputs, were written down to zero in 2019, except for additional information.inventory, which was sold at the lower of cost or market. The impairment charge was included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Packaging & Specialty Plastics ($24 million) and Corporate ($51 million).
In the fourth quarter of 2017,2019, the Company performed its annual goodwill impairment testing utilizing a discounted cash flow methodology as its valuation technique. As a result, the Company determined the fair value of the Coatings & Performance MonomersC&PM reporting unit was lower than its carrying amount and recorded an impairment charge of $1,491$1,039 million, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income.income and related to Performance Materials & Coatings. See Note 13 for additional information on the impairment charge.
2016In the fourth quarter of 2019, the Company concluded that its equity method investment in Sadara, classified as a Level 3 measurement and valued using unobservable inputs, was other-than-temporarily impaired and written down to zero. Additionally, the Company reserved certain accounts and notes receivable and accrued interest balances due to uncertainty on the timing of collection. As a result, the Company recorded a $1,755 million charge related to Sadara. The charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Packaging & Specialty Plastics ($370 million), Industrial Intermediates & Infrastructure ($1,168 million) and Corporate ($217 million). See Note 12 for additional information.
2018 Fair Value Measurements on a Nonrecurring Basis As part of the 2016 restructuring plan, theThe Company has or will shut down a number of manufacturing and other non-manufacturing facilities and corporate facilities. Thefacilities around the world as part of its restructuring programs. In 2018, the manufacturing facilities and related assets and corporate facilities and data centers associated with this planthese programs were written down to zero in the second quarter of 2016. The Company also rationalized its aircraft fleet in the second quarter of 2016. Certain aircraft, classified as a Level 3 measurement, were considered held for sale and written down to fair value, using unobservable inputs, including assumptions a market participant would use to measure the fair value of the aircraft. The aircraft were subsequently sold in the second half of 2016.zero. The impairment charges related to the 2016 restructuring plan,programs, totaling $153$33 million, were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note income and related to Packaging & Specialty Plastics ($10 million), Performance Materials & Coatings ($7 for additional information onmillion) and Corporate ($16 million).
In 2018, the Company's restructuring activities.
The Company recognized an additional pretax impairment charge of $143$34 million related primarily to capital additions made to Santa Vitoria, which was impaired in the fourth quarter of 2016, related to its equity interest in AFSI. This investment, classified as a Level 1 measurement, was2017. The assets were written down to $46 million using quoted prices0 in an active market.2018. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net"net” in the consolidated statements of income. income and related to the Packaging & Specialty Plastics segment.
See Notes 7 and 12Note 6 for additional information.information on the Company's restructuring activities.
NOTE 2324 – VARIABLE INTEREST ENTITIES Consolidated Variable Interest Entities ("VIEs") The Company holds a variable interest in the following joint ventures or entities for which it is the primary beneficiary.beneficiary:
Asia Pacific joint venturesJoint Ventures The Company has variable interests in threetwo joint ventures that own and operate manufacturing and logistics facilities, which produce chemicals and provide services in Asia Pacific. The Company's variable interests in these joint ventures relate to arrangements between the joint ventures and the Company, involving the majority of the output on take-or-pay terms with pricing ensuring a guaranteed return to the joint ventures.
Polishing materials joint venture
The Company has variable interestswas a 50 percent indirect owner in a propylene oxide ("PO") manufacturing joint venture that manufactures products in Japan for the semiconductor industry. EachAsia Pacific. The Company had a variable interest in this joint venture partner holds several equivalent variable interests, with the exception of a royalty agreement held exclusivelyrelating to arrangements between the joint venture and the Company. In addition,Company involving the entire outputmajority of the output on take-or-pay terms, with pricing ensuring a guaranteed return to the joint venture. On April 30, 2019, the Company executed an agreement to acquire full ownership in the PO manufacturing joint venture. The transaction closed on October 1, 2019, for a cash purchase price of $331 million. Approximately half of the purchase price was attributed to the Company’s proportionate equity interest in the entity that owned the PO manufacturing joint venture, which is soldaccounted for under the equity method of accounting, and was classified as "Investments in and loans to nonconsolidated affiliates" in the Company for resale to third-party customers.consolidated statements of cash flows. The remaining $166 million was classified as "Purchases of noncontrolling interests" in the consolidated statements of cash flows.
Ethylene storage joint ventureStorage Joint Venture The Company has variable interests in a joint venture that provides ethylene storage in Alberta, Canada. The Company's variable interests relate to arrangements involving a majority of the joint venture's storage capacity on take-or-pay terms with pricing ensuring a guaranteed return to the joint venture; and favorably priced leases provided to the joint venture. The Company provides the joint venture with operation and maintenance services and utilities.
Ethanol production and cogenerationCogeneration in Brazil
The Company held a variable interest in a joint venture located in Brazil that produces ethanol from sugarcane. In August 2015, the partner exercised an equity option which required Dow to purchase their equity interest. On March 31, 2016, the partner's equity investment transferred to the Company. On July 11, 2016, the Company paid $202 million to the former partner, which was classified as "Purchases of noncontrolling interests" in the consolidated statements of cash flows. This former joint venture is now 100 percent owned by the Company. The Company continues to hold variable interests in a related entitycogeneration facility in Brazil that owns a cogenerationprovided power to the Company's bio-ethanol manufacturing facility. The Company's variable interests arewere the result of a tolling arrangement where it providesprovided fuel to the entity and purchasespurchased a majority of the cogeneration facility’s output on terms that ensureensured a return to the entity’s equity holders. On September 29, 2020, the Company divested its bio-ethanol manufacturing facility and is no longer a party to the tolling arrangement with the cogeneration facility.
Assets and Liabilities of Consolidated VIEs The Company's consolidated financial statements include the assets, liabilities and results of operations of VIEs for which the Company is the primary beneficiary. The other equity holders’ interests are reflected in "Net income attributable to noncontrolling interests" in the consolidated statements of income and "Noncontrolling interests" in the consolidated balance sheets.
The following table summarizes the carrying amounts of these entities’ assets and liabilities included in the Company’s consolidated balance sheets at December 31, 20182020 and 2017:2019:
| | | | | | | | | | Assets and Liabilities of Consolidated VIEs at Dec 31 | | | | In millions | 2020 | 2019 | | Cash and cash equivalents | $ | 26 | | $ | 37 | | | Other current assets | 44 | | 51 | | | Net property | 232 | | 330 | | | Other noncurrent assets | 17 | | 18 | | Total assets 1 | $ | 319 | | $ | 436 | | | Current liabilities | $ | 73 | | $ | 141 | | | Long-term debt | 6 | | 34 | | | Other noncurrent obligations | 18 | | 21 | | Total liabilities 2 | $ | 97 | | $ | 196 | |
| | | | | | | | | Assets and Liabilities of Consolidated VIEs at Dec 31 | | | | In millions | 2018 | 2017 | | Cash and cash equivalents | $ | 82 |
| $ | 107 |
| | Other current assets | 114 |
| 131 |
| | Net property | 734 |
| 907 |
| | Other noncurrent assets | 45 |
| 50 |
| Total assets 1 | $ | 975 |
| $ | 1,195 |
| | Current liabilities | $ | 334 |
| $ | 303 |
| | Long-term debt | 75 |
| 249 |
| | Other noncurrent obligations | 31 |
| 41 |
| Total liabilities 2 | $ | 440 |
| $ | 593 |
|
| | 1. | 1.All assets were restricted at December 31, 2018 and 2017. |
| | 2. | All liabilities were nonrecourse at December 31, 2018 and 2017. |
In addition, the Company holds a variable interest in an entity created to monetize accounts receivable of select European entities. Dow is the primary beneficiary of this entity as a result of holding subordinated notes while maintaining servicing responsibilities for the accounts receivable. The carrying amounts of assets and liabilities included in the Company’s consolidated balance sheets pertaining to this entity were current assets of zero (zero restricted) at December 31, 2018 ($671 million, zero restricted, at2020 and 2019.
December 31, 2017) and current2.All liabilities of zero (zero nonrecourse) at December 31, 2018 (less than $1 million, zerowere nonrecourse at December 31, 2017).2020 and 2019.
Amounts presented in the consolidated balance sheets and the table above as restricted assets or nonrecourse obligations relating to consolidated VIEs at December 31, 20182020 and 20172019 are adjusted for intercompany eliminations and parental guarantees.eliminations.
Nonconsolidated VIEs The Company holds a variable interest in the following entities for which Dow is not the primary beneficiary.
Polysilicon joint venture
As a result of the Dow Silicones ownership restructure, the Company holds variable interests in Hemlock Semiconductor L.L.C. The variable interests relate to an equity interest held by the Company and arrangements between the Company and the joint venture to provide services. The Company is not the primary beneficiary, as it does not direct the activities that most significantly impact the economic performance of this entity; therefore, the entity is accounted for under the equity method of accounting. At December 31, 2018, the Company had a negative investment basis of $495 million in this joint venture (negative $752 million at December 31, 2017), classified as "Other noncurrent obligations" in the consolidated balance sheets. The Company's maximum exposure to loss was zero at December 31, 2018 (zero at December 31, 2017). See Note 12 for additional information on this joint venture.beneficiary:
Silicon joint venturesJoint Ventures Also as a result of the Dow Silicones ownership restructure, theThe Company holds minority voting interests in certain joint ventures that produce silicon inputs for the Company. These joint ventures operate under supply agreements that sell inventory to the equity owners using pricing mechanisms that guarantee a return, therefore shielding the joint ventures from the obligation to absorb expected losses. As a result of the pricing mechanisms of these agreements, these entities are determined to be VIEs. The Company is not the primary beneficiary, as it does not hold the power to direct the activities that most significantly impact the economic performance of these entities; therefore, the entities are accounted for under the equity method of accounting. The Company's maximum exposure to loss as a result of its involvement with these variable interest entities is determined to be the carrying value of the investment in these entities. At December 31, 2018,2020, the Company's investment in these joint ventures was $100$107 million ($103100 million at December 31, 2017)2019), classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets, representing the Company's maximum exposure to loss.
