filings.toolsItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On December 11, 2015, The Dow Chemical Company ("Historical Dow") and E. I. du Pont de Nemours and Company ("Historical DuPont") entered into an Agreement and Plan of Merger ("Merger Agreement"), as amended on March 31, 2017, to effect an all-stock merger of equals strategic combination resulting in a newly formed corporation named DowDuPont Inc. ("DowDuPont" or the "Company"). On August 31, 2017, pursuant to the Merger Agreement, Historical Dow and Historical DuPont each merged with wholly owned subsidiaries of DowDuPont ("Mergers") and, as a result of the Mergers, Historical Dow and Historical DuPont became subsidiaries of DowDuPont (collectively, the "Merger"). Prior to the Merger, DowDuPont did not conduct any business activities other than those required for its formation and matters contemplated by the Merger Agreement. Historical Dow was determined to be the accounting acquirer in the Merger. As a result, the financial statements of Historical Dow for the periods prior to the Merger are considered to be the historical financial statements of DowDuPont. The results of Historical DuPont are included in DowDuPont's consolidated results from the Merger date forward. See Note 3 to the Consolidated Financial Statements for additional information.
DowDuPont intends to pursue, subject to the receipt of approval by the Board of Directors ("Board") of DowDuPont and customary closing conditions, the separation of the combined Company's agriculture, materials science and specialty products businesses through one or more tax-efficient transactions ("Intended Business Separations").
Except as otherwise indicated by the context, the term "Historical Dow" includes Historical Dow and its consolidated subsidiaries, "Historical DuPont" includes Historical DuPont and its consolidated subsidiaries, "Union Carbide" means Union Carbide Corporation, a wholly owned subsidiary of Historical Dow, and "Dow Silicones" means Dow Silicones Corporation (formerly known as Dow Corning Corporation, which changed its name effective as of February 1, 2018), a wholly owned subsidiary of Historical Dow.
Items Affecting Comparability of Financial Results
Due to the size of each of Historical Dow's and Historical DuPont's businesses prior to the Merger, in this section certain supplemental unaudited pro forma financial information is provided that assumes the Merger had been consummated on January 1, 2016. Adjustments have been made in the unaudited pro forma financial information for (1) the purchase accounting impact, (2) accounting policy alignment, (3) the elimination of the effect of events that were directly attributable to the Merger Agreement (e.g., one-time transaction costs), (4) the elimination of the impact of transactions between Historical Dow and Historical DuPont, and (5) the elimination of the effect of consummated divestitures required as a condition of regulatory approval for the Merger. Events that are not expected to have a continuing impact on the combined results (e.g., inventory step-up costs) were excluded. These adjustments impacted the consolidated results as well as the reportable segments. For additional information, see the Supplemental Unaudited Pro Forma Combined Financial Information in this section.
ABOUT DOWDUPONT INC.
DowDuPont is a holding company comprised of Historical Dow and Historical DuPont with the intent to form strong, independent, publicly traded companies in the agriculture, materials science and specialty products sectors that will lead their respective industries through productive, science-based innovation to meet the needs of customers and help solve global challenges.
In 2018, 37 percent of the Company’s net sales were to customers in U.S. & Canada; 28 percent were in Europe, Middle East and Africa ("EMEA"); 24 percent were in Asia Pacific; and 11 percent were in Latin America.
In 2018, the Company and its consolidated subsidiaries did not operate in countries subject to U.S. economic sanctions and export controls as imposed by the U.S. State Department or in countries designated by the U.S. State Department as state sponsors of terrorism, including Iran, the Democratic People's Republic of Korea (North Korea), Sudan and Syria. The Company has policies and procedures in place designed to ensure that it and its consolidated subsidiaries remain in compliance with applicable U.S. laws and regulations.
OVERVIEW
The following is a summary of the results from continuing operations for the year ended December 31, 2018:
| • | The Company reported net sales for 2018 of $86.0 billion, up 38 percent from $62.5 billion in 2017, with broad-based sales growth across all segments and geographic regions. Portfolio & Other contributed 29 percent of the sales increase, primarily reflecting the Merger as a full year of net sales in 2018 related to Historical DuPont compared with four months in 2017, which impacted all segments except Performance Materials & Coatings and Industrial Intermediates & Infrastructure. |
| • | Volume increased 4 percent compared with the same period last year, with increases in all segments, except Performance Materials & Coatings and Transportation & Advanced Polymers (both down 2 percent) and Nutrition & Biosciences (flat). Volume increased in all geographic regions, except U.S. & Canada (flat), led by a double-digit increase in Asia Pacific (up 13 percent). |
| • | Local price was up 4 percent compared with last year, primarily in response to higher feedstock and raw material costs. Local price increased in all segments, except Electronics & Imaging (flat). Local price increased in all geographic regions. |
| • | Currency had a favorable impact of 1 percent on sales, driven by a favorable impact in EMEA, partially offset by an unfavorable impact in Latin America. |
| • | Research and development ("R&D") expenses totaled $3,060 million in 2018, up 43 percent from $2,141 million in 2017. Selling, general and administrative ("SG&A") expenses were $6,709 million in 2018, up 65 percent from $4,064 million in 2017. R&D and SG&A expenses increased primarily due to the Merger, as 2018 included a full year of expenses related to Historical DuPont, compared with four months in 2017. |
| • | Restructuring, goodwill impairment and asset related charges - net was $1,105 million in 2018, primarily reflecting post-merger restructuring actions under the DowDuPont Cost Synergy Program of $869 million and the DowDuPont Agriculture Division Restructuring Program of $84 million; as well as pretax impairment charges of $160 million related to certain in-process research and development, an equity method investment and capital additions made to a manufacturing facility in Brazil. |
| • | Integration and separation costs were $2,463 million in 2018, up from $1,101 million in 2017, reflecting post-Merger integration and Intended Business Separation activities. |
| • | Equity in earnings of nonconsolidated affiliates was $1,001 million in 2018, up from $764 million in 2017, as higher earnings from the Kuwait joint ventures, lower equity losses from Sadara Chemical Company ("Sadara") and higher earnings from the HSC Group were partially offset by lower equity earnings from the Thai joint ventures. |
| • | Net income available for common stockholders was $3,844 million ($1.65 per share) in 2018, compared with $1,460 million ($0.91 per share) in 2017. |
| • | In November 2018, DowDuPont consummated the offering of senior unsecured DowDuPont Notes in an aggregate principal amount of $12.7 billion, with various maturities through 2048. The net proceeds of the offering after the underwriting discount were $12.6 billion. |
| • | In November 2018, $4.4 billion aggregate principal amount of Historical DuPont's outstanding debt securities were validly tendered and accepted for payment. In exchange, Historical DuPont paid a total of $4.8 billion, which included breakage fees and all related accrued and unpaid interest on the tender notes. |
| • | In the fourth quarter of 2018, Historical Dow issued $2.0 billion of senior unsecured notes with various maturities through 2048, and tendered and redeemed $2.1 billion of notes issued by Historical Dow. |
| • | In 2018, Historical Dow and Historical DuPont each made discretionary contributions of $1,100 million to their respective principal U.S. pension plans. |
| • | On November 1, 2018, the Company announced a new $3.0 billion share buyback program, which expires on March 31, 2019 - commensurate with the expected timing of the materials science spin-off. At December 31, 2018, the Company had repurchased $1.4 billion of shares under this program. The Company intends to complete the program before March 31, 2019. |
| • | On November 1, 2018, the Company increased its cost synergy target under the DowDuPont Synergy Program to $3.6 billion. |
RESULTS OF OPERATIONS
Beginning in the third quarter of 2018, DowDuPont realigned joint ventures, global businesses and product lines in preparation for the Intended Business Separations. The segment reporting changes were retrospectively applied to all periods presented. See Note 24 to the Consolidated Financial Statements for additional information.
| Summary of Sales Results | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 85,977 | $ | 62,484 | $ | 48,158 | |||
| Pro forma net sales | $ | 79,535 | $ | 70,894 |
| Sales Variances by Segment and Geographic Region - As Reported | ||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||
| Percentage change from prior year | Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total | Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total | ||||||||||
| Agriculture | 3 | % | (2 | )% | 1 | % | 88 | % | 90 | % | (1 | )% | — | % | (2 | )% | 25 | % | 22 | % |
| Performance Materials & Coatings | 10 | 1 | (2 | ) | — | 9 | 8 | — | 2 | 27 | 37 | |||||||||
| Industrial Intermediates & Infrastructure | 5 | 1 | 14 | — | 20 | 10 | — | 7 | — | 17 | ||||||||||
| Packaging & Specialty Plastics | 1 | 1 | 5 | 5 | 12 | 8 | 1 | 5 | 3 | 17 | ||||||||||
| Electronics & Imaging | — | — | 2 | 39 | 41 | (1 | ) | — | 9 | 37 | 45 | |||||||||
| Nutrition & Biosciences | 2 | (1 | ) | — | 143 | 144 | — | — | 11 | 183 | 194 | |||||||||
| Transportation & Advanced Polymers | 6 | — | (2 | ) | 119 | 123 | — | — | 6 | 175 | 181 | |||||||||
| Safety & Construction | 2 | — | 3 | 76 | 81 | — | — | 3 | 57 | 60 | ||||||||||
| Total | 4 | % | 1 | % | 4 | % | 29 | % | 38 | % | 6 | % | — | % | 5 | % | 19 | % | 30 | % |
| U.S. & Canada | 4 | % | — | % | — | % | 36 | % | 40 | % | 6 | % | — | % | 4 | % | 16 | % | 26 | % |
| EMEA | 5 | 3 | 2 | 25 | 35 | 10 | 1 | 5 | 16 | 32 | ||||||||||
| Asia Pacific | 2 | — | 13 | 30 | 45 | 4 | — | 7 | 27 | 38 | ||||||||||
| Latin America | 4 | (3 | ) | 5 | 17 | 23 | 2 | — | (1 | ) | 18 | 19 | ||||||||
| Total | 4 | % | 1 | % | 4 | % | 29 | % | 38 | % | 6 | % | — | % | 5 | % | 19 | % | 30 | % |
| 1. | Portfolio & Other primarily reflects sales related to the Merger (impacts all segments, except Performance Materials & Coatings and Industrial Intermediates & Infrastructure). Portfolio & Other also includes sales for the acquisition of FMC Corporation's ("FMC") Health and Nutrition Business (the "H&N Business") acquired on November 1, 2017, impacting Nutrition & Biosciences. Portfolio & Other also reflects the following divestitures: a portion of Dow AgroSciences' Brazil corn seed business ("DAS Divested Ag Business"), divested on November 30, 2017 (impacting Agriculture), global Ethylene Acrylic Acid copolymers and ionomers business ("EAA Business"), divested on September 1, 2017 (impacting Packaging & Specialty Plastics) and SKC Haas Display Films group of companies, divested June 30, 2017 (impacting Electronics & Imaging). In addition, Portfolio & Other in 2017 includes the ownership restructure of Dow Silicones announced on June 1, 2016 (impacts Performance Materials & Coatings, Electronics & Imaging and Transportation & Advanced Polymers). |
| Sales Variances by Segment and Geographic Region - As Reported | ||||||||||
| 2016 | ||||||||||
| Percentage change from prior year | Local Price & Product Mix | Currency | Volume | Portfolio & Other 1 | Total | |||||
| Agriculture | 1 | % | (1 | )% | (2 | )% | — | % | (2 | )% |
| Performance Materials & Coatings | (8 | ) | (1 | ) | (2 | ) | 52 | 41 | ||
| Industrial Intermediates & Infrastructure | (9 | ) | (1 | ) | 2 | (4 | ) | (12 | ) | |
| Packaging & Specialty Plastics | (8 | ) | — | 9 | (1 | ) | — | |||
| Electronics & Imaging | (3 | ) | — | 3 | 16 | 16 | ||||
| Nutrition & Biosciences | (2 | ) | — | (2 | ) | — | (4 | ) | ||
| Transportation & Advanced Polymers | (1 | ) | (1 | ) | 7 | 49 | 54 | |||
| Safety & Construction | (1 | ) | — | (2 | ) | — | (3 | ) | ||
| Total | (6 | )% | — | % | 3 | % | 2 | % | (1 | )% |
| U.S. & Canada | (7 | )% | — | % | 3 | % | 2 | % | (2 | )% |
| EMEA | (6 | ) | (1 | ) | 4 | (1 | ) | (4 | ) | |
| Asia Pacific | (6 | ) | — | 6 | 9 | 9 | ||||
| Latin America | (6 | ) | — | — | (1 | ) | (7 | ) | ||
| Total | (6 | )% | — | % | 3 | % | 2 | % | (1 | )% |
| 1. | Portfolio & Other reflects sales from June 1, 2016 through December 31, 2016 related to the ownership restructure of Dow Silicones (impacts Performance Materials & Coatings, Electronics & Imaging and Transportation & Advanced Polymers) and sales from January 1, 2016 through April 30, 2016 for the step acquisition of Univation Technologies, LLC, acquired on May 5, 2015 (Packaging & Specialty Plastics). Portfolio & Other also reflects the following divestitures: the chlorine value chain, divested on October 5, 2015 (Industrial Intermediates & Infrastructure and Packaging & Specialty Plastics), ANGUS Chemical Company, divested on February 2, 2015 and the global Sodium Borohydride business, divested on January 30, 2015 (both included in Industrial Intermediates & Infrastructure). |
2018 versus 2017
The Company reported net sales for 2018 of $86.0 billion, up 38 percent from $62.5 billion for 2017, driven by the Merger, higher sales volume, reflecting additional capacity from U.S. Gulf Coast growth projects and increased supply from Sadara, increased local price and the favorable impact of currency. Sales growth was broad-based, with increases in all segments and geographic regions. Portfolio & Other contributed 29 percent of the sales increase, primarily reflecting the Merger. Volume increased 4 percent compared with last year, as increases in Industrial Intermediates & Infrastructure (up 14 percent), Packaging & Specialty Plastics (up 5 percent), Safety & Construction (up 3 percent), Electronics & Imaging (up 2 percent) and Agriculture (up 1 percent) more than offset declines in Performance Materials & Coatings and Transportation & Advanced Polymers (both down 2 percent). Nutrition & Biosciences volume was flat. Volume increased in most geographic regions, including a double-digit increase in Asia Pacific (up 13 percent). Local price was up 4 percent compared with last year, with increases in all geographic regions, driven by pricing initiatives in response to higher feedstock and raw material costs. Local price increased in most segments, with the most notable increases in Performance Materials & Coatings (up 10 percent), Transportation & Advanced Polymers (up 6 percent) and Industrial Intermediates & Infrastructure (up 5 percent). Currency was up 1 percent compared with last year, driven by a favorable impact in EMEA, partially offset by an unfavorable impact in Latin America.
