Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. At March 31, 2019, TDCCJune 30, 2020, the Company had accrued obligations of $813$1,118 million for probable environmental remediation and restoration costs, including $159$205 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 currentbest estimate of the costs for remediation and restoration with respect to environmental matters for which TDCCthe Company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two 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 TDCC’sthe Company's results of operations, financial condition and cash flows. It is the opinion of TDCC’sthe Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on TDCC’sthe Company’s results of operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. 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 environmental liability. In the second quarter of 2019, as a result of the business separations, and change in ownership of certain sites where there are remediation activities, additional costs may be incurred to effectively manage the ongoing activities. In addition, as a result of the potential culmination of long standing negotiations with regulators and/or agencies, additional charges for environmental matters may be recorded. Management believes that it is reasonably possible that the accrued obligation for environmental matters may be increased up to $400 million as a result of this review. At December 31, 2018, TDCC2019, the Company had accrued obligations of $820$1,155 million for probable environmental remediation and restoration costs, including $156$207 million for the remediation of Superfund sites.
A summary of Asbestos-Related Matters of Union Carbide Corporation can be found in Note 1617 to the Consolidated Financial Statements included in TDCC'sthe combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2018.2019.
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.
Since 2003, Union Carbide has engaged Ankura Consulting Group, LLC ("Ankura"), a third party actuarial specialist, to review Union Carbide's historical asbestos-related claim and resolution activity in order to assist Union Carbide's management in estimating the asbestos-related liability. Each year, Union Carbide requests Ankura has reviewed theto review its claim and resolution activity, including asbestos-related defense and processing costs, to determine the appropriateness of updating the most recent Ankura study.
Each quarter, Union Carbide reviews claims filed, settled and dismissed, as well as average settlement and resolution costs by disease category. Union Carbide also considers additional quantitative and qualitative factors such as the nature of pending claims, trial experience of Union Carbide and other asbestos defendants, current spending for defense and processing costs, significant appellate rulings and legislative developments, trends in the tort system, and their respective effects on expected future resolution costs. Union Carbide's management considers all these factors in conjunction with the most recent Ankura study and determines whether a change in the estimate is warranted. Based on Union Carbide's review of 20192020 activity, it was determined that no adjustment to the accrual was required at March 31, 2019.June 30, 2020.
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 TDCC'sthe Company's results of operations and cash flows for a particular period and on the consolidated financial position.
Under the Plan, a product liability settlement program administered by an independent claims office (the “Settlement Facility”) was created to resolve breast implant and other product liability claims. Product liability claimants rejecting the settlement program in favor of pursuing litigation must bring suit against a litigation facility (the “Litigation Facility”). Dow Silicones has an obligation
Dow Silicones' liability for breast implant and other product liability claims ("Implant Liability") was $263$160 million at March 31, 2019 and December 31, 2018, of which $157 million at March 31, 2019June 30, 2020 ($111165 million at December 31, 2018)2019), of which 0 ($20 million at December 31, 2019) was included in “Accrued and other current liabilities” and $106$160 million at March 31, 2019 ($152145 million at December 31, 2018)2019) 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 a prior settlement program, which management uses to estimate future claim filing levels for the Settlement Facility; future acceptance rates, disease mix, and payment values will be materially consistent with historical experience; no material negative outcomes in future controversies or disputes over Plan interpretation will occur; and the Plan will not be modified. If actual outcomes related to any of these assumptions prove to be materially different, the future liability to fund the Plan may be materially different than the amount estimated. If Dow Silicones was ultimately required to fund the full liability up to the maximum capped value, the liability would be $2,148 million at March 31, 2019.
The amounts recorded by Dow Silicones for the Chapter 11 related matters described above were based on 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.
The following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for guarantees:
Guarantees arise during the ordinary course of business from relationships with customers, committed accounts receivable facilities and nonconsolidated affiliates when TDCCthe 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 TDCCthe Company to make payments to the beneficiary of the guarantee. The majority of TDCC’sthe Company’s guarantees relate to debt of nonconsolidated affiliates, which have expiration dates ranging from less than one year to less than four years, and trade financing transactions in Latin America, which typically expire within one year of inception. TDCC’sthree years. The Company’s current expectation is that future payment or performance related to the non-performance of others is considered remote.
The following table provides supplemental cash flow information related to leases:
The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at MarchJune 30, 2020 and December 31, 2019:
NOTE 1214 – STOCKHOLDERS' EQUITYACCUMULATED OTHER COMPREHENSIVE LOSS
Dow Inc.The changes in each component of accumulated other comprehensive loss ("AOCL") for the three and six months ended June 30, 2020 and 2019 were as follows:
Common Stock
Dow Inc. was incorporated in 2018 with 100 authorized | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Loss | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 |
| Unrealized Gains (Losses) on Investments | | | | |
| Beginning balance | $ | (36) | | $ | 16 | | $ | 64 | | $ | (51) | |
| Unrealized gains (losses) on investments | 122 | | 52 | | 4 | | 138 | |
| Less: Tax (expense) benefit | (27) | | (11) | | (2) | | (29) | |
| Net unrealized gains (losses) on investments | 95 | | 41 | | 2 | | 109 | |
(Gains) losses reclassified from AOCL to net income 1 | (25) | | (11) | | (34) | | (12) | |
Less: Tax expense (benefit) 2 | 6 | | 3 | | 8 | | 3 | |
| Net (gains) losses reclassified from AOCL to net income | (19) | | (8) | | (26) | | (9) | |
| Other comprehensive income (loss), net of tax | 76 | | 33 | | (24) | | 100 | |
| Ending balance | $ | 40 | | $ | 49 | | $ | 40 | | $ | 49 | |
| Cumulative Translation Adjustment | | | | |
| Beginning balance | $ | (1,298) | | $ | (1,844) | | $ | (1,135) | | $ | (1,813) | |
| Gains (losses) on foreign currency translation | 63 | | 76 | | (98) | | 64 | |
| Less: Tax (expense) benefit | 2 | | 15 | | 14 | | 14 | |
| Net gains (losses) on foreign currency translation | 65 | | 91 | | (84) | | 78 | |
(Gains) losses reclassified from AOCL to net income 3 | (2) | | (24) | | (16) | | (42) | |
| Other comprehensive income (loss), net of tax | 63 | | 67 | | (100) | | 36 | |
Impact of common control transaction 4 | — | | 710 | | — | | 710 | |
| Ending balance | $ | (1,235) | | $ | (1,067) | | $ | (1,235) | | $ | (1,067) | |
| Pension and Other Postretirement Benefits | | | | |
| Beginning balance | $ | (8,639) | | $ | (7,824) | | $ | (8,781) | | $ | (7,965) | |
| Gains (losses) arising during the period | — | | 34 | | — | | 34 | |
| Less: Tax (expense) benefit | — | | (10) | | — | | (10) | |
| Net gains (losses) arising during the period | — | | 24 | | — | | 24 | |
Amortization and recognition of net loss and prior service credits 5 | 184 | | 108 | | 369 | | 274 | |
Less: Tax expense (benefit) 2 | (43) | | (26) | | (86) | | (51) | |
| Net loss and prior service credits reclassified from AOCL to net income | 141 | | 82 | | 283 | | 223 | |
| Other comprehensive income (loss), net of tax | 141 | | 106 | | 283 | | 247 | |
Impact of common control transaction 4 | — | | 83 | | — | | 83 | |
| Ending balance | $ | (8,498) | | $ | (7,635) | | $ | (8,498) | | $ | (7,635) | |
| Derivative Instruments | | | | |
| Beginning balance | $ | (556) | | $ | (131) | | $ | (394) | | $ | (56) | |
| Gains (losses) on derivative instruments | 17 | | (263) | | (159) | | (358) | |
| Less: Tax (expense) benefit | (2) | | 46 | | 8 | | 73 | |
| Net gains (losses) on derivative instruments | 15 | | (217) | | (151) | | (285) | |
(Gains) losses reclassified from AOCL to net income 6 | 12 | | 17 | | 19 | | 10 | |
Less: Tax expense (benefit) 2 | (3) | | (4) | | (6) | | (4) | |
| Net (gains) losses reclassified from AOCL to net income | 9 | | 13 | | 13 | | 6 | |
| Other comprehensive income (loss), net of tax | 24�� | | (204) | | (138) | | (279) | |
| Ending balance | $ | (532) | | $ | (335) | | $ | (532) | | $ | (335) | |
| Total AOCL ending balance | $ | (10,225) | | $ | (8,988) | | $ | (10,225) | | $ | (8,988) | |
1. Reclassified to "Net sales" and issued shares"Sundry income (expense) - net."
2. Reclassified to "Provision for income taxes on continuing operations."
3. Reclassified to "Sundry income (expense) - net."
4. Reclassified to "Retained earnings" as a result of common stock, 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 continued to be solely owned byfrom DowDuPont at March 31,on April 1, 2019. See Note 193 for additional information.
TDCC
Accumulated Other Comprehensive Loss
The following table summarizes5. These AOCL components are included in the changes and after-tax balancescomputation of each component of AOCL for the three months ended March 31, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Loss | Unrealized Gains (Losses) on Investments | Cumulative Translation Adj | Pension and Other Postretire Benefits | Derivative Instruments | Total Accum Other Comp Loss |
| In millions |
| Balance at Jan 1, 2018 | $ | 17 |
| $ | (1,481 | ) | $ | (6,998 | ) | $ | (109 | ) | $ | (8,571 | ) |
| Other comprehensive income (loss) before reclassifications | (26 | ) | 376 |
| — |
| (16 | ) | 334 |
|
| Amounts reclassified from accumulated other comprehensive income (loss) | 1 |
| — |
| 126 |
| 22 |
| 149 |
|
| Net other comprehensive income (loss) | $ | (25 | ) | $ | 376 |
| $ | 126 |
| $ | 6 |
| $ | 483 |
|
| Balance at Mar 31, 2018 | $ | (8 | ) | $ | (1,105 | ) | $ | (6,872 | ) | $ | (103 | ) | $ | (8,088 | ) |
| | | | | | |
| Balance at Jan 1, 2019 | $ | (51 | ) | $ | (1,813 | ) | $ | (7,965 | ) | $ | (56 | ) | $ | (9,885 | ) |
| Other comprehensive income (loss) before reclassifications | 68 |
| (13 | ) | — |
| (68 | ) | (13 | ) |
| Amounts reclassified from accumulated other comprehensive loss | (1 | ) | (18 | ) | 141 |
| (7 | ) | 115 |
|
| Net other comprehensive income (loss) | $ | 67 |
| $ | (31 | ) | $ | 141 |
| $ | (75 | ) | $ | 102 |
|
| Balance at Mar 31, 2019 | $ | 16 |
| $ | (1,844 | ) | $ | (7,824 | ) | $ | (131 | ) | $ | (9,783 | ) |
The tax effects on the net activity related to each component of other comprehensive income (loss) for the three months ended March 31, 2019 and 2018 were as follows:
|
| | | | | | |
Tax Benefit (Expense) 1 | Three Months Ended |
| In millions | Mar 31, 2019 | Mar 31, 2018 |
| Unrealized gains (losses) on investments | $ | (18 | ) | $ | 6 |
|
| Cumulative translation adjustments | (1 | ) | 5 |
|
| Pension and other postretirement benefit plans | (25 | ) | (28 | ) |
| Derivative instruments | 27 |
| 3 |
|
| Tax expense from income taxes related to other comprehensive income (loss) items | $ | (17 | ) | $ | (14 | ) |
| |
1. | Prior period amounts were updated to conform with the current year presentation. |
A summaryperiodic benefit cost of the reclassifications outCompany's defined benefit pension and other postretirement benefit plans. See Note 16 for additional information.
6. Reclassified to "Cost of AOCL for the three months ended March 31, 2019sales," "Sundry income (expense) - net" and 2018 is provided as follows:
"Interest expense and amortization of debt discount."
|
| | | | | | | |
| Reclassifications Out of Accumulated Other Comprehensive Loss | Three Months Ended | Consolidated Statements of Income Classification |
| Mar 31, 2019 | Mar 31, 2018 |
| In millions |
| Unrealized (gains) losses on investments | $ | (1 | ) | $ | 2 |
| See (1) below |
| Tax benefit | — |
| (1 | ) | See (2) below |
| After tax | $ | (1 | ) | $ | 1 |
| |
| Cumulative translation adjustments | $ | (18 | ) | $ | — |
| See (3) below |
| Pension and other postretirement benefit plans | $ | 166 |
| $ | 154 |
| See (4) below |
| Tax benefit | (25 | ) | (28 | ) | See (2) below |
| After tax | $ | 141 |
| $ | 126 |
| |
| Derivative instruments | $ | (7 | ) | $ | 27 |
| See (5) below |
| Tax benefit | — |
| (5 | ) | See (2) below |
| After tax | $ | (7 | ) | $ | 22 |
| |
| Total reclassifications for the period, after tax | $ | 115 |
| $ | 149 |
| |
| |
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 TDCC's defined benefit pension and other postretirement benefit plans. See Note 14 for additional information. |
| |
5. | "Cost of sales," "Sundry income (expense) - net" and "Interest expense and amortization of debt discount." |
NOTE 1315 – NONCONTROLLING INTERESTS
Ownership interests in TDCC'sthe Company's subsidiaries held by parties other than TDCCthe Company are presented separately from TDCC'sthe Company's equity in the consolidated balance sheets as "Noncontrolling interests." The amount of consolidated net income attributable to TDCCthe Company and the noncontrolling interests are both presented on the face of the consolidated statements of income.
The following table summarizes the activity for equity attributable to noncontrolling interests for the three and six months ended March 31, 2019June 30, 2020 and 2018:2019:
| | | | | | | | | | | | | | | | | |
| Noncontrolling Interests | Three Months Ended | | Six Months Ended | | | | |
In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 | | | |
| Balance at beginning of period | $ | 555 | | $ | 1,180 | | $ | 553 | | $ | 1,138 | | | | |
| Net income attributable to noncontrolling interests - continuing operations | 8 | | 15 | | 27 | | 47 | | | | |
| Net income attributable to noncontrolling interests - discontinued operations | — | | — | | — | | 13 | | | | |
Distributions to noncontrolling interests 1 | (11) | | (5) | | (12) | | (14) | | | | |
| | | | | | | |
Impact of common control transaction 2 | — | | (353) | | — | | (353) | | | | |
Purchase of noncontrolling interest 3 | — | | (254) | | — | | (254) | | | | |
| Cumulative translation adjustments | 8 | | 6 | | (8) | | 13 | | | | |
| Other | — | | — | | — | | (1) | | | | |
| Balance at end of period | $ | 560 | | $ | 589 | | $ | 560 | | $ | 589 | | | | |
1.Distributions to noncontrolling interests are net of $7 million for the three and six months ended June 30, 2020 in dividends paid to a joint venture, which were reclassified to "Equity in losses of nonconsolidated affiliates" in the consolidated statements of income. Also includes amounts attributable to discontinued operations of $7 million for the six months ended June 30, 2019.
2.Relates to the separation from DowDupont. See Note 3 for additional information.
3.Relates to the acquisition of full ownership in a propylene oxide manufacturing joint venture.
|
| | | | | | |
| Noncontrolling Interests | Three Months Ended |
In millions | Mar 31, 2019 | Mar 31, 2018 |
| Balance at beginning of period | $ | 1,138 |
| $ | 1,186 |
|
| Net income attributable to noncontrolling interests | 45 |
| 35 |
|
| Distributions to noncontrolling interests | (9 | ) | (24 | ) |
| Cumulative translation adjustments | 7 |
| (6 | ) |
| Other | (1 | ) | (1 | ) |
| Balance at end of period | $ | 1,180 |
| $ | 1,190 |
|
NOTE 1416 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITSBENEFIT PLANS
A summary of TDCC'sthe Company's pension plans and other postretirement benefitsbenefit plans can be found in Note 1921 to the Consolidated Financial Statements included in TDCC’sthe combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2018.2019. The following table provides the components of TDCC'sthe Company's net periodic benefit cost for all significant plans:
| | | | | | | | | | | | | | |
| Net Periodic Benefit Cost for All Significant Plans | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30,
2020 | Jun 30,
2019 | Jun 30,
2020 | Jun 30,
2019 |
| Defined Benefit Pension Plans: | | | | |
| Service cost | $ | 99 | | $ | 95 | | $ | 198 | | $ | 207 | |
| Interest cost | 191 | | 227 | | 383 | | 468 | |
| Expected return on plan assets | (412) | | (421) | | (826) | | (838) | |
| Amortization of prior service credit | (5) | | (5) | | (10) | | (11) | |
| Amortization of net loss | 192 | | 147 | | 384 | | 279 | |
Curtailment/special termination benefits 1 | — | | (27) | | — | | (27) | |
| Net periodic benefit cost | $ | 65 | | $ | 16 | | $ | 129 | | $ | 78 | |
| Less: Discontinued operations | — | | — | | — | | 21 | |
| Net periodic benefit cost - continuing operations | $ | 65 | | $ | 16 | | $ | 129 | | $ | 57 | |
| | | | |
| Other Postretirement Benefit Plans: | | | | |
| Service cost | $ | 2 | | $ | 2 | | $ | 4 | | $ | 4 | |
| Interest cost | 10 | | 12 | | 19 | | 26 | |
| Amortization of net gain | (3) | | (5) | | (5) | | (11) | |
Curtailment/special termination benefits 1 | — | | (3) | | — | | (3) | |
| Net periodic benefit cost | $ | 9 | | $ | 6 | | $ | 18 | | $ | 16 | |
|
| | | | | | |
| Net Periodic Benefit Cost for All Significant Plans | Three Months Ended |
| In millions | Mar 31,
2019 | Mar 31,
2018 |
| Defined Benefit Pension Plans: | | |
| Service cost | $ | 112 |
| $ | 133 |
|
| Interest cost | 241 |
| 218 |
|
| Expected return on plan assets | (417 | ) | (406 | ) |
| Amortization of prior service credit | (6 | ) | (6 | ) |
| Amortization of net loss | 132 |
| 171 |
|
| Net periodic benefit cost | $ | 62 |
| $ | 110 |
|
| | | |
| Other Postretirement Benefits: | | |
| Service cost | $ | 2 |
| $ | 3 |
|
| Interest cost | 14 |
| 11 |
|
| Amortization of net gain | (6 | ) | (6 | ) |
| Net periodic benefit cost | $ | 10 |
| $ | 8 |
|
Net periodic benefit cost, other than the service cost component, is included in "Sundry income (expense) - net" in the consolidated statements of income.
The Company's funding policy is to contribute to defined benefit pension plans in the United States and a number of other countries when pension laws and/or economics either require or encourage funding. The Company expects to contribute approximately $290 million to its pension plans in 2020, of which$112 million has been contributed through June 30, 2020.
NOTE 17 – STOCK-BASED COMPENSATION
A summary of the Company's stock-based compensation plans can be found in Note 22 to the Consolidated Financial Statements included in the combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2019.
Stock Incentive Plan
The Company grants stock-based compensation to employees and non-employee directors under the 2019 Stock Incentive Plan. Most of the Company's stock-based compensation awards are granted in the first quarter of each year.
In the first quarter of 2020, Dow Inc. granted the following stock-based compensation awards to employees and non-employee directors:
•2.2 million stock options with a weighted-average exercise price of $48.30 per share and a weighted-average fair value of $5.89 per share;
•2.0 million restricted stock units with a weighted-average fair value of $48.00 per share; and
•1.4 million performance stock units with a weighted-average fair value of $48.35 per share.
There was minimal grant activity in the second quarter of 2020.
NOTE 1518 – FINANCIAL INSTRUMENTS
A summary of TDCC'sthe Company's financial instruments, risk management policies, derivative instruments and hedging activities can be found in Note 21 of23 to the Consolidated Financial Statements included in TDCC'sthe combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2018. If applicable, updates have been included in the respective section below.2019.