AFSI
The Company holds a variable interest in AFSI, a company that produces and sells proprietary technologies for the horticultural market. The variable interest in AFSI relates to a tax receivable agreement that entitles Dow to additional consideration in the form of tax savings, which is contingent on the operations and earnings of AFSI. The Company is not the primary beneficiary, as Dow is a minority shareholder in AFSI and AFSI is governed by a board of directors, the composition of which is mandated by AFSI's corporate governance requirements that a majority of the directors be independent.
On April 4, 2017, the Company entered into a stock purchase agreement to purchase up to 5,070,358 shares of AFSI's common stock, which represented approximately 10 percent of AFSI's common stock outstanding at signing of the agreement, subject to certain terms and conditions. On November 19, 2018, the stock purchase agreement concluded. The Company's investment in AFSI was $48 million at December 31, 2018 ($51 million at December 31, 2017), classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets. In the fourth quarter of 2016, as a result of a decline in the market value of AFSI, the Company recognized a $143 million pretax impairment charge related to its equity interest in AFSI, recorded in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income (see Notes 12 and 22 for further information).
At December 31, 2018, the Company's receivable with AFSI related to the tax receivable agreement was $8 million ($4 million at December 31, 2017), classified as "Accounts and notes receivable - Other" in the consolidated balance sheets. The Company's maximum exposure to loss was $56 million at December 31, 2018 ($55 million at December 31, 2017).
Crude acrylic acid joint venture
The Company held a variable interest in a joint venture that manufactured crude acrylic acid in the United States and Germany on behalf of the Company and the other joint venture partner. The variable interest related to a cost-plus arrangement between the joint venture and each joint venture partner. The Company was not the primary beneficiary, as a majority of the joint venture’s output was committed to the other joint venture partner; therefore, the entity was accounted for under the equity method of accounting.
In the fourth quarter of 2017, the joint venture was dissolved by mutual agreement with return of the originally contributed assets to the partners. The carrying value of the Company's investment prior to the dissolution was $168 million, which was also determined to be fair value, therefore, no gain or loss was recognized as a result of the transaction. The fair value of assets recognized included $47 million of cash, $67 million of other assets and $48 million of goodwill (net of $6 million settlement of an affiliate's pre-existing obligation).
NOTE 2425 – RELATED PARTY TRANSACTIONS Effective with the separation from DowDuPont on April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. and reported transactions with Dow Inc. as related party transactions. From the Merger Dow reportsDate through March 31, 2019, TDCC reported transactions with DowDuPont and Historical DuPont and its affiliates as related party transactions.
TDCC TDCC has committed to fund Dow Inc.'s dividends paid to common stockholders and share repurchases, as approved by Dow Inc.'s Board from time to time, as well as certain governance expenses. Funding is accomplished through intercompany loans. TDCC's Board reviews and determines a dividend distribution to Dow Inc. to settle the intercompany loans. In 2020 and 2019, TDCC declared and paid dividends to Dow Inc. of $2,233 million and $201 million, respectively. At December 31, 2020 and 2019, TDCC's intercompany loan balance with Dow Inc. was insignificant.
DowDuPont The Company hasPursuant to the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, and prior to the separation from DowDuPont, TDCC committed to fund a portion of DowDuPont's share repurchases, dividends paid to common stockholders and certain governance expenses. Funding is accomplishedIn addition, share repurchases by DowDuPont were partially funded by TDCC through intercompany loans. On a quarterly basis, the Company's Board reviews and determines a dividend distribution to DowDuPont to settle the intercompany loans. The dividend distribution considers the level of the Company’s earnings and cash flows and the outstanding intercompany loan balances.2018. In 2018, the Company2019, TDCC declared and paid dividends to DowDuPont of $3,711$535 million ($1,0563,711 million in 2017)2018). At December 31, 2018, the Company's outstanding intercompany loan balance was insignificant (insignificant at December 31, 2017). In addition, at December 31, 2018, Dow had a receivable related to a tax sharing agreement with DowDuPont of $89 million ($354 million at December 31, 2017), included in "Accounts and notes receivable - Other" in the consolidated balance sheets.
Historical DuPont and its Affiliates Dow sellsPrior to the separation from DowDuPont, TDCC sold to and procuresprocured from Historical DuPont and its affiliates certain feedstocks, energy and raw materials that arewere consumed in each company's manufacturing process. In addition, Dow and DuPont have tolling arrangements and recognize product sales for agriculture products. The following table presents amounts due to or due from DuPont and its affiliates at December 31, 2018:
| | | | | | | | | Balances Due To or Due From DuPont and its Affiliates | Dec 31, 2018 | Dec 31, 2017 | | In millions | | Accounts and notes receivable - Other | $ | 288 |
| $ | 26 |
| | Accounts payable - Other | $ | 201 |
| $ | 12 |
|
The following table presents revenue earned and expenses incurred related to transactions with Historical DuPont and its affiliates:
| | | | | | | | | | Sales to Historical DuPont and its Affiliates | 2019 | 2018 | | In millions | | Net sales | $ | 12 | | $ | 55 | | | Cost of sales | $ | 9 | | $ | 42 | |
| | | | | | Sales to DuPont and its Affiliates | 2018 | | In millions | | Net sales | $ | 320 |
| | Cost of sales | $ | 219 |
|
The Company also transferred certain feedstocks and energy to DuPont at cost which totaled $343 million in 2018 and was reflected in "Cost of sales" in the consolidated statements of income.
Purchases from Historical DuPont and its affiliates were $261 million in 2018 (insignificantinsignificant for the period September 1, 2017 through December 31, 2017).2019 and 2018.
NOTE 2526 – BUSINESSSEGMENTS AND GEOGRAPHIC REGIONS EffectiveDow combines global breadth, asset integration and scale, focused innovation and leading business positions to achieve profitable growth. The Company's ambition is to become the most innovative, customer centric, inclusive and sustainable materials science company, with the Merger, Dow’s business activities are components of its parent company’s business operations. Dow’s business activities, including the assessment of performance and allocation of resources, ultimately are reviewed and managed by DowDuPont. Information used by the chief operating decision maker of Dow relatesa purpose to the Company in its entirety. Accordingly, there are no separate reportable business segmentsdeliver a sustainable future for the Company under ASC Topic 280 “Segment Reporting”world through our materials science expertise and the Company’s business results are reported in this Form 10-K as a single operating segment. See Note 3 for additional information on the Merger.
Beginning in the third quarter of 2018, Dow realigned the following joint ventures, product lines and principal product groups in preparation for the Intended Business Separations:
Realignment of the HSC Group joint ventures (DC HSC Holdings LLC and Hemlock Semiconductor L.L.C.) from the Consumer Solutions principal product group to the Electronics & Imaging principal product group.
Realignment of certain cellulosics product lines from the Nutrition & Health principal product group to the Consumer Solutions principal product group.
Certain roofing products were realigned from the Safety & Construction principal product group to Corporate.
Realignment of the previously divested Epoxy and Chlorinated Organics principal product groups to Corporate.
The Construction Chemicals principal product group was combinedcollaboration with the Polyurethanes & CAV principal product group.
Certain product lines associated with the oil and gas industry were realigned from the Industrial Solutions principal product group to the Polyurethanes & CAV principal product group.
These reporting changes were retrospectively applied to all periods presented.
Principal Product Groups
Dow combines science and technology to develop innovative solutions that are essential to human progress. Dow has one of the strongest and broadest toolkits in the industry, with robust technology, asset integration, scale and competitive capabilities that enable it to address complex global issues.our partners. Dow’s market-driven, industry-leading portfolio of advanced materials,plastics, industrial intermediates, coatings and plastics deliversilicones businesses delivers a broad range of differentiated technology-basedscience-based products and solutions tofor its customers in 175 countries in high-growth marketsmarket segments, such as packaging, infrastructure, mobility and consumer care. The Company's products are manufactured at 164Dow operates 106 manufacturing sites in 3531 countries acrossand employs approximately 35,700 people.
The Company conducts its worldwide operations through six global businesses which are organized into the globe. Infollowing operating segments: Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure and Performance Materials & Coatings. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. The Company did not aggregate any operating segments when determining its reportable segments. The Company reports geographic information for the following regions: U.S. & Canada, Asia Pacific, Latin America and EMEAI. The Company transfers ethylene to its downstream derivative businesses at market prices. The Company also allocated costs previously assigned to AgCo and SpecCo ("stranded costs") to the operating segments.
Dow’s measure of profit/loss for segment reporting purposes is Operating EBIT (for the year ended December 31, 2020) and pro forma Operating EBIT (for the years ended December 31, 2019 and 2018) as this is the manner in which the Company's chief operating decision maker ("CODM") assesses performance and allocates resources. The Company defines Operating EBIT as earnings (i.e., "Income (loss) from continuing operations before income taxes") before interest, excluding the impact of significant items. The Company defines pro forma Operating EBIT as earnings (i.e., "Income (loss) from continuing operations before income taxes") before interest, plus pro forma adjustments, excluding the impact of significant items. Operating EBIT and pro forma Operating EBIT by segment include all operating items relating to the businesses; items that principally apply to Dow as a whole are assigned to Corporate. The Company also presents pro forma net sales for the years ended December 31, 2019 and 2018 in this footnote as it is included in management's measure of segment performance and is regularly reviewed by the CODM. Pro forma net sales includes the impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont.