2017 versus 2016
The Company reported net sales for 2017 of $62.5 billion, up 30 percent from $48.2 billion for 2016, primarily reflecting the Merger, the addition of the Dow Silicones business, increased local price and demand growth. Sales growth was broad-based with increases in all segments and geographic regions. Portfolio & Other changes contributed 19 percent of the sales increase and impacted all segments, except Industrial Intermediates & Infrastructure, which was flat. Local price was up 6 percent compared with last year, with increases in all geographic regions, including a double-digit increase in EMEA (up 10 percent), driven by broad-based pricing actions as well as higher feedstock and raw material prices. Local price increased in Industrial Intermediates & Infrastructure (up 10 percent) and Packaging & Specialty Plastics and Performance Materials & Coatings (both up 8 percent) and declined in Agriculture and Electronics & Imaging (both down 1 percent). Local price was flat in Nutrition & Biosciences, Transportation & Advanced Polymers and Safety & Construction. Volume increased 5 percent compared with last year, with increases in all segments, except Agriculture (down 2 percent), including a double-digit increase in Nutrition & Biosciences (up 11 percent). Volume increased in all geographic regions, except Latin America (down 1 percent). Currency was flat compared with last year.
| Sales Variances by Segment and Geographic Region - Pro Forma Basis | ||||||||||||||||||||
| 2018 1 | 2017 | |||||||||||||||||||
| Percentage change from prior year | Local Price & Product Mix | Currency | Volume | Portfolio & Other 2 | Total | Local Price & Product Mix | Currency | Volume | Portfolio & Other 2 | Total | ||||||||||
| Agriculture | 3 | % | — | % | (2 | )% | (1 | )% | — | % | — | % | — | % | 1 | % | 1 | % | 2 | % |
| Performance Materials & Coatings | 10 | 1 | (2 | ) | — | 9 | 8 | — | 2 | 27 | 37 | |||||||||
| Industrial Intermediates & Infrastructure | 5 | 1 | 14 | — | 20 | 10 | — | 7 | — | 17 | ||||||||||
| Packaging & Specialty Plastics | 1 | 2 | 5 | — | 8 | 8 | — | 5 | — | 13 | ||||||||||
| Electronics & Imaging | (1 | ) | 1 | 1 | (2 | ) | (1 | ) | (1 | ) | — | 11 | 2 | 12 | ||||||
| Nutrition & Biosciences | 1 | 1 | 3 | 9 | 14 | — | — | 3 | 1 | 4 | ||||||||||
| Transportation & Advanced Polymers | 6 | 2 | 2 | — | 10 | 2 | — | 7 | 5 | 14 | ||||||||||
| Safety & Construction | 1 | 1 | 4 | — | 6 | (1 | ) | — | 4 | — | 3 | |||||||||
| Total | 3 | % | 1 | % | 4 | % | — | % | 8 | % | 4 | % | — | % | 5 | % | 3 | % | 12 | % |
| U.S. & Canada | 3 | % | — | % | — | % | 1 | % | 4 | % | 4 | % | — | % | 3 | % | 3 | % | 10 | % |
| EMEA | 4 | 4 | 2 | 1 | 11 | 8 | 1 | 5 | 3 | 17 | ||||||||||
| Asia Pacific | 2 | 1 | 11 | — | 14 | 2 | — | 8 | 5 | 15 | ||||||||||
| Latin America | 4 | (3 | ) | 4 | (1 | ) | 4 | 1 | 1 | — | 3 | 5 | ||||||||
| Total | 3 | % | 1 | % | 4 | % | — | % | 8 | % | 4 | % | — | % | 5 | % | 3 | % | 12 | % |
| 1. | As reported net sales in the current period compared with pro forma net sales in the prior period. |
| 2. | Pro forma net sales for Agriculture excludes sales related to the November 30, 2017, divestiture of the DAS Divested Ag Business for the period January 1, 2016 through August 31, 2017; sales from September 1, 2017 through November 30, 2017, are included in Portfolio & Other. Pro forma net sales for Packaging & Specialty Plastics excludes sales related to the September 1, 2017, divestiture of the EAA Business for the period January 1, 2016 through August 31, 2017. Portfolio & Other includes sales for the acquisition of the H&N Business acquired on November 1, 2017, impacting Nutrition & Biosciences. Portfolio & Other also reflects the following divestitures: SKC Haas Display Films group of companies (divested June 30, 2017) and the authentication business (divested on January 6, 2017), both impacting Electronics & Imaging; and, the divestiture of the global food safety diagnostic business (divested February 28, 2017), impacting Nutrition & Biosciences. In 2017, Portfolio & Other also reflects sales from January 1, 2017 through May 31, 2017, related to the ownership restructure of Dow Silicones on June 1, 2016 (impacts Performance Materials & Coatings, Electronics & Imaging and Transportation & Advanced Polymers). |
2018 versus 2017
The Company reported net sales for 2018 of $86.0 billion, up 8 percent from pro forma net sales of $79.5 billion for 2017, with increases across most segments and all geographic regions. Double-digit net sales increases were reported in Industrial Intermediates & Infrastructure (up 20 percent), Nutrition & Biosciences (up 14 percent) and Transportation & Advanced Polymers (up 10 percent). These increases were partially offset by a decline in Electronics & Imaging (down 1 percent). Net sales increased in Asia Pacific (up 14 percent), EMEA (up 11 percent), U.S. & Canada and Latin America (both up 4 percent). Volume increased 4 percent compared with pro forma results last year, as increases in Industrial Intermediates & Infrastructure (up 14 percent), Packaging & Specialty Plastics (up 5 percent), Safety & Construction (up 4 percent), Nutrition & Biosciences (up 3 percent), Transportation & Advanced Polymers (up 2 percent) and Electronics & Imaging (up 1 percent) more than offset declines in Agriculture and Performance Materials & Coatings (both down 2 percent). Volume increased in most geographic regions, including a double-digit increase in Asia Pacific (up 11 percent). Volume was flat in U.S. & Canada. Local price was up 3 percent compared with pro forma results last year with increases in all geographic regions, driven by pricing initiatives in response to higher feedstock and raw material costs. Local price increased across most segments, including double-digit increases in Performance Materials & Coatings (up 10 percent). Currency was up 1 percent compared with last year, driven primarily by EMEA (up 4 percent) partially offset by an unfavorable impact in Latin America (down 3 percent).
2017 versus 2016
The Company reported pro forma net sales for 2017 of $79.5 billion, up 12 percent from pro forma net sales of $70.9 billion for 2016, primarily reflecting demand growth, increased local price and the addition of the Dow Silicones business. Pro forma net sales increased across all segments and geographic regions. Volume increased 5 percent compared with last year, with increases in all segments, including a double-digit increase in Electronics & Imaging (up 11 percent). Volume increased in all geographic regions, except Latin America, which was flat. Local price was up 4 percent compared with last year, with increases in all geographic regions, driven by broad-based pricing actions as well as higher feedstock and raw material prices. Local price increased in Industrial Intermediates & Infrastructure (up 10 percent), Performance Materials & Coatings and Packaging & Specialty Plastics (both up 8 percent) and Transportation & Advanced Polymers (up 2 percent), which more than offset declines in Electronics & Imaging and Safety & Construction (both down 1 percent). Local price was flat in Agriculture and Nutrition & Biosciences. Currency was flat compared with last year.
Cost of Sales
Cost of sales was $65.3 billion in 2018, up from $49.8 billion in 2017. Cost of sales increased in 2018 primarily due to the Merger, increased sales volume, which reflected additional capacity from U.S. Gulf Coast growth projects and increased supply from Sadara, higher feedstock and other raw material costs and increased planned maintenance turnaround costs, which more than offset lower commissioning expenses related to U.S. Gulf Coast growth projects and cost synergies. Cost of sales in 2018 was negatively impacted by a $1,628 million charge for the fair value step-up of inventories assumed in the Merger and the acquisition of the H&N Business, related to Agriculture ($1,554 million), Packaging & Specialty Plastics ($2 million), Nutrition & Biosciences ($67 million) and Safety & Construction ($5 million). Cost of sales as a percentage of sales was 76.0 percent compared with 79.7 percent in 2017.
Cost of sales was $49.8 billion in 2017, up from $37.7 billion in 2016. Cost of sales in 2017 was negatively impacted by a $1,469 million charge for the fair value step-up of inventories assumed in the Merger and the acquisition of the H&N Business, related to Agriculture ($424 million), Packaging & Specialty Plastics ($120 million), Electronics & Imaging ($138 million), Nutrition & Biosciences ($403 million), Transportation & Advanced Polymers ($211 million) and Safety & Construction ($173 million); a charge of $201 million related to the payment of plan obligations to certain participants of a Dow U.S. non-qualified pension plan as a result of the Merger (related to Corporate); and $49 million of transaction costs and productivity actions (related to Corporate). Excluding these significant items, cost of sales increased primarily due to the Merger, increased sales volume, higher feedstock, energy and other raw material costs, higher commissioning expenses related to Historical Dow's U.S. Gulf Coast growth projects and the addition of the Dow Silicones business. Cost of sales as a percentage of sales was 79.7 percent compared with 78.2 percent in 2016. See Notes 3 and 19 to the Consolidated Financial Statements for additional information.
Research and Development Expenses
R&D expenses were $3,060 million in 2018, compared with $2,141 million in 2017 and $1,593 million in 2016. In 2018, R&D expenses increased primarily due to the Merger, which was partially offset by cost synergies. In 2017, R&D expenses increased primarily due to the Merger. R&D expenses as a percentage of net sales were 3.6 percent, 3.4 percent and 3.3 percent for 2018, 2017 and 2016, respectively.
Selling, General and Administrative Expenses
SG&A expenses were $6,709 million in 2018, compared with $4,064 million in 2017 and $2,953 million in 2016. SG&A expenses in 2018 increased primarily due to the Merger, which was partially offset by cost synergies. SG&A expenses in 2017 increased primarily due to the Merger. SG&A expenses as a percentage of net sales were 7.8 percent, 6.5 percent and 6.1 percent for 2018, 2017 and 2016, respectively.
Amortization of Intangibles
Amortization of intangibles was $1,903 million in 2018, $1,013 million in 2017 and $544 million in 2016. The increase in amortization in 2018 was primarily due to the Merger. The increase in amortization in 2017 was primarily due to an increase in intangible assets as a result of the Merger and the Dow Silicones ownership restructure. See Notes 3 and 13 to the Consolidated Financial Statements for additional information on intangible assets.
Restructuring, Goodwill Impairment and Asset Related Charges - Net
Restructuring, goodwill impairment and asset related charges - net was $1,105 million in 2018, $3,280 million in 2017 and $595 million in 2016, and consisted primarily of the following:
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 segment in preparation for the Intended Business Separations ("Agriculture Division Program"). As a result of these actions, the Company expects to record total pretax charges of approximately $96 million, comprised of $83 million of severance and related benefit costs, $8 million of asset write-downs and write-offs and $5 million of costs associated with exit and disposal activities.
For the year ended December 31, 2018, DowDuPont recorded a pretax charge of $84 million related to this program, which was recorded in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. This charge consisted of severance and related benefit costs of $78 million related to Corporate, and asset write-downs and write-offs of $6 million related to Agriculture. The Company expects actions related to this 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 is designed to integrate and optimize the organization following the Merger and in preparation for the Intended Business Separations. The Company expects to record total pretax restructuring charges of
approximately $2 billion, comprised of approximately $895 million to $975 million of severance and related benefit costs; $525 million to $615 million of asset write-downs and write-offs, and $370 million to $410 million of costs associated with exit and disposal activities.
As a result of the Synergy Program, for the year ended December 31, 2017, the Company recorded pretax restructuring charges of $874 million, which were recorded in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and consisted of severance and related benefit costs of $510 million, asset write-downs and write-offs of $290 million and costs associated with exit and disposal activities of $74 million. The restructuring charges by segment are as follows: $134 million in Agriculture, $86 million in Electronics & Imaging, $36 million in Packaging & Specialty Plastics, $21 million in Safety & Construction, $12 million in Industrial Intermediates & Infrastructure, $11 million in Performance Materials & Coatings, $2 million in Transportation & Advanced Polymers, $1 million in Nutrition & Biosciences and $571 million in Corporate.
For the year ended December 31, 2018, the Company recorded pretax restructuring charges of $869 million which were recorded in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. These charges consisted of severance and related benefit costs of $419 million, asset write-downs and write-offs of $289 million, and costs associated with exit and disposal activities of $161 million. The restructuring charges by segment were as follows: $340 million in Agriculture, $29 million in Nutrition & Biosciences, $24 million in Safety & Construction, $13 million in Packaging & Specialty Plastics, $11 million in Industrial Intermediates & Infrastructure, $7 million in Performance Materials & Coatings, $2 million in Transportation & Advanced Polymers, $2 million in Electronics & Imaging, and $441 million in Corporate. The Company expects to record additional restructuring charges during 2019 and substantially complete the Synergy Program by the end of 2019.
Dow 2016 Restructuring Plan
On June 27, 2016, Historical Dow's Board of Directors approved a restructuring plan that incorporated actions related to the ownership restructure of Dow Silicones. These actions, aligned with Historical Dow's value growth and synergy targets, resulted in a global workforce reduction of approximately 2,500 positions, with most of these positions resulting from synergies related to the ownership restructure of Dow Silicones. As a result of these actions, Historical Dow recorded pretax restructuring charges of $449 million in the second quarter of 2016, consisting of severance and related benefit costs of $268 million, asset write-downs and write-offs of $153 million and costs associated with exit and disposal activities of $28 million and related to the Company's segment results as follows: $42 million in Performance Materials & Coatings, $83 million in Industrial Intermediates & Infrastructure, $10 million in Packaging & Specialty Plastics and $314 million in Corporate.
In 2017, Historical Dow recorded a favorable adjustment to the 2016 restructuring charge related to costs associated with exit and disposal activities of $7 million, related to Performance Materials & Coatings.
In 2018, Historical Dow recorded a favorable adjustment to the 2016 restructuring charge related to severance and related benefit costs of $8 million, related to Corporate, and an unfavorable adjustment to costs associated with exit and disposal activities of $14 million, related to Performance Materials & Coatings. The 2016 restructuring activities were substantially complete at June 30, 2018, with remaining liabilities for severance and related benefit costs and costs associated with exit and disposal activities to be settled over time. See Note 6 to the Consolidated Financial Statements for details on the Company's restructuring activities.
Goodwill Impairment
Upon completion of the goodwill impairment testing in the fourth quarter of 2017, the Company determined the fair value of the Coatings & Performance Monomers reporting unit was lower than its carrying amount. As a result, the Company recorded an impairment charge of $1,491 million in the fourth quarter of 2017, related to Performance Materials & Coatings. There were no impairment charges in 2016 or 2018. See Note 13 to the Consolidated Financial Statements for additional information on the impairment charge.
Asset Related Charges
2018 Charges
During the third quarter of 2018, the Company recognized an $85 million pretax impairment charge in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income related to certain in-process research and development (“IPR&D") assets within the Agriculture segment. See Notes 6, 13 and 22 to the Consolidated Financial Statements for additional information.
In addition, based on updated projections for the Company’s equity method investments in joint ventures in China related to the Agriculture segment, management determined the fair values of the equity method investments were below the carrying values and had no expectation that the fair values would recover due to the continuing unfavorable regulatory environment, including lack of intellectual property protection, uncertain product registration timing and limited freedom to operate. As a result,
management concluded the impairment was other than temporary and in the third quarter of 2018 recorded an impairment charge of $41 million in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income. See Notes 6 and 22 to the Consolidated Financial Statements for additional information.
In 2018, the Company recognized an additional pretax impairment charge of $34 million primarily related to capital additions made to the biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017. The impairment charge was related to Packaging & Specialty Plastics.
2017 Charges
In 2017, the Company recognized a $622 million pretax impairment charge related to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil. Historical Dow determined it would not pursue an expansion of the facility’s ethanol mill into downstream derivative products, primarily as a result of cheaper ethane-based production as well as Historical Dow’s new assets coming online on the U.S. Gulf Coast which can be used to meet growing market demands in Brazil. As a result of this decision, cash flow analysis indicated the carrying amount of the impacted assets was not recoverable. The impairment charge was related to Packaging & Specialty Plastics.
The Company also recognized other pretax impairment charges of $317 million in the fourth quarter of 2017, including charges related to manufacturing assets of $230 million, an equity method investment of $81 million and other assets of $6 million. The impairment charges were related to Performance Materials & Coatings ($82 million), Industrial Intermediates & Infrastructure ($6 million), Packaging & Specialty Plastics ($57 million), Electronics & Imaging ($39 million), Safety & Construction ($32 million) and Corporate ($101 million). See Notes 6, 22 and 23 to the Consolidated Financial Statements for additional information.
2016 Charges
In 2016, Historical Dow recognized a $143 million pretax impairment charge related to its equity interest in AgroFresh Solutions, Inc. ("AFSI") due to a decline in the market value of AFSI. The impairment charge impacted Corporate. See Notes 6, 12, 22 and 23 to the Consolidated Financial Statements for additional information.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to the Merger, post-Merger integration and Intended Business Separation activities and costs related to the ownership restructure of Dow Silicones, were $2,463 million in 2018, $1,101 million in 2017 and $349 million in 2016, and were related to Corporate.
Asbestos-Related Charge
In 2016, Historical Dow and Union Carbide Corporation elected to change the method of accounting for asbestos-related defense and processing costs from expensing as incurred to estimating and accruing a liability. As a result of this accounting policy change, Union Carbide recorded a pretax charge of $1,009 million for asbestos-related defense costs through the terminal year of 2049. Union Carbide also recorded a pretax charge of $104 million to increase the asbestos-related liability for pending and future claims through the terminal year of 2049. There was no adjustment to the asbestos-related liability for pending and future claims and defense and processing costs in 2017 or 2018. These charges were related to Corporate. See Notes 1 and 16 to the Consolidated Financial Statements for additional information on asbestos-related matters.