The following table summarizes the fair value of financial instruments at March 31, 2019June 30, 2020 and December 31, 2018:2019:
| | | Fair Value of Financial Instruments | Mar 31, 2019 | Dec 31, 2018 | Fair Value of Financial Instruments | Jun 30, 2020 | | Dec 31, 2019 | |
| In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value | In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value |
| Cash equivalents | $ | 345 |
| $ | — |
| $ | — |
| $ | 345 |
| $ | 566 |
| $ | — |
| $ | — |
| $ | 566 |
| |
| Cash equivalents: | | Cash equivalents: | | |
Held-to-maturity securities 1 | | Held-to-maturity securities 1 | $ | 297 | | $ | — | | $ | — | | $ | 297 | | $ | 220 | | $ | — | | $ | — | | $ | 220 | |
| Money market funds | | Money market funds | 519 | | — | | — | | 519 | | 408 | | — | | — | | 408 | |
| Total cash equivalents | | Total cash equivalents | $ | 816 | | $ | — | | $ | — | | $ | 816 | | $ | 628 | | $ | — | | $ | — | | $ | 628 | |
| Marketable securities | $ | 101 |
| $ | — |
| $ | — |
| $ | 101 |
| $ | 100 |
| $ | — |
| $ | — |
| $ | 100 |
| Marketable securities | $ | 2 | | $ | — | | $ | — | | $ | 2 | | $ | 21 | | $ | — | | $ | — | | $ | 21 | |
| Other investments: | | | | | | Other investments: | | |
| Debt securities: | | | | Debt securities: | | |
Government debt 1 | $ | 694 |
| $ | 17 |
| $ | (9 | ) | $ | 702 |
| $ | 714 |
| $ | 9 |
| $ | (23 | ) | $ | 700 |
| |
Government debt 2 | | Government debt 2 | $ | 506 | | $ | 28 | | $ | (19) | | $ | 515 | | $ | 533 | | $ | 33 | | $ | (11) | | $ | 555 | |
| Corporate bonds | 1,051 |
| 43 |
| (21 | ) | 1,073 |
| 1,026 |
| 20 |
| (63 | ) | 983 |
| Corporate bonds | 882 | | 87 | | (35) | | 934 | | 944 | | 80 | | (10) | | 1,014 | |
| Total debt securities | $ | 1,745 |
| $ | 60 |
| $ | (30 | ) | $ | 1,775 |
| $ | 1,740 |
| $ | 29 |
| $ | (86 | ) | $ | 1,683 |
| Total debt securities | $ | 1,388 | | $ | 115 | | $ | (54) | | $ | 1,449 | | $ | 1,477 | | $ | 113 | | $ | (21) | | $ | 1,569 | |
Equity securities 2 | 16 |
| 5 |
| — |
| 21 |
| 16 |
| 1 |
| (1 | ) | 16 |
| |
Equity securities 3 | | Equity securities 3 | 8 | | 1 | | (1) | | 8 | | 10 | | 6 | | (1) | | 15 | |
| Total other investments | $ | 1,761 |
| $ | 65 |
| $ | (30 | ) | $ | 1,796 |
| $ | 1,756 |
| $ | 30 |
| $ | (87 | ) | $ | 1,699 |
| Total other investments | $ | 1,396 | | $ | 116 | | $ | (55) | | $ | 1,457 | | $ | 1,487 | | $ | 119 | | $ | (22) | | $ | 1,584 | |
| Total cash equivalents, marketable securities and other investments | $ | 2,207 |
| $ | 65 |
| $ | (30 | ) | $ | 2,242 |
| $ | 2,422 |
| $ | 30 |
| $ | (87 | ) | $ | 2,365 |
| Total cash equivalents, marketable securities and other investments | $ | 2,214 | | $ | 116 | | $ | (55) | | $ | 2,275 | | $ | 2,136 | | $ | 119 | | $ | (22) | | $ | 2,233 | |
Long-term debt including debt due within one year 3 | $ | (19,529 | ) | $ | 84 |
| $ | (1,405 | ) | $ | (20,850 | ) | $ | (19,594 | ) | $ | 351 |
| $ | (971 | ) | $ | (20,214 | ) | |
Long-term debt including debt due within one year 4 | | Long-term debt including debt due within one year 4 | $ | (16,739) | | $ | 182 | | $ | (2,560) | | $ | (19,117) | | $ | (16,410) | | $ | 7 | | $ | (2,258) | | $ | (18,661) | |
| Derivatives relating to: | | | | Derivatives relating to: | | |
| Interest rates | $ | — |
| $ | — |
| $ | (181 | ) | $ | (181 | ) | $ | — |
| $ | — |
| $ | (64 | ) | $ | (64 | ) | |
Interest rates 5 | | Interest rates 5 | $ | — | | $ | 190 | | $ | (323) | | $ | (133) | | $ | — | | $ | 8 | | $ | (283) | | $ | (275) | |
| Foreign currency | — |
| 86 |
| (14 | ) | 72 |
| — |
| 120 |
| (43 | ) | 77 |
| Foreign currency | — | | 43 | | (26) | | 17 | | — | | 101 | | (21) | | 80 | |
Commodities 4 | — |
| 88 |
| (147 | ) | (59 | ) | — |
| 91 |
| (178 | ) | (87 | ) | |
Commodities 5 | | Commodities 5 | — | | 105 | | (201) | | (96) | | — | | 59 | | (115) | | (56) | |
| Total derivatives | $ | — |
| $ | 174 |
| $ | (342 | ) | $ | (168 | ) | $ | — |
| $ | 211 |
| $ | (285 | ) | $ | (74 | ) | Total derivatives | $ | — | | $ | 338 | | $ | (550) | | $ | (212) | | $ | — | | $ | 168 | | $ | (419) | | $ | (251) | |
1. The Company's held-to-maturity securities primarily included treasury bills and time deposits.
2. U.S. Treasury obligations, U.S. agency obligations, U.S. agency mortgage-backed securities and other municipalities’ obligations.
| |
2. | Equity securities with a readily determinable fair value. |
| |
3. | Cost includes fair value hedge adjustments of $17 million at March 31, 2019 and $18 million at December 31, 2018 on $2,290 million of debt at March 31, 2019 and December 31, 2018. |
| |
4. | Presented net of cash collateral where master netting arrangements allow. |
3. Equity securities with a readily determinable fair value.
4. Cost includes fair value hedge adjustment gains of $68 million at June 30, 2020 and $1 million at December 31, 2019 on $2,790 million of debt at June 30, 2020 and $3,490 million of debt at December 31, 2019.
5. Presented net of cash collateral where master netting arrangements allow.
Cost approximates fair value for all other financial instruments.
Debt Securities
TDCC'sThe 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 threesix months ended MarchJune 30, 2020 and 2019:
| | | | | | | | |
| Investing Results | Six Months Ended | |
| In millions | Jun 30,
2020 | Jun 30,
2019 |
| Proceeds from sales of available-for-sale securities | $ | 542 | | $ | 534 | |
| Gross realized gains | $ | 51 | | $ | 22 | |
| Gross realized losses | $ | (17) | | $ | (10) | |
The following table summarizes the contractual maturities of the Company's investments in debt securities:
| | | | | | | | |
Contractual Maturities of Debt Securities at Jun 30, 2020 1 | Cost | Fair Value |
| In millions | | |
| Within one year | $ | 18 | | $ | 18 | |
| One to five years | 376 | | 379 | |
| Six to ten years | 486 | | 494 | |
| After ten years | 508 | | 558 | |
| Total | $ | 1,388 | | $ | 1,449 | |
1.Includes marketable securities with maturities of less than one year.
The following table provides the fair value and gross unrealized losses of the Company’s investments in debt securities that were deemed to be temporarily impaired at June 30, 2020 and December 31, 2019, aggregated by investment category:
| | | | | | | | | | | | | | | | | | | | |
| Temporarily Impaired Debt Securities | Less than 12 months | | 12 months or more | | Total | |
| Fair
Value | Unrealized
Losses | Fair
Value | Unrealized
Losses | Fair Value | Unrealized Losses |
| In millions | | | | | | |
| Jun 30, 2020 | | | | | | |
Government debt 1 | $ | 69 | | $ | (9) | | $ | 7 | | $ | (10) | | $ | 76 | | $ | (19) | |
| Corporate bonds | 235 | | (22) | | 19 | | (13) | | 254 | | (35) | |
| Total temporarily impaired debt securities | $ | 304 | | $ | (31) | | $ | 26 | | $ | (23) | | $ | 330 | | $ | (54) | |
| Dec 31, 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) | |
1.U.S. Treasury obligations, U.S. agency obligations, U.S. agency mortgage-backed securities and 2018:other municipalities' obligations.
|
| | | | | | |
| Investing Results | Three Months Ended |
| In millions | Mar 31,
2019 | Mar 31,
2018 |
| Proceeds from sales of available-for-sale securities | $ | 159 |
| $ | 348 |
|
| Gross realized gains | $ | 6 |
| $ | 7 |
|
| Gross realized losses | $ | (5 | ) | $ | (9 | ) |
Equity Securities
TDCC’s investments in equity securities with a readily determinable fair value totaled $21 million at March 31, 2019 ($16 million at December 31, 2018). The aggregate carrying value of TDCC’s investments in equity securities where fair value is not readily determinable totaled $207 million at March 31, 2019 ($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 three and six months ended March 31, 2019 and 2018.June 30, 2020. The net unrealized gain recognized in earnings on equity securities totaled $5$1 million for the three months ended March 31, 2019June 30, 2020 ($91 million net unrealized gain for the three months ended MarchJune 30, 2019) and a net unrealized amount of zero for the six months ended June 30, 2020 ($6 million net unrealized gain for the six months ended June 30, 2019).
| | | | | | | | |
| Investments in Equity Securities | Jun 30, 2020 | Dec 31, 2019 |
| In millions | | |
| Readily determinable fair value | $ | 8 | | $ | 15 | |
| Not readily determinable fair value | $ | 182 | | $ | 189 | |
Derivative Instruments
The notional amounts of the Company's derivative instruments presented on a net basis at June 30, 2020 and December 31, 2018).2019 were as follows:
| | | | | | | | |
| Notional Amounts - Net | Jun 30, 2020 | Dec 31, 2019 |
| In millions | | |
| Derivatives designated as hedging instruments: | | |
| Interest rate contracts | $ | 917 | | $ | 922 | |
| Foreign currency contracts | $ | 3,326 | | $ | 6,253 | |
| Derivatives not designated as hedging instruments: | | |
| Interest rate contracts | $ | 93 | | $ | 145 | |
| Foreign currency contracts | $ | 6,202 | | $ | 5,567 | |
The notional amounts of the Company's commodity derivatives presented on a net basis at June 30, 2020 and December 31, 2019 were as follows:
| | | | | | | | | | | |
| Commodity Notionals - Net | Jun 30, 2020 | Dec 31, 2019 | Notional Volume Unit |
| Derivatives designated as hedging instruments: | | | |
| Hydrocarbon derivatives | 19.7 | 6.1 | million barrels of oil equivalent |
| Derivatives not designated as hedging instruments: | | | |
| Hydrocarbon derivatives | 1.2 | 0.1 | million barrels of oil equivalent |
| Power derivatives | 45.0 | 87.5 | thousands of megawatt hours |
| | | | | |
| Maturity Dates of Derivatives Designated as Hedging Instruments | Year |
| Interest rate contracts | 2021 |
| Foreign currency contracts | 2021 |
| Commodity contracts | 2022 |
The following tables provide the fair value and balance sheet classification of derivative instruments at March 31, 2019June 30, 2020 and December 31, 2018:2019:
| | | | | | | | | | | | | | |
| Fair Value of Derivative Instruments | | Jun 30, 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 | $ | 171 | | $ | (130) | | $ | 41 | |
| Foreign currency contracts | Other current assets | 66 | | (53) | | 13 | |
| Commodity contracts | Other current assets | 117 | | (70) | | 47 | |
| Commodity contracts | Deferred charges and other assets | 80 | | (33) | | 47 | |
| Total | | $ | 434 | | $ | (286) | | $ | 148 | |
| Derivatives not designated as hedging instruments: | | | | |
| | | | |
| Interest rate contracts | Deferred charges and other assets | $ | 149 | | $ | — | | $ | 149 | |
| Foreign currency contracts | Other current assets | 61 | | (31) | | 30 | |
| Commodity contracts | Other current assets | 11 | | (2) | | 9 | |
| Commodity contracts | Deferred charges and other assets | 2 | | — | | 2 | |
| Total | | $ | 223 | | $ | (33) | | $ | 190 | |
| Total asset derivatives | | $ | 657 | | $ | (319) | | $ | 338 | |
| | | | |
| Liability derivatives | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate contracts | Accrued and other current liabilities | $ | 130 | | $ | (130) | | $ | — | |
| Interest rate contracts | Other noncurrent obligations | 1 | | — | | 1 | |
| Foreign currency contracts | Accrued and other current liabilities | 62 | | (53) | | 9 | |
| Commodity contracts | Accrued and other current liabilities | 158 | | (76) | | 82 | |
| Commodity contracts | Other noncurrent obligations | 141 | | (33) | | 108 | |
| Total | | $ | 492 | | $ | (292) | | $ | 200 | |
| Derivatives not designated as hedging instruments: | | | | |
| | | | |
| Interest rate contracts | Other noncurrent obligations | $ | 322 | | $ | — | | $ | 322 | |
| Foreign currency contracts | Accrued and other current liabilities | 48 | | (31) | | 17 | |
| Commodity contracts | Accrued and other current liabilities | 12 | | (2) | | 10 | |
| Commodity contracts | Other noncurrent obligations | 1 | | — | | 1 | |
| Total | | $ | 383 | | $ | (33) | | $ | 350 | |
| Total liability derivatives | | $ | 875 | | $ | (325) | | $ | 550 | |
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 | Mar 31, 2019 |
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheet |
| Asset derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 161 |
| $ | (89 | ) | $ | 72 |
|
| Commodity contracts | Other current assets | 31 |
| (5 | ) | 26 |
|
| Commodity contracts | Deferred charges and other assets | 57 |
| (4 | ) | 53 |
|
| Total | | $ | 249 |
| $ | (98 | ) | $ | 151 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Other current assets | $ | 29 |
| $ | (15 | ) | $ | 14 |
|
| Commodity contracts | Other current assets | 8 |
| (1 | ) | 7 |
|
| Commodity contracts | Deferred charges and other assets | 4 |
| (2 | ) | 2 |
|
| Total | | $ | 41 |
| $ | (18 | ) | $ | 23 |
|
| Total asset derivatives | | $ | 290 |
| $ | (116 | ) | $ | 174 |
|
| | | | | |
| Liability derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate swaps | Other noncurrent obligations | $ | 181 |
| $ | — |
| $ | 181 |
|
| Foreign currency contracts | Accrued and other current liabilities | 98 |
| (89 | ) | 9 |
|
| Commodity contracts | Accrued and other current liabilities | 93 |
| (6 | ) | 87 |
|
| Commodity contracts | Other noncurrent obligations | 60 |
| (8 | ) | 52 |
|
| Total | | $ | 432 |
| $ | (103 | ) | $ | 329 |
|
| Derivatives not designated as hedging instruments: | | | | |
| Foreign currency contracts | Accrued and other current liabilities | $ | 20 |
| $ | (15 | ) | $ | 5 |
|
| Commodity contracts | Accrued and other current liabilities | 8 |
| (4 | ) | 4 |
|
| Commodity contracts | Other noncurrent obligations | 7 |
| (3 | ) | 4 |
|
| Total | | $ | 35 |
| $ | (22 | ) | $ | 13 |
|
| Total liability derivatives | | $ | 467 |
| $ | (125 | ) | $ | 342 |
|
| |
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 TDCC 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) | | $ | — | |
| | | | |
| 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 | | — | | 1 | |
| Foreign currency contracts | Accrued and other current liabilities | 46 | | (36) | | 10 | |
| Commodity contracts | Accrued and other current liabilities | 95 | | (29) | | 66 | |
| Commodity contracts | Other noncurrent obligations | 38 | | (4) | | 34 | |
| Total | | $ | 203 | | $ | (82) | | $ | 121 | |
| Derivatives not designated as hedging instruments: | | | | |
| Interest rate contracts | Accrued and other current liabilities | $ | 136 | | $ | (14) | | $ | 122 | |
| Interest rate contracts | Other noncurrent obligations | 150 | | — | | 150 | |
| Foreign currency contracts | Accrued and other current liabilities | 23 | | (12) | | 11 | |
| Commodity contracts | Accrued and other current liabilities | 17 | | (3) | | 14 | |
| Commodity contracts | Other noncurrent obligations | 1 | | — | | 1 | |
| Total | | $ | 327 | | $ | (29) | | $ | 298 | |
| Total liability derivatives | | $ | 530 | | $ | (111) | | $ | 419 | |
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 Sheet |
| 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 TDCC 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. TDCCThe Company posted cash collateral of $20$18 million at March 31, 2019June 30, 2020 ($265 million at December 31, 2018)2019). There was no counterpartyNaN cash collateral was posted by counterparties with TDCCthe Company at March 31, 2019June 30, 2020 ($343 million at December 31, 2018)2019).
Net Foreign Investment Hedges
For derivative instruments that | | | | | | | | | | | | | | | | | |
| Effect of Derivative Instruments | Amount of gain (loss) recognized in OCI 1 | | Amount of gain (loss) recognized in income 2 | | Income Statement Classification |
| Three months ended | | Three months ended | | |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 | |
Derivatives designated as hedging
instruments: | | | | | |
| Fair value hedges: | | | | | |
| | | | | |
Excluded components 3 | $ | 4 | | $ | (4) | | $ | — | | $ | — | | Interest expense and amortization
of debt discount |
| Cash flow hedges: | | | | | |
| Interest rate contracts | — | | (130) | | — | | — | | Interest expense and amortization
of debt discount |
| Foreign currency contracts | (5) | | (1) | | 5 | | 8 | | Cost of sales |
| Foreign currency contracts | — | | 1 | | — | | — | | Sundry income (expense) - net |
| Commodity contracts | 22 | | (41) | | (17) | | (26) | | Cost of sales |
| Net foreign investment hedges: | | | | | |
| Foreign currency contracts | (6) | | (128) | | — | | — | | |
Excluded components 3 | 5 | | 66 | | 2 | | 25 | | Sundry income (expense) - net |
Total derivatives designated as hedging
instruments | $ | 20 | | $ | (237) | | $ | (10) | | $ | 7 | | |
Derivatives not designated as hedging
instruments: | | | | | |
| Interest rate contracts | $ | — | | $ | — | | $ | (1) | | $ | — | | Interest expense and amortization
of debt discount |
| Foreign currency contracts | — | | — | | 9 | | 38 | | Sundry income (expense) - net |
| Commodity contracts | — | | — | | 6 | | (19) | | Cost of sales |
Total derivatives not designated as
hedging instruments | $ | — | | $ | — | | $ | 14 | | $ | 19 | | |
| Total derivatives | $ | 20 | | $ | (237) | | $ | 4 | | $ | 26 | | |
1. OCI is defined as other comprehensive income (loss).
2. Pretax amounts.
3. The excluded components are designated and qualify as net foreign investment hedges,related to the effective portiontime value of the gain or loss on the derivative is included in “Cumulative Translation Adjustments” in AOCL. TDCC had outstanding foreign-currency denominated debtderivatives designated as a hedgehedges.
| | | | | | | | | | | | | | | | | |
| Effect of Derivative Instruments | Amount of gain (loss) recognized in OCI 1 | | Amount of gain (loss) recognized in income 2 | | Income Statement Classification |
| Six months ended | | Six months ended | | |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 | |
Derivatives designated as hedging
instruments: | | | | | |
| Fair value hedges: | | | | | |
| Interest rate contracts | $ | — | | $ | — | | $ | 24 | | $ | — | | Interest expense and amortization of debt discount 3 |
Excluded components 4 | 7 | | (4) | | — | | — | | Interest expense and amortization
of debt discount |
| Cash flow hedges: | | | | | |
| Interest rate contracts | — | | (236) | | — | | — | | Interest expense and amortization
of debt discount |
| Foreign currency contracts | 3 | | 6 | | 9 | | 16 | | Cost of sales |
| Foreign currency contracts | — | | 2 | | — | | — | | Sundry income (expense) - net |
| Commodity contracts | (65) | | 14 | | (28) | | (26) | | Cost of sales |
| Net foreign investment hedges: | | | | | |
| Foreign currency contracts | 16 | | (98) | | — | | — | | |
Excluded components 4 | 27 | | 152 | | 16 | | 50 | | Sundry income (expense) - net |
Total derivatives designated as hedging
instruments | $ | (12) | | $ | (164) | | $ | 21 | | $ | 40 | | |
Derivatives not designated as hedging
instruments: | | | | | |
| Interest rate contracts | $ | — | | $ | — | | $ | (7) | | $ | — | | Interest expense and amortization
of debt discount |
| Foreign currency contracts | — | | — | | (10) | | 6 | | Sundry income (expense) - net |
| Commodity contracts | — | | — | | 17 | | (31) | | Cost of sales |
Total derivatives not designated as
hedging instruments | $ | — | | $ | — | | $ | — | | $ | (25) | | |
| Total derivatives | $ | (12) | | $ | (164) | | $ | 21 | | $ | 15 | | |
1. OCI is defined as other comprehensive income (loss).
2. Pretax amounts.
3. Gain (loss) recognized in income of $181 million at March 31, 2019 ($182 million at December 31, 2018).derivatives is offset by gain (loss) recognized in income of the hedged item.