Corporate Profile Dow had annual salesconducts its worldwide operations through global businesses which are reflected in the following reportable segments:
Packaging & Specialty Plastics Packaging & Specialty Plastics consists of approximately $60 billion.two highly integrated global businesses: Hydrocarbons & Energy and Packaging and Specialty Plastics. The following issegment employs the industry’s broadest polyolefin product portfolio, supported by the Company’s proprietary catalyst and manufacturing process technologies, to work at the customer’s design table throughout the value chain to deliver more reliable and durable, higher performing, and more sustainable plastics to customers in food and specialty packaging; industrial and consumer packaging; health and hygiene; caps, closures and pipe applications; consumer durables; mobility and transportation; and infrastructure. This segment includes the results of The Kuwait Styrene Company K.S.C.C. and The SCG-Dow Group, as well as a descriptionportion of the Company’s principalresults of EQUATE, The Kuwait Olefins Company K.S.C.C. ("TKOC"), Map Ta Phut and Sadara, all joint ventures of the Company.
Industrial Intermediates & Infrastructure Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & Construction Chemicals - that develop important intermediate chemicals that are essential to manufacturing processes, as well as downstream, customized materials and formulations that use advanced development technologies. These businesses primarily produce and market ethylene oxide and propylene oxide derivatives that are aligned to market segments as diverse as appliances, coatings, electronics, surfactants for cleaning and sanitization, infrastructure and oil and gas. The global scale and reach of these businesses, world-class technology and R&D capabilities and materials science expertise enable the Company to be a premier solutions provider offering customers value-add sustainable solutions to enhance comfort, energy efficiency, product groups:effectiveness and durability across a wide range of home comfort and appliances, building and construction, adhesives and lubricant applications, among others. This segment includes a portion of the Company's share of the results of EQUATE, TKOC, Map Ta Phut and Sadara.
Principal Product Groups Aligned with thePerformance Materials Science Business& Coatings
Performance Materials & Coatings & Performance Monomers includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers makes critical ingredients and additives that help advanceConsumer Solutions. These businesses primarily utilize the performanceCompany's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of paintsthe architectural and coatings. The product grouping offers innovative and sustainable products to accelerate paint and coatings performance across diverse market segments, including architectural paints and coatings, as well as industrial coatings applications used in maintenance and protective industries, wood, metal packaging, traffic markings, thermal paper and leather. These products enhance coatings by improving hiding and coverage characteristics, enhancing durability against nature and the elements, reducing volatile organic compounds (“VOC”) content, reducing maintenance and improving ease of application. Coatings & Performance Monomers also manufactures critical building blocks based on acrylics needed for the production of coatings, textiles, andcoatings; home care and personal care products.
Consumer Solutions
Consumer Solutions uses innovative, versatile silicone-basedcare; consumer and electronics; mobility and transportation; industrial and chemical processing; and building and infrastructure end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to provide ingredients and solutions to customers in high performance building, consumer goods, elastomeric applications and the pressure sensitive adhesives industry that help them meet modern consumer preferences in attributes such as texture, feel, scent, durability and consistency; provides a wide array of silicone-based products and solutions that enable Dow’s customers to increase the appeal of their products, extend shelf life, improve performance of products under a wider range of conditions and provide a more sustainable offering; provides standalone silicone materials that are used as intermediates in a wide range of applications including adhesion promoters, coupling agents, crosslinking agents, dispersing agents and surface modifiers; and collaborates closely with global and regional brand ownerscombine chemistry platforms to deliver innovative solutions for creating new and unrivaled consumer benefits and experiences in cleaning, laundry, skin and hair care applications, among others.differentiated offerings to customers.
Hydrocarbons & Energy
Hydrocarbons & Energy is the largest global producer of ethylene, an internal feedstock, and a leading producer of propylene and aromatics products that are used to manufacture materials that consumers use every day. It also produces and procures the power and feedstocks used by the Company's manufacturing sites.
Industrial Solutions
Industrial Solutions is the world’s largest producer of purified ethylene oxide. It provides a broad portfolio of solutions that address world needs by enabling and improving the manufacture of consumer and industrial goods and services, including products and innovations that minimize friction and heat in mechanical processes, manage the oil and water interface, deliver ingredients for maximum effectiveness, facilitate dissolvability, enable product identification and provide the foundational building blocks for the development of chemical technologies. Industrial Solutions supports manufacturers associated with a large variety of end-markets, notably better crop protection offerings in agriculture, coatings, detergents and cleaners, solvents for electronics processing, inks and textiles.
Packaging and Specialty Plastics
Packaging and Specialty Plastics serves growing, high-value sectors using world-class technology, broad existing product lines and a rich product pipeline that creates competitive advantages for the entire packaging value chain. Dow is also a leader in polyolefin elastomers and ethylene propylene diene monomer ("EPDM") rubber serving automotive, consumer, wire and cable and construction markets. Market growth is expected to be driven by major shifts in population demographics; improving socioeconomic status in emerging geographies; consumer and brand owner demand for increased functionality; global efforts to reduce food waste; growth in telecommunications networks; global development of electrical transmission and distribution infrastructure; and renewable energy applications.
Polyurethanes & CAV
Polyurethanes & Chlor-Alkali & Vinyl ("CAV") is the world’s largest producer of propylene oxide, propylene glycol and polyether polyols, and a leading producer of aromatic isocyanates and fully formulated polyurethane systems for rigid, semi-rigid and flexible foams, and coatings, adhesives, sealants, elastomers and composites that serve energy efficiency, consumer comfort, industrial and enhanced mobility market sectors. Polyurethanes & CAV provides cost advantaged chlorine and caustic soda supply and markets caustic soda, a valuable co-product of the chlor-alkali manufacturing process, and ethylene dichloride and vinyl chloride monomer. The product grouping also provides cellulose ethers, redispersible latex powders, silicones and acrylic emulsions used as key building blocks for differentiated building and construction materials across many market segments and applications ranging from roofing and flooring to gypsum-, cement-, concrete- or dispersion-based building materials.
Corporate Corporate includes certain enterprise and governance activities (including insurance operations, environmental operations, etc.); non-business aligned joint ventures; gains and losses on sales of financial assets; non-business aligned litigation expenses; and discontinued or non-aligned businesses; and foreign exchange gains (losses).businesses.
Principal Product Groups Aligned with the Agriculture Business
Crop Protection
Crop Protection serves the global production agriculture industry with crop protection products for field crops such as wheat, corn, soybean and rice, and specialty crops such as trees, fruits and vegetables. Principal crop protection products are weed control, disease control and insect control offerings for foliar or soil application or as a seed treatment.
Seed
Seed provides seed/plant biotechnology products and technologies to improve the productivity and profitability of its customers. Seed develops, produces and markets canola, cereals, corn, cotton, rice, soybean and sunflower seeds.
Principal Product Groups Aligned with the Specialty Products Business
Electronics & Imaging
Electronics & Imaging is a leading global supplier of differentiated materials and systems for a broad range of consumer electronics including mobile devices, television monitors, personal computers and electronics used in a variety of industries. Dow offers a broad portfolio of semiconductor and advanced packaging materials including chemical mechanical planarization ("CMP") pads and slurries, photoresists and advanced coatings for lithography, metallization solutions for back-end-of-line advanced chip packaging, and silicones for light emitting diode ("LED") packaging and semiconductor applications. This product line also includes innovative metallization processes for metal finishing, decorative and industrial applications and cutting-edge materials for the manufacturing of rigid and flexible displays for liquid crystal displays and quantum dot applications.
Industrial Biosciences
Industrial Biosciences is an innovator that works with customers to improve the performance, productivity and sustainability of their products and processes through advanced microbial control technologies such as advanced diagnostics and biosensors, ozone delivery technology and biological microbial control.
Nutrition & Health
Nutrition & Health uses cellulosics and other technologies to improve the functionality and delivery of food and the safety and performance of pharmaceutical products.
Safety & Construction
Safety & Construction unites market-driven science with the strength of highly regarded brands such as STYROFOAM™ brand insulation products, GREAT STUFF™ insulating foam sealants and adhesives, and DOW FILMTEC™ reverse osmosis and nanofiltration elements to deliver products to a broad array of markets including industrial, building and construction, consumer and water processing. Safety & Construction is a leader in the construction space, delivering insulation, air sealing and weatherization systems to improve energy efficiency, reduce energy costs and provide more sustainable buildings. Safety & Construction is also a leading provider of purification and separation technologies including reverse osmosis membranes and ion exchange resins to help customers with a broad array of separation and purification needs such as reusing waste water streams and making more potable drinking water.
Transportation & Advanced Polymers
Transportation & Advanced Polymers provides high-performance adhesives, lubricants and fluids to engineers and designers in the transportation, electronics and consumer end-markets. Key products include MOLYKOTE® lubricants, DOW CORNING® silicone solutions for healthcare, MULTIBASE™ TPSiV™ silicones for thermoplastics and BETASEAL™, BETAMATE™ and BETAFORCE™ structural and elastic adhesives.