Equity in Earnings of Nonconsolidated Affiliates
DowDuPont’s share of the earnings of nonconsolidated affiliates in 2018 was $1,001 million, compared with $764 million in 2017 and $442 million in 2016. In 2018, equity earnings increased as higher earnings from the Kuwait joint ventures, lower equity losses from Sadara and higher earnings from the HSC Group, which included settlements with a customer related to long-term polysilicon sales agreements, were partially offset by lower equity earnings from the Thai joint ventures.
In 2017, equity earnings increased as lower equity losses from Sadara and higher equity earnings from the Kuwait joint ventures and the HSC Group, which included settlements with a customer related to long-term polysilicon sales agreements, were partially offset by the impact of the Dow Silicones ownership restructure and lower equity earnings from the Thai joint ventures. See Note 12 to the Consolidated Financial Statements for additional information on nonconsolidated affiliates.
Sundry Income (Expense) - Net
Sundry income (expense) – net includes a variety of income and expense items such as the gain or loss on foreign currency exchange, interest income, dividends from investments, gains and losses on sales of investments and assets, non-operating pension and other postretirement benefit plan credits or costs, and certain litigation matters. Sundry income (expense) - net for 2018 was income of $592 million, compared with income of $417 million in 2017 and income of $1,486 million in 2016.
In 2018, sundry income (expense) - net included credits related to non-operating pension and other postretirement benefit plans, interest income and gains on the sales of investments and other assets, including a $20 million gain for post-closing adjustments on Historical Dow’s sale of its equity interest in MEGlobal (related to Industrial Intermediates & Infrastructure) and a $22 million gain related to Agriculture asset sales. These gains were partially offset by a $135 million loss on the early extinguishment of debt (related to Corporate), foreign currency exchange losses, including a $50 million foreign exchange loss related to adjustments to foreign currency exchange contracts for the change in the U.S. tax rate (related to Corporate), a $47 million loss for adjustments related to the Dow Silicones ownership restructure ($27 million related Electronics & Imaging and $20 million related to Performance Materials & Coatings), and a $14 million loss on the divestiture of the European XPS STYROFOAM™ business (related to Safety & Construction). See Notes 3, 5, 7, and 15 to the Consolidated Financial Statements for additional information.
In 2017, sundry income (expense) - net included a $635 million gain on the divestiture of the DAS Divested Ag Business (related to Agriculture), a $227 million gain on the divestiture of Historical Dow's EAA Business (related to Packaging & Specialty Plastics), a $137 million gain related to Historical Dow's patent infringement matter with Nova Chemical Corporation (related to Packaging & Specialty Plastics), a $7 million gain for post-closing adjustments on the split-off of Historical Dow's chlorine value chain (related to Corporate), gains on sales of other assets and investments and interest income. These gains more than offset non-operating pension and other postretirement benefit costs, primarily related to a settlement charge for a U.S. non-qualified pension plan of $697 million (related to Corporate), a $469 million loss related to Dow AgroSciences' arbitration matter with Bayer CropScience (related to Agriculture) and foreign currency exchange losses. See Notes 1, 2, 5, 7, 16 and 19 to the Consolidated Financial Statements for additional information.
In 2016, sundry income (expense) - net included a $2,445 million gain on the Dow Silicones ownership restructure (related to Performance Materials & Coatings ($1,617 million), Electronics & Imaging ($512 million) and Transportation & Advanced Polymers ($316 million)), a $6 million gain for post-closing adjustments on the split-off of Historical Dow's chlorine value chain (related to Corporate), gains on sales of assets and investments, non-operating pension and other postretirement benefit credits and interest income. These gains more than offset a $1,235 million loss related to Historical Dow's settlement of the urethane matters class action lawsuit and the opt-out cases litigation (related to Industrial Intermediates & Infrastructure), $41 million of transaction costs and productivity actions (related to Corporate), losses on divestitures and foreign currency exchange losses. See Notes 3, 5, 7 and 16 to the Consolidated Financial Statements for additional information.
Interest Expense and Amortization of Debt Discount
Interest expense and amortization of debt discount was $1,504 million in 2018, $1,082 million in 2017 and $858 million in 2016. The increase in 2018 was primarily related to the Merger as well as higher debt balances as a result of the DowDuPont Notes Offering. The increase in 2017 was primarily related to the Merger and the effect of the long-term debt assumed in the Dow Silicones ownership restructure. See Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 11 and 15 to the Consolidated Financial Statements for additional information related to debt financing activity.
Provision (Credit) for Income Taxes on Continuing Operations
The Company's effective tax rate fluctuates based on, among other factors, where income is earned, reinvestment assertions regarding foreign income and the level of income relative to tax credits available. The Company's tax rate is also influenced by the level of equity earnings, since most of the earnings from the Company's equity method investments are taxed at the joint venture level. The underlying factors affecting the Company's overall tax rate are summarized in Note 8 to the Consolidated Financial Statements.
On December 22, 2017, the Tax Cuts and Jobs Act ("The Act") was enacted. The Act reduces the U.S. federal corporate income tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves towards a hybrid territorial system. At December 31, 2018, the Company had completed its accounting for the tax effects of The Act; see Note 8 to the Consolidated Financial Statements for additional information.
The "Provision (Credit) for income taxes on continuing operations" was a charge of $1,489 million in 2018, a benefit of $476 million in 2017 and a charge of $9 million in 2016. The tax rate for 2018 was favorably impacted by equity earnings as well as excess tax benefits related to equity compensation. These impacts were more than offset by the impact of geographic mix of earnings, amortization of the fair value step-up of Historical DuPont’s inventories as a result of the Merger, a $75 million tax charge associated with a valuation allowance recorded against the net deferred tax asset position of a Historical DuPont legal entity in Brazil and costs associated with the Merger (including a $74 million net tax charge on repatriation activities to facilitate the Intended Business Separations). These factors resulted in a tax rate of 27.1 percent for 2018.
The tax rate for 2017 was favorably impacted by a provisional net benefit of $1,086 million that the Company recognized due to the enactment of The Act, as well as the geographic mix of earnings. In addition, the tax rate was favorably impacted by the adoption of Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which resulted in the recognition of excess tax benefits related to equity compensation in the provision for income taxes. These impacts were partially offset by a goodwill impairment recognized in the fourth quarter for which there was no corresponding tax deduction, amortization of the fair value step-up of Historical DuPont’s inventories as a result of the Merger and certain net foreign currency exchange losses recognized on the remeasurement of the net monetary asset positions which were not tax deductible in their local jurisdictions. These factors resulted in a negative tax rate of 39.9 percent for 2017.
The tax rate for Historical Dow in 2016 was favorably impacted by the non-taxable gain on the ownership restructure of Dow Silicones and a tax benefit on the reassessment of a deferred tax liability related to the basis difference in Historical Dow’s investment in Dow Silicones. The tax rate was also favorably impacted by the geographic mix of earnings, the availability of foreign tax credits, the deductibility of the urethane matters class action lawsuit and opt-out cases settlements and the asbestos-related charge. A reduction in equity earnings and non-deductible transaction costs and productivity actions unfavorably impacted the tax rate. These factors resulted in an effective tax rate of 0.2 percent for 2016.
Loss from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax was $5 million in 2018 and $77 million in 2017, and is related to certain Historical DuPont assets divested as a condition of the regulatory approval of the Merger. See Note 5 to the Consolidated Financial Statements for additional information.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $155 million in 2018, $132 million in 2017 and $86 million in 2016. Net income attributable to noncontrolling interests increased in 2018 compared with 2017, primarily due to the Merger and the sale of Historical Dow's ownership interests in the SKC Haas Display Films group of companies in 2017. Net income attributable to noncontrolling interests increased in 2017 compared with 2016, primarily due to higher earnings from Dow Silicones' consolidated joint ventures and improved results from a cogeneration facility in Brazil. See Notes 18 and 23 to the Consolidated Financial Statements for additional information.
Historical Dow Cumulative Convertible Preferred Stock Dividends
On December 30, 2016, Historical Dow converted all outstanding shares of its Cumulative Convertible Perpetual Preferred Stock, Series A ("Historical Dow Preferred Stock") into shares of Historical Dow's common stock. As a result of this conversion, no shares of Historical Dow Preferred Stock are issued or outstanding. On January 6, 2017, Historical Dow filed an amendment to its Restated Certificate of Incorporation by way of a certificate of elimination with the Secretary of State of Delaware eliminating this series of preferred stock. Historical Dow Preferred Stock dividends of $340 million were recognized in 2016. See Note 17 to the Consolidated Financial Statements for additional information.
Net Income Available for DowDuPont Inc. Common Stockholders
Net income available for common stockholders was $3,844 million ($1.65 per share) in 2018, compared with $1,460 million ($0.91 per share) in 2017 and $3,978 million ($3.52 per share) in 2016. See Note 9 to the Consolidated Financial Statements for details on the Company's earnings per share calculations.
SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following supplemental unaudited pro forma combined statements of income (the "unaudited pro forma income statements") for DowDuPont are presented to illustrate the estimated effects of the Merger, assuming that the Merger had been consummated on January 1, 2016. For the periods presented below, activity prior to August 31, 2017 (the “Merger Date”) was prepared on a pro forma basis (the “unaudited pro forma information”) and activity after the Merger Date was prepared on a combined basis under accounting principles generally accepted in the United States of America (“U.S. GAAP”). The unaudited pro forma information below was prepared in accordance with Article 11 of Regulation S-X which is a different basis than the unaudited pro forma information presented in Note 3 to the Consolidated Financial Statements, which was prepared in accordance with Accounting Standards Codification ("ASC") Topic 805, "Business Combinations" ("ASC 805"). Pro forma adjustments have been made for (1) the purchase accounting impact, (2) accounting policy alignment, (3) the elimination of the effect of events that are directly attributable to the Merger Agreement (e.g., one-time transaction costs), (4) the elimination of the impact of transactions between Historical Dow and Historical DuPont, and (5) the elimination of the effect of consummated divestitures required as a condition of approval for the Merger. Events that are not expected to have a continuing impact on the combined results (e.g., inventory step‑up costs) are excluded from the unaudited pro forma information. The unaudited pro forma information does not reflect restructuring or integration activities or other costs following the Merger that may be incurred to achieve cost or growth synergies of DowDuPont. The unaudited pro forma income statements provide stockholders with summary financial information and historical data that is on a basis consistent with how DowDuPont reports current financial information.
The Merger was accounted for under ASC 805, under which Historical Dow was designated as the accounting acquirer in the Merger for accounting purposes. Under ASC 805, Historical Dow accounted for the transaction by using Historical Dow financial information and accounting policies and adding the assets and liabilities of Historical DuPont as of the Merger Date at their respective fair values. The assets and liabilities of Historical DuPont were measured based on various estimates at the Merger Date using assumptions that DowDuPont believes are reasonable based on information that was available. The fair value estimates reflected in the unaudited pro forma information are based on those used in the Current Report on Form 8-K/A filed with the SEC on October 26, 2017, and subsequent measurement period adjustments are not reflected.
The unaudited pro forma income statements have been presented for informational purposes only and are not necessarily indicative of what DowDuPont’s results of operations actually would have been had the Merger been completed on January 1, 2016. In addition, the unaudited pro forma income statements do not purport to project the future operating results of the Company. The unaudited pro forma income statements were based on and should be read in conjunction with the separate historical financial statements and accompanying notes contained in each of the Historical Dow and Historical DuPont Quarterly Reports on Form 10-K for the applicable periods. See Note 3 to the Consolidated Financial Statements for additional information.
| Unaudited Pro Forma Combined Statement of Income | Year Ended Dec 31, 2017 | |||||||||||||||||
| Adjustments | ||||||||||||||||||
| In millions, except per share amounts | DWDP 1, 2 | Historical DuPont 2, 3 | Reclass 2, 4 | Divestitures 5 | Pro Forma 6 | Pro Forma | ||||||||||||
| Net sales | $ | 62,484 | $ | 18,349 | $ | 84 | $ | (1,219 | ) | $ | (163 | ) | $ | 79,535 | ||||
| Cost of sales | 49,791 | 10,464 | 387 | (523 | ) | 65 | 60,184 | |||||||||||
| Other operating charges | — | 521 | (521 | ) | — | — | — | |||||||||||
| Research and development expenses | 2,141 | 1,117 | (27 | ) | (104 | ) | 19 | 3,146 | ||||||||||
| Selling, general and administrative expenses | 4,064 | 3,368 | (583 | ) | (143 | ) | 29 | 6,735 | ||||||||||
| Other (loss) income, net | — | (106 | ) | 106 | — | — | — | |||||||||||
| Amortization of intangibles | 1,013 | — | 139 | — | 591 | 1,743 | ||||||||||||
| Restructuring, goodwill impairment and asset related charges - net | 3,280 | 323 | — | — | (10 | ) | 3,593 | |||||||||||
| Integration and separation costs | 1,101 | — | 605 | (24 | ) | (183 | ) | 1,499 | ||||||||||
| Equity in earnings of nonconsolidated affiliates | 764 | — | 55 | — | (15 | ) | 804 | |||||||||||
| Sundry income (expense) - net | 417 | — | (278 | ) | (12 | ) | — | 127 | ||||||||||
| Interest expense and amortization of debt discount | 1,082 | 254 | — | — | (80 | ) | 1,256 | |||||||||||
| Income from continuing operations before income taxes | 1,193 | 2,196 | (33 | ) | (437 | ) | (609 | ) | 2,310 | |||||||||
| Provision (Credit) for income taxes on continuing operations | (476 | ) | 228 | (33 | ) | (88 | ) | (233 | ) | (602 | ) | |||||||
| Income from continuing operations, net of tax | 1,669 | 1,968 | — | (349 | ) | (376 | ) | 2,912 | ||||||||||
| Net income attributable to noncontrolling interests | 132 | 20 | — | — | 7 | 159 | ||||||||||||
| Net income from continuing operations attributable to DowDuPont Inc. | 1,537 | 1,948 | — | (349 | ) | (383 | ) | 2,753 | ||||||||||
| Preferred stock dividends | — | 7 | — | — | (7 | ) | — | |||||||||||
| Net income from continuing operations available for DowDuPont Inc. common stockholders | $ | 1,537 | $ | 1,941 | $ | — | $ | (349 | ) | $ | (376 | ) | $ | 2,753 | ||||
| Per common share data: | ||||||||||||||||||
| Earnings per common share from continuing operations - basic | $ | 1.18 | ||||||||||||||||
| Earnings per common share from continuing operations - diluted | $ | 1.17 | ||||||||||||||||
| Weighted-average common shares outstanding - basic | 2,323.9 | |||||||||||||||||
| Weighted-average common shares outstanding - diluted | 2,346.1 |
| 1. | See the U.S. GAAP consolidated statements of income. |
| 2. | Amounts have been updated to reflect certain reclassifications required under ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which was adopted on January 1, 2018, and applied retrospectively. |
| 3. | Reflects Historical DuPont activity for the period from January 1, 2017 to August 31, 2017. |
| 4. | Certain reclassifications were made to conform with the presentation used for DowDuPont. |
| 5. | Includes the following divestitures agreed to with certain regulatory agencies as a condition of approval for the Merger: Historical Dow’s EAA Business; the DAS Divested Ag Business; and Historical DuPont’s cereal broadleaf herbicides and chewing insecticides portfolio as well as its crop protection research and development pipeline and organization. |
| 6. | Certain pro forma adjustments were made to illustrate the estimated effects of the Merger, assuming that the Merger had been consummated on January 1, 2016. Refer to Summary of Pro Forma Adjustments at the end of this section for additional details. |
| Unaudited Pro Forma Combined Statement of Income | Year Ended Dec 31, 2016 | |||||||||||||||||
| Adjustments | ||||||||||||||||||