4. The results of hedges of TDCC’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCL was a net loss of $36 million after tax for the three months ended March 31, 2019 (net loss of $43 million after tax for the three months ended March 31, 2018). For the three months ended March 31, 2019, TDCC recognized after tax gains of $86 millionexcluded components are related to excluded componentsthe time value of net foreign investment hedges included in “Cumulative Translation Adjustments” in AOCL. For the three months ended March 31, 2019, gains of $25 million were amortized to “Sundry income (expense) - net” in the consolidated statements of income.
Fair Value Hedges
Subsequent to March 31, 2019, TDCC entered into interest rate contractsderivatives designated as a fair value hedge of underlying fixed rate debt obligations with maturity dates extending through 2048.hedges.
Income Statement Effect of Derivative Instruments
Foreign currency derivatives not designated as hedges are used to offset foreign exchange gains or losses resulting from the underlying exposures of foreign currency denominated assets and liabilities. The amount charged on a pretax basis related to foreign currency derivatives not designated as a hedge, which was included in “Sundry income (expense) - net” in the consolidated statements of income, was a gain of $31 million for the three months ended March 31, 2019 (loss of $17 million for the three months ended March 31, 2018). The income statement effects of other derivatives were immaterial.
Reclassification from AOCL
The following table provides the net after-tax amounts expected to be reclassified from AOCL to income within the next 12 months are a $1 million gain for interest rate contracts, a $42 million loss for commodity contracts, a $11 million gain for foreign currency contracts and a $57 million gain for excluded components.months:
| | | | | |
| Expected Reclassifications from AOCL within the next 12 months | Jun 30, 2020 |
| In millions | |
| Cash flow hedges: | |
| Interest rate contracts | $ | 1 | |
| Commodity contracts | $ | (28) | |
| |
| Net foreign investment hedges: | |
| Excluded components | $ | 6 | |
NOTE 1619 – FAIR VALUE MEASUREMENTS
A summary of TDCC'sthe Company's recurring and nonrecurring fair value measurements can be found in Note 2224 to the Consolidated Financial Statements included in TDCC'sthe combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2018. If applicable, updates have been included in the respective section below.2019.
Fair Value Measurements on a Recurring Basis
The following tables summarizetable 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 | Mar 31, 2019 | Dec 31, 2018 | Basis of Fair Value Measurements on a Recurring Basis | Jun 30, 2020 | | Dec 31, 2019 | |
Quoted Prices in Active Markets for Identical Items
(Level 1) | Significant Other Observable Inputs
(Level 2) | Total | Quoted Prices in Active Markets for Identical Items
(Level 1) | Significant Other Observable Inputs
(Level 2) | Total | | Quoted Prices in Active Markets for Identical Items
(Level 1) | Significant Other Observable Inputs
(Level 2) | | Total | Quoted Prices in Active Markets for Identical Items
(Level 1) | Significant Other Observable Inputs
(Level 2) | | Total |
| In millions | In millions | |
| Assets at fair value: | | | | | |
Cash equivalents 1 | $ | — |
| $ | 345 |
| $ | 345 |
| $ | — |
| $ | 566 |
| $ | 566 |
| |
| Assets at fair value | | Assets at fair value | | | | | |
| Cash equivalents | | Cash equivalents | | | | | |
Held-to-maturity securities 1 | | Held-to-maturity securities 1 | $ | — | | $ | 297 | | | $ | 297 | | $ | — | | $ | 220 | | | $ | 220 | |
| Money market funds | | Money market funds | — | | 519 | | | 519 | | — | | 408 | | | 408 | |
| Marketable securities | — |
| 101 |
| 101 |
| — |
| 100 |
| 100 |
| Marketable securities | — | | 2 | | | 2 | | — | | 21 | | | 21 | |
Equity securities 2 | 21 |
| — |
| 21 |
| 16 |
| — |
| 16 |
| Equity securities 2 | 8 | | — | | | 8 | | 15 | | — | | | 15 | |
Debt securities: 2 | | | | | Debt securities: 2 | | | | | |
Government debt 3 | — |
| 702 |
| 702 |
| — |
| 700 |
| 700 |
| Government debt 3 | — | | 515 | | | 515 | | — | | 555 | | | 555 | |
| Corporate bonds | 19 |
| 1,054 |
| 1,073 |
| — |
| 983 |
| 983 |
| Corporate bonds | 22 | | 912 | | | 934 | | 22 | | 992 | | | 1,014 | |
Derivatives relating to: 4 | | | | | Derivatives relating to: 4 | | | | | |
| Interest rates | | Interest rates | — | | 320 | | | 320 | | — | | 35 | | | 35 | |
| Foreign currency | — |
| 189 |
| 189 |
| — |
| 226 |
| 226 |
| Foreign currency | — | | 127 | | | 127 | | — | | 149 | | | 149 | |
| Commodities | 10 |
| 90 |
| 100 |
| 17 |
| 93 |
| 110 |
| Commodities | 16 | | 194 | | | 210 | | 23 | | 67 | | | 90 | |
| Total assets at fair value | $ | 50 |
| $ | 2,481 |
| $ | 2,531 |
| $ | 33 |
| $ | 2,668 |
| $ | 2,701 |
| Total assets at fair value | $ | 46 | | $ | 2,886 | | | $ | 2,932 | | $ | 60 | | $ | 2,447 | | | $ | 2,507 | |
| Liabilities at fair value: | | | | | | | |
| Liabilities at fair value | | Liabilities at fair value | | | | | | | |
Long-term debt including debt due within one year 5 | $ | — |
| $ | 20,850 |
| $ | 20,850 |
| $ | — |
| $ | 20,214 |
| $ | 20,214 |
| Long-term debt including debt due within one year 5 | $ | — | | $ | 19,117 | | | $ | 19,117 | | $ | — | | $ | 18,661 | | | $ | 18,661 | |
Derivatives relating to: 4 | | | | | | Derivatives relating to: 4 | | | | | |
| Interest rates | — |
| 181 |
| 181 |
| — |
| 64 |
| 64 |
| Interest rates | — | | 453 | | | 453 | | — | | 310 | | | 310 | |
| Foreign currency | — |
| 117 |
| 117 |
| — |
| 149 |
| 149 |
| Foreign currency | — | | 110 | | | 110 | | — | | 69 | | | 69 | |
| Commodities | 13 |
| 155 |
| 168 |
| 23 |
| 189 |
| 212 |
| Commodities | 13 | | 299 | | | 312 | | 14 | | 137 | | | 151 | |
| Total liabilities at fair value | $ | 13 |
| $ | 21,303 |
| $ | 21,316 |
| $ | 23 |
| $ | 20,616 |
| $ | 20,639 |
| Total liabilities at fair value | $ | 13 | | $ | 19,979 | | | $ | 19,992 | | $ | 14 | | $ | 19,177 | | | $ | 19,191 | |
| |
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. | TDCC’s investments in debt securities, which are primarily available-for-sale, and equity securities are included in “Other investments” in the consolidated balance sheets. |
| |
3. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations. |
| |
4. | See Note 15 for the classification of derivatives in the consolidated balance sheets. |
| |
5. | See Note 151. The Company's held-to-maturity securities primarily included treasury bills and time deposits. 2. The Company’s investments in debt securities, which are primarily available-for-sale, and equity securities are included in “Other investments” in the consolidated balance sheets. 3. U.S. Treasury obligations, U.S. agency obligations, U.S. agency mortgage-backed securities and other municipalities’ obligations. 4. See Note 18 for the classification of derivatives in the consolidated balance sheets. 5. See Note 18 for information on fair value measurements of long-term debt. |
For equity securities calculated at net asset value per share (or its equivalent), TDCCthe Company had $121$106 million in private market securities and $29$21 million in real estate at March 31, 2019June 30, 2020 ($120117 million in private market securities and $29$18 million in real estate at December 31, 2018)2019). There are no redemption restrictions and the unfunded commitments on these investments were $87$66 million at March 31, 2019June 30, 2020 ($8976 million at December 31, 2018)2019).
Fair Value Measurements on a Nonrecurring Basis
As part of the Synergy Program, TDCC has or will shut down a number of manufacturing, R&D and corporate facilities around the world. In the first threesix months of 2019, inventory associated with this plan2020, the Company recognized an additional pretax impairment charge of $12 million related to capital additions made to the biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017. The assets were written down to zero. In addition, impairments of leased, non-manufacturing facilities, which were classified as Level 3 measurements, resultedzero in a write-down of right-of-use assets to $80 million using unobservable inputs.2020. The impairment charges related to the Synergy Program, totaling $100 million, werecharge was included in "Restructuring“Restructuring and asset related charges - net"net” in the consolidated statements of income.income and related to Packaging & Specialty Plastics. See Note 45 for additional information on TDCC's restructuring activities.information.
NOTE 1720 – VARIABLE INTEREST ENTITIES
A summary of TDCC'sthe Company's variable interest entities ("VIEs") can be found in Note 2325 to the Consolidated Financial Statements included in TDCC’sthe combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Assets and Liabilities of Consolidated VIEs
TDCC'sThe Company's consolidated financial statements include the assets, liabilities and results of operations of VIEs for which TDCCthe 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 TDCC’sthe Company’s consolidated balance sheets at March 31, 2019June 30, 2020 and December 31, 2018:2019:
| | | | | | | | |
| Assets and Liabilities of Consolidated VIEs | Jun 30,
2020 | Dec 31,
2019 |
| In millions | | |
| Cash and cash equivalents | $ | 41 | | $ | 37 | |
| Other current assets | 56 | | 51 | |
| Net property | 284 | | 330 | |
| Other noncurrent assets | 17 | | 18 | |
Total assets 1 | $ | 398 | | $ | 436 | |
| Current liabilities | $ | 122 | | $ | 141 | |
| Long-term debt | 20 | | 34 | |
| Other noncurrent obligations | 19 | | 21 | |
Total liabilities 2 | $ | 161 | | $ | 196 | |
|
| | | | | | |
| Assets and Liabilities of Consolidated VIEs | Mar 31,
2019 | Dec 31,
2018 |
| In millions |
| Cash and cash equivalents | $ | 109 |
| $ | 82 |
|
| Other current assets | 116 |
| 114 |
|
| Net property | 718 |
| 734 |
|
| Other noncurrent assets | 60 |
| 45 |
|
Total assets 1 | $ | 1,003 |
| $ | 975 |
|
| Current liabilities | $ | 318 |
| $ | 334 |
|
| Long-term debt | 43 |
| 75 |
|
| Other noncurrent obligations | 46 |
| 31 |
|
Total liabilities 2 | $ | 407 |
| $ | 440 |
|
| |
1. | All assets were restricted at March 31, 2019 and December 31, 2018. |
| |
2. | All liabilities were nonrecourse at March 31, 2019 and December 31, 2018. |
2. All liabilities were nonrecourse at June 30, 2020 and December 31, 2019.
Amounts presented in the consolidated balance sheets and the table above as restricted assets or nonrecourse obligations relating to consolidated VIEs at March 31, 2019June 30, 2020 and December 31, 2018,2019 are adjusted for intercompany eliminations and parental guarantees.
Subsequent Event
TDCC is a 50 percent indirect owner in a propylene oxide ("PO") manufacturing joint venture in Asia Pacific. TDCC has a variable interest in this joint venture relating to arrangements between the joint venture and TDCC, involving the majority of the output on take-or-pay terms with pricing ensuring a guaranteed return to the joint venture. On April 30, 2019, TDCC executed an agreement to acquire full ownership in the PO manufacturing joint venture for an estimated cash purchase price of $312 million, with an expected closing date in the fourth quarter of 2019.
Nonconsolidated VIEs
The following table summarizes the carrying amounts of assets and liabilities included in the consolidated balance sheets at March 31, 2019June 30, 2020 and December 31, 2018,2019, related to variable interests in joint ventures or entities for which TDCCthe Company is not the primary beneficiary. TDCC'sThe Company's maximum exposure to loss is the same as the carrying amounts, unless otherwise noted below.amounts.
| | | | | | | | | | | |
| Carrying Amounts of Assets Related to Nonconsolidated VIEs | | Jun 30,
2020 | Dec 31,
2019 |
| In millions | Description of asset | | |
| Silicon joint ventures | Equity method investments 1 | $ | 101 | | $ | 100 | |
1. Classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets.
|
| | | | | | | |
| Carrying Amounts of Assets and Liabilities Related to Nonconsolidated VIEs | | Mar 31,
2019 | Dec 31,
2018 |
| In millions | Description of asset or liability |
| Hemlock Semiconductor L.L.C. | Equity method investment 1 | $ | (658 | ) | $ | (495 | ) |
| Silicon joint ventures | Equity method investments 2 | $ | 96 |
| $ | 100 |
|
| AgroFresh Solutions, Inc. | Equity method investment 2 | $ | 45 |
| $ | 48 |
|
Other receivable 3 | $ | 8 |
| $ | 8 |
|
| |
1. | Classified as "Other noncurrent obligations" in the consolidated balance sheets. TDCC's maximum exposure to loss was zero at March 31, 2019 (zero at December 31, 2018). |
| |
2. | Classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets. |
| |
3. | Classified as "Accounts and notes receivable - Other" in the consolidated balance sheets. |
NOTE 1821 – RELATED PARTY TRANSACTIONS
Effective with the separation from DowDuPont on April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. and reports transactions with Dow Inc. as related party transactions. From the Merger date 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 of Directors from time to time, as well as certain governance expenses. Funding is accomplished through intercompany loans. TDCC's Board of Directors reviews and determines a dividend distribution to Dow Inc. to settle the intercompany loans. For the three and six months ended June 30, 2020, TDCC declared and paid dividends to Dow Inc. of $529 million and $1,172 million, respectively. For the three and six months ended June 30, 2019, TDCC did not pay dividends to Dow Inc. At June 30, 2020 and December 31, 2019, TDCC's outstanding intercompany loan balance with Dow Inc. was insignificant.
DowDuPont
Pursuant to the Merger Agreement and prior to the separation from DowDuPont, TDCC had committed to fund a portion of DowDuPont's dividends paid to common stockholders and certain governance expenses. In addition, share repurchases by DowDuPont were partially funded by TDCC through 2018. Funding was accomplished through intercompany loans. On a quarterly basis, TDCC's Board reviewed and determined a dividend distribution to DowDuPont to settle the intercompany loans. The dividend distribution considered the level of TDCC’s earnings and cash flows and the outstanding intercompany loan balances. For the threesix months ended March 31,June 30, 2019, TDCC declared and paid dividends to DowDuPont of $535 million ($1,057 million for the three months ended March 31, 2018). At March 31, 2019, TDCC's outstanding intercompany loan balance was zero (insignificant at December 31, 2018). In addition, at March 31, 2019, TDCC had a receivable related to a tax sharing agreement with DowDuPont of $89 million ($89 million at December 31, 2018), included in "Accounts and notes receivable - Other" in the consolidated balance sheets.million.
Historical DuPont and its Affiliatesaffiliates
Prior to the separation from DowDuPont, TDCC sellssold 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, TDCC 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:
|
| | | | | | |
| Balances Due To or Due From DuPont and its Affiliates | Mar 31, 2019 | Dec 31, 2018 |
| In millions |
| Accounts and notes receivable - Other | $ | 201 |
| $ | 288 |
|
| Accounts payable - Other | $ | 112 |
| $ | 201 |
|
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 | | | | Six Months Ended |
| In millions | | | | Jun 30, 2019 |
| Net sales | | | | $ | 12 | |
| Cost of sales | | | | $ | 9 | |
Purchases from Historical DuPont and its affiliates were insignificant for the six months ended June 30, 2019.
NOTE 22 – SEGMENTS AND GEOGRAPHIC REGIONS
Dow’s measure of profit/loss for segment reporting purposes is Operating EBIT (for the three months ended June 30, 2020 and 2019 and the six months ended June 30, 2020) and pro forma Operating EBIT (for the six months ended June 30, 2019) 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 six months ended June 30, 2019 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.
| | Segment Information | | Segment Information | Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Materials & Coatings | Corp. | Total |
| In millions | | In millions | |
| Three months ended Jun 30, 2020 | | Three months ended Jun 30, 2020 | | |
| Net sales | | Net sales | $ | 4,001 | | $ | 2,417 | | $ | 1,855 | | $ | 81 | | $ | 8,354 | |
| Equity in earnings (losses) of nonconsolidated affiliates | | Equity in earnings (losses) of nonconsolidated affiliates | 20 | | (113) | | 2 | | (4) | | (95) | |
Dow Inc. Operating EBIT 1 | | Dow Inc. Operating EBIT 1 | 318 | | (220) | | 27 | | (68) | | 57 | |
| | Sales to DuPont and its Affiliates | Three Months Ended | |
| In millions | Mar 31, 2019 | Mar 31, 2018 | |
| Three months ended Jun 30, 2019 | | Three months ended Jun 30, 2019 | | |
| Net sales | $ | 106 |
| $ | 43 |
| Net sales | $ | 5,205 | | $ | 3,342 | | $ | 2,356 | | $ | 111 | | $ | 11,014 | |
| Cost of sales | $ | 65 |
| $ | 26 |
| |
| Equity in earnings (losses) of nonconsolidated affiliates | | Equity in earnings (losses) of nonconsolidated affiliates | 74 | | (78) | | 1 | | (12) | | (15) | |
Dow Inc. Operating EBIT 1 | | Dow Inc. Operating EBIT 1 | 768 | | 154 | | 214 | | (77) | | 1,059 | |
| Six months ended Jun 30, 2020 | | Six months ended Jun 30, 2020 | | |
| Net sales | | Net sales | $ | 8,610 | | $ | 5,462 | | $ | 3,920 | | $ | 132 | | $ | 18,124 | |
| | Equity in earnings (losses) of nonconsolidated affiliates | | Equity in earnings (losses) of nonconsolidated affiliates | 25 | | (189) | | 3 | | (23) | | (184) | |
Dow Inc. Operating EBIT 1 | | Dow Inc. Operating EBIT 1 | 898 | | (45) | | 189 | | (142) | | 900 | |
| | Six months ended Jun 30, 2019 | | Six months ended Jun 30, 2019 | | |
| Net sales | | Net sales | $ | 10,343 | | $ | 6,822 | | $ | 4,638 | | $ | 180 | | $ | 21,983 | |
| Pro forma net sales | | Pro forma net sales | 10,343 | | 6,831 | | 4,676 | | 180 | | 22,030 | |
| Equity in earnings (losses) of nonconsolidated affiliates | | Equity in earnings (losses) of nonconsolidated affiliates | 112 | | (126) | | 1 | | (16) | | (29) | |
Dow Inc. pro forma Operating EBIT 2 | | Dow Inc. pro forma Operating EBIT 2 | 1,458 | | 431 | | 485 | | (172) | | 2,202 | |
1. Operating EBIT for TDCC also transferred certain feedstocks and energy to DuPont at cost which totaled $82 million for the three months ended March 31,June 30, 2020 and 2019 ($79 millionand for the threesix months ended March 31, 2018), and was reflected in "Cost of sales" inJune 30, 2020 is substantially the consolidated statements of income.