The following table provides sales to external customers by principal product group:
| | | | | | | | | | | | Sales to External Customers by Principal Product Group | | | | | In millions | 2018 | 2017 | 2016 | | Coatings & Performance Monomers | $ | 3,987 |
| $ | 3,761 |
| $ | 3,362 |
| | Consumer Solutions | 5,660 |
| 5,067 |
| 3,077 |
| | Crop Protection | 4,666 |
| 4,553 |
| 4,628 |
| | Electronics & Imaging | 2,630 |
| 2,615 |
| 2,307 |
| | Hydrocarbons & Energy | 7,401 |
| 6,831 |
| 5,088 |
| | Industrial Biosciences | 500 |
| 484 |
| 419 |
| | Industrial Solutions | 4,736 |
| 4,083 |
| 3,675 |
| | Nutrition & Health | 598 |
| 563 |
| 529 |
| | Packaging and Specialty Plastics | 15,239 |
| 14,110 |
| 13,316 |
| | Polyurethanes & CAV | 10,368 |
| 8,548 |
| 7,143 |
| | Safety & Construction | 1,983 |
| 1,932 |
| 1,877 |
| | Seed | 1,003 |
| 1,393 |
| 1,545 |
| | Transportation & Advanced Polymers | 1,202 |
| 1,167 |
| 897 |
| | Corporate | 285 |
| 383 |
| 281 |
| | Other | 20 |
| 18 |
| 14 |
| | Total | $ | 60,278 |
| $ | 55,508 |
| $ | 48,158 |
|
Sales are attributed to geographic regionsregion based on customer location; long-lived assets are attributed to geographic regionsregion based on asset location. The United States is home to 52
| | | | | | | | | | | | | | | | Geographic Region Information | United
States | EMEAI | Rest of
World | Total | | In millions | | 2020 | | | | | | Sales to external customers | $ | 12,547 | | $ | 12,969 | | $ | 13,026 | | $ | 38,542 | | | Long-lived assets | $ | 13,833 | | $ | 2,813 | | $ | 3,593 | | $ | 20,239 | | | 2019 | | | | | | Sales to external customers | $ | 14,437 | | $ | 14,612 | | $ | 13,902 | | $ | 42,951 | | | Long-lived assets | $ | 14,571 | | $ | 2,649 | | $ | 3,776 | | $ | 20,996 | | | 2018 | | | | | | Sales to external customers | $ | 16,613 | | $ | 17,406 | | $ | 15,585 | | $ | 49,604 | | | Long-lived assets | $ | 14,750 | | $ | 2,657 | | $ | 4,011 | | $ | 21,418 | |
| | | | | | | | | | | | | | | | | | | Segment Information | Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Materials & Coatings | Corp. | Total | | In millions | | 2020 | | | | | | | Net sales | $ | 18,301 | | $ | 12,021 | | $ | 7,951 | | $ | 269 | | $ | 38,542 | | Restructuring and asset related charges - net 1 | 30 | | 22 | | 192 | | 464 | | 708 | | | Equity in earnings (losses) of nonconsolidated affiliates | 173 | | (166) | | 6 | | (31) | | (18) | | Operating EBIT 2 | 2,325 | | 355 | | 314 | | (279) | | 2,715 | | | Depreciation and amortization | 1,372 | | 605 | | 870 | | 27 | | 2,874 | | | Total assets | 30,069 | | 12,220 | | 13,915 | | 5,266 | | 61,470 | | | Investments in nonconsolidated affiliates | 661 | | 531 | | 108 | | 27 | | 1,327 | | | Capital expenditures | 678 | | 268 | | 306 | | 0 | | 1,252 | | | 2019 | | | | | | | Net sales | $ | 20,245 | | $ | 13,440 | | $ | 8,923 | | $ | 343 | | $ | 42,951 | | | Pro forma net sales | 20,245 | | 13,449 | | 8,961 | | 343 | | 42,998 | | Restructuring, goodwill impairment and asset related charges - net 1 | 439 | | 1,175 | | 1,076 | | 529 | | 3,219 | | | Equity in earnings (losses) of nonconsolidated affiliates | 162 | | (241) | | 5 | | (20) | | (94) | | Pro forma Operating EBIT 3 | 2,904 | | 845 | | 918 | | (315) | | 4,352 | | | Depreciation and amortization | 1,435 | | 594 | | 877 | | 32 | | 2,938 | | | Total assets | 29,522 | | 11,753 | | 14,059 | | 5,190 | | 60,524 | | | Investments in nonconsolidated affiliates | 675 | | 568 | | 101 | | 60 | | 1,404 | | | Capital expenditures | 1,039 | | 452 | | 470 | | 0 | | 1,961 | | | 2018 | | | | | | | Net sales | $ | 24,195 | | $ | 15,447 | | $ | 9,677 | | $ | 285 | | $ | 49,604 | | | Pro forma net sales | 24,237 | | 15,465 | | 9,865 | | 285 | | 49,852 | | Restructuring, goodwill impairment and asset related charges - net 1 | 46 | | 11 | | 21 | | 143 | | 221 | | | Equity in earnings (losses) of nonconsolidated affiliates | 287 | | 284 | | 4 | | (20) | | 555 | | Pro forma Operating EBIT 3 | 3,593 | | 1,767 | | 1,246 | | (370) | | 6,236 | | | Depreciation and amortization | 1,385 | | 607 | | 888 | | 29 | | 2,909 | | Total assets 4 | 30,279 | | 14,092 | | 16,050 | | 3,378 | | 63,799 | | | Investments in nonconsolidated affiliates | 1,278 | | 1,850 | | 99 | | 93 | | 3,320 | | | Capital expenditures | 1,231 | | 433 | | 427 | | 0 | | 2,091 | |
1.See Note 6 for information regarding the Company's 164 manufacturing sites, representing 67 percentrestructuring programs, goodwill impairment and other asset related charges. 2.Operating EBIT for TDCC in 2020 is substantially the same as that of Dow Inc. and therefore is not disclosed separately in the Company’s long-livedtable above. A reconciliation of "Income from continuing operations, net of tax" to Operating EBIT is provided on the following page. 3.Pro forma Operating EBIT for TDCC in 2019 is substantially the same as that of Dow Inc. (same for 2018) and therefore is not disclosed separately in the table above. A reconciliation of "Income (loss) from continuing operations, net of tax" to pro forma Operating EBIT is provided on the following page. 4.Excludes assets value.of discontinued operations of $19,900 million.
| | | | | | | | | | | | | | | Geographic Region Information | United States | EMEA 1 | Rest of World | Total | | In millions | | 2018 | | | | | | Sales to external customers | $ | 20,008 |
| $ | 18,148 |
| $ | 22,122 |
| $ | 60,278 |
| | Long-lived assets | $ | 15,782 |
| $ | 2,921 |
| $ | 4,959 |
| $ | 23,662 |
| | 2017 |
|
|
| | | Sales to external customers | $ | 19,166 |
| $ | 16,393 |
| $ | 19,949 |
| $ | 55,508 |
| Long-lived assets | $ | 15,715 |
| $ | 2,999 |
| $ | 5,098 |
| $ | 23,812 |
| | 2016 | | | | | | Sales to external customers | $ | 16,681 |
| $ | 13,633 |
| $ | 17,844 |
| $ | 48,158 |
| | Long-lived assets | $ | 14,812 |
| $ | 2,708 |
| $ | 5,966 |
| $ | 23,486 |
|
| | | | | | 1.Reconciliation of "Income from continuing operations, net of tax" to Operating EBIT | Europe, Middle East2020 | | In millions | | Income from continuing operations, net of tax | $ | 1,294 | | | + Provision for income taxes on continuing operations | 777 | | | Income from continuing operations before income taxes | $ | 2,071 | | | - Interest income | 38 | | + Interest expense and Africa.amortization of debt discount | 827 | | | - Significant items | 145 | | | Operating EBIT | $ | 2,715 | |
| | | | | | | | | | Reconciliation of "Income (loss) from continuing operations, net of tax" to Pro Forma Operating EBIT | 2019 | 2018 | | In millions | | Income (loss) from continuing operations, net of tax | $ | (1,717) | | $ | 2,940 | | | + Provision for income taxes on continuing operations | 470 | | 809 | | | Income (loss) from continuing operations before income taxes | $ | (1,247) | | $ | 3,749 | | | - Interest income | 81 | | 82 | | | + Interest expense and amortization of debt discount | 933 | | 1,063 | | + Pro forma adjustments 1 | 65 | | 180 | | | - Significant items | (4,682) | | (1,326) | | | Pro forma Operating EBIT | $ | 4,352 | | $ | 6,236 | | | | | | | |
1.Pro forma adjustments include: (1) the margin impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont (included for 2019 and 2018 only), (2) the removal of the amortization of ECP's inventory step-up recognized in connection with the Merger and (3) the elimination of the impact of events directly attributable to the Merger, internal reorganization and business realignment, separation, distribution and other related transactions (e.g., one-time transaction costs).
The following tables summarize the pretax impact of significant items by segment that are excluded from Operating EBIT and pro forma Operating EBIT:
| | | | | | | | | | | | | | | | | | | Significant Items by Segment for 2020 | Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Materials & Coatings | Corp. | Total | | In millions | Integration and separation costs 1 | $ | 0 | | $ | 0 | | $ | 0 | | $ | (239) | | $ | (239) | | Restructuring and asset related charges - net 2 | (30) | | (22) | | (192) | | (464) | | (708) | | Warranty accrual adjustment of exited business 3 | 0 | | 0 | | 0 | | 11 | | 11 | | Restructuring implementation costs 4 | 0 | | 0 | | 0 | | (10) | | (10) | | Net gain on divestitures and asset sale 5 | 52 | | 61 | | 0 | | 604 | | 717 | | Litigation related charges, awards and adjustments 6 | 544 | | 0 | | 0 | | 0 | | 544 | | Loss on early extinguishment of debt 7 | 0 | | 0 | | 0 | | (149) | | (149) | | Indemnification and other transaction related costs 8 | 0 | | 0 | | 0 | | (21) | | (21) | | | Total | $ | 566 | | $ | 39 | | $ | (192) | | $ | (268) | | $ | 145 | |
1.Costs related to business separation activities. 2.Includes Board approved restructuring plans and asset-related charges, which include other asset impairments. See Note 6 for additional information. 3.Includes an adjustment to the warranty accrual of an exited business. 4.Includes costs associated with implementing the Company's 2020 Restructuring Program. 5.Primarily related to a gain on the sale of rail infrastructure in the U.S. and Canada and a gain on the sale of marine and terminal operations and assets in the U.S. See Notes 5 and 7 for additional information. 6.Includes recognition of gains associated with a legal matter with Nova. See Note 16 for additional information. 7.The Company retired outstanding long-term debt resulting in a loss on early extinguishment. See Note 15 for additional information. 8.Primarily related to charges associated with agreements entered into with DuPont and Corteva as part of the separation and distribution which, among other matters, provides for cross-indemnities and allocations of obligations and liabilities for periods prior to, at and after the completion of the separation.