| In millions, except per share amounts | Historical Dow 1, 2 | Historical DuPont 2, 3 | Reclass 2, 4 | Divestitures 5 | Pro Forma 6 | Pro Forma | ||||||||||||
| Net sales | $ | 48,158 | $ | 24,594 | $ | 170 | $ | (1,812 | ) | $ | (216 | ) | $ | 70,894 | ||||
| Cost of sales | 37,668 | 14,451 | 559 | (783 | ) | 110 | 52,005 | |||||||||||
| Other operating charges | — | 686 | (686 | ) | — | — | — | |||||||||||
| Research and development expenses | 1,593 | 1,635 | (40 | ) | (153 | ) | 29 | 3,064 | ||||||||||
| Selling, general and administrative expenses | 3,302 | 4,303 | (762 | ) | (203 | ) | 43 | 6,683 | ||||||||||
| Other (loss) income, net | — | 668 | (668 | ) | — | — | — | |||||||||||
| Amortization of intangibles | 544 | — | 194 | — | 886 | 1,624 | ||||||||||||
| Restructuring, goodwill impairment and asset related charges - net | 452 | 552 | 143 | 4 | — | 1,151 | ||||||||||||
| Integration and separation costs | — | — | 735 | — | (259 | ) | 476 | |||||||||||
| Asbestos-related charge | 1,113 | — | — | — | — | 1,113 | ||||||||||||
| Equity in earnings of nonconsolidated affiliates | 442 | — | 99 | — | (25 | ) | 516 | |||||||||||
| Sundry income (expense) - net | 1,236 | — | 671 | (10 | ) | — | 1,897 | |||||||||||
| Interest income | 107 | — | (107 | ) | — | — | — | |||||||||||
| Interest expense and amortization of debt discount | 858 | 370 | — | — | (120 | ) | 1,108 | |||||||||||
| Income from continuing operations before income taxes | 4,413 | 3,265 | 22 | (687 | ) | (930 | ) | 6,083 | ||||||||||
| Provision for income taxes on continuing operations | 9 | 744 | 22 | (160 | ) | (327 | ) | 288 | ||||||||||
| Income from continuing operations, net of tax | 4,404 | 2,521 | — | (527 | ) | (603 | ) | 5,795 | ||||||||||
| Net income attributable to noncontrolling interests | 86 | 12 | — | — | 10 | 108 | ||||||||||||
| Net income attributable to DowDuPont Inc. | 4,318 | 2,509 | — | (527 | ) | (613 | ) | 5,687 | ||||||||||
| Preferred stock dividends | 340 | 10 | — | — | (10 | ) | 340 | |||||||||||
| Net income available for DowDuPont Inc. common stockholders | $ | 3,978 | $ | 2,499 | $ | — | $ | (527 | ) | $ | (603 | ) | $ | 5,347 | ||||
| Per common share data: | ||||||||||||||||||
| Earnings per common share from continuing operations - basic | $ | 2.40 | ||||||||||||||||
| Earnings per common share from continuing operations - diluted | $ | 2.37 | ||||||||||||||||
| Weighted-average common shares outstanding - basic | 2,221.3 | |||||||||||||||||
| Weighted-average common shares outstanding - diluted | 2,242.1 |
| 1. | See the consolidated statements of income included in Historical Dow's Annual Report on Form 10-K for the year ended December 31, 2016. |
| 2. | Amounts have been updated to reflect certain reclassifications required under ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which was adopted on January 1, 2018, and applied retrospectively. |
| 3. | See the consolidated statements of income included in Historical DuPont's Annual Report on Form 10-K for the year ended December 31, 2016. |
| 4. | Certain reclassifications were made to conform with the presentation used for DowDuPont. The reclassifications are consistent with those identified and disclosed in the Current Report on Form 8-K/A filed with the SEC on October 26, 2017. Additionally, in the fourth quarter of 2017, to improve comparability and conform to the current period presentation, the Company reclassified $143 million of asset impairment charges from "Sundry income (expense) - net" to "Restructuring, goodwill impairment and asset related charges - net." |
| 5. | Includes the following divestitures agreed to with certain regulatory agencies as a condition of approval for the Merger: Historical Dow’s EAA Business; the DAS Divested Ag Business; and Historical DuPont’s cereal broadleaf herbicides and chewing insecticides portfolio as well as its crop protection research and development pipeline and organization. |
| 6. | Certain pro forma adjustments were made to illustrate the estimated effects of the Merger, assuming that the Merger had been consummated on January 1, 2016. Refer to Summary of Pro Forma Adjustments at the end of this section for additional details. |
| Summary of Pro Forma Adjustments | Year Ended | |||||
| In millions (Unaudited) | Dec 31, 2017 | Dec 31, 2016 | ||||
| Net sales | ||||||
| Intercompany transactions 1 | $ | (163 | ) | $ | (216 | ) |
| Cost of sales | ||||||
| Intercompany transactions 1 | $ | (163 | ) | $ | (216 | ) |
| Policy harmonization 2 | 11 | — | ||||
| Depreciation expense 3 | 217 | 326 | ||||
| Total cost of sales | $ | 65 | $ | 110 | ||
| Research and development expenses | ||||||
| Depreciation expense 3 | $ | 19 | $ | 29 | ||
| Selling, general and administrative expenses | ||||||
| Depreciation expense 3 | $ | 29 | $ | 43 | ||
| Amortization of intangibles | ||||||
| Amortization expense 4 | $ | 591 | $ | 886 | ||
| Restructuring, goodwill impairment and asset related charges - net | ||||||
| Transaction costs 5 | $ | (10 | ) | $ | — | |
| Integration and separation costs | ||||||
| Transaction costs 5 | $ | (183 | ) | $ | (259 | ) |
| Equity in earnings of nonconsolidated affiliates | ||||||
| Fair value of nonconsolidated affiliates 6 | $ | (15 | ) | $ | (25 | ) |
| Interest expense and amortization of debt discount | ||||||
| Amortization of debt discount 7 | $ | (80 | ) | $ | (120 | ) |
| Total pro forma adjustments to income from continuing operations before income taxes | $ | (609 | ) | $ | (930 | ) |
| Provision for income taxes on continuing operations 8 | ||||||
| Policy harmonization 2 | $ | (4 | ) | $ | — | |
| Depreciation expense 3 | (91 | ) | (132 | ) | ||
| Amortization expense 4 | (184 | ) | (280 | ) | ||
| Transaction costs 5 | 22 | 49 | ||||
| Fair value of nonconsolidated affiliates 6 | (5 | ) | (8 | ) | ||
| Amortization of debt discount 7 | 29 | 44 | ||||
| Total provision for income taxes on continuing operations | $ | (233 | ) | $ | (327 | ) |
| Total pro forma adjustments to income from continuing operations, net of tax | $ | (376 | ) | $ | (603 | ) |
| Net income attributable to noncontrolling interests | ||||||
| Reclass historical dividends 9 | $ | 7 | $ | 10 | ||
| Net income from continuing operations attributable to DowDuPont Inc. | $ | (383 | ) | $ | (613 | ) |
| Preferred stock dividends | ||||||
| Reclass historical dividends 9 | $ | (7 | ) | $ | (10 | ) |
| Net income from continuing operations available for DowDuPont Inc. common stockholders | $ | (376 | ) | $ | (603 | ) |
| 1. | Elimination of intercompany transactions between Historical Dow and Historical DuPont. |
| 2. | Adjustment to conform Historical DuPont's accounting policy of deferring and amortizing expense for planned major maintenance activities with Historical Dow's accounting policy of directly expensing the costs as incurred. |
| 3. | Increase in depreciation expense for the fair value step-up of Historical DuPont's property, plant and equipment. |
| 4. | Increase in amortization expense for the fair value step-up of Historical DuPont's finite-lived intangibles. |
| 5. | Elimination of one-time transaction costs directly attributable to the Merger. |
| 6. | Decrease in equity in earnings of nonconsolidated affiliates for the fair value adjustment to Historical DuPont's investment in nonconsolidated affiliates. |
| 7. | Decrease in interest expense related to amortization of the fair value adjustment to Historical DuPont's long-term debt. |
| 8. | Represents the income tax effect of the pro forma adjustments related to the Merger calculated using a blended statutory income tax rate, inclusive of state taxes. Management believes the blended statutory income tax rate resulting from this calculation provides a reasonable basis for the pro forma adjustments, however the effective tax rate of DowDuPont could be significantly different depending on the mix of activities. |
| 9. | Reclassify historical dividends for Historical DuPont preferred stock from "Preferred stock dividends" to "Net income attributable to noncontrolling interests." |
SEGMENT RESULTS
Effective August 31, 2017, Historical Dow and Historical DuPont completed the previously announced merger of equals transaction pursuant to the Merger Agreement, resulting in a newly formed corporation named DowDuPont. See Note 3 to the Consolidated Financial Statements for additional information on the Merger. As a result of the Merger, new operating segments were created which are used by management to allocate Company resources and assess performance. The new segments are aligned with the market verticals they serve, while maintaining integration and innovation strengths within strategic value chains. DowDuPont is comprised of nine operating segments, which are aggregated into eight reportable segments: Agriculture; Performance Materials & Coatings; Industrial Intermediates & Infrastructure; Packaging & Specialty Plastics; Electronics & Imaging; Nutrition & Biosciences; Transportation & Advanced Polymers and Safety & Construction. Corporate contains the reconciliation between the totals for the reportable segments and the Company’s totals. The Company’s Nutrition & Biosciences reportable segment consists of two operating segments, Nutrition & Health and Industrial Biosciences, which individually did not meet the quantitative thresholds.
Beginning in the third quarter of 2018, DowDuPont realigned the following joint ventures, global businesses and product lines in preparation for the Intended Business Separations:
| • | Realignment of the HSC Group joint ventures (DC HSC Holdings LLC and Hemlock Semiconductor L.L.C.) from the Consumer Solutions global business in the Performance Materials & Coatings reportable segment to the Electronics & Imaging reportable segment. |
| • | Realignment of certain cellulosics product lines from the Nutrition & Health operating segment in the Nutrition & Biosciences reportable segment to the Consumer Solutions global business in the Performance Materials & Coatings reportable segment. |
| • | Certain roofing products were realigned from the Building Solutions product line in the Safety & Construction reportable segment to Corporate. |
| • | Realignment of the previously divested Epoxy and Chlorinated Organics global businesses from the Industrial Intermediates & Infrastructure reportable segment to Corporate. |
| • | In addition, the following realignments within the Industrial Intermediates & Infrastructure reportable segment were made, which had no effect on the segment results: |
| – | The Construction Chemicals global business was combined with the Polyurethanes & CAV global business. |
| – | Certain product lines associated with the oil and gas industry were realigned from the Industrial Solutions global business to the Polyurethanes & CAV global business. |
DowDuPont reported geographic information for the following regions: U.S. & Canada, Asia Pacific, Latin America, and EMEA. As a result of the Merger, Historical Dow changed the geographic alignment for the country of India to be reflected in Asia Pacific (previously reported in EMEA) and aligned Puerto Rico to U.S. & Canada (previously reported in Latin America).
The segment and geographic region reporting changes have been retrospectively reflected in the following discussion of segment results for all periods presented.
The Company’s measure of profit/loss for segment reporting purposes is Operating EBITDA (for the twelve months ended December 31, 2018) and pro forma Operating EBITDA (for the twelve months ended December 31, 2017 and 2016) as this is the manner in which the Company’s chief operating decision maker (“CODM”) assesses performance and allocates resources. The Company defines Operating EBITDA as earnings (i.e., "Income from continuing operations before income taxes”) before interest, depreciation, amortization and foreign exchange gains (losses), excluding the impact of significant items. Pro forma Operating EBITDA is defined as pro forma earnings (i.e. pro forma "Income from continuing operations before income taxes") before interest, depreciation, amortization and foreign exchange gains (losses), excluding the impact of adjusted significant items. Reconciliations of these measures can be found in Note 24 to the Consolidated Financial Statements. The Company also presents pro forma net sales for 2017 and 2016 as it is included in management’s measure of segment performance and is regularly reviewed by the CODM.
Pro forma adjustments used in the calculation of pro forma net sales and pro forma Operating EBITDA were determined in accordance with Article 11 of Regulation S-X and were based on the historical consolidated financial statements of Historical Dow and Historical DuPont, adjusted to give effect to the Merger as if it had been consummated on January 1, 2016. For additional information on the pro forma adjustments made, see Supplemental Unaudited Pro Forma Combined Financial Information in the preceding section.
AGRICULTURE
The Agriculture segment leverages the Company’s technology, customer relationships and industry knowledge to improve the quantity, quality and safety of the global food supply and the global production agriculture industry. Land available for worldwide agricultural production is increasingly limited so production growth will need to be achieved principally through improving crop yields and productivity. The segment’s two global businesses, Seed and Crop Protection, deliver a broad portfolio of products and services that are specifically targeted to achieve gains in crop yields and productivity, including well-established brands of seed products, crop chemicals, seed treatments, agronomy and digital services. R&D focuses on leveraging germplasm and plant science technology to increase farmer productivity and to enhance the value of grains and oilseeds through improved seed traits, superior seed germplasm and effective use of crop protection solutions.
| Agriculture | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 14,301 | $ | 7,516 | $ | 6,173 | |||
| Pro forma net sales | $ | 14,342 | $ | 14,060 | |||||
| Operating EBITDA 1 | $ | 2,705 | $ | 2,611 | $ | 2,322 | |||
| Equity earnings | $ | — | $ | 3 | $ | 5 |
| 1. | The Company’s measure of profit/loss for segment reporting purposes is Operating EBITDA for the twelve months ended December 31, 2018 and pro forma Operating EBITDA for the twelve months ended December 31, 2017 and 2016. |
| Agriculture | ||||||
| Percentage change from prior year | 2018 | 2017 | 2016 | |||
| Change in Net Sales from Prior Period due to: | ||||||
| Local price & product mix | 3 | % | (1 | )% | 1 | % |
| Currency | (2 | ) | — | (1 | ) | |
| Volume | 1 | (2 | ) | (2 | ) | |
| Portfolio & other | 88 | 25 | — | |||
| Total | 90 | % | 22 | % | (2 | )% |
| Change in Pro Forma Net Sales from Prior Period due to: 1 | ||||||
| Local price & product mix | 3 | — | % | |||
| Currency | — | — | ||||
| Volume | (2 | ) | 1 | |||
| Portfolio & other | (1 | ) | 1 | |||
| Total | — | % | 2 | % |
| 1. | As reported net sales in 2018 compared with pro forma net sales in 2017. Pro forma net sales in 2017 compared with pro forma net sales in 2016. |
2018 Versus 2017
Agriculture net sales were $14,301 million in 2018, up from $7,516 million in 2017. Net sales in 2018 were down slightly from pro forma net sales of $14,342 million in 2017, as a 3 percent increase in price was offset by a 2 decrease in volume and a 1 percent decline due to portfolio. Currency was flat year over year.
The increase in local price was driven by a favorable mix in U.S. & Canada as well as increases in Crop Protection pricing in Latin America to offset currency pressure. Volume gains in Crop Protection due to new product launches, including VESSARYATM in Latin America, ENLISTTM products in U.S. & Canada and Latin America, and PYRAXALTTM in Asia Pacific, were offset by lower planted area in U.S. & Canada and Latin America and lower demand for nitrogen stabilizers in U.S. & Canada. The portfolio loss reflected the inclusion of three months of the DAS Divested Ag Business in 2017 results.
Operating EBITDA was $2,705 million in 2018, up 4 percent from pro forma Operating EBITDA of $2,611 million in 2017. Cost synergies, new product sales in Crop Protection, lower pension/OPEB costs and lower variable compensation were partially offset by higher raw material costs and royalty expense, investments to support new product launches and seed sales declines.
2017 Versus 2016
Agriculture net sales were $7,516 million in 2017, up from $6,173 million in 2016. Pro forma net sales were $14,342 million in 2017, up from $14,060 million in 2016. Pro forma net sales growth of 2 percent was led by volume gains of 1 percent and a 1 percent benefit from portfolio actions. Seed net sales grew 5 percent, driven by volume and price improvement, and Crop Protection net sales decreased 1 percent as increases in volume were more than offset by lower local price. Seed and Crop Protection volume growth was driven by an increase in sunflower and corn seed sales in Europe, increased soybean sales in U.S. & Canada,
continued penetration of new crop protection products VESSARYA® and ZORVECTM fungicides and continued demand for ARYLEXTM herbicide, ISOCLAST® insecticide, and novel seed treatment solutions. These volume increases were partially offset by higher Crop Protection inventory levels in China and a reduction in global corn planted area. Increases in local prices for Seeds, driven by continued penetration of LEPTRA® corn hybrids, were offset by a decrease in local prices for Crop Protection, driven by competitive pressures in Latin America.
The benefit from portfolio actions for 2017 as compared with 2016, is due to the DAS Divested Ag Business, which is excluded from pro forma results for periods prior to the Merger, but included in reported results after the Merger and through the close of the sale of this business on November 30, 2017.
Pro forma Operating EBITDA was $2,611 million in 2017, up 12 percent from $2,322 million in 2016. Pro forma Operating EBITDA increased on improved volume, cost savings, lower pension/OPEB costs, currency and portfolio benefits. Increases were partially offset by lower local price due to competitive crop protection pricing pressure and higher product costs, including higher soybean royalties.