Purchases from DuPont and its affiliates were $115 million for the three months ended March 31, 2019 ($44 million for the three months ended March 31, 2018).
NOTE 19 – SUBSEQUENT EVENT
Separation from DowDuPont
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 recordsame as of the close of business, Eastern Time, on March 21, 2019 (the “Record Date”). The shareholders of record of DowDuPont received one share of Dow Inc. common stock, par value $0.01 per share, for every three shares of DowDuPont common stock, par value $0.01 per share, held as of the Record Date. No fractional shares of Dow Inc. common stock were issued. Instead, cash in lieu of any fractional shares was paid to DowDuPont registered shareholders. The number of shares of Dow Inc. common stock issued on April 1, 2019 was 748.8 million shares. Dow Inc. is now an independent, publicly traded company and Dow Inc. common stock is listed on the New York Stock Exchange under the symbol “DOW.” Dow Inc. common stock began regular-way trading on April 2, 2019, the first day following the distribution.
Effective April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. As of the effective date and time of the distribution, DowDuPont does not beneficially own any equity interest in Dow and will no longer consolidate Dow and its consolidated subsidiaries into its financial results. Beginning in the second quarter of 2019, Dow’s consolidated financial results will reflect the resultsthat of Dow Inc. and its consolidated subsidiaries -therefore has not been disclosed separately in the table above. A reconciliation of "Income (loss) from continuing operations, net of tax" to Operating EBIT is provided below.
2. Pro forma Operating EBIT for TDCC for the six months ended June 30, 2019 is substantially the same as that of Dow Inc. and therefore has not been disclosed separately in the table above. A reconciliation of "Income from continuing operations, net of tax" to pro forma Operating EBIT is provided below.
| | | | | | | | | | | |
| Reconciliation of "Income (loss) from continuing operations, net of tax" to Operating EBIT | Three Months Ended | | Six Months Ended |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 |
| Income (loss) from continuing operations, net of tax | $ | (217) | | $ | 90 | | $ | 41 | |
| + Provision for income taxes on continuing operations | 34 | | 125 | | 172 | |
| Income (loss) from continuing operations before income taxes | $ | (183) | | $ | 215 | | $ | 213 | |
| - Interest income | 6 | | 21 | | 21 | |
| + Interest expense and amortization of debt discount | 200 | | 237 | | 415 | |
| - Significant items | (46) | | (628) | | (293) | |
| Operating EBIT | $ | 57 | | $ | 1,059 | | $ | 900 | |
| | | | | |
| Reconciliation of "Income from continuing operations, net of tax" to Pro Forma Operating EBIT | Six Months Ended |
| In millions | Jun 30, 2019 |
| Income from continuing operations, net of tax | $ | 246 | |
| + Provision for income taxes on continuing operations | 266 | |
| Income from continuing operations before income taxes | $ | 512 | |
| - Interest income | 39 | |
| + Interest expense and amortization of debt discount | 478 | |
+ Pro forma adjustments 1 | 65 | |
| - Significant items | (1,186) | |
| Pro forma Operating EBIT | $ | 2,202 | |
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 after giving effectand Historical DuPont and (2) the elimination of the impact of events directly attributable to the distribution of TDCC’s agricultural sciences business (“AgCo”) and TDCC’s specialty products business (“SpecCo”) and the receipt of DuPont’s ethylene and ethylene copolymers businesses (other than its ethylene acrylic elastomers business) (“ECP”). The consolidated financial results of Dow for periods prior to April 1, 2019, will reflect the distribution of AgCo and SpecCo as discontinued operations for each period presented as well as reflect the receipt of ECP as a common control transaction from the closing of the Merger, on August 31, 2017.
On April 1, 2019, Dow Inc. received a cash contribution of $2,024 million from DowDuPont as part of the internal reorganization and business realignment, steps between Dow Inc.separation, distribution and other related transactions (e.g., TDCCone-time transaction costs).
The following tables summarize the pretax impact of significant items by segment that are excluded from Operating EBIT and DowDuPont.pro forma Operating EBIT:
In connection | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Significant Items by Segment | Three Months Ended Jun 30, 2020 | | | | | Six Months Ended Jun 30, 2020 | | | | |
| Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Mat. & Coatings | Corp. | Total | Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Mat. & Coatings | Corp. | Total |
| In millions | | | | | | | | | | |
| | | | | | | | | | |
Integration and separation costs 1 | $ | — | | $ | — | | $ | — | | $ | (46) | | $ | (46) | | $ | — | | $ | — | | $ | — | | $ | (111) | | $ | (111) | |
Restructuring and asset related charges - net 2 | (6) | | — | | — | | — | | (6) | | (12) | | — | | — | | (90) | | (102) | |
Litigation related charges, awards and adjustments 3 | 6 | | — | | — | | — | | 6 | | 6 | | — | | — | | — | | 6 | |
Loss on early extinguishment of debt 4 | — | | — | | — | | — | | — | | — | | — | | — | | (86) | | (86) | |
| Total | $ | — | | $ | — | | $ | — | | $ | (46) | | $ | (46) | | $ | (6) | | $ | — | | $ | — | | $ | (287) | | $ | (293) | |
1. Costs related to business separation activities.
2. Includes Board approved restructuring plans and asset related charges, which include other asset impairments. See Note 5 for additional information.
3. Includes a gain associated with the separation, Dow Inc.a legal settlement with Nova. See Note 12 for additional information.
4. The Company retired outstanding long-term debt resulting in a loss on early extinguishment. See Note 11 for additional information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Significant Items by Segment | Three Months Ended Jun 30, 2019 | | | | | Six Months Ended Jun 30, 2019 | | | | |
| Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Mat. & Coatings | Corp. | Total | Pack. & Spec. Plastics | Ind. Interm. & Infrast. | Perf. Mat. & Coatings | Corp. | Total |
| In millions | | | | | | | | | | |
Indemnification and other transaction related costs 1 | $ | — | | $ | — | | $ | — | | $ | (127) | | $ | (127) | | $ | — | | $ | — | | $ | — | | $ | (127) | | $ | (127) | |
Integration and separation costs 2 | — | | — | | — | | (348) | | (348) | | — | | — | | — | | (750) | | (750) | |
Restructuring and asset related charges - net 3 | (6) | | — | | (22) | | (37) | | (65) | | (19) | | — | | (22) | | (180) | | (221) | |
Loss on divestiture 4 | — | | — | | — | | (44) | | (44) | | — | | — | | — | | (44) | | (44) | |
Loss on early extinguishment of debt 5 | — | | — | | — | | (44) | | (44) | | — | | — | | — | | (44) | | (44) | |
| Total | $ | (6) | | $ | — | | $ | (22) | | $ | (600) | | $ | (628) | | $ | (19) | | $ | — | | $ | (22) | | $ | (1,145) | | $ | (1,186) | |
1. Includes charges primarily associated with agreements entered into certain agreements with DowDuPont and/orDuPont and Corteva a subsidiary of DowDuPont which was formed to serve as the parent company for DowDuPont’s agriculture business, including the following: Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Intellectual Property Cross-License Agreements. In addition to establishing the termspart of the separation these agreements provide a frameworkand distribution which, among other matters, provides for Dow’s interaction with DowDuPontcross-indemnities and Cortevaallocations of obligations and liabilities for periods prior to, at and after the completion of the separation.
2. Costs related to post-Merger integration and business separation activities. The six months ended June 30, 2019 excludes one-time transaction costs directly attributable to the Merger.
For3. Includes Board approved restructuring plans and asset related charges, which include other asset impairments. See Note 5 for additional informationinformation.
4. Includes post-closing adjustments on a previous divestiture.
5. The Company retired outstanding long-term debt resulting in a loss on early extinguishment. See Note 11 for additional information.
NOTE 23 - SUBSEQUENT EVENT
On July 2, 2020, TDCCentered into a definitive agreement to sell its rail infrastructure assets and related equipment at six sites in the U.S. & Canada for expected cash proceeds in excess of $310 million. The assets are located at TDCC’s sites in Plaquemine and St. Charles, Louisiana; Freeport and Seadrift, Texas; and Fort Saskatchewan and Prentiss, Alberta, Canada. TDCC will also enter into long-term service agreements with the buyer for the continuation of certain rail-related services for TDCC's operations at these sites. The transaction is expected to close in the fourth quarter of 2020, subject to customary closing conditions, and the Company expects to record a gain on the separationtransaction.
Dividends
On April 11, 2019, Dow Inc.’s Board of Directors declared a dividend of $0.70 per share, payable on June 14, 2019, to shareholders of record on May 31, 2019, consistent with its March 7, 2019 action declaring that a cash dividend of $525 million would be paid effective upon separation from DowDuPont.
2019 Stock Incentive Plan
On April 1, 2019, in connection with the separation, Dow Inc. adopted the 2019 Stock Incentive Plan. Subsequent to March 31, 2019, Dow Inc. granted the following stock-based compensation awards to employees and non-employee directors:
1.6 million stock options with a weighted-average exercise price of $54.89 and a weighted-average fair value of $7.99 per share;
1.7 million restricted stock units with a weighted-average fair value of $54.89 per share; and
1.2 million performance stock units with a weighted-average fair value of $57.58 per share.
ITEM 2. 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 Quarterly Report on Form 10-Q. The information reflected in the report is equally applicable to both Dow Inc. and TDCC, except where otherwise noted.
OVERVIEW
Merger with DuPont
Effective August 31, 2017, pursuant toThe separation was contemplated by the merger of equals transaction contemplated byeffective August 31, 2017, under the Agreement and Plan of Merger, (the "Merger Agreement"), dated as of December 11, 2015, as amended on March 31, 2017, The Dow Chemical Company and its consolidated subsidiaries (“TDCC”)2017. TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries (“Historical DuPont”) each merged with subsidiaries of DowDuPont Inc. (“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. (together with TDCC, “Dow”) was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business.
As a result of Dow Inc.'s Registration Statement on Form 10 becoming effective on March 12, 2019 with the U.S. Securities and Exchange Commission ("SEC"), Dow Inc. is now required to file a Quarterly Report on Form 10-Q. At March 31, 2019, Dow Inc. and TDCC were separate wholly owned subsidiaries of DowDuPont. At March 31, 2019, Dow Inc. was a holding company that did not have subsidiaries or operations. As a result, financial statements of Dow Inc. have not been included in this Quarterly Report on Form 10-Q and, unless otherwise indicated, Management’s Discussion and Analysis of Financial Condition and Results of Operations, relate to TDCC.
From the Merger date and through March 31, 2019, TDCC’s business activities were components of DowDuPont’s business operations. TDCC’s business activities, including the assessment of performance and allocation of resources, were reviewed and managed by DowDuPont. Information used by the chief operating decision maker of TDCC related to TDCC in its entirety. Accordingly, there were no separate reportable business segments for TDCC under Accounting Standards Codification Topic 280 “Segment Reporting” and TDCC's business results have been reported in this Quarterly Report on Form 10-Q as a single operating segment.
From the Merger date and through March 31, 2019, DowDuPont owned all of the common stock of TDCC. Pursuant to General Instruction H(1)(a) and (b) for Form 10-Q “Omission of Information by Certain Wholly-Owned Subsidiaries,” Dow is filing this Quarterly Report on Form 10-Q including required TDCC disclosures with a reduced disclosure format.
Subsequent Event - Separation from DowDuPont
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 close of business, Eastern Time, on March 21, 2019 (the “Record Date”). The shareholders of record of DowDuPont received one share of Dow Inc. common stock, par value $0.01 per share, for every three shares of DowDuPont common stock, par value $0.01 per share, held as of the Record Date. No fractional shares of Dow Inc. common stock were issued. Instead, cash in lieu of any fractional shares was paid to DowDuPont registered shareholders. The number of shares of Dow Inc. common stock issued on April 1, 2019 was 748.8 million shares. Dow Inc. is now an independent, publicly traded company and Dow Inc. common stock is listed on the New York Stock Exchange under the symbol “DOW.” Dow Inc. common stock began regular-way trading on April 2, 2019, the first day following the distribution.
Effective April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. As of the effective date and time of the distribution, DowDuPont does not beneficially own any equity interest in Dow and will no longer consolidateconsolidates Dow and its consolidated subsidiaries into its financial results. Beginning in the second quarter of 2019, Dow’sThe consolidated financial results will reflect the results of Dow Inc. and its consolidated subsidiaries - that is, TDCC after giving effect tofor all periods presented reflect the distribution of TDCC’s agricultural sciences business (“AgCo”) and TDCC’s specialty products business (“SpecCo”) andas 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”). The consolidated financial results of Dow for periods prior to April 1, 2019, will reflect the distribution of AgCo and SpecCo as discontinued operations for each period presented as well as reflect the receipt of ECP as a common control transaction from the closing of the Merger on August 31, 2017. See Note 3 to the Consolidated Financial Statements for additional information.
Throughout this Quarterly Report on Form 10-Q, 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, and "Dow Silicones" means Dow Silicones Corporation, both wholly owned subsidiaries of the Company.
Items Affecting Comparability of Financial Results
As a result of the future relationship between Dowseparation from DowDuPont, pro forma net sales and pro forma Operating EBIT are provided in this section, which were 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. For the six months ended June 30, 2019, pro forma adjustments have been made for (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 companies are filing a combined report for this Quarterly Report on Form 10-Q.
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. For additionalfurther information on the separation of the materials science business,unaudited pro forma financial information, please refer to the Company's Current Report on Form 8-K fileddated June 3, 2019.
STATEMENT ON COVID-19, OIL PRICE VOLATILITY AND THIRD QUARTER OUTLOOK
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/demand fundamentals. Financial markets have also improved as economies in the U.S. and Western Europe have started to reopen.
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. At the time of this filing, approximately half of Dow’s global workforce is working remotely. The CMTs have initiated the implementation of the Company’s comprehensive Return to Workplace plan that is tailored for each site and includes a number of health and safety measures to be followed in a gradual and phased approach. The Company is also encouraging its workforce to follow safety measures when 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 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 foams 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 opening some new opportunities for innovation and business. Dow’s contributions to fighting the COVID-19 pandemic include:
•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 U.S., 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 committed $3 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 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 ease through the remainder of 2020, absent significant impacts from COVID-19 infection resurgences.
The Company continues to maintain a strong financial position and solid 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. At June 30, 2020, the Company had approximately $12 billion in committed forms of liquidity, including $3.7 billion in cash and cash equivalents. The Company has no substantive long-term debt maturities until the second half of 2023.
Recognizing the significant impact the COVID-19 pandemic would have on demand in the second quarter of 2020, 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. Those actions included: further reducing the 2020 capital expenditure target to $1.25 billion; trimming operating expenses by $350 million; and unlocking another $500 million from working capital. The Company has also temporarily suspended share repurchases and delayed planned maintenance turnaround spending, where appropriate, without compromising safety or its ability to serve customer needs. In addition, the Company announced the temporary idling of 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 ("MDI"), at reduced operating rates; reducing siloxanes operating rates globally and extending a planned maintenance turnaround at a silicones production unit in Zhangjiagang, China, which has now restarted. Based on current demand, the polyethylene production units have also restarted. The Company continues to monitor demand in automotive and other durable good end-markets and as conditions improve in those end-markets, is bringing units online where needed.
Review of First Half 2020 Financial Impacts from COVID-19 and Third Quarter Outlook
The Company's sales declined 18 percent in the first six months of 2020, as the COVID-19 pandemic significantly impacted the global economy and supply/demand fundamentals. Demand remained strong in food packaging, health and hygiene, home care and pharma end-markets. Volume declined 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.
Local prices declined in the first quarter and continued to decline in the second quarter 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. Declines in crude oil prices impact the pace of oil drilling in the U.S. & Canada, which makes natural gas, a significant by-product of oil drilling and the primary feedstock used in the U.S. by Dow Inc.and other ethylene producers, less cost advantaged. The Company has feedstock flexibility driven by manufacturing assets that have the ability to produce ethylene from natural gas liquids or crude oil-based feedstocks, significant naphtha-based production capabilities, as well as comprehensive financial and physical hedging programs. The Company’s feedstock flexibility, fully integrated feedstock position and differentiated product portfolio positions enable the Company to respond to the challenges from oil price volatility.
The Company experienced margin compression in the second quarter, largely due to lower global energy prices. In the latter half of the second quarter, crude oil prices increased as supply/demand fundamentals improved, driving higher feedstock costs, which should be beneficial to product prices and margins in the third quarter of 2020. See Results of Operations in this report for additional discussion of results for the three and six months ended June 30, 2020.
The Company expects results of operations to improve sequentially as the gradual and uneven recovery progresses. The Company expects net sales to increase 5 to 10 percent sequentially, with increases in all geographic regions and all operating segments. Volume is expected to increase, driven by continued robust consumer demand for food packaging and health and hygiene applications; the initial indicators of recovery in consumer durable good end-markets such as automotive, construction and furniture and bedding; stable demand for solvents and surfactants used in cleaning products; and solid demand in do-it-yourself architectural coatings applications, partially offset by normal seasonality. Local price is also expected to increase sequentially as global energy prices recover and polyethylene price increases take hold. The Company expects margins to expand in the third quarter, driven by sales growth. This outlook assumes virus containment will continue to progress without significant infection resurgences and with continued reopening of economies, with recovery taking a stronger hold in Europe and U.S. & Canada in the third quarter.
The Company will continue to focus on a disciplined approach to cash generation, capital allocation and structural cost improvements, which will serve as a solid foundation for the Company to weather the downturn and capture value as markets lift. In addition to the actions announced in the second quarter, the Company will also increase its 2020 operating expense reduction from $350 million to $500 million through additional structural cost interventions. The Company will also initiate a restructuring program in the third quarter, 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 as well as actions to exit uncompetitive assets. These actions are necessary to maintain competitiveness while the economic recovery gains traction.
Dow has significant addressable market opportunities that are expected to drive growth as the economy recovers. Global economic indicators and end-markets have begun to show improvement, and Dow will continue to benefit from its unique competitive advantages – including its feedstock flexibility, extensive materials portfolio and geographic end-market diversity.
At the time of this filing, the ultimate severity and duration of the COVID-19 pandemic and oil price volatility 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 in the first six months of 2020 and the additional risks associated with these conditions are more fully discussed in this report in Part II, 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.
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.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the U.S. The Company continues to assess the provisions and potential impacts of this legislation; however, there have been no significant impacts to the Company's results of operations or financial position resulting from the CARES Act in the three and six months ended June 30, 2020.
OVERVIEW
The following is a summary of the results from continuing operations for the three months ended June 30, 2020:
•The Company reported net sales in the second quarter of 2020 of $8.4 billion, down 24 percent from $11.0 billion in the second quarter of 2019, with declines across all geographic regions and operating segments. The sales decline was driven by both local price and volume declines.
•Local price decreased 14 percent compared with the SECsame period last year, primarily in response to lower global energy prices, with double-digit declines in all geographic regions. Local price declined in Packaging & Specialty Plastics (down 22 percent), Industrial Intermediates & Infrastructure (down 9 percent) and Performance Materials & Coatings (down 6 percent).
•Volume decreased 9 percent compared with the second quarter of 2019. Packaging & Specialty Plastics volume was flat. Volume decreased in Industrial Intermediates & Infrastructure (down 18 percent) and Performance Materials & Coatings (down 14 percent). Volume declined in all geographic regions, except Asia Pacific (up 3 percent).
•Currency had an unfavorable impact of 1 percent on net sales in all operating segments and geographic regions, except U.S. & Canada.
•Research and development ("R&D") expenses were $182 million in the second quarter of 2020, compared with $208 million in the second quarter of 2019. Selling, general and administrative ("SG&A") expenses were $357 million and $356 million for Dow Inc. and TDCC, respectively, in the second quarter of 2020, compared with $422 million and $418 million for Dow Inc. and TDCC, respectively, in the second quarter of 2019. R&D and SG&A expenses decreased primarily due to cost reductions.
•Integration and separation costs were $46 million in the second quarter of 2020, down from $348 million and $324 million for Dow Inc. and TDCC, respectively, in the second quarter of 2019, reflecting the wind-down of business separation activities.
•Equity in losses of nonconsolidated affiliates was $95 million in the second quarter of 2020, compared with $15 million in the second quarter of 2019, primarily due to lower equity earnings from the Kuwait joint ventures due to margin compression stemming from the COVID-19 pandemic.