| | | | | | | | | | | | | | | | | | | Significant Items by Segment for 2019 | Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Materials & Coatings | Corp. | Total | | In millions | Integration and separation costs 1 | $ | 0 | | $ | 0 | | $ | 0 | | $ | (1,013) | | $ | (1,013) | | Restructuring, goodwill impairment and asset related charges - net 2 | (439) | | (1,175) | | (1,076) | | (529) | | (3,219) | | Warranty accrual adjustment of exited business 3 | 0 | | 0 | | 0 | | 39 | | 39 | | Environmental charges 4 | (5) | | (8) | | (50) | | (336) | | (399) | | Loss on divestitures 5 | 0 | | (5) | | 0 | | (44) | | (49) | | Loss on early extinguishment of debt 6 | 0 | | 0 | | 0 | | (102) | | (102) | | Litigation related charges, awards and adjustments 7 | 170 | | 0 | | 0 | | 35 | | 205 | | Indemnification and other transaction related costs 8 | 0 | | 0 | | 0 | | (144) | | (144) | | | Total | $ | (274) | | $ | (1,188) | | $ | (1,126) | | $ | (2,094) | | $ | (4,682) | |
1.Costs related to post-Merger integration and business separation activities. Excludes one-time transaction costs directly attributable to the Merger. 2.Includes Board approved restructuring plans and asset related charges (see Note 6 for additional information); a charge related to Sadara (see Note 12 for additional information) and an impairment charge related to goodwill associated with the Coatings & Performance Monomers reporting unit (see Note 13 for additional information). 3.Includes an adjustment to the warranty accrual of an exited business. 4.Related to environmental remediation, primarily resulting from the culmination of long-standing negotiations with regulators and/or agencies and review of additional costs to manage ongoing remediation activities resulting from Dow’s separation from DowDuPont and related agreements with Corteva and DuPont. See Note 16 for additional information. 5.Includes post-closing adjustments on previous divestitures. 6.The Company retired outstanding long-term debt resulting in a loss on early extinguishment. See Note 15 for additional information. 7.Includes a gain associated with a legal matter with Nova, as well as a gain related to an adjustment of the Implant Liability and a charge related to the settlement of the Commercial Creditor matters. See Note 16 for additional information. 8.Includes charges primarily associated with agreements entered into with DuPont and Corteva as part of the separation and distribution which, among other matters, provides for cross-indemnities and allocations of obligations and liabilities for periods prior to, at and after the completion of the separation.
| | | | | | | | | | | | | | | | | | | Significant Items by Segment for 2018 | Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Materials & Coatings | Corp. | Total | | In millions | Impact of Dow Silicones ownership restructure 1 | $ | 0 | | $ | 0 | | $ | (20) | | $ | 0 | | $ | (20) | | Integration and separation costs 2 | 0 | | 0 | | 0 | | (1,074) | | (1,074) | | Restructuring and asset related charges - net 3 | (46) | | (11) | | (21) | | (120) | | (198) | | Gain on divestiture 4 | 0 | | 20 | | 0 | | 0 | | 20 | | Loss on early extinguishment of debt 5 | 0 | | 0 | | 0 | | (54) | | (54) | | | Total | $ | (46) | | $ | 9 | | $ | (41) | | $ | (1,248) | | $ | (1,326) | |
1.Includes a loss related to a post-closing adjustment related to the Dow Silicones ownership restructure. 2.Costs related to post-Merger integration and separation and distribution activities, and costs related to the Dow Silicones ownership restructure. 3.Includes Board approved restructuring plans and asset-related charges, which include other asset impairments. See Note 6 for additional information. 4.Includes a gain related to the Company's sale of its equity interest in MEGlobal. 5.The Company retired outstanding notes payable resulting in a loss on early extinguishment. See Note 15 for additional information.
NOTE 2627 - SELECTED QUARTERLY FINANCIAL DATA
| | | | | | | | | | | | | | | | | | | 2020 | | | | | | | In millions, except per share amounts (Unaudited) | 1st | 2nd | 3rd | 4th | Year | | Dow Inc. | | | | | | | Net sales | $ | 9,770 | | $ | 8,354 | | $ | 9,712 | | $ | 10,706 | | $ | 38,542 | | | Cost of sales | $ | 8,230 | | $ | 7,610 | | $ | 8,371 | | $ | 9,135 | | $ | 33,346 | | | Gross margin | $ | 1,540 | | $ | 744 | | $ | 1,341 | | $ | 1,571 | | $ | 5,196 | | Restructuring and asset related charges (credits) - net 1 | $ | 96 | | $ | 6 | | $ | 617 | | $ | (11) | | $ | 708 | | Integration and separation costs 2 | $ | 65 | | $ | 46 | | $ | 63 | | $ | 65 | | $ | 239 | | | | | | | | Net income (loss) 3 | $ | 258 | | $ | (217) | | $ | (1) | | $ | 1,254 | | $ | 1,294 | | | Net income (loss) attributable to Dow Inc. | $ | 239 | | $ | (225) | | $ | (25) | | $ | 1,236 | | $ | 1,225 | | Earnings (loss) per common share from continuing operations - basic 4 | $ | 0.32 | | $ | (0.31) | | $ | (0.04) | | $ | 1.66 | | $ | 1.64 | | Earnings (loss) per common share from continuing operations - diluted 4 | $ | 0.32 | | $ | (0.31) | | $ | (0.04) | | $ | 1.65 | | $ | 1.64 | | | Dividends declared per share of common stock | $ | 0.70 | | $ | 0.70 | | $ | 0.70 | | $ | 0.70 | | $ | 2.80 | | | Market price range of common stock: | | | | | | | High | $ | 53.75 | | $ | 45.90 | | $ | 51.07 | | $ | 57.73 | | $ | 57.73 | | | Low | $ | 22.00 | | $ | 27.04 | | $ | 39.44 | | $ | 45.18 | | $ | 22.00 | | | TDCC | | | | | | | Net sales | $ | 9,770 | | $ | 8,354 | | $ | 9,712 | | $ | 10,706 | | $ | 38,542 | | | Cost of sales | $ | 8,230 | | $ | 7,608 | | $ | 8,371 | | $ | 9,134 | | $ | 33,343 | | | Gross margin | $ | 1,540 | | $ | 746 | | $ | 1,341 | | $ | 1,572 | | $ | 5,199 | | Restructuring and asset related charges (credits) - net 1 | $ | 96 | | $ | 6 | | $ | 617 | | $ | (11) | | $ | 708 | | Integration and separation costs 2 | $ | 65 | | $ | 46 | | $ | 63 | | $ | 65 | | $ | 239 | | | | | | | | | | | | | | Net income (loss) 3 | $ | 258 | | $ | (217) | | $ | (1) | | $ | 1,264 | | $ | 1,304 | | | Net income (loss) attributable to The Dow Chemical Company | $ | 239 | | $ | (225) | | $ | (25) | | $ | 1,246 | | $ | 1,235 | |
1.See Note 6 for additional information. 2.See Note 3 for additional information. 3.See Notes 5, 7, 15 and 16 for information on additional items materially impacting "Net income (loss)." The fourth quarter of 2020 includes a gain related to the sale of marine and terminal operations and assets and a gain associated with a legal matter with Nova. The third quarter of 2020 includes a gain related to the sale of rail infrastructure operations and assets and a loss on the early extinguishment of debt. The first quarter of 2020 includes a loss on the early extinguishment of debt. 4.Earnings per common share amounts relate only to Dow Inc. as TDCC common shares are not publicly traded and are all owned by Dow Inc. Due to quarterly changes in the share count and the allocation of income to participating securities, the sum of the four quarters does not equal the earnings per share amount calculated for the year.