Agriculture Outlook for 2019
Agriculture's full year 2019 net sales are expected to benefit from new product launches and pricing actions, largely offset by the unfavorable impact of currency. The segment is expected to see benefits from cost synergies, partially offset by higher unit costs and an unfavorable impact from currency.
PERFORMANCE MATERIALS & COATINGS
Performance Materials & Coatings includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. These businesses primarily utilize the Company's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of the architectural and industrial coatings, home care and personal care end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to combine chemistry platforms to deliver differentiated offerings to customers.
| Performance Materials & Coatings | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 9,575 | $ | 8,809 | $ | 6,439 | |||
| Pro forma net sales | $ | 8,768 | $ | 6,389 | |||||
| Operating EBITDA 1 | $ | 2,170 | $ | 1,774 | $ | 1,015 | |||
| Equity earnings | $ | 4 | $ | 41 | $ | 98 |
| 1. | The Company’s measure of profit/loss for segment reporting purposes is Operating EBITDA for the twelve months ended December 31, 2018 and pro forma Operating EBITDA for the twelve months ended December 31, 2017 and 2016. |
| Performance Materials & Coatings | ||||||
| Percentage change from prior year | 2018 | 2017 | 2016 | |||
| Change in Net Sales from Prior Period due to: | ||||||
| Local price & product mix | 10 | % | 8 | % | (8 | )% |
| Currency | 1 | — | (1 | ) | ||
| Volume | (2 | ) | 2 | (2 | ) | |
| Portfolio & other | — | 27 | 52 | |||
| Total | 9 | % | 37 | % | 41 | % |
| Change in Pro Forma Net Sales from Prior Period due to: 1 | ||||||
| Local price & product mix | 10 | % | 8 | % | ||
| Currency | 1 | — | ||||
| Volume | (2 | ) | 2 | |||
| Portfolio & other | — | 27 | ||||
| Total | 9 | % | 37 | % |
| 1. | As reported net sales in 2018 compared with pro forma net sales in 2017. Pro forma net sales in 2017 compared with pro forma net sales in 2016. |
2018 Versus 2017
Performance Materials & Coatings net sales were $9,575 million in 2018, up from $8,809 million in 2017. Net sales increased 9 percent compared with pro forma net sales of $8,768 million in 2017, with local price up 10 percent, a benefit from currency of 1 percent, primarily in EMEA, and volume down 2 percent. Local price increased in both businesses and all geographic regions. Consumer Solutions local price increased primarily due to disciplined price/volume management in upstream silicone intermediates, which more than offset a decrease in volume. Local price increased in Coatings & Performance Monomers in response to higher feedstock and raw material costs and favorable supply/demand fundamentals. Volume decreased in both businesses and all geographic regions, except Asia Pacific. Volume decreased in Consumer Solutions primarily as a result of targeted reductions of low-margin business, primarily in the home care market sector. Volume decreased slightly for Coatings & Performance Monomers, with a decline in all geographic regions, except Asia Pacific.
Operating EBITDA was $2,170 million in 2018, up 22 percent from pro forma Operating EBITDA of $1,774 million in 2017. Operating EBITDA improved compared with 2017 as higher selling prices and the favorable impact of cost synergies more than offset increased feedstock and other raw material costs.
2017 Versus 2016
Performance Materials & Coatings net sales were $8,809 million in 2017, up from $6,439 million in 2016. Pro forma net sales were $8,768 in 2017, up from $6,389 in 2016. Pro forma net sales increased 37 percent compared with 2016, primarily due to portfolio actions, which contributed to 27 percent of the increase, reflecting the favorable impact of the addition of Dow Silicones. Local price increased 8 percent and volume increased 2 percent. Local price increased in both businesses and all geographic regions. Local price increased in Coatings & Performance Monomers in response to higher raw material costs, tight supply and demand fundamentals for acrylates and methacrylates and pricing actions for architectural coatings. Consumer Solutions local price increased primarily due to pricing initiatives for silicone intermediates in Asia Pacific and EMEA. Volume increased in both businesses and all geographic regions, except Latin America and EMEA, which were flat. Consumer Solutions experienced volume growth in all geographic regions, except EMEA, which was flat, driven by strong demand in pressure sensitive packaging, construction and personal care end-markets. Volume growth in Coatings & Performance Monomers was driven by opportunistic merchant sales of acrylates and methacrylates and strong growth in specialty monomers, particularly in U.S. & Canada.
Pro forma Operating EBITDA was $1,774 million in 2017, up from $1,015 in 2016. Pro forma Operating EBITDA improved compared with 2016 as the favorable impact of earnings from Dow Silicones and higher selling prices more than offset higher feedstock, energy and other raw material costs.
Performance Materials & Coatings Outlook for 2019
Performance Materials & Coatings' 2019 sales are expected to benefit from strong demand for performance silicones and home and personal care products, as well as volume growth in acrylates and architectural coatings. Sales volume growth and the favorable impact of cost synergies are expected to offset local price declines in upstream products.
INDUSTRIAL INTERMEDIATES & INFRASTRUCTURE
Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & CAV - 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, propylene oxide derivatives, cellulose ethers, redispersible latex powders and acrylic emulsions that are aligned to market segments as diverse as appliances, coatings, infrastructure, oil and gas and building and construction. 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 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.
Historical Dow is responsible for marketing a majority of Sadara products outside of the Middle East zone through Historical Dow's established sales channels. As part of this arrangement, Historical Dow purchases and sells Sadara products for a marketing fee.
| Industrial Intermediates & Infrastructure | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 15,116 | $ | 12,647 | $ | 10,832 | |||
| Pro forma net sales | $ | 12,640 | $ | 10,820 | |||||
| Operating EBITDA 1 | $ | 2,543 | $ | 2,282 | $ | 1,675 | |||
| Equity earnings (losses) | $ | 284 | $ | 172 | $ | (18 | ) |
| 1. | The Company’s measure of profit/loss for segment reporting purposes is Operating EBITDA for the twelve months ended December 31, 2018 and pro forma Operating EBITDA for the twelve months ended December 31, 2017 and 2016. |
| Industrial Intermediates & Infrastructure | ||||||
| Percentage change from prior year | 2018 | 2017 | 2016 | |||
| Change in Net Sales from Prior Period due to: | ||||||
| Local price & product mix | 5 | % | 10 | % | (9 | )% |
| Currency | 1 | — | (1 | ) | ||
| Volume | 14 | 7 | 2 | |||
| Portfolio & other | — | — | (4 | ) | ||
| Total | 20 | % | 17 | % | (12 | )% |
| Change in Pro Forma Net Sales from Prior Period due to: 1 | ||||||
| Local price & product mix | 5 | % | 10 | % | ||
| Currency | 1 | — | ||||
| Volume | 14 | 7 | ||||
| Portfolio & other | — | — | ||||
| Total | 20 | % | 17 | % |
| 1. | As reported net sales in 2018 compared with pro forma net sales in 2017. Pro forma net sales in 2017 compared with pro forma net sales in 2016. |
2018 Versus 2017
Industrial Intermediates & Infrastructure net sales were $15,116 million in 2018, up 20 percent from $12,647 million in 2017. Net sales increased 20 percent compared with pro forma net sales of $12,640 million in 2017, with volume up 14 percent, local price up 5 percent and currency up 1 percent. Volume increased in all businesses and geographic regions. Polyurethanes & CAV reported volume increases in all geographic regions, except Latin America, primarily reflecting increased supply from Sadara. Industrial Solutions volume increased in all geographic regions reflecting greater production from Sadara and increased demand in industrial specialties. Local price increased in all businesses and geographic regions, except Asia Pacific. Local price increases were driven by higher feedstock and other raw material costs, pricing initiatives and strong demand for caustic soda, propylene glycols and propylene oxide which more than offset price decline in isocyanates. Currency had a benefit of 1 percent, primarily in EMEA.
Operating EBITDA was $2,543 million in 2018, up 11 percent from pro forma Operating EBITDA of $2,282 million in 2017. Operating EBITDA increased as the impact of higher selling prices, the benefit from currency on sales, cost synergies, higher equity earnings from the Kuwait joint ventures and lower equity losses from Sadara more than offset contraction in isocyanates margins and higher feedstock and other raw material costs.
2017 Versus 2016
Industrial Intermediates & Infrastructure net sales were $12,647 million in 2017, up 17 percent from $10,832 million in 2016. Pro forma net sales were $12,640 million in 2017, up from $10,820 million in 2016. Pro forma net sales increased 17 percent in 2017, with local price up 10 percent and volume up 7 percent. Local price was up in all geographic regions and all businesses driven by higher raw material costs, pricing initiatives and tight market conditions due to supply disruptions in the industry. Polyurethanes & CAV volume increased in all geographic regions due to strong demand for downstream, higher margin systems applications, new production from Sadara and increased demand for caustic soda and vinyl chloride monomer in EMEA resulting from tighter supply/demand fundamentals. Industrial Solutions reported volume gains in all geographic regions driven by new production from Sadara, increased demand for products used in crop protection offerings and solvents used in electronics processing, and higher catalyst sales in Asia Pacific.
Pro forma Operating EBITDA was $2,282 million in 2017, up from $1,675 million in 2016. Compared with last year, pro forma Operating EBITDA increased as higher selling prices, increased sales volume, higher equity earnings from the Kuwait joint ventures, lower equity losses from Sadara and lower SG&A and R&D spending more than offset higher feedstock, energy and other raw material costs.
Industrial Intermediates & Infrastructure Outlook for 2019
Industrial Intermediates & Infrastructure's 2019 sales are expected to be impacted by currency headwinds and price declines. The segment is expected to benefit from the favorable impact of cost synergies while margin contraction in isocyanates and monoethylene glycol is expected in 2019.
PACKAGING & SPECIALTY PLASTICS
Packaging & Specialty Plastics is a world leader in plastics and 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; and infrastructure. This segment also includes the results of The Kuwait Styrene Company K.S.C.C. and The SCG-Dow Group, as well as a portion of the results of EQUATE, TKOC, Map Ta Phut Olefins Company Limited and Sadara, all joint ventures of the Company.
Historical Dow is responsible for marketing a majority of Sadara products outside of the Middle East zone through Historical Dow’s established sales channels. As part of this arrangement, Historical Dow purchases and sells Sadara products for a marketing fee.
| Packaging & Specialty Plastics | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 24,096 | $ | 21,456 | $ | 18,404 | |||
| Pro forma net sales | $ | 22,392 | $ | 19,848 | |||||
| Operating EBITDA 1 | $ | 4,926 | $ | 4,698 | $ | 5,129 | |||
| Equity earnings | $ | 287 | $ | 189 | $ | 137 |
| 1. | The Company’s measure of profit/loss for segment reporting purposes is Operating EBITDA for the twelve months ended December 31, 2018 and pro forma Operating EBITDA for the twelve months ended December 31, 2017 and 2016. |
| Packaging & Specialty Plastics | ||||||
| Percentage change from prior year | 2018 | 2017 | 2016 | |||
| Change in Net Sales from Prior Period due to: | ||||||
| Local price & product mix | 1 | % | 8 | % | (8 | )% |
| Currency | 1 | 1 | — | |||
| Volume | 5 | 5 | 9 | |||
| Portfolio & other | 5 | 3 | (1 | ) | ||
| Total | 12 | % | 17 | % | — | % |
| Change in Pro Forma Net Sales from Prior Period due to: 1 | ||||||
| Local price & product mix | 1 | % | 8 | % | ||
| Currency | 2 | — | ||||
| Volume | 5 | 5 | ||||
| Portfolio & other | — | — | ||||
| Total | 8 | % | 13 | % |
| 1. | As reported net sales in 2018 compared with pro forma net sales in 2017. Pro forma net sales in 2017 compared with pro forma net sales in 2016. |
2018 Versus 2017
Packaging & Specialty Plastics net sales were $24,096 million in 2018, up 12 percent from net sales of $21,456 million in 2017. Net sales increased 8 percent compared with pro forma net sales of $22,392 million in 2017, with volume up 5 percent, currency up 2 percent, primarily in EMEA, and local price up 1 percent. Volume increased in both businesses and across all geographic regions primarily due to new capacity additions on the U.S. Gulf Coast and increased supply from Sadara. Packaging and Specialty Plastics' volume growth was driven by increased demand in industrial and consumer packaging, food and specialty packaging, health and hygiene solutions and elastomer applications. Hydrocarbons & Energy volume increased primarily due to higher sales
of ethylene and ethylene by-products. Local price increased in all geographic regions, except U.S. & Canada. Hydrocarbons & Energy local price increased as a result of higher Brent crude oil prices, which increased approximately 30 percent compared with 2017. Packaging and Specialty Plastics local price was flat when compared with 2017 as local price increases in Latin America were offset by declines in EMEA.
Operating EBITDA was $4,926 million in 2018, up 5 percent from pro forma Operating EBITDA of $4,698 million in 2017. Compared with pro forma Operating EBITDA from the same period last year, Operating EBITDA increased as the impact of higher sales volume, reflecting additional capacity from growth projects, higher selling prices, the benefit from currency on sales, cost synergies, higher equity earnings and lower startup and commissioning costs more than offset higher feedstock and other raw materials costs, increased costs from planned maintenance turnarounds and the impact of weather-related disruptions on the U.S. Gulf Coast.
2017 Versus 2016
Packaging & Specialty Plastics net sales were $21,456 million in 2017, up 17 percent from $18,404 million in 2016. Pro forma net sales were $22,392 million in 2017, up from $19,848 million in 2016. Pro forma net sales increased 13 percent from 2016 with local price up 8 percent and volume up 5 percent. Local price increased in all geographic regions and both businesses in response to higher feedstock, energy and other raw material costs. Double-digit price increases were reported in Hydrocarbons & Energy as a result of higher Brent crude oil prices, which increased approximately 22 percent compared with 2016. Local price also increased in U.S. & Canada as a result of tight supply conditions due to hurricane-related disruptions. Volume increased in both businesses and across all geographic regions, except Latin America. Packaging and Specialty Plastics volume growth was driven by continued consumer-led demand in health and hygiene end-markets in the Americas, strong demand for food and specialty packaging solutions, particularly in Asia Pacific, and increased use of elastomers in packaging and footwear applications. Volume decreased for wire and cable applications as a result of hurricane-related supply disruptions. Volume growth in EMEA and Asia Pacific was enabled by an increase in production volume at Sadara. Hydrocarbons & Energy volume increased in all geographic regions, except Asia Pacific, primarily due to higher sales of ethylene and ethylene by-products enabled by the start-up of a world‑scale ethylene production facility in Texas in September 2017.
Pro forma Operating EBITDA for 2017 was $4,698 million, down from $5,129 million in 2016. Pro forma Operating EBITDA decreased in 2017 as the impact of higher feedstock and energy costs, planned maintenance turnaround spending, increased U.S. Gulf Coast start-up and commissioning costs and hurricane-related expenses more than offset increased selling prices and higher equity earnings.
Packaging & Specialty Plastics Outlook for 2019
Packaging & Specialty Plastics' 2019 sales are expected to benefit from continued strong demand and volume from growth investments partially offset by currency headwinds. In 2019, the Company expects crude oil prices, on average, to be comparable to or slightly lower than 2018. Global ethylene margins are expected to remain healthy in 2019, supported by continued strength in demand and significant scheduled industry maintenance outages in EMEA. Ethylene margins could vary materially from these expectations depending on global GDP rates, global operating rates and changes in global oil prices. The segment is expected to continue to benefit from the favorable impact of cost synergies and contributions from new capacity additions.
Current and Future Investments
Historical Dow announced the startup of three new production facilities on the U.S. Gulf Coast in 2018 which included a Low Density Polyethylene (LDPE) production facility and a NORDEL™ Metallocene ethylene propylene diene monomer ("EPDM") production facility which started up in the first quarter of 2018, and a High Melt Index (HMI) AFFINITY™ polymer production facility which started up in the fourth quarter of 2018. Investments in 2019 include the expansion of the capacity of Historical Dow’s new ethylene production facility, bringing the facility’s total ethylene capacity to 2,000 KTA and making it the largest ethylene facility in the world. Completion is expected in late 2019.