•Sundry income (expense) - net for Dow Inc. and TDCC was income of $53 million and income of $51 million, respectively, in the second quarter of 2020, compared with expense of $1 million for Dow Inc. and income of $109 million for TDCC in the second quarter of 2019. Sundry income (expense) - net for Dow Inc. increased primarily due to one-time charges in the second quarter of 2019 for post-closing adjustments related to a previous divestiture and agreements entered into with DuPont and Corteva as part of the separation and distribution, which did not impact TDCC.
•Net income (loss) available for Dow Inc. and TDCC common stockholder(s) was a loss of $225 million in the second quarter of 2020, compared with income of $75 million and $202 million for Dow Inc. and TDCC, respectively, in the second quarter of 2019. Earnings (loss) per share for Dow Inc. was a loss per share of $0.31 in the second quarter of 2020, compared with earnings per share of $0.10 in the second quarter of 2019.
•On April 9, 2020, Dow Inc. announced that its Board of Directors ("Board") declared a dividend of $0.70 per share, which was paid on June 12 2019, Amendment No. 4, 2020, to shareholders of record as of May 29, 2020.
•Dow Inc. did not repurchase any of the Company's common stock in the second quarter of 2020.
•In May 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 flooding and its aftermath.
•In June 2020, the Company launched Dow ACTs (Advocacy, Community and Talent), a strategic framework that outlines a new set of actions Dow will take to support inclusion and advance anti-racism. In addition, Dow pledged $5 million over the next five years to help advance racial equality and social justice.
•In June 2020, Dow 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.
In addition to the Registration Statement on Form 10 filed by Dow Inc. withhighlights above, the SEC on March 8, 2019,following event occurred subsequent to the second quarter of 2020:
•On July 2, 2020, TDCC entered into a definitive agreement to sell its rail infrastructure assets and related filings withequipment at six sites in the SEC.U.S. & Canada for expected cash proceeds in excess of $310 million. The assets are located at Dow’s sites in Plaquemine and St. Charles, Louisiana; Freeport and Seadrift, Texas; and Fort Saskatchewan and Prentiss, Alberta, Canada. The transaction is expected to close in the fourth quarter of 2020, subject to customary closing conditions, and the Company expects to record a gain on the transaction.
| | | | | | | | | | | | | | |
| Selected Financial Data - Dow Inc. | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30,
2020 | Jun 30,
2019 | Jun 30,
2020 | Jun 30,
2019 |
| Net sales | $ | 8,354 | | $ | 11,014 | | $ | 18,124 | | $ | 21,983 | |
| | | | |
| Cost of sales ("COS") | $ | 7,610 | | $ | 9,420 | | $ | 15,840 | | $ | 18,562 | |
| Percent of net sales | 91.1 | % | 85.5 | % | 87.4 | % | 84.4 | % |
| | | | |
| R&D | $ | 182 | | $ | 208 | | $ | 361 | | $ | 398 | |
| Percent of net sales | 2.2 | % | 1.9 | % | 2.0 | % | 1.8 | % |
| | | | |
| SG&A | $ | 357 | | $ | 422 | | $ | 691 | | $ | 870 | |
| Percent of net sales | 4.3 | % | 3.8 | % | 3.8 | % | 4.0 | % |
| | | | |
| Effective tax rate | (18.6) | % | 58.1 | % | 80.8 | % | 52.0 | % |
| | | | |
| Net income (loss) available for common stockholders | $ | (225) | | $ | 75 | | $ | 14 | | $ | 631 | |
| | | Selected Financial Data | Three Months Ended | |
| Selected Financial Data - TDCC | | Selected Financial Data - TDCC | Three Months Ended | | Six Months Ended | |
| In millions | Mar 31,
2019 | Mar 31,
2018 | In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 |
| Net sales | $ | 13,582 |
| $ | 14,899 |
| Net sales | $ | 8,354 | | $ | 11,014 | | $ | 18,124 | | $ | 21,983 | |
| | | | |
| Cost of sales ("COS") | $ | 10,707 |
| $ | 11,552 |
| Cost of sales ("COS") | $ | 7,608 | | $ | 9,419 | | $ | 15,838 | | $ | 18,561 | |
| Percent of net sales | 78.8 | % | 77.5 | % | Percent of net sales | 91.1 | % | 85.5 | % | 87.4 | % | 84.4 | % |
| | | | |
| Research and development expenses ("R&D") | $ | 361 |
| $ | 386 |
| |
| R&D | | R&D | $ | 182 | | $ | 208 | | $ | 361 | | $ | 398 | |
| Percent of net sales | 2.7 | % | 2.6 | % | Percent of net sales | 2.2 | % | 1.9 | % | 2.0 | % | 1.8 | % |
| | | | |
| Selling, general and administrative expenses ("SG&A") | $ | 701 |
| $ | 751 |
| |
| SG&A | | SG&A | $ | 356 | | $ | 418 | | $ | 690 | | $ | 866 | |
| Percent of net sales | 5.2 | % | 5.0 | % | Percent of net sales | 4.3 | % | 3.8 | % | 3.8 | % | 3.9 | % |
| | | | |
| Effective tax rate | 31.7 | % | 20.9 | % | Effective tax rate | (18.6) | % | 36.5 | % | 80.8 | % | 41.6 | % |
| | | | |
| Net income available for common stockholder | $ | 541 |
| $ | 1,342 |
| |
| Net income (loss) available for common stockholder | | Net income (loss) available for common stockholder | $ | (225) | | $ | 202 | | $ | 14 | | $ | 758 | |
RESULTS OF OPERATIONS
Net Sales
The following table summarizestables summarize net sales, pro forma net sales and sales variances by operating segment and geographic region from the prior year:
| | | | | | | | | | | | | | |
| Summary of Sales Results | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 |
| Net sales | $ | 8,354 | | $ | 11,014 | | $ | 18,124 | | $ | 21,983 | |
| Pro forma net sales | | | | $ | 22,030 | |
|
| | | | | | | | | | |
| Sales Variances by Geographic Region | Three Months Ended Mar 31, 2019 |
| Local Price & Product Mix | Currency | Volume | Portfolio & Other | Total |
| Percentage change from prior year |
| U.S. & Canada | (7 | )% | — | % | (4 | )% | — | % | (11 | )% |
EMEA 1 | (7 | ) | (5 | ) | 1 |
| (1 | ) | (12 | ) |
| Asia Pacific | (9 | ) | (2 | ) | 9 |
| — |
| (2 | ) |
| Latin America | (10 | ) | (1 | ) | 2 |
| — |
| (9 | ) |
| Total | (8 | )% | (2 | )% | 1 | % | — | % | (9 | )% |
| |
1. | Europe, Middle East and Africa. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales Variances by Operating Segment and Geographic Region - As Reported | | | | | | | | | | |
| Three Months Ended Jun 30, 2020 | | | | | Six Months Ended Jun 30, 2020 | | | | |
| Local Price & Product Mix | Currency | Volume | | Total | Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total |
| Percentage change from prior year | | | | | | | | | | |
| Packaging & Specialty Plastics | (22) | % | (1) | % | — | % | | (23) | % | (16) | % | (1) | % | — | % | — | % | (17) | % |
| Industrial Intermediates & Infrastructure | (9) | | (1) | | (18) | | | (28) | | (9) | | (1) | | (10) | | — | | (20) | |
| Performance Materials & Coatings | (6) | | (1) | | (14) | | | (21) | | (7) | | (1) | | (9) | | 2 | | (15) | |
| Total | (14) | % | (1) | % | (9) | % | | (24) | % | (12) | % | (1) | % | (5) | % | — | % | (18) | % |
| Total, excluding the Hydrocarbons & Energy business | (11) | % | (1) | % | (10) | % | | (22) | % | (10) | % | (1) | % | (6) | % | 1 | % | (16) | % |
| U.S. & Canada | (11) | % | — | % | (17) | % | | (28) | % | (10) | % | — | % | (10) | % | 1 | % | (19) | % |
EMEAI 2 | (21) | | (1) | | (5) | | | (27) | | (14) | | (2) | | (4) | | — | | (20) | |
| Asia Pacific | (13) | | (1) | | 3 | | | (11) | | (11) | | (1) | | — | | — | | (12) | |
| Latin America | (13) | | (1) | | (13) | | | (27) | | (13) | | — | | (5) | | — | | (18) | |
| Total | (14) | % | (1) | % | (9) | % | | (24) | % | (12) | % | (1) | % | (5) | % | — | % | (18) | % |
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.
2. Europe, Middle East, Africa and India
Net sales in the firstsecond quarter of 20192020 were $13.6$8.4 billion, down 924 percent from $14.9$11.0 billion in the firstsecond quarter of last year, primarily due to decreasedwith local price down 14 percent, volume down 9 percent and thean unfavorable impact from currency of currency. Sales decreased in all geographic regions with double-digit declines in EMEA (down 12 percent) and U.S. & Canada (down 11 percent). Local price decreased 8 percent, primarily in response to lower feedstock and raw material costs. Local price1 percent. Net sales decreased in all geographic regions and across most principal product groups,operating segments, reflecting the impact of the COVID-19 pandemic on global economies and supply/demand fundamentals. Local price declined in all operating segments and all geographic regions, primarily due to lower global energy prices. Local price decreased in Packaging & Specialty Plastics (down 22 percent), Industrial Intermediates & Infrastructure (down 9 percent) and Performance Materials & Coatings (down 6 percent) and declined double-digits in all geographic regions. Volume decreased in all geographic regions, except Consumer Solutions, Transportation & Advanced Polymers and Industrial Biosciences. Local priceAsia Pacific which was up 3 percent, largely driven by China as economies in Asia Pacific reopened. Volume was flat in SafetyPackaging & Construction, NutritionSpecialty Plastics and declined in Industrial Intermediates & HealthInfrastructure (down 18 percent) and ElectronicsPerformance Materials & Imaging.Coatings (down 14 percent) as the COVID-19 pandemic drove volume growth in food packaging, health and hygiene, home care and pharma applications and demand weakness for products used in durable good end-markets. Currency unfavorably impacted net sales 21 percent compared with the same period last year, driven by currency fluctuations in Europe, Middle East, Africa and India ("EMEAI"), Asia Pacific and Latin America (all down 1 percent). Excluding the Hydrocarbons & Energy business, sales declined 22 percent.
Net sales for the first six months of 2020 were $18.1 billion, down 18 percent from $22.0 billion in the same period last year, with local price down 12 percent, volume down 5 percent and an unfavorable impact from currency of 1 percent. Net sales decreased in all geographic regions and operating segments. 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 16 percent), Industrial Intermediates & Infrastructure (down 9 percent) and in Performance Materials &
Coatings (down 7 percent). Volume decreased 5 percent with declines in all geographic regions, except Asia Pacific which was flat. Volume was flat in Packaging & Specialty Plastics and decreased in Industrial Intermediates & Infrastructure (down 10 percent) and Performance Materials & Coatings (down 9 percent). Currency unfavorably impacted net sales 1 percent compared with the same period last year, driven primarily by EMEAEMEAI (down 2 percent) and Asia Pacific (down 1 percent). Excluding the Hydrocarbons & Energy business, sales declined 16 percent.
| | | | | | | | | | | | | | | | | | | | |
| Sales Variances by Operating Segment and Geographic Region - Pro Forma Basis | | | | | | | | | | |
| | | | | | Six Months Ended Jun 30, 2020 | | | | |
| | | | | | Local Price & Product Mix | Currency | Volume | | Total |
| Percentage change from prior year | | | | | | | | | | |
| Packaging & Specialty Plastics | | | | | | (16) | % | (1) | % | — | % | | (17) | % |
| Industrial Intermediates & Infrastructure | | | | | | (9) | | (1) | | (10) | | | (20) | |
| Performance Materials & Coatings | | | | | | (7) | | (1) | | (8) | | | (16) | |
| Total | | | | | | (12) | % | (1) | % | (5) | % | | (18) | % |
| Total, excluding the Hydrocarbons & Energy business | | | | | | (10) | % | (1) | % | (5) | % | | (16) | % |
| U.S. & Canada | | | | | | (10) | % | — | % | (9) | % | | (19) | % |
| EMEAI | | | | | | (14) | | (2) | | (4) | | | (20) | |
| Asia Pacific | | | | | | (11) | | (1) | | — | | | (12) | |
| Latin America | | | | | | (13) | | (1) | | (4) | | | (18) | |
| Total | | | | | | (12) | % | (1) | % | (5) | % | | (18) | % |
Net sales for the first six months of 2020 were $18.1 billion, down 18 percent from pro forma net sales of $22.0 billion in the same period last year, with local price down 12 percent, volume down 5 percent and an unfavorable impact from currency of 1 percent. Net sales decreased in all geographic regions and operating segments. 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 16 percent), Industrial Intermediates & Infrastructure (down 9 percent) and Performance Materials & Coatings (down 7 percent). Volume increased 1decreased 5 percent, as increases in Polyurethanes & CAV, Crop Protection, Safety & Construction, Packaging and Specialty Plastics, Consumer Solutions, Industrial Solutions and Electronics & Imaging more than offsetwith declines in Hydrocarbons & Energy, Seed, Transportation & Advanced Polymers, Industrial Biosciences and Coatings & Performance Monomers. Volume was flat in Nutrition & Health. Volume increased in all geographic regions, except U.SAsia Pacific, which was flat. Volume was flat in Packaging & CanadaSpecialty Plastics and decreased in Industrial Intermediates & Infrastructure (down 410 percent) and Performance Materials & Coatings (down 8 percent). Portfolio & Other was flatCurrency unfavorably impacted net sales 1 percent compared with the same period last year.year, driven primarily by EMEAI (down 2 percent), Asia Pacific (down 1 percent) and Latin America (down 1 percent). Excluding the Hydrocarbons & Energy business, sales declined 16 percent.
Cost of Sales
COS was $10.7$7.6 billion in the firstsecond quarter of 2019,2020, down from $11.6$9.4 billion in the first quarter of 2018. COS decreased in the firstsecond quarter of 2019, primarily due to lower feedstock and other raw material costs and decreased planned maintenance turnaroundsales volume. Operating rates were lower 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. For the first six months of 2020, COS was $15.8 billion, down from $18.6 billion in the first six months of 2019, primarily due to lower feedstock and other raw material costs lower commissioning expenses related to U.S. Gulf Coast growth projects and cost synergies which more than offset the impact of increaseddecreased sales volume, which reflected additional supply from Sadara Chemical Company (“Sadara”).volume. COS as a percentage of net sales in the firstsecond quarter of 20192020 was 78.891.1 percent compared with 77.5(85.5 percent in the same period last year.second quarter of 2019) and 87.4 percent for the first six months of 2020 (84.4 percent for the first six months of 2019).
Research and Development Expenses
R&D expenses totaled $182 million in the second quarter of 2020, compared with $208 million in the second quarter of 2019. R&D expenses for the first six months of 2020 were $361 million, down from $398 million in the first quartersix months of 2019, down $25 million (6 percent) from $386 million in the first quarter of 2018.2019. R&D expenses for the three and six months ended June 30, 2020 decreased primarily due to cost synergies.reductions and lower performance-based compensation costs.
Selling, General and Administrative Expenses
Dow Inc.
SG&A expenses were $701$357 million in the second quarter of 2020, down from $422 million in the second quarter of 2019. For the first six months of 2020, SG&A expenses were $691 million, down from $870 million in the first six months of 2019. SG&A expenses for the three and six months ended June 30, 2020 decreased compared with the same periods last year primarily due to cost reductions, lower performance-based compensation costs, and the recovery of legal costs related to the Nova Chemicals Corporation ("Nova") ethylene asset matter. SG&A expenses were also favorably impacted in the first six months of 2020 by the reversal of a bad debt reserve related to an arbitration judgment.
TDCC
SG&A expenses were $356 million in the second quarter of 2019,2020, down $50from $418 million (7 percent)in the second quarter of 2019. For the first six months of 2020, SG&A expenses were $690 million, down from $751$866 million in the first quartersix months of last year. SG&A expenses decreased primarily due to cost synergies.2019.
Amortization of Intangibles
Amortization of intangibles was $154$100 million in the second quarter of 2020, down from $104 million in the second quarter of 2019. In the first six months of 2020, amortization of intangibles was $200 million, down from $220 million in the first quartersix months of 2019, down from $159 million in the first quarter of 2018.2019. See Note 710 to the Consolidated Financial Statements for additional information on intangible assets.
Restructuring and Asset Related Charges - Net
DowDuPont Agriculture Division Restructuring Program
During the fourth quarter of 2018 and in connection with the ongoing integration activities, DowDuPont approved restructuring actions to simplify and optimize certain organizational structures within the Agriculture division in preparation for its intended separation as a standalone company ("Agriculture Division Program"). For the three months ended March 31, 2019, TDCC recorded a favorable adjustment of $4 million to the severance and related benefit costs reserve. TDCC expects actions related to the Agriculture Division Program to be substantially complete by mid 2019.
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont approved post-merger restructuring actions under the DowDuPont Cost Synergy Program (the "Synergy Program") which iswas designed to integrate and optimize the organization following the Merger and in preparation for the business separations. For the three months ended March 31, 2019, TDCC recorded pretaxThe restructuring charges below reflect charges from continuing operations. The final charges related to the Synergy Program were incurred in the first quarter of $224 million, consisting of severance2020 and related benefit costs of $72 million, asset write-downs and write-offs of $100 million and costs associated with exit and disposal activities of $52 million. For the three months ended March 31, 2018, TDCC recorded pretax restructuring charges of $163 million, consisting of severance and related benefit costs of $104 million, asset write-downs and write-offs of $48 million and costs associated with exit and disposal activities of $11 million. TDCCCompany expects actionscash expenditures related to the Synergy Program to be substantially complete by the end of 2019.2020.
For the three months ended June 30, 2020, the Company did not record any pretax restructuring charges. For the six months ended June 30, 2020, the Company recorded pretax restructuring charges of $90 million for severance and related benefit costs.
For the three months ended June 30, 2019, the Company recorded pretax restructuring charges of $59 million, consisting of severance and related benefit costs of $25 million, asset write-downs and write-offs of $29 million and costs associated with exit and disposal activities of $5 million. For the six months ended June 30, 2019, the Company recorded pretax restructuring charges of $203 million, consisting of severance and related benefit costs of $77 million, asset write-downs and write-offs of $105 million and costs associated with exit and disposal activities of $21 million.
Asset Related Charges
The Company recognized additional pretax impairment charges of $6 million and $12 million for the three and six months ended June 30, 2020, respectively, related to capital additions made to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017 (charges of $6 million and $18 million for the three and six months ended June 30, 2019). The impairment charges were related to the Packaging & Specialty Plastics segment. See Note 45 to the Consolidated Financial Statements for details on TDCC'sthe Company's restructuring activities.and asset related charges, including charges by segment.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to post-Merger integration and business separation activities, were $46 million in the second quarter of 2020, down from $348 million and $324 million for Dow Inc. and TDCC, respectively, in the second quarter of 2019. In the first six months of 2020, integration and separation costs were $111 million, down from $800 million and $776 million for Dow Inc. and TDCC, respectively, in the first six months of 2019. Further decreases in integration and separation costs are expected as well asbusiness separation activities wind down. Integration and separation costs are related to Corporate.
Equity in Losses of Nonconsolidated Affiliates
The Company's share of equity in losses of nonconsolidated affiliates was $95 million in the ownership restructuresecond quarter of Dow Silicones Corporation2020, up from losses of $15 million in the second quarter of 2019, primarily due to margin compression at the Kuwait joint ventures and higher equity losses from Sadara Chemical Company ("Dow Silicones"Sadara") (through May 31, 2018),which were $408partially offset by improved results at the Thai joint ventures. Equity in losses of nonconsolidated affiliates was $184 million in the first quartersix months of 2019, up from $2022020, compared with $29 million in the first quarter of 2018. The increase was due to increased costs related to business separation activities.
Equity in Earnings of Nonconsolidated Affiliates
TDCC's share of the earnings of nonconsolidated affiliates was $13 million in the first quartersix months of 2019, down from $243 million in the first quarter of 2018, primarily due to increased equity losses from Sadara and lower equity earnings from the Kuwait joint ventures (due to lower monoethylene glycol and polyethylene prices), the Thai joint ventures and higher equity losses from Sadara. See Note 9 to the HSC Group.Consolidated Financial Statements for additional information.