| | | 2018 | | | | 2019 | | 2019 | | | | In millions, except per share amounts (Unaudited) | 1st | 2nd | 3rd | 4th | Year | In millions, except per share amounts (Unaudited) | 1st | 2nd | 3rd | 4th | Year | | Dow Inc. | | Dow Inc. | | | | Net sales | $ | 14,899 |
| $ | 15,793 |
| $ | 14,976 |
| $ | 14,610 |
| $ | 60,278 |
| Net sales | $ | 10,969 | | $ | 11,014 | | $ | 10,764 | | $ | 10,204 | | $ | 42,951 | | | Cost of sales | $ | 11,552 |
| $ | 12,400 |
| $ | 11,933 |
| $ | 11,820 |
| $ | 47,705 |
| Cost of sales | $ | 9,142 | | $ | 9,420 | | $ | 9,377 | | $ | 8,718 | | $ | 36,657 | | | Gross margin | $ | 3,347 |
| $ | 3,393 |
| $ | 3,043 |
| $ | 2,790 |
| $ | 12,573 |
| Gross margin | $ | 1,827 | | $ | 1,594 | | $ | 1,387 | | $ | 1,486 | | $ | 6,294 | | Restructuring, goodwill impairment and asset related charges - net 1 | $ | 165 |
| $ | 98 |
| $ | 108 |
| $ | 249 |
| $ | 620 |
| Restructuring, goodwill impairment and asset related charges - net 1 | $ | 156 | | $ | 65 | | $ | 147 | | $ | 2,851 | | $ | 3,219 | | | Integration and separation costs | $ | 202 |
| $ | 231 |
| $ | 278 |
| $ | 333 |
| $ | 1,044 |
| | Net income 2 | $ | 1,377 |
| $ | 1,310 |
| $ | 1,036 |
| $ | 910 |
| $ | 4,633 |
| | | Net income attributable to The Dow Chemical Company | $ | 1,342 |
| $ | 1,279 |
| $ | 1,000 |
| $ | 878 |
| $ | 4,499 |
| | Integration and separation costs 2 | | Integration and separation costs 2 | $ | 452 | | $ | 348 | | $ | 164 | | $ | 99 | | $ | 1,063 | | | Income (loss) from continuing operations, net of tax | | Income (loss) from continuing operations, net of tax | $ | 156 | | $ | 90 | | $ | 347 | | $ | (2,310) | | $ | (1,717) | | | Income from discontinued operations net of tax | | Income from discontinued operations net of tax | $ | 445 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 445 | | Net income (loss) 3 | | Net income (loss) 3 | $ | 601 | | $ | 90 | | $ | 347 | | $ | (2,310) | | $ | (1,272) | | | Net income (loss) attributable to Dow Inc. | | Net income (loss) attributable to Dow Inc. | $ | 556 | | $ | 75 | | $ | 333 | | $ | (2,323) | | $ | (1,359) | | Earnings (loss) per common share from continuing operations - basic 4 | | Earnings (loss) per common share from continuing operations - basic 4 | $ | 0.16 | | $ | 0.10 | | $ | 0.45 | | $ | (3.14) | | $ | (2.42) | | Earnings (loss) per common share from continuing operations - diluted 4 | | Earnings (loss) per common share from continuing operations - diluted 4 | $ | 0.16 | | $ | 0.10 | | $ | 0.45 | | $ | (3.14) | | $ | (2.42) | | Dividends declared per share of common stock 5 | | Dividends declared per share of common stock 5 | N/A | $ | 0.70 | | $ | 0.70 | | $ | 0.70 | | $ | 2.10 | | | Market price range of common stock: | | Market price range of common stock: | | | High 5 | | High 5 | N/A | $ | 59.71 | | $ | 52.79 | | $ | 55.99 | | $ | 59.71 | | Low 5 | | Low 5 | N/A | $ | 46.76 | | $ | 40.71 | | $ | 43.85 | | $ | 40.71 | | | TDCC | | TDCC | | | | Net sales | | Net sales | $ | 10,969 | | $ | 11,014 | | $ | 10,764 | | $ | 10,204 | | $ | 42,951 | | | Cost of sales | | Cost of sales | $ | 9,142 | | $ | 9,419 | | $ | 9,377 | | $ | 8,719 | | $ | 36,657 | | | Gross margin | | Gross margin | $ | 1,827 | | $ | 1,595 | | $ | 1,387 | | $ | 1,485 | | $ | 6,294 | | Restructuring, goodwill impairment and asset related charges - net 1 | | Restructuring, goodwill impairment and asset related charges - net 1 | $ | 156 | | $ | 65 | | $ | 147 | | $ | 2,851 | | $ | 3,219 | | Integration and separation costs 2 | | Integration and separation costs 2 | $ | 452 | | $ | 324 | | $ | 164 | | $ | 99 | | $ | 1,039 | | | Income (loss) from continuing operations, net of tax | | Income (loss) from continuing operations, net of tax | $ | 156 | | $ | 217 | | $ | 324 | | $ | (2,292) | | $ | (1,595) | | | Income from discontinued operations net of tax | | Income from discontinued operations net of tax | $ | 445 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 445 | | Net income (loss) 3 | | Net income (loss) 3 | $ | 601 | | $ | 217 | | $ | 324 | | $ | (2,292) | | $ | (1,150) | | | Net income (loss) attributable to The Dow Chemical Company | | Net income (loss) attributable to The Dow Chemical Company | $ | 556 | | $ | 202 | | $ | 310 | | $ | (2,305) | | $ | (1,237) | |
| | 1. | See Note 7 for additional information. |
| | 2. | Includes tax adjustments related to The Act, enacted on December 22, 2017. See Note 9 for additional information. |
1.See Note 6 for additional information. 2.See Note 3 for additional information. 3.See Notes 3, 8, 15 and 16 for information on additional items materially impacting "Net income (loss)." The fourth quarter of 2019 included a gain related to the effects of Swiss tax reform and a loss on the early extinguishment of debt. The third quarter of 2019 included a charge related to environmental remediation, a charge related to the settlement of the Commercial Creditor matters, a gain related to an adjustment to the Implant Liability and a gain associated with a legal matter with Nova. The second quarter of 2019 included charges associated with agreements entered into with DuPont and Corteva as part of the separation from DowDuPont. 4.Earnings per common share amounts relate only to Dow Inc. as TDCC common shares are not publicly traded and are all owned by Dow Inc. Due to quarterly changes in the share count and the allocation of income to participating securities, the sum of the four quarters does not equal the earnings per share amount calculated for the year. 5.Dow Inc.'s common stock was solely owned by DowDuPont through March 31, 2019, and on April 1, 2019, Dow Inc. became an independent, publicly traded company.
| | | | | | | | | | | | | | | | | | 2017 | | | | | | | In millions, except per share amounts (Unaudited) | 1st | 2nd | 3rd | 4th | Year | | Net sales | $ | 13,230 |
| $ | 13,834 |
| $ | 13,633 |
| $ | 14,811 |
| $ | 55,508 |
| Cost of sales 1 | $ | 10,194 |
| $ | 10,761 |
| $ | 10,663 |
| $ | 11,994 |
| $ | 43,612 |
| Gross margin 1 | $ | 3,036 |
| $ | 3,073 |
| $ | 2,970 |
| $ | 2,817 |
| $ | 11,896 |
| Restructuring, goodwill impairment and asset related charges - net 2 | $ | (1 | ) | $ | (12 | ) | $ | 139 |
| $ | 2,974 |
| $ | 3,100 |
| | Integration and separation costs | $ | 109 |
| $ | 136 |
| $ | 283 |
| $ | 258 |
| $ | 786 |
| Net income (loss) 3 | $ | 915 |
| $ | 1,359 |
| $ | 805 |
| $ | (2,484 | ) | $ | 595 |
| | Net income (loss) attributable to The Dow Chemical Company | $ | 888 |
| $ | 1,321 |
| $ | 783 |
| $ | (2,526 | ) | $ | 466 |
| Earnings per common share - basic 4 | $ | 0.74 |
| $ | 1.08 |
| N/A |
| N/A |
| N/A |
| Earnings per common share - diluted 4 | $ | 0.72 |
| $ | 1.07 |
| N/A |
| N/A |
| N/A |
| Dividends declared per share of common stock 4, 5 | $ | 0.46 |
| $ | 0.46 |
| $ | 0.46 |
| N/A |
| $ | 1.38 |
| Market price range of common stock: 4, 6 | | | | | | | High | $ | 65.00 |
| $ | 65.26 |
| N/A |
| N/A |
| N/A |
| | Low | $ | 57.09 |
| $ | 60.20 |
| N/A |
| N/A |
| N/A |
|
| | 1. | Previously reported amounts have been updated to reflect the impact of adoption of ASU 2017-07. |
| | 2. | See Note 7 for additional information. |
| | 3. | See Notes 6, 8, 9, 16 and 19 for additional information on items materially impacting "Net income (loss)." The fourth quarter of 2017 included: tax adjustments related to The Act, enacted on December 22, 2017; a gain related to the DAS Divested Ag Business; and, a charge related to payment of plan obligations to certain participants of a U.S. non-qualified pension plan. The third quarter of 2017 included a gain related to the sale of the Company's EAA Business. The second quarter of 2017 included a gain related to the Nova patent infringement award. The first quarter of 2017 included a loss related to the Bayer CropScience arbitration matter. |
| | 4. | Effective with the Merger, all issued and outstanding shares of the Company's common stock are owned solely by its parent, DowDuPont Inc. |
| | 5. | Dow declared its last dividend on common stock in July 2017. |
| | 6. | Composite price as reported by the New York Stock Exchange. |
| | | | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
| | | | ITEM 9A. CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Annual Report on Form 10-K, theDow Inc. and The Dow Chemical Company (the "Companies") carried out an evaluation, under the supervision and with the participation of the Company’sCompanies' Disclosure Committee and the Company’sCompanies' management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’sCompanies' disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’sCompanies' disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting There were no changes in the Company'sCompanies' internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company'sCompanies' internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’sCompanies' internal control framework and processes are designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of the Company’sCompanies' consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.
The Company’sCompanies' internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;Companies; •provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the CompanyCompanies are being made only in accordance with authorizations of management and Directors of the Company;Companies; and •provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’sCompanies' assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, any system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.
Management assessed the effectiveness of the Company’sCompanies' internal control over financial reporting and concluded that, as of December 31, 2018,2020, such internal control is effective. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013).
The Company’sCompanies' independent auditors, Deloitte & Touche LLP,, with direct access to the Company’sCompanies' Board of Directors through the Dow Audit Subcommittee of the DowDuPont Audit Committee of Dow Inc., have audited the consolidated financial statements prepared by the Company.Companies. Their reportreports on the consolidated financial statements isare included in Part II, Item 8. Financial Statements and Supplementary Data. Deloitte & Touche LLP’s report reports on the Company’sCompanies' internal control over financial reporting isare referenced therein and included herein.
February 11, 2019
| | | | /s/ JIM FITTERLING | | /s/ HOWARD UNGERLEIDER | Jim Fitterling | | Howard Ungerleider | Director and Chief Executive Officer | | Director, President and Chief Financial Officer | | | | | | | /s/ RONALD C. EDMONDS | | | Ronald C. Edmonds | | | Controller and Vice President of Controllers and Tax | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Dow Chemical CompanyInc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of The Dow Chemical CompanyInc. and subsidiaries (the “Company”) as of December 31, 2018,2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2020, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018,2020, of the Company and the financial statement schedule listed in the Index at Item 15(a)2 and our report dated February 11, 2019,5, 2021, expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding a) a change in accounting policy in the fourth quarter of 2016 from expensing asbestos-related defense and processing costs as incurred to the accrual of asbestos-related defense and processing costs when probable of occurring and estimable and b) in the first quarter of 2018, a change in its method of accounting for revenue due to the adoption of Accounting Standards Codification Topic 606, Revenue From Contracts with Customers.schedule. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| | | /S/ DELOITTE & TOUCHE LLP | Deloitte & Touche LLPMidland, Michigan | Midland, Michigan | February 11, 20195, 2021 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and the Board of Directors of The Dow Chemical Company Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of The Dow Chemical Company and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and the financial statement schedule listed in the Index at Item 15(a)2 and our report dated February 5, 2021, expressed an unqualified opinion on those financial statements and financial statement schedule. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| | | /S/ DELOITTE & TOUCHE LLP | | Midland, Michigan | | February 5, 2021 |
| | | | ITEM 9B. OTHER INFORMATION |
None.
| | | | Dow Inc. and Subsidiaries | | The Dow Chemical Company and Subsidiaries | | PART III |
| | | | ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
OmittedInformation relating to Directors, certain executive officers and certain corporate governance matters (including identification of Audit Committee members and financial expert(s)) is contained in the definitive Proxy Statement for the 2021 Annual Meeting of Stockholders of Dow Inc. and is incorporated herein by reference. See also the information regarding executive officers of the registrant set forth in Part I, Item 1. Business under the caption "Executive Officers of the Registrant" in reliance on General Instruction G to Form 10-K.