ELECTRONICS & IMAGING
The Electronics & Imaging segment is a leading global supplier of differentiated materials and systems for a broad range of consumer electronics including mobile devices, television monitors, personal computers and electronics used in a variety of industries. The segment is a leading provider of materials and solutions for the fabrication of semiconductors and integrated circuits, and also provides innovative metallization processes for metal finishing, decorative, and industrial applications. Electronics & Imaging is a leading global supplier of key materials for the manufacturing of photovoltaics ("PV") and solar cells, including innovative metallization pastes and back sheet materials for the production of solar cells and solar modules and in the advanced printing and packaging graphics industry providing flexographic printing inks, photopolymer plates, and platemaking systems used in digital printing applications for textile, commercial and home-office use. In addition, the segment provides cutting-edge materials for the manufacturing of rigid and flexible displays for liquid crystal displays ("LCD"), advanced-matrix organic light
emitting diode ("AMOLED"), and quantum dot ("QD") applications. The segment also includes the Company's share of the results of the HSC Group, a U.S.-based group of companies that manufacture and sell polycrystalline silicon products.
| Electronics & Imaging | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 4,720 | $ | 3,356 | $ | 2,307 | |||
| Pro forma net sales | $ | 4,775 | $ | 4,266 | |||||
| Operating EBITDA 1 | $ | 1,902 | $ | 1,840 | $ | 1,388 | |||
| Equity earnings | $ | 412 | $ | 356 | $ | 234 |
| 1. | The Company’s measure of profit/loss for segment reporting purposes is Operating EBITDA for the twelve months ended December 31, 2018 and pro forma Operating EBITDA for the twelve months ended December 31, 2017 and 2016. |
| Electronics & Imaging | ||||||
| Percentage change from prior year | 2018 | 2017 | 2016 | |||
| Change in Net Sales from Prior Period due to: | ||||||
| Local price & product mix | — | % | (1 | )% | (3 | )% |
| Currency | — | — | — | |||
| Volume | 2 | 9 | 3 | |||
| Portfolio & other | 39 | 37 | 16 | |||
| Total | 41 | % | 45 | % | 16 | % |
| Change in Pro Forma Net Sales from Prior Period due to: 1 | ||||||
| Local price & product mix | (1 | )% | (1 | )% | ||
| Currency | 1 | — | ||||
| Volume | 1 | 11 | ||||
| Portfolio & other | (2 | ) | 2 | |||
| Total | (1 | )% | 12 | % |
| 1. | Net sales in 2018 compared with pro forma net sales in 2017. Pro forma net sales in 2017 compared with pro forma net sales in 2016. |
2018 Versus 2017
Electronics & Imaging net sales were $4,720 million in 2018, up from $3,356 million in 2017. Net sales in 2018 were down 1 percent from pro forma net sales of $4,775 million in 2017. Net sales declined as a 2 percent unfavorable impact from portfolio actions related to the prior year divestiture of the SKC Haas Display Films business and a 1 percent decrease in local price, were partially offset by volume growth of 1 percent and a 1 percent benefit from currency.
Volume growth in the segment was driven by gains in semiconductor technologies, display technologies, and interconnect solutions, primarily in Asia Pacific, partially offset by a decline in photovoltaic & advanced materials. Local price declines were driven primarily by competitive pressure in advanced printing, photovoltaic & advanced materials and semiconductor applications.
Operating EBITDA was $1,902 million in 2018, up 3 percent from pro forma Operating EBITDA of $1,840 million in 2017. Cost synergies, volume growth, lower pension/OPEB costs, and a benefit associated with higher customer settlements within an equity affiliate compared with prior year more than offset higher raw material costs.
2017 Versus 2016
Electronics & Imaging net sales were $3,356 million in 2017, up from $2,307 million in 2016. Pro forma net sales were $4,775 million in 2017, up from $4,266 million in 2016. Pro forma net sales growth of 12 percent was led by volume gains of 11 percent and a net 2 percent favorable impact from portfolio actions, slightly offset by a 1 percent decline in local price. Volume growth, primarily in Asia Pacific, was due to increased demand in semiconductor, consumer electronics, photovoltaic & advanced materials, display and industrial markets. Increased semiconductor content in end-use applications drove strong demand in both memory and logic market segments. Continued demand for mobile phones and other consumer electronics, as well as industrial applications drove sales gains. Demand for TEDLAR® film in photovoltaic & advanced materials was partially offset by continued declines in SOLAMET® paste. The net favorable impact of portfolio actions related primarily to the addition of Dow Silicones in June 2016, partially offset by the divestitures of SKC Haas Display Films and the Authentications business in the first half of 2017. Local price declines were driven primarily by local price declines in semiconductor markets and competitive pressure in advanced printing applications.
Pro forma Operating EBITDA was $1,840 million in 2017, up 33 percent from $1,388 million in 2016. Pro forma Operating EBITDA increased as volume growth, favorable portfolio impacts from the addition of Dow Silicones, higher equity earnings, cost savings and lower pension/OPEB costs were partially offset by higher raw material costs and lower local price.
Electronics & Imaging Outlook for 2019
Electronics & Imaging's 2019 sales are expected to benefit from increased demand in semiconductors, interconnect solutions and display markets, along with anticipated recovery in photovoltaics. The segment is expected to be unfavorably impacted by lower equity earnings due to the absence of customer settlement benefits, a gain on an asset sale reflected in 2018, as well as continued price pressure, partially offset by volume growth and the favorable impact of cost synergies.
NUTRITION & BIOSCIENCES
Nutrition & Biosciences is an innovation-driven and customer-focused segment that provides solutions for the global food and beverage, dietary supplements, pharma, home and personal care, energy and animal nutrition markets. The segment consists of two operating segments: Nutrition & Health and Industrial Biosciences. The Nutrition & Health business is one of the world's largest producers of specialty ingredients, developing and manufacturing solutions for the global food and beverage, dietary supplements and pharmaceutical markets. The Nutrition & Health business is also one of the world's largest producers of cellulosic- and alginates-based pharma excipients. The Industrial Biosciences business is an industry pioneer and innovator that works with customers to improve the performance, productivity and sustainability of their products and processes through biotechnology, chemistry and engineering solutions including enzymes, biomaterials, biocides and antimicrobial solutions and process technology.
| Nutrition & Biosciences | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 6,801 | $ | 2,786 | $ | 948 | |||
| Pro forma net sales | $ | 5,952 | $ | 5,736 | |||||
| Operating EBITDA 1 | $ | 1,632 | $ | 1,296 | $ | 1,227 | |||
| Equity earnings | $ | 16 | $ | 13 | $ | 10 |
| 1. | The Company’s measure of profit/loss for segment reporting purposes is Operating EBITDA for the twelve months ended December 31, 2018 and pro forma Operating EBITDA for the twelve months ended December 31, 2017 and 2016. |
| Nutrition & Biosciences | ||||||
| Percentage change from prior year | 2018 | 2017 | 2016 | |||
| Change in Net Sales from Prior Period due to: | ||||||
| Local price & product mix | 2 | % | — | % | (2 | )% |
| Currency | (1 | ) | — | — | ||
| Volume | — | 11 | (2 | ) | ||
| Portfolio & other | 143 | 183 | — | |||
| Total | 144 | % | 194 | % | (4 | )% |
| Change in Pro Forma Net Sales from Prior Period due to: 1 | ||||||
| Local price & product mix | 1 | % | — | % | ||
| Currency | 1 | — | ||||
| Volume | 3 | 3 | ||||
| Portfolio & other | 9 | 1 | ||||
| Total | 14 | % | 4 | % |
| 1. | Net sales in 2018 compared with pro forma net sales in 2017. Pro forma net sales in 2017 compared with pro forma net sales in 2016. |
2018 Versus 2017
Nutrition & Biosciences net sales were $6,801 million in 2018, up from $2,786 million in 2017. Net sales in 2018 were up 14 percent from pro forma net sales of $5,952 million in 2017. The increase was primarily due to a 9 percent net benefit from portfolio actions due to the acquisition of FMC’s Health & Nutrition business, 3 percent volume growth, a 1 percent benefit from currency and a 1 percent increase in local price. Volume growth in the segment was led by Nutrition & Health on gains in probiotics, specialty proteins, systems and texturants and pharmaceutical excipients, driven by demand in Asia Pacific. Industrial Biosciences volume grew on improvement in clean technologies due to alkylation offerings in Asia Pacific and EMEA and acid equipment sales. Demand for bioactives in home and personal care applications and animal nutrition also contributed to volume growth. Pricing gains were led by microbial control and systems and texturants.
Operating EBITDA was $1,632 million in 2018, up 26 percent from pro forma Operating EBITDA of $1,296 million in 2017, driven by favorable portfolio actions, cost synergies, volume growth and lower pension/OPEB costs, partially offset by higher costs due to growth investments.
2017 Versus 2016
Nutrition & Biosciences net sales were $2,786 million in 2017, up from $948 million in 2016. Pro forma net sales were $5,952 million in 2017, up from $5,736 million in 2016. Pro forma net sales increased 4 percent, driven by volume growth of 3 percent and a favorable impact of 1 percent from portfolio actions. Volume growth was led by Industrial Biosciences, driven by strong demand for microbial control solutions in energy markets, continued growth in biomaterials in apparel and carpet markets and growth in bioactives, primarily in the grain processing market. Volume in Nutrition & Health was flat as growth in probiotics and pharmaceuticals was offset by declines in protein solutions and systems and texturants due to weakness in packaged food markets and specific actions taken to exit low-margin market segments. The favorable impact from portfolio actions was driven by the acquisition of the FMC H&N Business.
Pro forma Operating EBITDA was $1,296 million in 2017, up 6 percent from $1,227 million in 2016. The increase in pro forma Operating EBITDA was driven by cost savings, volume growth, lower pension/OPEB costs and favorable impacts of portfolio actions. Increases in pro forma Operating EBITDA were partially offset by the absence of a $27 million gain from a prior-year asset sale.
Nutrition & Biosciences Outlook for 2019
Nutrition & Biosciences’ 2019 sales are expected to benefit from higher volume and prices partially offset by unfavorable currency impacts. Demand for probiotics, sweeteners, and specialty proteins is expected to increase in Nutrition & Health along with increased demand for bioactives and biomaterials in Industrial Biosciences. The segment is expected to benefit from the favorable impact of cost synergies and volume growth, partially offset by growth investments.
TRANSPORTATION & ADVANCED POLYMERS
Transportation & Advanced Polymers provides high-performance engineering resins, adhesives, lubricants and parts to engineers and designers in the transportation, electronics, healthcare, industrial and consumer end-markets to enable systems solutions for demanding applications and environments. The segment delivers a broad range of polymer-based high-performance materials in its product portfolio, including elastomers and thermoplastic and thermoset engineering polymers which are used by customers to fabricate components for mechanical, chemical and electrical systems. In addition, the segment produces innovative engineering polymer solutions, high performance parts, specialty silicones and differentiated adhesive technologies to meet customer specifications in automotive, aerospace, electronics, industrial, healthcare and consumer markets. Transportation & Advanced Polymers is a global leader of advanced materials that provides technologies that differentiate customers’ products with improved performance characteristics.
| Transportation & Advanced Polymers | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 5,620 | $ | 2,521 | $ | 897 | |||
| Pro forma net sales | $ | 5,131 | $ | 4,497 | |||||
| Operating EBITDA 1 | $ | 1,702 | $ | 1,319 | $ | 1,043 | |||
| Equity earnings (losses) | $ | — | $ | (1 | ) | $ | 3 |
| 1. | The Company’s measure of profit/loss for segment reporting purposes is Operating EBITDA for the twelve months ended December 31, 2018 and pro forma Operating EBITDA for the twelve months ended December 31, 2017 and 2016. |
| Transportation & Advanced Polymers | ||||||
| Percentage change from prior year | 2018 | 2017 | 2016 | |||
| Change in Net Sales from Prior Period due to: | ||||||
| Local price & product mix | 6 | % | — | % | (1 | )% |
| Currency | — | — | (1 | ) | ||
| Volume | (2 | ) | 6 | 7 | ||
| Portfolio & other | 119 | 175 | 49 | |||
| Total | 123 | % | 181 | % | 54 | % |
| Change in Pro Forma Net Sales from Prior Period due to: 1 | ||||||
| Local price & product mix | 6 | % | 2 | % | ||
| Currency | 2 | — | ||||
| Volume | 2 | 7 | ||||
| Portfolio & other | — | 5 | ||||
| Total | 10 | % | 14 | % |
| 1. | Net sales in 2018 compared with pro forma net sales in 2017. Pro forma net sales in 2017 compared with pro forma net sales in 2016. |
2018 Versus 2017
Transportation & Advanced Polymers net sales were $5,620 million in 2018, up from $2,521 million in 2017. Net sales in 2018 were up 10 percent from pro forma net sales of $5,131 million in 2017 due to a 6 percent increase in local price, 2 percent volume growth and a 2 percent benefit from currency, driven by EMEA.
The increase in local price, primarily in engineering polymers, was driven by tight polymer supply and higher feedstock costs. Volume growth in the segment was primarily due to performance solutions, led by growth in KALREZ® and VESPEL® high-performance parts in the electronics and aerospace markets, performance resins, due to growth in DELRIN® and HYTREL® in the automotive market, and in engineering polymers due to growth in ZYTEL®. Broad based volume growth was led by U.S & Canada and Asia Pacific.
Operating EBITDA was $1,702 million in 2018, up 29 percent from pro forma Operating EBITDA of $1,319 million in 2017 due to price and volume gains, lower pension/OPEB costs, cost synergies and favorable currency, partially offset by higher raw material costs.
2017 Versus 2016
Transportation & Advanced Polymers net sales were $2,521 million in 2017, up from $897 million in 2016. Pro forma net sales were $5,131 million in 2017, up from $4,497 million in 2016. Pro forma net sales growth of 14 percent, with gains across all geographies, was led by increased volume of 7 percent, a favorable impact from portfolio actions of 5 percent and a 2 percent increase in local price. Broad based volume growth was driven by increased demand for polymers in automotive, electronics and industrial markets, leading to growth from KALREZ® and VESPEL® high-performance parts. Volume growth was led by Asia Pacific followed by EMEA, U.S. & Canada and Latin America. The increase in local price was driven by price gains in polymers in automotive markets. The favorable impact from portfolio actions related to the addition of Dow Silicones in June 2016.
Pro forma Operating EBITDA was $1,319 million in 2017, up 26 percent from $1,043 million in 2016. The increase in Operating EBITDA was driven by increased volume growth, the favorable impact of earnings from Dow Silicones, higher local selling prices, cost savings and lower pension/OPEB costs, partially offset by higher raw material costs.
Transportation & Advanced Polymers Outlook for 2019
Transportation & Advanced Polymers' 2019 sales are expected to remain essentially flat as local pricing gains are expected to be offset by the unfavorable impact of currency and portfolio actions. The segment is expected to be favorably impacted by cost synergies and increases in local price, offset by an unfavorable impact from currency.
SAFETY & CONSTRUCTION
The Safety & Construction segment is a leading provider of engineered products and integrated systems for a number of industries including construction, worker safety, energy, oil and gas, transportation, medical devices and water purification and separation. The segment satisfies the growing global needs of businesses, governments, and consumers for solutions that make life safer, healthier, and better. By uniting market-driven science with the strength of highly regarded brands, the segment strives to bring new products and solutions to solve customers' needs faster, better and more cost effectively. The segment is a leader in safety consulting, selling training products as well as consulting services, to improve the safety, productivity, and sustainability of organizations across a range of industries.
| Safety & Construction | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 5,453 | $ | 3,006 | $ | 1,877 | |||
| Pro forma net sales | $ | 5,142 | $ | 4,984 | |||||
| Operating EBITDA 1 | $ | 1,427 | $ | 1,194 | $ | 1,133 | |||
| Equity earnings | $ | 24 | $ | 2 | $ | 1 |
| 1. | The Company’s measure of profit/loss for segment reporting purposes is Operating EBITDA for the twelve months ended December 31, 2018 and pro forma Operating EBITDA for the twelve months ended December 31, 2017 and 2016. |
| Safety & Construction | ||||||
| Percentage change from prior year | 2018 | 2017 | 2016 | |||
| Change in Net Sales from Prior Period due to: | ||||||
| Local price & product mix | 2 | % | — | % | (1 | )% |
| Currency | — | — | — | |||
| Volume | 3 | 3 | (2 | ) | ||
| Portfolio & other | 76 | 57 | — | |||
| Total | 81 | % | 60 | % | (3 | )% |
| Change in Pro Forma Net Sales from Prior Period due to: 1 | ||||||
| Local price & product mix | 1 | % | (1 | )% | ||
| Currency | 1 | — | ||||
| Volume | 4 | 4 | ||||
| Portfolio & other | — | — | ||||
| Total | 6 | % | 3 | % |
| 1. | Net sales in 2018 compared with pro forma net sales in 2017. Pro forma net sales in 2017 compared with pro forma net sales in 2016. |
2018 Versus 2017
Safety & Construction net sales were $5,453 million in 2018, up from $3,006 million in 2017. Net sales in 2018 were up 6 percent from pro forma net sales of $5,142 million in 2017 due to 4 percent volume growth, a 1 percent benefit from currency and a 1 percent increase in local price.