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. Sundry
Dow Inc.
For the three months ended June 30, 2020, "Sundry income (expense) – net in- net" was income of $53 million compared with expense of $1 million for the firstthree months ended June 30, 2019. The second quarter of 2020 included a $6 million gain related to the Nova ethylene asset matter (related to Packaging & Specialty Plastics), non-operating pension and postretirement benefit plan credits and foreign currency exchange losses. The second quarter of 2019 included a $58 million loss on post-closing adjustments related to a previous divestiture, a $52 million charge associated with agreements entered into with DuPont and Corteva and a $44 million loss on the early extinguishment of debt (all related to Corporate), which were partially offset by non-operating pension and postretirement benefit plan credits and foreign currency exchange gains. For the six months ended June 30, 2020, "Sundry income (expense) - net" was incomeexpense of $73 million, a decrease of $10$28 million compared with income of $83$68 million infor the firstsix months ended June 30, 2019. In addition to the items previously disclosed, "Sundry income (expense) - net" for the six months ended June 30, 2020 included an $86 million loss on the early extinguishment of debt (related to Corporate). See Notes 3, 11, 16 and 22 to the Consolidated Financial Statements for additional information.
TDCC
For the three months ended June 30, 2020, "Sundry income (expense) - net" was income of $51 million compared with income of $109 million for the three months ended June 30, 2019. The second quarter of 2018.2020 included a $6 million gain related to the Nova ethylene asset matter (related to Packaging & Specialty Plastics), non-operating pension and postretirement benefit plan credits and foreign currency exchange losses. The second quarter of 2019 included a $44 million loss on the early extinguishment of debt and a gain of $14 million on post-closing adjustments related to a previous divestiture (both related to Corporate), which were partially offset by non-operating pension and postretirement benefit plan credits and foreign currency exchange gains. For the six months ended June 30, 2020, "Sundry income (expense) - net" was expense of $31 million compared with income of $178 million for the six months ended June 30, 2019. In addition to the items previously disclosed, "Sundry income (expense) - net" for the six months ended June 30, 2020 included an $86 million loss on the early extinguishment of debt (related to Corporate). See Notes 11, 16 and 22 to the Consolidated Financial Statements for additional information.
Interest Expense and Amortization of Debt Discount
Interest expense and amortization of debt discount was $247$200 million in the second quarter of 2020, down from $237 million and $249 million for Dow Inc. and TDCC, respectively, in the second quarter of 2019. Interest expense and amortization of debt discount was $415 million in the first quartersix months of 2019,2020, down from $270$478 million and $490 million for Dow Inc. and TDCC, respectively, in the first quartersix months of 2018, as lower interest bearing notes issued2019. The decreases are primarily due to the redemption of long-term debt in the fourth quarter of 2018 replaced higher interest bearing notes redeemed in the fourth quarter of 2018.2019.
Provision for Income Taxes
TDCC'sThe 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 of the earnings from TDCC'sthe Company's equity method investments are taxed at the joint venture level. The effective tax rate for the firstsecond quarter of 20192020 for Dow Inc. and TDCC was 31.7negative 18.6 percent, compared with 20.958.1 percent and 36.5 percent for Dow Inc. and TDCC, respectively, for the second quarter of 2019. For the first six months of 2020, the effective tax rate for Dow Inc. and TDCC was 80.8 percent, compared with 52.0 percent and 41.6 percent for Dow Inc. and TDCC, respectively, for the first quartersix months of 2018.2019. The tax rate for Dow Inc. and TDCC in the second quarter and first six months of 2020 was unfavorably impacted primarily by equity losses and geographic mix of earnings and, to a lesser extent, non-deductible restructuring costs and an increase in tax reserves. The tax rate for Dow Inc. and TDCC in the second quarter of 2019 was unfavorably impacted by non-deductible restructuring costs and was favorably impacted as a result of a change in deferred taxes related to fixed assets. The tax rate for the first six months of 2019 was unfavorably impacted by tax impacts related to spin preparation activities and favorably impacted by tax benefits related to the issuance of stock-based compensation and deferred tax remeasurement in foreign jurisdictions. The
Income from Discontinued Operations, Net of Tax
Income from discontinued operations, net of tax rate inwas $445 million for the first quartersix months of 2018 was favorably impacted by tax benefits2019, related to the issuancedistribution of stock-based compensationAgCo and unfavorably impacted by non-deductible restructuring costs and certain provisions inSpecCo to DowDuPont as a result of the Tax Cuts and Jobs Act relatedseparation. See Note 3 to the taxabilityConsolidated Financial Statements for additional information.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests from continuing operations was $45$8 million in the firstsecond quarter of 2019, up2020, down from $35$15 million in the firstsecond quarter of 2018.2019. For the first six months of 2020, net income attributable to noncontrolling interests from continuing operations was $27 million, compared with $47 million for the same period last year.
Net income attributable to noncontrolling interests from discontinued operations was $13 million for the first six months of 2019, related to the distribution of AgCo and SpecCo to DowDuPont as a result of the separation. See Note 15 to the Consolidated Financial Statements for additional information.
Net Income Available for Common Stockholder(s)
Dow Inc.
Net income (loss) available for Dow Inc. common stockholders was a loss of $225 million, or $0.31 per share, in the Common Stockholdersecond quarter of 2020, compared with income of $75 million, or $0.10 per share, in the second quarter of 2019. Net income available for Dow Inc. common stockholders was $14 million, or $0.01 per share, in the first six months of 2020, compared with $631 million, or $0.84 per share, in the first six months of 2019. See Note 7 to the Consolidated Financial Statements for details on Dow Inc.'s earnings per share calculations.
TDCC
Net income (loss) available for the TDCC common stockholder was a loss of $225 million in the second quarter of 2020, compared with income of $202 million in the second quarter of 2019. Net income available for the TDCC common stockholder was $541$14 million in the first quartersix months of 2019, down from $1,3422020, compared with $758 million in the first quartersix months of 2018. From the Merger date and through March 31, 2019, TDCC had no publicly traded common stock. At March 31, 2019, TDCC's common shares were owned solely by its parent company, DowDuPont.2019. Following the separation from DowDuPont, TDCC's common shares are owned solely by Dow Inc.
SEGMENT RESULTS
Dow’s measure of profit/loss for segment reporting purposes is Operating EBIT (for the three and six months ended June 30, 2020 and the three months ended June 30, 2019) and pro forma Operating EBIT (for the six months ended June 30, 2019) 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 six months ended June 30, 2019, 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 from DowDuPont which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont. See Note 22 to the Consolidated Financial Statements for reconciliations of these measures and a summary of the pro forma adjustments impacting segment measures for the six months ended June 30, 2019.
PACKAGING & SPECIALTY PLASTICS
Packaging & Specialty Plastics consists of two highly integrated global businesses: Hydrocarbons & Energy and Packaging and Specialty Plastics. The segment employs the industry’s broadest polyolefin product portfolio, supported by the Company’s proprietary catalyst and manufacturing process technologies, to work at the customer’s design table throughout the value chain to deliver more reliable and durable, higher performing, and more sustainable plastics to customers in food and specialty packaging; industrial and consumer packaging; health and hygiene; caps, closures and pipe applications; consumer durables; automotive; and infrastructure. Ethylene is transferred to downstream derivative businesses at market-based prices, which are generally equivalent to prevailing market prices for large volume purchases. This segment also includes the results of The Kuwait Styrene Company K.S.C.C. and The SCG-Dow Group, as well as a portion of the results of EQUATE Petrochemical Company K.S.C.C. ("EQUATE"), The Kuwait Olefins Company K.S.C.C. ("TKOC"), Map Ta Phut Olefins Company Limited and Sadara, all joint ventures of the Company.
The Company is responsible for marketing a majority of Sadara products outside of the Middle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee.
| | | | | | | | | | | | | | |
| Packaging & Specialty Plastics | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 |
| Net sales | $ | 4,001 | | $ | 5,205 | | $ | 8,610 | | $ | 10,343 | |
| Pro forma net sales | | | | $ | 10,343 | |
| Operating EBIT | $ | 318 | | $ | 768 | | $ | 898 | | |
| Pro forma Operating EBIT | | | | $ | 1,458 | |
| Equity earnings | $ | 20 | | $ | 74 | | $ | 25 | | $ | 112 | |
| | | | | | | | |
| Packaging & Specialty Plastics | Three Months Ended | Six Months Ended |
| Percentage change from prior year | Jun 30, 2020 | Jun 30, 2020 |
| Change in Net Sales from Prior Period due to: | | |
| Local price & product mix | (22) | % | (16) | % |
| Currency | (1) | | (1) | |
| Volume | — | | — | |
| Portfolio & other | — | | — | |
| Total | (23) | % | (17) | % |
Change in Pro Forma Net Sales from Prior Period due to: 1 | | |
| Local price & product mix | | (16) | % |
| Currency | | (1) | |
| Volume | | — | |
| | |
| Total | | (17) | % |
1. As reported net sales for the six months ended June 30, 2020 compared with pro forma net sales for the six months ended June 30, 2019.
Packaging & Specialty Plastics net sales were $4,001 million in the second quarter of 2020, down 23 percent from net sales of $5,205 million in the second quarter of 2019, with local price down 22 percent, an unfavorable currency impact of 1 percent, primarily in EMEAI, and volume flat. Local price decreased in both businesses and across all geographic regions, driven by lower global energy prices and reduced polyethylene pricing. Price declines were reported in Hydrocarbons & Energy as prices for co-products are generally correlated to Brent crude oil prices, which, on average, declined 51 percent compared with the second quarter of 2019, as well as lower cracker co-product prices due to weak end-market demand. Volume was mixed by geographic region as increases in Asia Pacific and EMEAI were offset by declines in U.S. & Canada and Latin America. Packaging and Specialty Plastics reported volume growth in flexible food and specialty packaging, industrial and consumer packaging and health and hygiene applications, which was offset by reduced demand for functional polymers used in durable good end-markets, notably automotive, infrastructure and construction.
Operating EBIT was $318 million in the second quarter of 2020, down 59 percent from Operating EBIT of $768 million in the second quarter of 2019. Operating EBIT decreased primarily due to margin compression in both businesses, driven by lower demand in durable good end-markets and reduced equity earnings due to lower integrated olefin and aromatics margins at the Kuwait and Sadara joint ventures, which more than offset improvement at the Thai joint ventures. These declines more than offset cost reductions as well as demand growth and margin improvement in packaging applications.
Packaging & Specialty Plastics net sales were $8,610 million in the first six months of 2020, down 17 percent from net sales and pro forma net sales of $10,343 million in the first six months of 2019, with local price down 16 percent, an unfavorable currency impact of 1 percent, primarily in EMEAI, and volume flat. Local price decreased in both businesses and across all geographic regions, driven by reduced polyethylene prices and lower global energy prices. Price declines were reported in Hydrocarbons & Energy as prices for co-products are generally correlated to Brent crude oil prices, which, on average, declined 36 percent compared with the first six months of 2019. Volume decreased in Hydrocarbons & Energy, primarily in U.S. & Canada and Asia Pacific, more than offsetting increases in EMEAI. Volume increased in Packaging and Specialty Plastics in Asia Pacific, Latin America and EMEAI, partially offset by declines in U.S. & Canada primarily due to the COVID-19 pandemic.
Operating EBIT was $898 million in the first six months of 2020, down 38 percent from pro forma Operating EBIT of $1,458 million in the first six months of 2019. Operating EBIT decreased primarily due to margin compression in both businesses and reduced equity earnings due to margin compression at the Kuwait and Sadara joint ventures. These declines more than offset cost reductions.
INDUSTRIAL INTERMEDIATES & INFRASTRUCTURE
Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & Construction Chemicals - that develop important intermediate chemicals that are essential to manufacturing processes, as well as downstream, customized materials and formulations that use advanced development technologies. These businesses primarily produce and market ethylene oxide and propylene oxide derivatives that are aligned to market segments as diverse as appliances, coatings, infrastructure and oil and gas. The global scale and reach of these businesses, world-class technology and R&D capabilities and materials science expertise enable the Company to be a premier solutions provider, offering customers value-add sustainable solutions to enhance comfort, energy efficiency, product effectiveness and durability across a wide range of home comfort and appliances, building and construction, adhesives and lubricant applications, among others. This segment also includes a portion of the results of EQUATE, TKOC, Map Ta Phut Olefins Company Limited and Sadara, all joint ventures of the Company.
The Company is responsible for marketing a majority of Sadara products outside of the Middle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee.
| | | | | | | | | | | | | | |
| Industrial Intermediates & Infrastructure | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 |
| Net sales | $ | 2,417 | | $ | 3,342 | | $ | 5,462 | | $ | 6,822 | |
| Pro forma net sales | | | | $ | 6,831 | |
| Operating EBIT | $ | (220) | | $ | 154 | | $ | (45) | | |
| Pro forma Operating EBIT | | | | $ | 431 | |
| Equity losses | $ | (113) | | $ | (78) | | $ | (189) | | $ | (126) | |
| | | | | | | | |
| Industrial Intermediates & Infrastructure | Three Months Ended | Six Months Ended |
| Percentage change from prior year | Jun 30, 2020 | Jun 30, 2020 |
| Change in Net Sales from Prior Period due to: | | |
| Local price & product mix | (9) | % | (9) | % |
| Currency | (1) | | (1) | |
| Volume | (18) | | (10) | |
| | |
| Total | (28) | % | (20) | % |
Change in Pro Forma Net Sales from Prior Period due to: 1 | | |
| Local price & product mix | | (9) | % |
| Currency | | (1) | |
| Volume | | (10) | |
| | |
| Total | | (20) | % |
1. As reported net sales for the six months ended June 30, 2020 compared with pro forma net sales for the six months ended June 30, 2019.
Industrial Intermediates & Infrastructure net sales were $2,417 million in the second quarter of 2020, down 28 percent from $3,342 million in the second quarter of 2019, with volume down 18 percent, a decline in local price of 9 percent and an unfavorable currency impact of 1 percent. Volume decreased in Polyurethanes & Construction Chemicals and Industrial Solutions and in all geographic regions, except Asia Pacific, reflecting the impact of the COVID-19 pandemic. Polyurethanes & Construction Chemicals volume decreased primarily due to weak demand in consumer durable good end-markets, notably construction, furniture and bedding and automotive. Volume decreased in Industrial Solutions as improved demand for pharma and home care applications was more than offset by declines in industrial and oil applications and consumer textiles. Local price decreased in both businesses and in all geographic regions. The decrease in local price was primarily driven by lower global energy costs and the impact of the COVID-19 pandemic on supply/demand fundamentals.
Operating EBIT was a loss of $220 million in the second quarter of 2020, compared with Operating EBIT of $154 million in the second quarter of 2019. Operating EBIT decreased primarily due to demand destruction, margin compression and lower equity earnings from the Kuwait joint ventures.
Industrial Intermediates & Infrastructure net sales were $5,462 million in the first six months of 2020, down 20 percent from net sales of $6,822 million in the first six months of 2019. Net sales decreased 20 percent compared with pro forma net sales of $6,831 million in the first six months of 2019, driven by a decrease in volume of 10 percent, a decline in local price of 9 percent and an unfavorable currency impact of 1 percent. Volume declined in both businesses and in all geographic regions, except Asia Pacific, which was flat. Volume decreased in Polyurethanes & Construction Chemicals in all geographic regions and was attributable to weaker demand for products used in consumer durable good end-markets, including construction, furniture and bedding, and automotive, along with lower demand for aircraft deicing applications. Volume decreased in Industrial Solutions due to weakened demand for consumer durable goods and oil and gas and industrial applications, which was offset by stronger demand in pharma, cleaning and home care applications. Industrial Solutions volume declined in all geographic regions, except Asia Pacific. Local price decreased in both businesses and all geographic regions. The decrease in local price was primarily driven by lower global energy and raw material costs.
Operating EBIT was a loss of $45 million in the first six months of 2020, compared with pro forma Operating EBIT of $431 million in the first six months of 2019. Operating EBIT decreased as a result of margin compression, lower equity earnings from the Kuwait joint ventures and softer demand, which was partially offset by lower planned maintenance turnaround costs.
PERFORMANCE MATERIALS & COATINGS
Performance Materials & Coatings includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. These businesses primarily utilize the Company's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of the architectural and industrial coatings, home care and personal care end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to combine chemistry platforms to deliver differentiated offerings to customers.
| | | | | | | | | | | | | | |
| Performance Materials & Coatings | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 |
| Net sales | $ | 1,855 | | $ | 2,356 | | $ | 3,920 | | $ | 4,638 | |
| Pro forma net sales | | | | $ | 4,676 | |
| Operating EBIT | $ | 27 | | $ | 214 | | $ | 189 | | |
| Pro forma Operating EBIT | | | | $ | 485 | |
| Equity earnings | $ | 2 | | $ | 1 | | $ | 3 | | $ | 1 | |
| | | | | | | | |
| Performance Materials & Coatings | Three Months Ended | Six Months Ended |
| Percentage change from prior year | Jun 30, 2020 | Jun 30, 2020 |
| Change in Net Sales from Prior Period due to: | | |
| Local price & product mix | (6) | % | (7) | % |
| Currency | (1) | | (1) | |
| Volume | (14) | | (9) | |
| Portfolio & other | — | | 2 | |
| Total | (21) | % | (15) | % |
Change in Pro Forma Net Sales from Prior Period due to: 1 | | |
| Local price & product mix | | (7) | % |
| Currency | | (1) | |
| Volume | | (8) | |
| | |
| Total | | (16) | % |
1. As reported net sales for the six months ended June 30, 2020 compared with pro forma net sales for the six months ended June 30, 2019.
Performance Materials & Coatings net sales were $1,855 million in the second quarter of 2020, down 21 percent from net sales of $2,356 million in the second quarter of 2019, with volume down 14 percent, local price down 6 percent, and an unfavorable currency impact of 1 percent. Volume declined across all geographic regions, 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, construction and personal care end-markets as consumer activities and buying patterns were limited by the COVID-19 pandemic. Volume declined in Coatings & Performance Monomers primarily due to lower demand for industrial coatings, which more than offset growth for architectural coatings in U.S. & Canada. Local price decreased in both businesses and across all geographic regions. Local price decreased in Coatings & Performance Monomers due to weaker supply/demand fundamentals. Consumer Solutions local price decreased primarily due to lower pricing in siloxanes across all geographic regions due to weaker supply/demand fundamentals.
Operating EBIT was $27 million in the second quarter of 2020, down 87 percent from Operating EBIT of $214 million in the second quarter of 2019. Operating EBIT decreased primarily due to margin compression in siloxanes and lower demand due to the COVID-19 pandemic.
Performance Materials & Coatings net sales were $3,920 million in the first six months of 2020, down 15 percent from net sales of $4,638 million in the first six months of 2019. Net sales decreased 16 percent compared with pro forma net sales of $4,676 million in the same quarter last year, with volume down 8 percent, local price down 7 percent, and an unfavorable currency impact of 1 percent. Volume declines in Asia Pacific, EMEAI and U.S. & Canada, which reflected the impact from the COVID-19 pandemic, were partially offset by volume growth in Latin America. Consumer Solutions volume decreased due to lower demand in Asia Pacific, EMEAI and U.S. & Canada, partially offset by demand growth in upstream siloxanes in Latin America. Coatings & Performance Monomers volume decreased in Asia Pacific, EMEAI and Latin America primarily due to the impact of the COVID-19 pandemic, which was partially offset by strong demand for home improvement applications in U.S. & Canada. Local price decreased in both businesses and all geographic regions. Consumer Solutions local price declined primarily in upstream siloxanes due to weak supply/demand fundamentals. Local price decreased in Coatings & Performance Monomers in response to lower feedstock and other raw material costs.
Operating EBIT was $189 million in the first six months of 2020, down 61 percent from pro forma Operating EBIT of $485 million in the first six months of 2019. Operating EBIT decreased primarily due to margin compression in siloxanes and lower demand as a result of the COVID-19 pandemic.