This information is omitted for The Dow Chemical Company pursuant to General Instruction I of Form 10-K.
| | | | ITEM 11. EXECUTIVE COMPENSATION |
OmittedInformation relating to executive compensation and the Company's equity compensation plans is contained in the definitive Proxy Statement for the 2021 Annual Meeting of Stockholders of Dow Inc. and is incorporated herein by reference.
This information is omitted for The Dow Chemical Company pursuant to General Instruction I of Form 10-K.
| | | | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
OmittedInformation with respect to beneficial ownership of Dow Inc. common stock by each Director and all Directors and executive officers of the Company as a group is contained in the definitive Proxy Statement for the 2021 Annual Meeting of Stockholders of Dow Inc. and is incorporated herein by reference.
Information relating to any person who beneficially owns in excess of 5 percent of the total outstanding shares of Dow Inc. common stock is contained in the definitive Proxy Statement for the 2021 Annual Meeting of the Stockholders of Dow Inc. and is incorporated herein by reference.
Information with respect to compensation plans under which equity securities are authorized for issuance is contained in the definitive Proxy Statement for the 2021 Annual Meeting of Stockholders of Dow Inc. and is incorporated herein by reference.
This information is omitted for The Dow Chemical Company pursuant to General Instruction I of Form 10-K.
| | | | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
OmittedReportable relationships and related transactions, if any, as well as information relating to director independence are contained in the definitive Proxy Statement for the 2021 Annual Meeting of Stockholders of Dow Inc. and are incorporated herein by reference.
This information is omitted for The Dow Chemical Company pursuant to General Instruction I of Form 10-K.
| | | | ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES |
Independent Registered Public Accountants Information with respect to fees and services related to the Company's independent auditors, Deloitte & Touche LLP ("Deloitte"), and Touche LLP (“Deloitte”) has issued its reports, includedthe disclosure of the Audit Committee's pre-approval policies and procedures are contained in the Company’s Annual Report on Form 10-K, on the audited Consolidated Financial Statements of the Company and internal control over financial reportingdefinitive Proxy Statement for the period January 1 through December 31, 2018. The Dow Audit Subcommittee appointed Deloitte to be the independent auditor for the Company and its consolidated subsidiaries for 2018, which was ratified by holders2021 Annual Meeting of Stockholders of Dow Common Stock on July 1, 2018. Following the closing of the DowDuPont transaction, the Dow Audit Subcommittee of the DowDuPontInc. and are incorporated herein by reference.
The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the Company’s independent registered public accounting firm.
The Dow Audit SubcommitteeInc. carefully considers the qualifications and competence of candidates for the independent registered public accounting firm. In accordance with its pre-approval policies and procedures, the Dow Audit SubcommitteeCommittee pre-approved all professional services rendered by and associated fees paid to Deloitte, for the Company,Companies, for the years ended December 31, 20182020 and 2017.2019. Professional services were performed by Deloitte, its member firms of Deloitte Touche Tohmatsu Limited, and their respective affiliates (“Deloitte Entities”). Total fees paid to the Deloitte Entities are shown by category in the following table:
| | | | | | | | | | Type of Fees | | | | In thousands | 2020 | 2019 | Audit Fees 1 | $ | 21,237 | | $ | 25,142 | | Audit-Related Fees 2 | 2,807 | | 4,438 | | Tax Fees 3 | 2,053 | | 2,780 | | | Total | $ | 26,097 | | $ | 32,360 | |
1.The aggregate fees billed for the integrated audit of the Company's annual financial statements and internal control over financial reporting, the reviews of the financial statements in quarterly reports on Form 10-Q, comfort letters, consents, statutory audits, and other regulatory filings. For 2020 and 2019, the fees include $135,000 and $850,000 respectively, which were associated with supporting the DuPont de Nemours, Inc. filings with the U.S. Securities and Exchange Commission ("SEC") for the period prior to the separation from DowDuPont Inc. 2.The aggregate fees billed primarily for audits of carve-out financial statements, assessment of controls relating to outsourced services, audits and reviews supporting divestiture activities, and agreed-upon procedures engagements. 3.The aggregate fees billed primarily for corporate tax consulting services, the preparation of expatriate employees' tax returns and tax compliance services.
| | | | | | | | | Type of Fees | | | | In thousands | 2018 | 2017 | Audit Fees 1 | $ | 26,199 |
| $ | 25,792 |
| Audit-Related Fees 2 | 6,976 |
| 8,062 |
| Tax Fees 3 | 600 |
| 1,729 |
| | Total | $ | 33,775 |
| $ | 35,583 |
|
| | | 1. | The aggregate fees billed for the integrated audit of the Company's annual financial statementsDow Inc. and internal control over financial reporting, the reviews of the financial statements in quarterly reports on Form 10-Q, comfort letters, consents, statutory audits, and other regulatory filings. |
| Subsidiaries | 2. | The aggregate fees billed primarily for audits of carve-out financial statements, assessment of controls relating to outsourced services, audits and reviews supporting divestiture activities, and agreed-upon procedures engagements. |
| | 3. | The aggregate fees billed primarily for preparation of expatriate employees' tax returns and related compliance services. |
| | | The Dow Chemical Company and Subsidiaries | | PART IV |
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| | | (a) | The following documents are filed as part of this report:ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) The following documents are filed as part of this report:
(1) The Company’s 2020 Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are included in Part II, Item 8. Financial Statements and Supplementary Data.
(2) Financial Statement Schedules – The following Financial Statement Schedule should be read in conjunction with the Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm included in Part II, Item 8. Financial Statements and Supplementary Data: | | | | | | (1) | The Company’s 2018 Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are included in Part II, Item 8. Financial Statements and Supplementary Data. |
| | (2) | Financial Statement Schedules – The following Financial Statement Schedule should be read in conjunction with the Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm included in Part II, Item 8. Financial Statements and Supplementary Data: |
| | | | Schedule II | Valuation and Qualifying Accounts |
Schedules other than the one listed above are omitted due to the absence of conditions under which they are required or because the information called for is included in the Consolidated Financial Statements or the Notes to the Consolidated Financial Statements.
(3) The following exhibits are filed with or incorporated by reference into this Annual Report on Form 10-K:
| | | | | | (3) | The following exhibits are filed with or incorporated by reference into this Annual Report on Form 10-K: |
| | | | Exhibit No. | Description of Exhibit |
| | 2.1.1 | First Amendment, effective June 1, 2012, to the Shareholders' Agreement, dated as of October 8, 2011, between Performance Chemicals Holding Company, Dow Saudi Arabia Holding B.V., Saudi Arabian Oil Company, Dow Europe Holding B.V. and The Dow Chemical Company, incorporated by reference to Exhibit 99.1 to The Dow Chemical Company Current Report on Form 8-K filed February 14, 2013. |
| | 2.3 | Agreement and Plan of Merger, dated as of December 11, 2015, among The Dow Chemical Company, E. I. du Pont de Nemours and Company, Diamond Merger Sub, Inc., Orion Merger Sub, Inc. and Diamond-Orion HoldCo Inc., incorporated by reference to Exhibit 2.1 to The Dow Chemical Company Current Report on Form 8-K filed December 11, 2015. |
2.2.1 First Amendment, effective June 1, 2012, to the Shareholders' Agreement, dated as of October 8, 2011, between Performance Chemicals Holding Company, Dow Saudi Arabia Holding B.V., Saudi Arabian Oil Company, Dow Europe Holding B.V. and The Dow Chemical Company (incorporated by reference to Exhibit 99.1 to The Dow Chemical Company's Current Report on Form 8-K filed with the SEC on February 14, 2013). | | 2.3.1 | Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 2017, among The Dow Chemical Company, E. I. du Pont de Nemours and Company, Diamond Merger Sub, Inc., Orion Merger Sub, Inc. and DowDuPont Inc. f/k/a Diamond-Orion HoldCo Inc., incorporated by reference to Exhibit 2.1 to The Dow Chemical Company Current Report on Form 8-K filed March 31, 2017. |
| | 4.3 | The Dow Chemical Company agrees to provide the SEC, on request, copies of all other such indentures and instruments that define the rights of holders of long-term debt of The Dow Chemical Company and its consolidated subsidiaries, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. |
4.4 Dow Inc. agrees to provide the SEC, on request, copies of all other such indentures and instruments that define the rights of holders of long-term debt of Dow Inc. and its consolidated subsidiaries, including The Dow Chemical Company, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K.
| | 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. |
101.INS The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema Document.