Volume growth in the segment was driven by broad based demand in industrial applications, with strength across all lines of business, particularly in NOMEX® and KEVLAR®, as well as gains in TYVEK® enterprise and water solutions. The increase in local price was due to price gains across most businesses.
Operating EBITDA was $1,427 million in 2018, up 20 percent from pro forma Operating EBITDA of $1,194 million in 2017, due to lower pension/OPEB costs, cost synergies, volume and price gains and the favorable impact of currency, partially offset by the absence of prior year one-time gains and higher raw material and freight costs.
2017 Versus 2016
Safety & Construction net sales were $3,006 million in 2017, up from $1,877 million in the 2016. Pro forma net sales were $5,142 million in 2017, up 3 percent from $4,984 million in 2016. Pro forma net sales growth was led by volume gains of 4 percent, slightly offset by a 1 percent decline in local price. Continued demand from industrial markets contributed to gains in NOMEX® thermal-resistant garments, KEVLAR® high-strength materials and water filtration. Growth in TYVEK® protective materials reflected increased demand in industrial markets, construction and medical packaging. Declines in local price and product mix, primarily in aramids, were partially offset by pricing gains in building solutions. Regionally, volume gains were driven by Asia Pacific and EMEA followed by U.S. & Canada and Latin America. Drivers included TYVEK® for graphics and house wrap in EMEA, and gains from KEVLAR® in Asia Pacific.
Pro forma Operating EBITDA was $1,194 million in 2017, up 5 percent from $1,133 million in 2016. Pro forma Operating EBITDA increased as volume growth, lower pension/OPEB cost and cost savings were partially offset by the impact of lower local price and higher raw material costs.
Safety & Construction Outlook for 2019
Safety & Construction's 2019 sales are expected to remain essentially flat as broad-based pricing gains and increased volume are expected to be offset by the impact of portfolio actions and the unfavorable impact of currency. The segment is expected to benefit from the favorable impact of cost synergies and pricing gains, partially offset by an increase in raw material costs and increased spend on growth investments. The portfolio impact reflects the divestiture of the European XPS STYROFOAM™ business on December 1, 2018.
CORPORATE
Corporate includes certain enterprise and governance activities (including insurance operations, environmental operations, geographic management, etc.); business incubation platforms; non-business aligned joint ventures; gains and losses on the sales of financial assets; non-business aligned litigation expenses; discontinued or non-aligned businesses and pre-commercial activities.
| Corporate | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 295 | $ | 387 | $ | 281 | |||
| Pro forma net sales | $ | 393 | $ | 294 | |||||
| Operating EBITDA 1 | $ | (714 | ) | $ | (848 | ) | $ | (818 | ) |
| Equity losses | $ | (26 | ) | $ | (11 | ) | $ | (28 | ) |
| 1. | The Company’s measure of profit/loss for segment reporting purposes is Operating EBITDA for the twelve months ended December 31, 2018 and pro forma Operating EBITDA for the twelve months ended December 31, 2017 and 2016. |
2018 Versus 2017
Net sales for Corporate, which primarily relate to insurance operations, were $295 million in 2018, compared with net sales of $387 million and pro forma net sales of $393 million in 2017.
Operating EBITDA was a loss of $714 million in 2018, compared with a pro forma Operating EBITDA loss of $848 million in 2017. Compared with pro forma Operating EBITDA in 2017, Operating EBITDA improved primarily due to lower pre-commercial expenses, lower discontinued business costs and cost synergies.
2017 Versus 2016
Net sales for Corporate, which primarily relate to insurance operations, were $387 million in 2017, up from $281 million in 2016. Pro forma net sales for 2017 were $393 million, up from $294 million in 2016.
Pro forma Operating EBITDA in 2017 was a loss of $848 million, compared with a loss of $818 million in 2016. Compared with 2016, pro forma Operating EBITDA decreased, primarily due to lower gains on asset sales and higher discontinued business costs, which were partially offset by lower pre-commercial expenses.
SUPPLEMENTAL DIVISION INFORMATION
Discussion of segment revenue, operating EBITDA and price/volume metrics on a divisional basis for Agriculture is based on the results of the Agriculture segment; for Materials Science is based on the combined results of the Performance Materials & Coatings segment, the Industrial Intermediates & Infrastructure segment and the Packaging & Specialty Plastics segment; and for Specialty Products is based on the combined results of the Electronics & Imaging segment, the Nutrition & Biosciences segment, the Transportation & Advanced Polymers segment and the Safety & Construction segment. Corporate is not included in the division metrics. The segment disclosures have been presented in this manner for informational purposes only and should not be viewed as an indication of each division’s current or future operating results on a standalone basis assuming completion of the Intended Business Separations. See the section entitled “Segment Results” for additional qualitative analysis on segment performance.
| Net Sales by Division | 2018 | 2017 1 | 2016 1 | ||||||
| In millions | |||||||||
| Agriculture | $ | 14,301 | $ | 14,342 | $ | 14,060 | |||
| Performance Materials & Coatings | 9,575 | 8,768 | 6,389 | ||||||
| Industrial Intermediates & Infrastructure | 15,116 | 12,640 | 10,820 | ||||||
| Packaging & Specialty Plastics | 24,096 | 22,392 | 19,848 | ||||||
| Materials Science | $ | 48,787 | $ | 43,800 | $ | 37,057 | |||
| Electronics & Imaging | 4,720 | 4,775 | 4,266 | ||||||
| Nutrition & Biosciences | 6,801 | 5,952 | 5,736 | ||||||
| Transportation & Advanced Polymers | 5,620 | 5,131 | 4,497 | ||||||
| Safety & Construction | 5,453 | 5,142 | 4,984 | ||||||
| Specialty Products | $ | 22,594 | $ | 21,000 | $ | 19,483 |
| Net Sales Variance by Division 1 | 2018 | 2017 | ||||||||||||||||||
| Local Price & Product Mix | Currency | Volume | Portfolio / Other 2 | Total | Local Price & Product Mix | Currency | Volume | Portfolio / Other 2 | Total | |||||||||||
| Percent change from prior year | ||||||||||||||||||||
| Agriculture | 3 | % | — | % | (2 | )% | (1 | )% | — | % | — | % | — | % | 1 | % | 1 | % | 2 | % |
| Materials Science | 4 | % | 1 | % | 6 | % | — | % | 11 | % | 8 | % | — | % | 5 | % | 5 | % | 18 | % |
| Specialty Products | 2 | % | 1 | % | 3 | % | 2 | % | 8 | % | — | % | — | % | 6 | % | 2 | % | 8 | % |
| Operating EBITDA by Division | 2018 | 2017 1 | 2016 1 | ||||||
| In millions | |||||||||
| Agriculture | $ | 2,705 | $ | 2,611 | $ | 2,322 | |||
| Performance Materials & Coatings | 2,170 | 1,774 | 1,015 | ||||||
| Industrial Intermediates & Infrastructure | 2,543 | 2,282 | 1,675 | ||||||
| Packaging & Specialty Plastics | 4,926 | 4,698 | 5,129 | ||||||
| Materials Science | $ | 9,639 | $ | 8,754 | $ | 7,819 | |||
| Electronics & Imaging | 1,902 | 1,840 | 1,388 | ||||||
| Nutrition & Biosciences | 1,632 | 1,296 | 1,227 | ||||||
| Transportation & Advanced Polymers | 1,702 | 1,319 | 1,043 | ||||||
| Safety & Construction | 1,427 | 1,194 | 1,133 | ||||||
| Specialty Products | $ | 6,663 | $ | 5,649 | $ | 4,791 |
| 1. | Information for 2017 and 2016 was prepared on a pro forma basis. |
| 2. | Pro forma net sales for Agriculture excludes sales related to the November 30, 2017, divestiture of the DAS Divested Ag Business for the period January 1, 2016 through August 31, 2017. Sales from September 1, 2017 through November 30, 2017, are included in Portfolio & Other. Pro forma net sales for Materials Science excludes sales related to the September 1, 2017, divestiture of the EAA Business for the period January 1, 2016 through August 31, 2017. Portfolio & Other includes sales for the acquisition of the H&N Business acquired on November 1, 2017, impacting Specialty Products. Portfolio & Other also reflects the following divestitures: SKC Haas Display Films group of companies (divested on June 30, 2017), the authentication business (divested on January 6, 2017), and the divestiture of the global food safety diagnostic business (divested on February 28, 2017), all impacting Specialty Products. In 2017, Portfolio & Other also reflects sales from January 1, 2017 through May 31, 2017, related to the ownership restructure of Dow Silicones on June 1, 2016, impacting both Materials Science and Specialty Products. |
LIQUIDITY AND CAPITAL RESOURCES
In contemplation of the separations and distributions and in preparation to achieve the intended credit profiles of Corteva, Dow and DuPont, in the fourth quarter of 2018, DowDuPont consummated a public underwritten offer of the DowDuPont Notes in an aggregate principal amount of $12.7 billion. In the fourth quarter of 2018, DowDuPont used $4.8 billion of the aggregate proceeds from the DowDuPont Notes to fund Historical DuPont’s tender offers for certain of its outstanding debt securities of which $4.4 billion aggregate principal amount was tendered and retired; the purchase of $1.4 billion of shares under the $3.0 billion share buyback program; and costs and expenses associated with the DowDuPont Notes offering, the Historical DuPont tender offers and related premiums, fees and expenses.
The Company had cash and cash equivalents and marketable securities of $13,616 million at December 31, 2018 and $14,394 million at December 31, 2017. The Company’s cash and cash equivalents included $5,820 million at December 31, 2018 and $12,177 million at December 31, 2017, that was held by subsidiaries in foreign countries, including United States territories. The decrease in cash and cash equivalents held by subsidiaries in foreign countries is due to the repatriation activities discussed below. For each of its foreign subsidiaries, the Company makes an assertion regarding the amount of earnings intended for permanent reinvestment, with the balance available to be repatriated to the United States.
The Act requires companies to pay a one-time transition tax on earnings of foreign subsidiaries, a majority of which were previously considered permanently reinvested by the Company (see Note 8 to the Consolidated Financial Statements for further details of The Act). A tax liability was accrued for the estimated U.S. federal tax on all unrepatriated earnings at December 31, 2017, in accordance with The Act. The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries' operational activities and future foreign investments. The Company has the ability to repatriate additional funds to the U.S., which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/or U.S. state income taxes and the impact of foreign currency movements. It is not practicable to calculate the unrecognized deferred tax liability on undistributed foreign earnings due to the complexity of the hypothetical calculation. During 2018, the Company repatriated certain funds from its non-U.S. subsidiaries that are not needed to finance local operations or separation activities. During the year ended December 31, 2018, the Company recorded tax expense of $74 million associated with these repatriation activities.
The Company’s cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized in the following table:
| Cash Flow Summary | |||||||||
| In millions | 2018 | 2017 1 | 2016 1 | ||||||
| Cash provided by (used for): | |||||||||
| Operating activities | $ | 4,731 | $ | (765 | ) | $ | (2,957 | ) | |
| Investing activities | (2,462 | ) | 14,325 | 5,092 | |||||
| Financing activities | (1,918 | ) | (6,554 | ) | (4,014 | ) | |||
| Effect of exchange rate changes on cash | (344 | ) | 297 | (77 | ) | ||||
| Cash reclassified as held for sale | — | 88 | — | ||||||
| Summary | |||||||||
| Increase (Decrease) in cash, cash equivalents and restricted cash | 7 | 7,391 | (1,956 | ) | |||||
| Cash, cash equivalents and restricted cash at beginning of year | 14,015 | 6,624 | 8,580 | ||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 14,022 | $ | 14,015 | $ | 6,624 | |||
| Less: Restricted cash and cash equivalents, included in "Other current assets" | 540 | 577 | 17 | ||||||
| Cash and cash equivalents at end of year | $ | 13,482 | $ | 13,438 | $ | 6,607 |
- Updated for ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" (including SEC interpretive guidance) and ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." See Notes 1 and 2 to the Consolidated Financial Statements for additional information.
Cash Flows from Operating Activities
Cash provided by operating activities increased in 2018 compared with 2017, primarily due to the change in Historical Dow's accounts receivable securitization facilities discussed on the following page, a decrease in cash used for working capital requirements and higher cash earnings, which were partially offset by increased pension contributions, higher integration and separation costs, and the absence of certain cash receipts in 2017. Cash used for operating activities decreased in 2017 compared with 2016, primarily driven by higher cash earnings, advance payments from customers in the Agriculture segment and customers with long-term ethylene supply agreements, a tax refund related to a voluntary pension contribution and a cash receipt related to the Nova patent infringement award. These items were partially offset by increased pension contributions resulting from a change in control provision in a Historical Dow non-qualified U.S. pension plan, higher integration and separation costs and a cash payment related to the Bayer CropScience arbitration matter.
| Net Working Capital at Dec 31 | ||||||
| In millions | 2018 | 2017 | ||||
| Current assets | $ | 49,603 | $ | 49,893 | ||
| Current liabilities | 24,715 | 26,128 | ||||
| Net working capital | $ | 24,888 | $ | 23,765 | ||
| Current ratio | 2.01:1 | 1.91:1 |
Cash Flows from Investing Activities
Cash used for investing activities in 2018 was primarily for capital expenditures and purchases of investments, which were partially offset by proceeds from sales and maturities of investments and proceeds from interests in trade accounts receivable conduits. Cash provided by investing activities in 2017 was primarily from proceeds from interests in trade accounts receivable conduits, cash acquired in the Merger, proceeds from sales and maturities of investments and divestitures, including the divestitures of the DAS Divested Ag Business, the EAA Business and certain assets related to Historical DuPont's crop protection business and R&D organization. These items were partially offset by capital expenditures, purchases of investments and loans to nonconsolidated affiliates, primarily with Sadara. Cash provided by investing activities in 2016 was primarily from proceeds from interests in trade accounts receivable conduits and net cash acquired in the Dow Silicones ownership restructure, which were partially offset by capital expenditures and investments in and loans to nonconsolidated affiliates, primarily with Sadara.
In 2018, Historical Dow entered into a shareholder loan reduction agreement with Sadara and converted $312 million of the remaining loan and accrued interest balance into equity. Historical Dow's note receivable from Sadara was zero at December 31, 2018. In addition, in the fourth quarter of 2018, Historical Dow waived $70 million of accounts receivable with Sadara, which was converted into equity. In 2017, Historical Dow loaned $735 million to Sadara and converted $718 million into equity, and had a note receivable from Sadara of $275 million at December 31, 2017. Historical Dow expects to loan up to $500 million to Sadara in 2019. See Note 12 to the Consolidated Financial Statements for additional information.
The Company's capital expenditures, including capital expenditures of consolidated variable interest entities, were $3,837 million in 2018, $3,570 million in 2017 and $3,804 million in 2016. The Company expects capital spending in 2019 to be approximately $4.3 billion, below depreciation and amortization expense and inclusive of capital spending for targeted cost synergy and business separation projects.
Cash Flows from Financing Activities
Cash used for financing activities in 2018 included payments of notes payable and long-term debt, repurchases of DowDuPont common stock and dividends paid to stockholders. These items were largely offset by proceeds from the issuance of long-term debt. Cash used for financing activities in 2017 included dividends paid to stockholders, repurchases of DowDuPont common stock and payments of notes payable and long-term debt. Cash used for financing activities in 2016 included dividends paid to stockholders (including the accelerated payment of the fourth quarter preferred dividend), repurchases of Historical Dow common stock and payments of long-term debt. See Notes 15 and 17 to the Consolidated Financial Statements for additional information related to the issuance or retirement of debt and the share repurchase program, respectively.