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 | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 |
| Net sales | $ | 81 | | $ | 111 | | $ | 132 | | $ | 180 | |
| Pro forma net sales | | | | $ | 180 | |
| Operating EBIT | $ | (68) | | $ | (77) | | $ | (142) | | |
| Pro forma Operating EBIT | | | | $ | (172) | |
| Equity losses | $ | (4) | | $ | (12) | | $ | (23) | | $ | (16) | |
Net sales for Corporate, which primarily relate to the Company's insurance operations, were $81 million in the second quarter of 2020, a decrease from net sales of $111 million in the second quarter of 2019. Net sales were $132 million in the first six months of 2020, down from net sales and pro forma net sales of $180 million in the first six months of 2019.
Operating EBIT was a loss of $68 million in the second quarter of 2020, compared with a loss of $77 million in the second quarter of 2019. Operating EBIT was a loss of $142 million in the first six months of 2020, compared with a pro forma Operating EBIT loss of $172 million in the first six months of 2019. Operating EBIT improved primarily due to cost reductions and stranded cost removal throughout 2019.
CHANGES IN FINANCIAL CONDITION
TDCCThe Company had cash and cash equivalents of $2,969$3,724 million at March 31, 2019June 30, 2020 and $2,669$2,367 million at December 31, 2018,2019, of which $2,269$1,186 million at March 31, 2019June 30, 2020 and $1,963$986 million at December 31, 2018,2019 was held by subsidiaries in foreign countries, including United States territories. For each of its foreign subsidiaries, TDCCDow makes an assertion regarding the amount of earnings intended for permanent reinvestment, with the balance available to be repatriated to the United States.
The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries' operational activities and future foreign investments. TDCCDow has the ability to repatriate additional funds to the U.S., which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/or U.S. state income taxes and the impact of foreign currency movements. During 2019, TDCC2020, Dow has repatriated and expects to continue repatriating certain funds from its non-U.S. subsidiaries that are not needed to finance local operations or separation activities; however, these particular repatriation activities have not and are not expected to result in a significant incremental tax liability to TDCC.the Company.
TDCC'sThe 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 | |
| Six Months Ended | | Six Months Ended | |
| Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 |
| In millions | | | | |
| Cash provided by (used for): | | | | |
| Operating activities - continuing operations | $ | 2,835 | | $ | 2,003 | | $ | 2,842 | | $ | 1,977 | |
| Operating activities - discontinued operations | (6) | | 253 | | — | | 346 | |
| Operating activities | 2,829 | | 2,256 | | 2,842 | | 2,323 | |
| Investing activities - continuing operations | (534) | | (846) | | (534) | | (846) | |
| Investing activities - discontinued operations | — | | (34) | | — | | (34) | |
| Investing activities | (534) | | (880) | | (534) | | (880) | |
| Financing activities - continuing operations | (879) | | (1,649) | | (892) | | (1,716) | |
| Financing activities - discontinued operations | — | | (18) | | — | | (18) | |
| Financing activities | (879) | | (1,667) | | (892) | | (1,734) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (66) | | 10 | | (66) | | 10 | |
| | | | |
| Summary | | | | |
| Increase (decrease) in cash, cash equivalents and restricted cash | 1,350 | | (281) | | 1,350 | | (281) | |
| Cash, cash equivalents and restricted cash at beginning of period | 2,380 | | 2,764 | | 2,380 | | 2,764 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 3,730 | | $ | 2,483 | | $ | 3,730 | | $ | 2,483 | |
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 6 | | 37 | | 6 | | 37 | |
| Cash and cash equivalents at end of period | $ | 3,724 | | $ | 2,446 | | $ | 3,724 | | $ | 2,446 | |
|
| | | | | | |
| Cash Flow Summary | Three Months Ended |
| In millions | Mar 31, 2019 | Mar 31, 2018 |
| Cash provided by (used for): | | |
| Operating activities | $ | 1,426 |
| $ | (158 | ) |
| Investing activities | (486 | ) | (92 | ) |
| Financing activities | (667 | ) | (853 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 30 |
| 100 |
|
| Summary | | |
| Increase (Decrease) in cash, cash equivalents and restricted cash | $ | 303 |
| $ | (1,003 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | 2,709 |
| 6,207 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 3,012 |
| $ | 5,204 |
|
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 43 |
| 18 |
|
| Cash and cash equivalents at end of period | $ | 2,969 |
| $ | 5,186 |
|
Cash Flows from Operating Activities
InCash provided by operating activities from continuing operations increased in the first threesix months of 2019,2020 compared with the first six months of 2019. The improvement was primarily due to improvements in working capital, a decrease in performance-based compensation payments, a cash receipt for the refund of withholding tax related to the Nova ethylene asset matter and an increase in advance payments from customers, which were partially offset by a decrease in dividends received from nonconsolidated affiliates.
| | | | | | | | | | | | | | |
| Net Working Capital | Dow Inc. | | TDCC | |
| Jun 30, 2020 | Dec 31, 2019 | Jun 30, 2020 | Dec 31, 2019 |
| In millions | | | | |
| Current assets | $ | 16,997 | | $ | 16,815 | | $ | 16,930 | | $ | 16,733 | |
| Current liabilities | 9,786 | | 10,679 | | 9,308 | | 10,150 | |
| Net working capital | $ | 7,211 | | $ | 6,136 | | $ | 7,622 | | $ | 6,583 | |
| Current ratio | 1.74:1 | 1.57:1 | 1.82:1 | 1.65:1 |
| | | | | | | | |
| Working Capital Metrics | Three Months Ended | |
| Jun 30, 2020 | Jun 30, 2019 |
| | |
Days sales outstanding in receivables 1 | 50 | | 47 | |
Days sales in inventory 2 | 72 | | 67 | |
Days payables outstanding 3 | 68 | | 63 | |
1. The increase in days sales outstanding in receivables was primarily due to a decrease in net sales, which more than offset a decrease in average accounts receivable.
2. The increase in days sales in inventory was primarily due to a decrease in COS, which more than offset a decrease in average inventory.
3. The increase in days payables outstanding was primarily due to a decrease in COS and a decrease in the change in inventory, which more than offset a decrease in average accounts payable.
Cash used for operating activities from discontinued operations in the first six months of 2020 decreased compared with cash provided by operating activities was $1,426 million, up $1,584 million compared with cash used for operating activities of $158 millionfrom discontinued operations in the first threesix months of 2018, primarily reflecting a decrease in cash used2019 due to the separation of AgCo and SpecCo on April 1, 2019. See Note 3 to the Consolidated Financial Statements for working capital, advance payments from a customer for product supply agreements, lower pension contributions and higher dividends received from nonconsolidated affiliates which were partially offset by lower cash earnings.additional information.
Cash Flows from Operating Activities - Non-GAAP
The following table reconciles cash flows from operating activities to a non-GAAP measure regarding cash flows from operating activities excluding the impact of Accounting Standards Update ("ASU") 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" and related interpretive guidance for the three months ended March 31, 2018. 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 TDCC utilizes in support of its operating activities.
|
| | | |
| Cash Flows from Operating Activities Excluding Impact of ASU 2016-15 and Additional Interpretive Guidance (non-GAAP) | Three Months Ended |
| In millions | Mar 31, 2018 |
| Cash flows from operating activities - Updated for impact of ASU 2016-15 and additional interpretive guidance (GAAP) | $ | (158 | ) |
| Less: Impact of ASU 2016-15 and additional interpretive guidance | 445 |
|
| Cash flows from operating activities - Excluding impact of ASU 2016-15 and additional interpretive guidance (non-GAAP) | $ | 287 |
|
Cash Flows from Investing Activities
In the first three months of 2019, cashCash used for investing activities from continuing operations in the first six months of 2020 was $486 million, primarily due tofor capital expenditures, and purchases of investments, which were partially offset by proceeds from sales and maturities of investments. In the first three months of 2018, cash used for investing activities was $92 million, primarily due to purchases of investments and capital expenditures,investments in and loans to nonconsolidated affiliates (related to Sadara), which were partially offset by proceeds from sales and maturities of investments, and included partial monetization of the Company's investment in company-owned life insurance policies. Cash used for investing activities from continuing operations in the first six months of 2019 was primarily for capital expenditures, purchases of investments and investments in and loans to nonconsolidated affiliates (related to Sadara), which were partially offset by proceeds from interests in trade accounts receivable conduits.sales and maturities of investments.
Capital spending was $514The Company's capital expenditures, including capital expenditures of consolidated variable interest entities, were $668 million in the first threesix months of 2019,2020, compared with $423$912 million in the first threesix months of 2018. TDCC2019. In April 2020, the Company reduced its capital expenditure target and expects full year capital spending in 20192020 to be approximately $2.5 billion, below depreciation and amortization expense and inclusive of capital$1.25 billion. The Company will adjust its spending for targeted cost synergy and business separation projects.through the year as economic conditions develop.
In the first threesix months of 2019, TDCC waived $1352020, the Company loaned $236 million of accounts receivable with Sadara, which was converted into equity. TDCCto Sadara. The Company expects to loan Sadara up to $500 million in 2020. Due to the potential for Dow to continue providing financial support to Sadara, during the remainderCompany will continue to recognize its share of 2019. All or a portionequity losses reported by Sadara.
Cash used in investing activities from discontinued operations in the first six months of 2019 was primarily for capital expenditures, partially offset by proceeds from the loans to Sadara could potentially be converted into equitysale of property and businesses and proceeds from sales of ownership interests in future periods.nonconsolidated affiliates.
Cash Flows from Financing Activities
In the first three months of 2019, cashCash used for financing activities decreasedfrom continuing operations in the first six months of 2020 included proceeds from issuance of long-term debt and changes in short-term notes payable, which were partially offset by payments on long-term debt. In addition, Dow Inc. included cash outflows for dividends paid to $667 million comparedstockholders 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 the first six months of 2019 included payments on long-term debt and dividends paid to DowDuPont, which were partially offset by proceeds from the issuance of long-term debt. In addition, Dow Inc. received cash as part of the separation from DowDuPont, which more than offset dividends paid to common stockholders and repurchases of common stock. TDCC was further impacted by the change in the note payable with $853 millionDow Inc. See Note 11 to the Consolidated Financial Statements for additional information related to the issuance and retirement of debt.
Cash used for financing activities from discontinued operations in the first six months of 2019 primarily related to distributions to noncontrolling interests and employee taxes paid for share-based payment arrangements.
Dow Inc. Non-GAAP Cash Flow Measures
Free Cash Flow
Dow defines free cash flow as cash flows from operating activities - continuing operations, less capital expenditures. Under this definition, free cash flow represents the cash generated by the Company 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 the Company's financial planning process.
Operating EBITDA and Pro Forma Operating EBITDA
Dow defines Operating EBITDA (for the three months ended June 30, 2020 and 2019 and the six months ended June 30, 2020) as earnings (i.e., "Income (loss) from continuing operations before income taxes") before interest, depreciation and amortization, excluding the impact of significant items. Pro forma Operating EBITDA (for the six months ended June 30, 2019) 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 Flow Conversion (Operating EBITDA or Pro Forma Operating EBITDA to Cash Flow From Operations)
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, 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 to cash flow.
These financial measures are not recognized in accordance with U.S. GAAP and should not be viewed as alternatives to U.S. GAAP financial measures of performance. All companies do not calculate non-GAAP financial measures in the same period last year, primarily duemanner and, accordingly, Dow's definitions may not be consistent with the methodologies used by other companies.
| | | | | | | | |
| Reconciliation of Free Cash Flow | Six Months Ended | |
| Jun 30, 2020 | Jun 30, 2019 |
| In millions | | |
| Cash provided by operating activities - continuing operations (GAAP) | $ | 2,835 | | $ | 2,003 | |
| Capital expenditures | (668) | | (912) | |
| Free cash flow (Non-GAAP) | $ | 2,167 | | $ | 1,091 | |
| | | | | | | | |
| Reconciliation of Cash Flow Conversion (Operating EBITDA or Pro Forma Operating | Six Months Ended | |
| EBITDA to Cash Flow From Operations) | Jun 30, 2020 | Jun 30, 2019 1 |
| In millions | | |
| Income from continuing operations, net of tax (GAAP) | $ | 41 | | $ | 246 | |
| + Provision for income taxes on continuing operations | 172 | | 266 | |
| Income from continuing operations before income taxes | $ | 213 | | $ | 512 | |
| - Interest income | 21 | | 39 | |
| + Interest expense and amortization of debt discount | 415 | | 478 | |
| + Pro forma adjustments ² | — | | 65 | |
| - Significant items ³ | (293) | | (1,186) | |
| Operating EBIT (Non-GAAP) | $ | 900 | | $ | 2,202 | |
| + Depreciation and amortization | 1,424 | | 1,486 | |
| Operating EBITDA (Non-GAAP) | $ | 2,324 | | $ | 3,688 | |
| Cash flows from operating activities - continuing operations (GAAP) | $ | 2,835 | | $ | 2,003 | |
| Cash flow conversion (Operating EBITDA or pro forma Operating EBITDA to cash flow from operations) (Non-GAAP) | 122.0 | % | 54.3 | % |
1. Operating EBIT, depreciation and amortization and Operating EBITDA for the six months ended June 30, 2019 are presented on a pro forma basis.
2. Pro forma adjustments for the six months ended June 30, 2019 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 a decrease in dividends paid, which was partially offset by less commercial paper issued during the period.
Subsequent Event
On April 1, 2019, Dow Inc. received a cash contribution of $2,024 million from DowDuPont as part of theMerger, internal reorganization and business realignment, steps between Dow Inc.separation, distribution and other related transactions (e.g., TDCCone-time transaction costs).
3. The six months ended June 30, 2020 include integration and DowDuPont.separation costs, restructuring and asset related charges - net, a loss on early extinguishment of debt and a gain related to a legal settlement with Nova. The six months ended June 30, 2019 include integration and separation costs, restructuring and asset related charges - net, a loss on early extinguishment of debt, a loss related to a previous divestiture and a loss associated with agreements entered into with DuPont and Corteva as part of the separation and distribution. See Note 22 to the Consolidated Financial Statements for additional information.
Liquidity & Financial Flexibility
TDCC’sThe Company’s primary source of incremental liquidity is cash flows from operating activities. The generation of cash from operations and TDCC'sthe Company's ability to access debtcapital markets is expected to meet TDCC’sthe 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, TDCC’sthe Company’s current liquidity sources also include TDCC's U.S. and Euromarket commercial paper programs, committed and uncommitted credit facilities, a committed accounts receivable facility, a U.S. retail note program (“InterNotes®”) and other debt markets.
The Company continues to maintain a strong financial position and solid 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. At June 30, 2020, the Company had approximately $12 billion in committed forms of liquidity, which included $3.7 billion in cash and cash equivalents. The Company also has no substantive long-term debt maturities until the second half of 2023. Additional details on sources of liquidity are as follows:
Commercial Paper
TDCC issues promissory notes under its U.S. and Euromarket commercial paper programs. TDCC had no$500 million of commercial paper outstanding at March 31, 2019June 30, 2020 ($10151 million at December 31, 2018)2019). TDCC maintains access to the commercial paper market at competitive rates.Amounts outstanding under TDCC's commercial paper programs during the period may be greater, or less than, the amount reported at the end of the period. Subsequent to March 31, 2019,June 30, 2020, TDCC issued approximately $1,650$500 million of commercial paper.
Committed Credit Facilities
In the event TDCC has short-term liquidity needs and is unable to issue commercial paper for any reason, TDCCThe Company also has the ability to access liquidity through itsTDCC's committed and available credit facilities. At March 31, 2019,June 30, 2020, TDCC had total committed credit facilities of $12.1$8.7 billion and available credit facilities of $7.6$7.4 billion. In the first quarter of 2020, Dow Silicones voluntarily repaid $750 million of principal under a certain third party credit agreement. See Note 911 to the Consolidated Financial Statements for additional information on committed and available credit facilities.
Committed Accounts Receivable Facility
In connection withaddition to the ownership restructure of Dow Silicones on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness underabove committed credit facilities, the Company maintains a certain third party credit agreement ("Term Loan Facility"). On April 5, 2019, Dow Silicones voluntarily repaid $2.0 billion of principal oncommitted accounts receivable facility in North America where eligible trade accounts receivable, up to $900 million, may be sold at any point in time. For additional information, see Note 15 to the Term Loan Facility, which was classified as "Long-term debt due within one year"Consolidated Financial Statements included in the consolidatedcombined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2019.
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 sheetssheet date. The Company has the ability to monetize its investment in its COLI policies as an additional source of liquidity. At June 30, 2020, the Company had monetized $293 millionof its existing COLI policies' value ($85 million at MarchDecember 31, 2019. Dow Silicones intends to exercise the 2-year extension option on the remaining principal balance of $2.5 billion.2019). See Note 96 to the Consolidated Financial Statements for additional information oninformation.
Uncommitted Credit Facilities
Dow has entered into various uncommitted bilateral credit arrangements as a potential source of excess liquidity. These lines can be used to support short-term liquidity needs and for general purposes, including letters of credit. In the Term Loan Facility.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. See Note 11 to the Consolidated Financial Statements for additional information.
Debt
As TDCCthe Company continues to maintain its strong balance sheet and financial flexibility, management is focused on net debt (a non-GAAP financial measure), as TDCCthe Company believes this is the best representation of its 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 March 31, 2019,June 30, 2020, net debt as a percent of total capitalization decreasedincreased to 37.351.4 percent and 50.0 percent for Dow Inc. and TDCC, respectively, compared with 38.050.9 percent and 49.6 percent at December 31, 2018, primarily2019.
| | | | | | | | | | | | | | |
| Total Debt | Dow Inc. | | TDCC | |
| Jun 30, 2020 | Dec 31, 2019 | Jun 30, 2020 | Dec 31, 2019 |
| In millions | | | | |
| Notes payable | $ | 853 | | $ | 586 | | $ | 853 | | $ | 586 | |
| Long-term debt due within one year | 451 | | 435 | | 451 | | 435 | |
| Long-term debt | 16,288 | | 15,975 | | 16,288 | | 15,975 | |
| Gross debt | $ | 17,592 | | $ | 16,996 | | $ | 17,592 | | $ | 16,996 | |
| - Cash and cash equivalents | 3,724 | | 2,367 | | 3,724 | | 2,367 | |
| - Marketable securities | 2 | | 21 | | 2 | | 21 | |
| Net debt | $ | 13,866 | | $ | 14,608 | | $ | 13,866 | | $ | 14,608 | |
| Total equity | $ | 13,097 | | $ | 14,094 | | $ | 13,852 | | $ | 14,862 | |
| Gross debt as a percent of total capitalization | 57.3 | % | 54.7 | % | 55.9 | % | 53.3 | % |
| Net debt as a percent of total capitalization | 51.4 | % | 50.9 | % | 50.0 | % | 49.6 | % |
In February 2020, the Company issued €2.25 billion aggregate principal amount of notes (“Euro Notes”). The Euro Notes include €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. In addition, the Company redeemed $1.25 billion of 3.0 percent notes issued by the Company with maturity in 2022.
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, certain internal approvals of the Company, and applicable laws and regulations of the relevant jurisdiction in which any such potential transactions might take place. This in no way obligates the Company to make any such repurchases nor should it be considered an increase in cash.offer to do so.
|
| | | | | | |
| Total Debt | Mar 31, 2019 | Dec 31, 2018 |
| In millions |
| Notes payable | $ | 317 |
| $ | 305 |
|
| Long-term debt due within one year | 2,369 |
| 340 |
|
| Long-term debt | 17,160 |
| 19,254 |
|
| Gross debt | $ | 19,846 |
| $ | 19,899 |
|
| - Cash and cash equivalents | 2,969 |
| 2,669 |
|
| - Marketable securities | 101 |
| 100 |
|
| Net debt | $ | 16,776 |
| $ | 17,130 |
|
| Gross debt as a percent of total capitalization | 41.4 | % | 41.6 | % |
| Net debt as a percent of total capitalization | 37.3 | % | 38.0 | % |
TDCC's public debt instruments and primary, private credit agreements contain, among other provisions, certain customary restrictive covenant and default provisions. TDCC's most significant debt covenant with regard to its financial position is the obligation to maintain the ratio of its 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 TDCC's consolidated indebtedness to consolidated capitalization as defined in the Revolving Credit Agreement was 0.410.53 to 1.00 at March 31, 2019.June 30, 2020. Management believes TDCC was in compliance with all of its covenants and default provisions at March 31, 2019.June 30, 2020. For information on TDCC's debt covenants and default provisions, see Note 1516 to the Consolidated Financial Statements included in TDCC'sthe combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2018.2019. There were no material changes to the debt covenants and default provisions related to TDCC’s outstanding long-term debt and primary, private credit agreements in the first quartersix months of 2019.2020.