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104 Cover Page Interactive Data File. The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
*Filed herewith
A copy of any exhibit can be obtained via the Internet through the Dow SEC FilingsInvestor Relations section of the DowDuPontCompany's website (www.dow-dupont.com/www.dow.com/investors), or the Company will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Controller and Vice President of Controllers and Tax of the Company at the address of the Company’s principal executive offices. The referenced website and its content are not deemed incorporated by reference into this report.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
| | | | | The Dow Chemical Company and Subsidiaries | Schedule II | | Valuation and Qualifying Accounts | ITEM 16. FORM 10-K SUMMARY |
Not applicable.
| | | | | | | | | | | | (In millions) For the years ended Dec 31, | 2018 | 2017 | 2016 | | Accounts Receivable - Allowance for Doubtful Receivables | | | | | Balance at beginning of year | $ | 117 |
| $ | 110 |
| $ | 94 |
| | Additions charged to expenses | 23 |
| 33 |
| 31 |
| Additions charged to other accounts 1 | 4 |
| 3 |
| — |
| Deductions from reserves 2 | (38 | ) | (29 | ) | (15 | ) | | Balance at end of year | $ | 106 |
| $ | 117 |
| $ | 110 |
| | Inventory - Obsolescence Reserve | | | | | Balance at beginning of year | $ | 115 |
| $ | 123 |
| $ | 152 |
| | Additions charged to expenses | 87 |
| 40 |
| 29 |
| Deductions from reserves 3 | (55 | ) | (48 | ) | (58 | ) | | Balance at end of year | $ | 147 |
| $ | 115 |
| $ | 123 |
| | Reserves for Other Investments and Noncurrent Receivables | | | | | Balance at beginning of year | $ | 437 |
| $ | 358 |
| $ | 494 |
| Additions charged to expenses 4 | 44 |
| 83 |
| 153 |
| Deductions from reserves 5 | (16 | ) | (4 | ) | (289 | ) | | Balance at end of year | $ | 465 |
| $ | 437 |
| $ | 358 |
| | Deferred Tax Assets - Valuation Allowance | | | | | Balance at beginning of year | $ | 1,371 |
| $ | 1,061 |
| $ | 1,000 |
| | Additions charged to expenses | 161 |
| 370 |
| 155 |
| | Deductions from reserves | (212 | ) | (60 | ) | (94 | ) | | Balance at end of year | $ | 1,320 |
| $ | 1,371 |
| $ | 1,061 |
|
| | 1. | Additions to allowance for doubtful accounts charged to other accounts were classified as "Accounts and notes receivable - Other" in the consolidated balance sheets. These reserves relate to the Company's sale of trade accounts receivable. Anticipated credit losses in the portfolio of receivables sold were used to fair value the Company's interests held in trade accounts receivable conduits. See Notes 14 and 22 to the Consolidated Financial Statements for further information. |
| | 2. | Deductions include write-offs, recoveries, currency translation adjustment and other miscellaneous items. |
| | 3. | Deductions include disposals and currency translation adjustments. |
| | 4. | In 2016, additions to reserves for "Other investments and noncurrent receivables" charged to costs and expenses include $143 million related to the Company's investment in AgroFresh Solutions, Inc. See Note 7 to the Consolidated Financial Statements for further information. |
| | 5. | In 2016, deductions from reserves for "Other investments and noncurrent receivables" include $237 million related to the Dow Silicones ownership restructure. See Note 5 to the Consolidated Financial Statements for further information on the Dow Silicones ownership restructure. |
| | | | | | | | | | Dow Inc. and Subsidiaries | | | The Dow Chemical Company and Subsidiaries | | | | Valuation and Qualifying Accounts | Signatures | | Schedule II |
| | | | | | | | | | | | | (In millions) For the years ended Dec 31, | 2020 | 2019 | 2018 | | Accounts Receivable - Allowance for Doubtful Receivables | | | | | Balance at beginning of year | $ | 45 | | $ | 42 | | $ | 59 | | Additions charged to expenses 1 | 22 | | 24 | | 10 | | Additions charged to other accounts 2 | 0 | | 0 | | 4 | | Deductions from reserves 3 | (16) | | (21) | | (31) | | | Balance at end of year | $ | 51 | | $ | 45 | | $ | 42 | | | Inventory - Obsolescence Reserve | | | | | Balance at beginning of year | $ | 35 | | $ | 23 | | $ | 18 | | | Additions charged to expenses | 2 | | 19 | | 7 | | Deductions from reserves 4 | (14) | | (7) | | (2) | | | Balance at end of year | $ | 23 | | $ | 35 | | $ | 23 | | | Reserves for Other Investments and Noncurrent Receivables | | | | | Balance at beginning of year | $ | 2,215 | | $ | 460 | | $ | 430 | | Additions charged to expenses 1 | 7 | | 1,758 | | 44 | | Deductions from reserves 5 | (129) | | (3) | | (14) | | | Balance at end of year | $ | 2,093 | | $ | 2,215 | | $ | 460 | | | Deferred Tax Assets - Valuation Allowance | | | | | Balance at beginning of year | $ | 1,262 | | $ | 1,225 | | $ | 1,255 | | | Additions charged to expenses | 313 | | 140 | | 152 | | | Deductions from reserves | (273) | | (103) | | (182) | | | Balance at end of year | $ | 1,302 | | $ | 1,262 | | $ | 1,225 | |
1.In 2019, additions charged to expenses for "Accounts Receivable - Allowance for Doubtful Receivables" included $2 million and additions charged to expenses for "Reserves for Other Investments and Noncurrent Receivables" included $1,753 million related to the Company's investment in Sadara Chemical Company ("Sadara"). See Note 12 to the Consolidated Financial Statements for additional information. 2.Additions to allowance for doubtful receivables charged to other accounts were classified as "Accounts and notes receivable - Other" in the consolidated balance sheets. These reserves relate to the Company's sale of trade accounts receivable. Anticipated credit losses in the portfolio of receivables sold were used to fair value the Company's interests held in trade accounts receivable conduits. See Notes 14 and 23 to the Consolidated Financial Statements for additional information. 3.Deductions included write-offs, recoveries, currency translation adjustments and other miscellaneous items. 4.Deductions included disposals and currency translation adjustments. 5.In 2020, deductions from reserves for "Reserves for Other Investments and Noncurrent Receivables" included $77 million related to the Company's investment in Sadara. See Note 12 to the Consolidated Financial Statements for additional information.
| | | | | | | | | | | | | | | | | Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries | | | | | Signatures | | |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportAnnual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.authorized, on February 5, 2021.
| | | | DOW INC. | | THE DOW CHEMICAL COMPANY | | | By | /s/ RONALD C. EDMONDS | | Ronald C. Edmonds, Controller and Vice President of Controllers and Tax | Date | February 11, 2019
(Authorized Signatory and Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this reportAnnual Report on Form 10-K has been signed below on February 5, 2021 by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | | | | | | | | | | | By/s/ SAMUEL R. ALLEN | | /s/ RONALD C. EDMONDS | | By | /s/ HOWARD UNGERLEIDER | | Samuel R. Allen, Director, Dow Inc. | | Ronald C. Edmonds, Controller and Vice President of Controllers and Tax, Dow Inc.
and TDCC (Authorized Signatory and Principal Accounting Officer) | | | | | /s/ AJAY BANGA | | /s/ JEFF M. FETTIG | | Ajay Banga, Director, Dow Inc. | | Jeff M. Fettig, Lead Director, Dow Inc. | | | | | /s/ GAURDIE BANISTER JR. | | /s/ JIM FITTERLING | | Gaurdie Banister Jr., Director, Dow Inc. | | Jim Fitterling, Director, Chairman and Chief Executive Officer, Dow Inc. and TDCC (Principal Executive Officer) | | | | | /s/ JACQUELINE K. BARTON | | /s/ JACQUELINE C. HINMAN | | Jacqueline K. Barton, Director, Dow Inc. | | Jacqueline C. Hinman, Director, Dow Inc. | | | | | /s/ JAMES A. BELL | | /s/ HOWARD UNGERLEIDER | | James A. Bell, Director, Dow Inc. | | Howard Ungerleider, Director, President and Chief Financial Officer, Dow Inc. and TDCC;
Director, TDCC (Principal Financial Officer) | Date | February 11, 2019 | | Date | February 11, 2019 | | /s/ WESLEY G. BUSH | | | | /s/ JILL S. WYANT | ByWesley G. Bush, Director, Dow Inc. | /s/ JIM FITTERLING | | | Jill S. Wyant, Director, Dow Inc. | | Jim Fitterling, Director and Chief Executive Officer | | | | Date/s/ RICHARD K. DAVIS | February 11, 2019 | /s/ DANIEL W. YOHANNES | | Richard K. Davis, Director, Dow Inc. | | Daniel W. Yohannes, Director, Dow Inc. | | | |
| | | Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries | | Trademark Listing |
The following trademarks or service marks of The Dow Chemical Company and certain affiliated companies of Dow appear in this report: ACOUSTICRYL, ACRYSOL, AFFINITY, BETAFORCE, BETAMATE, BETASEAL,AMPLIFY, AQUASET, AVANSE, CARBOWAX, DOW, DOW CORNING,DOWANOL, DOWSIL, DOWTHERM, ECOFAST, ELITE, FILMTEC, GREAT STUFF, MOLYKOTE, MULTIBASE,ENGAGE, EVOQUE, FORMASHIELD, IMAGIN3D, MAINCOTE, MOBILITYSCIENCE, NEOSEED, NORDEL, STYROFOAM, TPSiVPRIMAL, RHOBARR, RHOPLEX, SENTRY, SILASTIC, SUNSPHERES, SYL-OFF, TAMOL, TERGITOL, TRITON, UCAR, UCON, VERSENE, WALOCEL
The following trademarks or service marksregistered trademark of Dow AgroSciences LLC and certain affiliated companies of Dow AgroSciences LLC appearDisability:IN appears in this report: DOW SEMENTES, ENLIST, MORGANDisability Equality Index®
The following registered trademark of Incapital Holdings appears in this report: InterNotes®
The following registered service mark of American Chemistry Council in the United States appears in this report: Responsible Care®
The following registered trademark of Great Place to Work® Institute, Inc. appears in this report: RESPONSIBLE CAREGreat Place to Work®
The following registered trademark of The National Safety Council appears in this report: Green Cross for Safety®
® ™Trademark of The Dow Chemical Company (“Dow”("TDCC") or an affiliated company, of Dow
except as otherwise specified.
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