Subsequent Event
On April 1, 2019, DowDuPont completedWhile taking into consideration 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 the 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 Quarterly Report on Form 10-Q.
Managementcurrent economic environment, management expects that TDCCthe Company will continue to have sufficient liquidity and financial flexibility to meet all of its business obligations.
Credit Ratings
At AprilJune 30, 2019,2020, TDCC's credit ratings 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, S&P announced a credit rating change for Dow 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 re-affirmed Dow’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 TDCC's credit ratings will increase borrowing costs on certain indentures and could impact its ability to access debt capital markets.
Dividends
Dow Inc.
On April 11, 2019,February 13, 2020, Dow Inc.’s announced that its Board of Directors declared a dividend of $0.70 per share, payablewhich was paid on June 14, 2019,March 13, 2020, to shareholders of record on May 31, 2019, consistent withas of February 28, 2020. On April 9, 2020, Dow Inc. announced that its March 7, 2019 action declaring thatBoard declared a cash dividend of $525 million would be$0.70 per share, which was paid effective upon separation from DowDuPont.on June 12, 2020, to shareholders of record as of May 29, 2020.
TDCC
Effective with the Merger,separation from DowDuPont on April 1, 2019, TDCC no longerbecame a wholly owned subsidiary of Dow Inc. TDCC has publicly traded common stock. At March 31, 2019, TDCC's common shares were owned solely by its parent company, DowDuPont. Pursuant to the Merger Agreement, TDCC committed to fund a portion of DowDuPont'sDow 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. In addition, share repurchases by DowDuPont were partially funded by TDCC through 2018. Funding wasis accomplished through intercompany loans. On a quarterly basis, TDCC's Board of Directors reviewedreviews and determineddetermines a dividend distribution to DowDuPontDow Inc. to settle the intercompany loans. The dividend distribution considered the level of TDCC’s earnings and cash flows and the outstanding intercompany loan balances. For the three months ended March 31, 2019,June 30, 2020, TDCC declared and paid dividendsa dividend to DowDuPontDow Inc. of $535$529 million ($1,057 ($1,172 million for the threesix months ended March 31, 2018)June 30, 2020). SeeAt June 30, 2020, TDCC's intercompany loan balance with Dow Inc. was insignificant. See Note 1821 to the Consolidated Financial Statements for additional information.
Share Repurchase Program
On February 25,April 1, 2019, Dow Inc. announced a new's Board ratified the share repurchase program originally approved on March 15, 2019, authorizing up to $3.0 billion shareto be spent on the repurchase program. The program hasof the Company's common stock, with no expiration date.The Company did not repurchase any of its common stock in the second quarter of 2020 (repurchased $125 million of the Company's common stock in the six months ended June 30, 2020). At June 30, 2020, approximately $2.4 billion of the share repurchase program authorization remained available for repurchases. At this time, Dow Inc. does not expect to repurchase additional shares in 2020, but will continue to evaluate as the year progresses.
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 Company's funding policy is to contribute to funded plans when pension laws and/or economics either require or encourage funding. The Company expects to contribute approximately $290 million to its pension plans in 2020, of which $112 million has been contributed through June 30, 2020. See Note 16 to the Consolidated Financial Statements and Note 21 to the Consolidated Financial Statements included in the combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2019 for additional information concerning the Company's pension plans.
Restructuring
The activities related to the DowDuPont Agriculture Division Program and the Synergy Program are expected to result in additional cash expenditures of approximately $350$100 million, primarily through the end of 2019,2020, consisting of severance and related benefit costs and costs associated with exit and disposal activities, including environmental remediation (see Note 45 to the Consolidated Financial Statements). TDCCThe Company expects to incur additional costs in the future related to its restructuring activities. Future costs are expected to include demolition costs related to closed facilities and restructuring plan implementation costs; these costs will be recognized as incurred. TDCCThe Company also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.
Integration and Separation Costs
Integration and separation costs which reflect costs related to post-Merger integration and business separation activities, as well as the ownership restructure of Dow Silicones (through May 31, 2018), were $408 million for the three months ended March 31, 2019 and $202 million for the three months ended March 31, 2018. Integration and separation costs related to post-Merger integration and business separation activities are expected to declineresult in additional cash expenditures of $125 million to $150 million through the remainderend of 2019, but are expected to be significant in 2019.2020.
Contractual Obligations
Information related to TDCC’sthe Company’s contractual obligations, commercial commitments and expected cash requirements for interest can be found in Notes 15, 16, 17, 18 and 1921 to the Consolidated Financial Statements included in TDCC’sthe combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2018.2019. With the exception of the items noted below, there have been no material changes in TDCC’sthe Company’s contractual obligations since December 31, 2018.2019.
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| Contractual Obligations at Jun 30, 2020 | Payments Due In | | | | |
| In millions | 2020 | 2021-2022 | 2023-2024 | 2025 and beyond | Total |
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Long-term debt obligations 1 | $ | 277 | | $ | 721 | | $ | 3,201 | | $ | 12,890 | | $ | 17,089 | |
Expected cash requirements for interest 2 | $ | 371 | | $ | 1,428 | | $ | 1,323 | | $ | 7,758 | | $ | 10,880 | |
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Operating leases 3 | $ | 232 | | $ | 775 | | $ | 506 | | $ | 808 | | $ | 2,321 | |
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| Total | $ | 880 | | $ | 2,924 | | $ | 5,030 | | $ | 21,456 | | $ | 30,290 | |
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| Contractual Obligations at Mar 31, 2019 | Payments Due In | |
| In millions | 2019 | 2020-2021 | 2022-2023 | 2024 and beyond | Total |
Long-term debt obligations 1 | $ | 2,307 |
| $ | 6,088 |
| $ | 2,007 |
| $ | 9,451 |
| $ | 19,853 |
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Expected cash requirements for interest 2 | $ | 673 |
| $ | 1,629 |
| $ | 1,168 |
| $ | 6,907 |
| $ | 10,377 |
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| Operating leases | $ | 437 |
| $ | 936 |
| $ | 634 |
| $ | 1,157 |
| $ | 3,164 |
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1. | Excludes unamortized debt discount and issuance costs of $324 million. Includes finance lease obligations of $369 million. Assumes the option to extend will be exercised for $2.5 billion of the Dow Silicones Term Loan Facility. |
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2. | Cash requirements for interest on long-term debt was calculated using current interest rates at March 31, 2019, and includes $4,919 million of various floating rate notes. |
2.Cash requirements for interest on long-term debt was calculated using current interest rates and exchange rates at June 30, 2020, and includes $1,571 million of various floating rate notes.
3.Includes imputed interest of $371 million.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are obligations TDCCthe Company has with nonconsolidated entities related to transactions, agreements or other contractual arrangements. TDCCThe Company holds variable interests in joint ventures accounted for under the equity method of accounting. TDCCThe Company is not the primary beneficiary of these joint ventures and therefore is not required to consolidate these entities (see Note 1720 to the Consolidated Financial Statements).
Guarantees arise during the ordinary course of business from relationships with customers, committed accounts receivable facilities and nonconsolidated affiliates when TDCCthe Company undertakes an obligation to guarantee the performance of others if specific triggering events occur. TDCCThe Company had outstanding guarantees at March 31, 2019June 30, 2020 of $4,514$3,788 million, down from $4,523$3,952 million at December 31, 2018.2019. Additional information related to guarantees can be found in the "Guarantees" section of Note 1012 to the Consolidated Financial Statements.
Fair Value Measurements
See Note 1619 to the Consolidated Financial Statements for additional information concerning fair value measurements.
OTHER MATTERS
Recent Accounting Guidance
See Note 2 to the Consolidated Financial Statements for a summary of recent accounting guidance.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements included in TDCC’sthe combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 10-K”2019 ("2019 10-K") describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. TDCC’sThe Company’s accounting policies that are impacted by judgments, assumptions and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in TDCC’s 2018the 2019 10-K. Since December 31, 2018,2019, there have been no material changes in TDCC’sthe Company’s accounting policies that are impacted by judgments, assumptions and estimates.
Asbestos-Related Matters of Union Carbide Corporation
Union Carbide Corporation ("Union Carbide") is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.
The table below provides information regarding asbestos-related claims pending against Union Carbide and Amchem based on criteria developed by Union Carbide and its external consultants.consultants:
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| Asbestos-Related Claim Activity | 2020 | 2019 |
| Claims unresolved at Jan 1 | 11,117 | | 12,780 | |
| Claims filed | 2,194 | | 2,819 | |
| Claims settled, dismissed or otherwise resolved | (2,488) | | (3,477) | |
| Claims unresolved at Jun 30 | 10,823 | | 12,122 | |
| Claimants with claims against both Union Carbide and Amchem | (3,555) | | (4,217) | |
| Individual claimants at Jun 30 | 7,268 | | 7,905 | |
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| Asbestos-Related Claim Activity | 2019 | 2018 |
| Claims unresolved at Jan 1 | 12,780 |
| 15,427 |
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| Claims filed | 1,383 |
| 1,932 |
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| Claims settled, dismissed or otherwise resolved | (1,569 | ) | (3,026 | ) |
| Claims unresolved at Mar 31 | 12,594 |
| 14,333 |
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| Claimants with claims against both Union Carbide and Amchem | (4,509 | ) | (5,148 | ) |
| Individual claimants at Mar 31 | 8,085 |
| 9,185 |
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Plaintiffs’ lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous claimants. As a result, the damages alleged are not expressly identified as to Union Carbide, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only Union Carbide and/or Amchem are the sole named defendants. For these reasons and based upon Union Carbide’s litigation and settlement experience, Union Carbide does not consider the damages alleged against Union Carbide and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.
For additional information, see Asbestos-Related Matters of Union Carbide Corporation in Note 1012 to the Consolidated Financial Statements and Part II, Item 1. Legal Proceedings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted asSee Note 18 to the Consolidated Financial Statements and Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the combined Dow Inc. and TDCC pursuant to General Instruction HAnnual Report on Form 10-K for the year ended December 31, 2019, for information on the Company's utilization of Form 10-Q.financial instruments and an analysis of the sensitivity of these instruments.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, Dow Inc. and The Dow Chemical Company (the "Companies") carried out an evaluation, under the supervision and with the participation of the Companies' Disclosure Committee and the Companies' management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Companies' 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 Companies' disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companies' 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 Companies' internal control over financial reporting.
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Dow Inc. and Subsidiaries The Dow Chemical Company and Subsidiaries PART II – OTHER INFORMATION |
ITEM 1. LEGAL PROCEEDINGS
Asbestos-Related Matters of Union Carbide Corporation
No material developments regarding this matter occurred in the firstsecond quarter of 2019.2020. For a current status of this matter, see Note 1012 to the Consolidated Financial Statements.
Environmental Matters
On July 7,5, 2018, The Dow Chemicalthe Company (“TDCC”) received an informal notice thata draft consent decree from the U.S. Environmental Protection Agency ("EPA"), Region 6 was contemplating filing a Noticethe U.S. Department of Violation with a proposed penalty for alleged violations uncovered during a prior inspection relatedJustice ("DOJ") and the Louisiana Department of Environmental Quality (“DEQ”), relating to the managementoperation of hazardous wastessteam-assisted flares at itsthe Company’s olefins manufacturing facilities in Freeport, Texas, manufacturing facility, pursuant to the Risk Management Plan requirements of the Clean Air Act. Texas; Plaquemine, Louisiana; and St. Charles, Louisiana. On March 4, 2019,June 2, 2020, the EPA and TDCC entered into a Consent Agreement and Final Order, which TDCC agreed to pay a fine of $260,349 and certify compliance with specified regulations with the EPA.
On March 5, 2019, Union Carbide Corporation ("Union Carbide")DOJ added Performance Materials NA, Inc., a wholly owned subsidiary of TDCC, receivedthe Company, as an informal notice thatadditional signatory to the existing draft consent decree based on the operation of steam-assisted flares at the Sabine olefins manufacturing facility in Orange, Texas. Performance Materials NA, Inc. acquired the Orange, TX Facility in February 2019 and became a subsidiary of the Company in April 2019. Discussions with the EPA, Region 6the DOJ and the DEQ are ongoing.
On October 23, 2019, Union Carbide received a proposed Agreed Order from the Texas Commission on Environmental Quality (“TCEQ”) relating to emissions of ethylene oxide from a process leak at Union Carbide's manufacturing facility in Seadrift, Texas. The proposed Agreed Order included an administrative penalty of $800,000. On December 30, 2019, the TCEQ sent a revised Agreed Order reducing the penalty to $600,000 based on Union Carbide's corrective actions and allowing for half of the administrative penalty amount to be used to fund a Supplemental Environmental Project. Union Carbide paid $300,000 in January 2020. The revised Agreed Order was contemplating filingapproved by the TCEQ Commissioners on July 1, 2020.
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 federal, 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 Violation withLodging and Notice of Availability and Request for Comments on Draft Restoration Plan/Environmental Assessment was published in the Federal Register. The DOJ filed a proposed penaltyJoint Motion for alleged violations uncovered during a prior inspection related to the management of hazardous materials at Union Carbide's Seadrift, Texas, manufacturing facility, pursuant to the Risk Management Plan requirementsEntry of the Clean Air Act. Discussions betweenConsent Decree on May 8, 2020, which was granted and entered as a final order on July 20, 2020. The consent decree requires the EPACompany to pay a $15 million cash settlement to be used for Trustee-selected remediation projects and Union Carbide$6.75 million to specified local projects managed by third parties, and requires the Company to complete 13 additional environmental restoration projects which are ongoing.valued by the trustees at approximately $77 million.
ITEM 1A. RISK FACTORS
Public Health Crisis: A public health crisis or global outbreak of disease, including the pandemic caused by coronavirus disease 2019 (“COVID-19”) has had, and could continue to have, a negative effect on the Company's manufacturing operations, supply chain and workforce, creating business disruptions that couldcontinue to have a substantial negative impact on the Company’s results of operations, financial condition and cash flows.
The pandemic caused by COVID-19 has impacted all geographic regions where Dow products are incorporatedproduced and sold. The global, regional and local spread of COVID-19 has 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. Uncertainty with respect to the severity and duration of the COVID-19 pandemic, coupled with crude oil price fluctuations due in part to the global spread of COVID-19, has contributed to the volatility of financial markets. While the severity and duration of the COVID-19 pandemic in key geographic regions and end-markets cannot be reasonably estimated at this time, impacts to the Company include, but are not limited to: fluctuations in the Company’s stock price due to market volatility; a decrease in demand for certain Company products; reduced profitability; supply chain disruptions impeding the Company’s ability to ship and/or receive product; temporary idling of select manufacturing facilities; interruptions or limitations to manufacturing operations imposed by reference into Item 1Alocal, state or federal governments; reduced market liquidity and increased borrowing costs; workforce absenteeism and distraction; labor shortages; customer credit concerns; increased cyber security risk and data accessibility disruptions due to remote working arrangements; and fluctuations in foreign currency markets. Additional risks may include, but are not limited to: shortages of key raw
materials; potential impairment in the carrying value of goodwill; other asset impairment charges; increased obligations related to the Company’s pension and other postretirement benefit plans; and deferred tax valuation allowances. Business disruptions and market volatility resulting from the COVID-19 pandemic have had and could continue to have a substantial negative impact on this Quarterly Reportthe Company’s results of operations, financial condition and cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of Dow Inc. common stock by the Company during the three months ended June 30, 2020:
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| 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 | | |
| April 2020 | — | | $ | — | | — | | $ | 2,375 | |
| May 2020 | — | | $ | — | | — | | $ | 2,375 | |
| June 2020 | — | | $ | — | | — | | $ | 2,375 | |
| Second quarter 2020 | — | | $ | — | | — | | $ | 2,375 | |
1. On April 1, 2019, Dow Inc.'s Board of Directors ratified the share repurchase program originally approved on Form 10-Q.March 15, 2019, authorizing up to $3.0 billion to be spent on the repurchase of the Company's common stock, with no expiration date.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
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| EXHIBIT NO. | | DESCRIPTION |
| 4.3 | | Separation and Distribution Agreement, dated as of April 1, 2019, by and among Corteva, Inc., Dow Inc. and DowDuPont Inc. (incorporated by reference to Exhibit 2.1 to Dow Inc.'s Current Report on Form 8-K filed with the SEC on April 2, 2019). |
| | | Amended and Restated Certificate of Incorporation of Dow Inc. (incorporated by reference to Exhibit 3.1 to Dow Inc.’s Current Report on Form 8-K filed with the SEC on April 2, 2019). |
| | | Amended and Restated Bylaws of Dow Inc. (incorporated by reference to Exhibit 3.2 to Dow Inc.’s Current Report on Form 8-K filed with the SEC on April 2, 2019). |
| 4.3 | | 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. |
| | | Tax Matters Agreement, dated as of April 1, 2019, by and among DowDuPont Inc., Dow Inc., and Corteva, Inc. (incorporated by reference to Exhibit 10.1 to Dow Inc.’s Current Report on Form 8-K filed with the SEC on April 2, 2019). |
| | | Employee Matters Agreement, dated as of April 1, 2019, by and among DowDuPont Inc., Dow Inc., and Corteva, Inc. (incorporated by reference to Exhibit 10.2 to Dow Inc.’s Current Report on Form 8-K filed with the SEC on April 2, 2019). |
| | | MatCo/SpecCo Intellectual Property Cross License Agreement, dated as of April 1, 2019, by and between Dow Inc. et al and DowDuPont Inc. et al (incorporated by reference to Exhibit 10.3 to Dow Inc.’s Current Report on Form 8‑K filed with the SEC on April 2, 2019). |
| | | MatCo/AgCo Intellectual Property Cross License Agreement, dated as of April 1, 2019, by and between Dow Inc. et al and Corteva, Inc. et al (incorporated by reference to Exhibit 10.4 to Dow Inc.’s Current Report on Form 8-K filed with the SEC on April 2, 2019). |
| | | Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019). |
| | | Form of Performance Stock Unit Award Agreement under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.1 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019). |
| | | Form of Restricted Stock Award Agreement under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.2 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019). |
| | | Form of Restricted Stock Unit Award Agreement under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.3 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019). |
| | | Form of Stock Appreciation Right Award Agreement under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.4 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019). |
| | | Form of Stock Option Award Agreement under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.5 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019). |
| | | Form of Restricted Stock Unit Award Agreement (Director) under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.6 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019). |
| | | The Dow Chemical Company Elective Deferral Plan (Pre-2005), restated and effective as of April 1, 2019. |
| | | The Dow Chemical Company Elective Deferral Plan (Post 2004), restated and effective as of April 1, 2019 (incorporated by reference to Exhibit 4.1 to The Dow Chemical Company’s Registration Statement on Form S-8 POS, filed with the SEC on April 1, 2019). |
| | | Dow Inc. Voluntary Deferred Compensation Plan for Non-Employee Directors, restated and effective as of April 1, 2019. |
| | | Ankura Consulting Group, LLC's Consent. |
| | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | | The instance document does not appear in the Interactive Data File because its XBRL Instance Document.tags are embedded within the Inline XBRL document. |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | | Cover Page Interactive Data File. The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
* Filed herewith
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Dow Inc. The Dow Chemical Company and Subsidiaries Trademark Listing |
The following registered trademark of Incapital Holdings appears in this report: InterNotes®
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Dow Inc. and Subsidiaries The Dow Chemical Company and Subsidiaries Signature |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DOW INC.
THE DOW CHEMICAL COMPANY
Date: May 3, 2019July 24, 2020
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| /s/ RONALD C. EDMONDS |
| Ronald C. Edmonds |
| Controller and Vice President |
| of Controllers and Tax |