Reclassification of Prior Year Amounts Related to Accounts Receivable Securitization
In connection with the review and implementation of ASU 2016-15 and additional interpretive guidance from the SEC related to the required method for calculating the cash received from beneficial interests in trade accounts receivable conduits, the Company changed the prior year presentation and amount of proceeds from interests in trade accounts receivable conduits. Changes related to the calculation and presentation of proceeds from interests in trade accounts receivable conduits resulted in a reclassification from cash used for operating activities to cash provided by investing activities of $9,462 million in 2017 and $8,551 million in 2016. In the fourth quarter of 2017, the Company suspended further sales of trade accounts receivable through these facilities and
began reducing outstanding balances through collections of trade accounts receivable previously sold to such conduits. In September and October 2018, the North American and European facilities, respectively, were amended and the terms of the agreements changed from off-balance sheet arrangements to secured borrowing arrangements.
The following table reconciles cash flows from operating activities to a non-GAAP measure regarding cash flows from operating activities excluding the impact of ASU 2016-15 and related interpretive guidance for the years ended December 31, 2018, 2017 and 2016. Management believes this non-GAAP financial measure is relevant and meaningful as it presents cash flows from operating activities inclusive of all trade accounts receivable collection activity, which the Company utilizes in support of its operating activities.
| Cash Flows from Operating Activities Excluding the Impact of ASU 2016-15 and Additional Interpretive Guidance (non-GAAP) | 2018 | 2017 | 2016 | |||||||
| In millions | ||||||||||
| Cash flows from operating activities - Updated for impact of ASU 2016-15 and additional interpretive guidance (GAAP) | $ | 4,731 | $ | (765 | ) | $ | (2,957 | ) | ||
| Less: Impact of ASU 2016-15 and additional interpretive guidance | (657 | ) | (9,462 | ) | (8,551 | ) | ||||
| Cash flows from operating activities - Excluding impact of ASU 2016-15 and additional interpretive guidance (non-GAAP) | $ | 5,388 | $ | 8,697 | $ | 5,594 |
Free Cash Flow
The Company defines free cash flow as cash provided by operating activities less capital expenditures. Under this definition, free cash flow represents the cash that remains available to the Company, after investing in its asset base, to fund obligations using the Company's primary source of incremental liquidity - cash provided by operating activities. Free cash flow is an integral financial measure used in the Company's financial planning process. This financial measure is not recognized in accordance with U.S. GAAP and should not be viewed as an alternative to U.S. GAAP financial measures of performance. All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, the Company's free cash flow definition may not be consistent with the methodologies used by other companies.
For further information relating to the change in cash provided by (used for) operating activities, see the discussion above under the section entitled "Cash Flows from Operating Activities.
| Reconciliation of "Cash Provided by (Used for) Operating Activities" to Free Cash Flow | |||||||||
| In millions | 2018 | 2017 1 | 2016 1 | ||||||
| Cash provided by (used for) operating activities | $ | 4,731 | $ | (765 | ) | $ | (2,957 | ) | |
| Capital expenditures | (3,837 | ) | (3,570 | ) | (3,804 | ) | |||
| Free Cash Flow | $ | 894 | $ | (4,335 | ) | $ | (6,761 | ) |
| 1. | "Cash from operating activities" was updated for ASU 2016-15 (including SEC interpretive guidance) and ASU 2016-18. See Notes 1 and 2 to the Consolidated Financial Statements for additional information. |
Liquidity & Financial Flexibility
The Company’s primary source of incremental liquidity is cash flows from operating activities. Management expects the generation of cash from operations and the ability to access the debt capital markets and other sources of liquidity will continue to provide sufficient liquidity and financial flexibility to meet the Company's and its subsidiaries' obligations as they come due.
DowDuPont's Liquidity Sources
In November 2018, DowDuPont consummated the offering of the senior unsecured DowDuPont Notes in an aggregate principal amount of $12.7 billion. The offering consisted of $0.5 billion in floating rate notes due November 2020, $0.3 billion in floating rate notes due November 2023, and six tranches of fixed-rate notes: $1.5 billion due November 2020, $2.5 billion due November 2023, $1.85 billion due November 2025, $2.25 billion due November 2028, $1.65 billion due November 2038 and $2.15 billion due November 2048. The net proceeds of the offering after the underwriting discount was $12.6 billion. See Note 15 to the Consolidated Financial Statements for additional information on the interest related to the DowDuPont Notes.
The DowDuPont Notes will rank equally with the Company's future senior unsecured debt outstanding from time to time. The DowDuPont Notes are not guaranteed by any of the Company's subsidiaries and are nonrecourse to the assets of Dow and Corteva. Each series of DowDuPont Notes will continue to be a senior unsecured obligation of DuPont after the separations and distributions. If each of the separations and distributions has not been completed on or before May 1, 2020, or, if prior to such date, the Company
has abandoned any of the separations or distributions, the Company will be required to redeem each series of DowDuPont Notes at a redemption price equal to 101 percent of the principal amount of such series of DowDuPont Notes, plus accrued and unpaid interest, if any, up to but excluding the date of redemption. DowDuPont also entered into a term loan agreement that establishes two term loan facilities in the aggregate principal amount of $3 billion, (the “DowDuPont Term Loan Facilities”). The DowDuPont Term Loan Facilities remain unfunded and future funding is subject to the satisfaction or waiver of certain customary conditions, including among others, the consummation of the separation and distribution of Dow.
DowDuPont intends to use the remaining proceeds from the DowDuPont Notes together with borrowing under the Term Loan Facilities to (i) reduce outstanding liabilities of Historical Dow that would otherwise be attributable to Dow and further reduce outstanding liabilities of Historical DuPont that would otherwise be attributable to Corteva; (ii) fund additional repurchases under the $3 Billion Share Repurchase Program and (iii) pay any related premiums, fees and expenses.
The deleveraging of Dow and the further deleveraging of Corteva may be effectuated through the repayment and/or repurchase of senior notes, term loans and/or commercial paper of Historical Dow and Historical DuPont prior to the respective distributions of Dow and Corteva.
Coincident with the DowDuPont notes offering in November 2018, the credit rating agencies released credit ratings for DowDuPont, prospectively assuming the consummation of the separations and distributions of Dow and Corteva. The ratings for the Company are: A- with a Stable outlook from Standard & Poor’s; Baa1 with a Stable outlook from Moody’s Investors Service; and BBB+ with a Stable outlook from Fitch Ratings.
Historical Dow's Liquidity Sources
Credit Ratings
At January 31, 2019, Historical Dow's credit ratings were as follows:
| Credit Ratings | Long-Term Rating | Short-Term Rating | Outlook |
| Standard & Poor’s | BBB | A-2 | Stable |
| Moody’s Investors Service | Baa2 | P-2 | Stable |
| Fitch Ratings | BBB+ | F2 | Stable |
Downgrades in Historical Dow's credit ratings would increase borrowing costs on certain indentures and could impact its ability to access debt capital markets.
Commercial Paper - Historical Dow
Historical Dow issues promissory notes under U.S. and Euromarket commercial paper programs. At December 31, 2018, Historical Dow had $10 million of commercial paper outstanding ($231 million at December 31, 2017). Historical Dow maintains access to the commercial paper market at competitive rates. Amounts outstanding under Historical Dow's commercial paper programs during the period may be greater, or less, than the amount reported at the end of the period. Subsequent to December 31, 2018, Historical Dow issued approximately $1.6 billion of commercial paper.
Committed Credit Facilities - Historical Dow
In the event the Company has short-term liquidity needs, it can access liquidity through Historical Dow's committed and available credit facilities. At December 31, 2018, Historical Dow had total committed credit facilities of $12.1 billion and available credit facilities of $7.6 billion. See Note 15 to the Consolidated Financial Statements for additional information on committed and available credit facilities.
Uncommitted Credit Facilities and Outstanding Letters of Credit - Historical Dow
Historical Dow had uncommitted credit facilities in the form of unused bank credit lines of approximately $3,480 million at December 31, 2018. These lines can be used to support short-term liquidity needs and general purposes, including letters of credit. Historical Dow had outstanding letters of credit of $439 million at December 31, 2018 ($433 million at December 31, 2017). These letters of credit support commitments made in the ordinary course of business.
Historical DuPont's Liquidity Sources
Credit Ratings
At January 31, 2019, Historical DuPont's credit ratings were as follows:
| Credit Ratings | Long-Term Rating | Short-Term Rating | Outlook |
| Standard & Poor’s | A- | A-2 | Stable |
| Moody’s Investors Service | A3 | P-2 | Stable |
| Fitch Ratings | A | F1 | Stable |
Downgrades in Historical DuPont's credit ratings would increase borrowing costs on certain indentures and could impact its ability to access debt capital markets.
Commercial Paper - Historical DuPont
Historical DuPont issues promissory notes under U.S. commercial paper programs. At December 31, 2018, Historical DuPont had $1,847 million of commercial paper outstanding ($1,436 million at December 31, 2017). Historical DuPont maintains access to the commercial paper market at competitive rates. Amounts outstanding under Historical DuPont's commercial paper programs during the period may be greater, or less, than the amount reported at the end of the period.
Committed Credit Facilities - Historical DuPont
In the event the Company has short-term liquidity needs, it can access liquidity through Historical DuPont's committed and available credit facilities. At December 31, 2018, DuPont had total committed credit facilities of $7.5 billion under its Term Loan Facility and amended revolving credit facility (the "RCF") with remaining available credit facilities of $5.5 billion. See Note 15 to the Consolidated Financial Statements for additional information.
Term Loan and Revolving Credit Facilities - Historical DuPont
In March 2016, Historical DuPont entered into a credit agreement that provides for a three-year, senior unsecured term loan facility in the aggregate principal amount of $4.5 billion (as may be amended, from time to time, the "Term Loan Facility") under which Historical DuPont may make up to seven term loan borrowings and amounts repaid or prepaid are not available for subsequent borrowings. The proceeds from the borrowings under the Term Loan Facility will be used for Historical DuPont's general corporate purposes including debt repayment, working capital and funding a portion of the Company's costs and expenses. The Term Loan Facility was amended in 2018 to extend the maturity date to June 2020, at which time all outstanding borrowings, including accrued but unpaid interest, become immediately due and payable, and to extend the date on which the commitment to lend terminates to June 2019. At December 31, 2018, Historical DuPont had made four term loan borrowings in an aggregate principal amount of $2.0 billion and had unused commitments of $2.5 billion under the Term Loan Facility. In 2018, Historical DuPont also amended its $3.0 billion revolving credit facility to extend the maturity date to June 2020.
Uncommitted Credit Facilities and Outstanding Letters of Credit - Historical DuPont
Historical DuPont had uncommitted credit facilities in the form of unused bank credit lines of $663 million at December 31, 2018. These lines can be used to support short-term liquidity needs and general corporate purposes, including letters of credit. Historical DuPont had outstanding letters of credit of $172 million at December 31, 2018 ($177 million at December 31, 2017). These letters of credit support commitments made in the ordinary course of business.
Debt
The following table reflects the debt of DowDuPont, as well as Historical Dow and Historical DuPont (together, the "Subsidiaries"):
| Total Debt | Dec 31, 2018 | Dec 31, 2017 | |||||||||||||||||||
| In millions | DowDuPont 1 | Historical Dow | Historical DuPont | Total | Historical Dow | Historical DuPont | Total | ||||||||||||||
| Notes payable | $ | — | $ | 302 | $ | 1,863 | $ | 2,165 | $ | 484 | $ | 1,464 | $ | 1,948 | |||||||
| Long-term debt due within one year | — | 340 | 297 | 637 | 752 | 1,315 | 2,067 | ||||||||||||||
| Long-term debt | 12,596 | 19,254 | 5,812 | 37,662 | 19,765 | 10,291 | 30,056 | ||||||||||||||
| Total debt | $ | 12,596 | $ | 19,896 | $ | 7,972 | $ | 40,464 | $ | 21,001 | $ | 13,070 | $ | 34,071 |
| 1. | Represents the DowDuPont holding company. |
On November 13, 2018, Historical DuPont launched a tender offer (the “Tender Offer”) to purchase $6.2 billion aggregate principal amount of its outstanding debt securities (the “Tender Notes”). The Tender Offer expired on December 11, 2018 (the “Expiration Date”). At the Expiration Date, $4,409 million aggregate principal amount of the Tender Notes had been validly tendered and was accepted for payment. In exchange for such validly tendered Tender Notes, Historical DuPont paid a total of $4,849 million, which included breakage fees and all applicable accrued and unpaid interest on such Tender Notes. DowDuPont contributed cash (generated from the offering of the DowDuPont Notes) to Historical DuPont to fund the settlement of the Tender Offer and payment of associated fees.
In the fourth quarter of 2018, Historical Dow issued $2.0 billion of senior unsecured notes in an offering under Rule 144A of the Securities Act of 1933, which included $500 million due 2025; $600 million due 2028 and $900 million due 2048. See Note 15 to the Consolidated Financial Statements for additional information on the interest related to these notes. In addition Historical Dow tendered and redeemed $2.1 billion of notes issued by Historical Dow with maturity in 2019. In addition, Dow Holdings Inc., the intended parent of Historical Dow after the Intended Business Separations, is obligated, should it issue a guarantee in respect of outstanding or committed indebtedness under Historical Dow’s Five Year Competitive Advance and Revolving Credit Facility Agreement (“Revolving Credit Agreement”), dated October 30, 2018, (as described below), to enter into a supplemental indenture with Historical Dow and the trustee under the existing base indenture governing certain notes issued by Historical Dow under which it will guarantee all outstanding debt securities and all amounts due under the existing base indenture.
The Company's indenture covenants include customary limitations on liens, sale and leaseback transactions, and mergers and consolidations, subject to certain limitations. The DowDuPont Notes also contain customary default provisions. In addition, the Company will be required to redeem all of the DowDuPont Notes at a redemption price equal to 101 percent of the principal amount of such series of DowDuPont Notes, plus accrued and unpaid interest to, but excluding, the redemption date if each of the separations and distributions has not been completed on or before May 1, 2020, or, if prior to such date, DowDuPont has abandoned any of the separations or distributions.
The Debt Instruments of the Subsidiaries contain, among other provisions, certain customary restrictive covenant and default provisions. Historical Dow’s Revolving Credit Agreement contains a financial covenant that Historical Dow must maintain its ratio of consolidated indebtedness to its consolidated capitalization at no greater than 0.65 to 1.00 at any time the aggregate outstanding amount of loans under Historical Dow’s Revolving Credit Agreement equals or exceeds $500 million. The ratio of Historical Dow’s consolidated indebtedness to its consolidated capitalization was 0.41 to 1.00 at December 31, 2018. Historical DuPont’s Term Loan Facility and RCF contain a financial covenant requiring that the ratio of total indebtedness to total capitalization for Historical DuPont and its consolidated subsidiaries not exceed 0.6667 to 1.00. At December 31, 2018, management believes each of the Subsidiaries were in compliance with all of their respective covenants and default provisions. For additional information on the Subsidiaries' debt covenants and default provisions, see Note 15 to the Consolidated Financial Statements.
On October 30, 2018, Historical Dow terminated and replaced its $5.0 billion Revolving Credit Agreement, under substantially similar terms and conditions. The new Revolving Credit Agreement has a maturity date in October 2023. Historical Dow’s Revolving Credit Agreement includes an event of default which would be triggered in the event Dow Holdings Inc. incurs or guarantees third party indebtedness for borrowed money in excess of $250 million or engages in any material business activity or directly owns any material assets, in each case, subject to certain conditions and exceptions. Dow Holdings Inc. may, at its option, cure the event of default by delivering an unconditional and irrevocable guaranty to the administrative agent within thirty days of the event or events giving rise to such event of default.
Dividends
The following table provides dividends paid to common and preferred shareholders for the years ended December 31, 2018, 2017 and 2016:
| Dividends Paid for the Years Ended Dec 31 | |||||||||
| In millions, except per share amounts | 2018 | 2017 | 2016 | ||||||
| Dividends paid, per common share 1 | $ | 1.52 | $ | 2.22 | $ | 1.84 | |||
| Dividends paid to common stockholders 2 | $ | 3,491 | $ | 3,394 | $ | 2,037 | |||
| Dividends paid to preferred shareholders 3 | $ | — | $ | — | $ | 425 |
| 1. | The 2017 dividend is comprised of $0.38 per share of DowDuPont dividends declared and paid in the fourth quarter of 2017 and the remaining amount relates to payments of Historical Dow dividends declared prior to the Merger. |
| 2. | The 2017 dividend consists of $885 million paid to DowDuPont common stockholders for dividends declared after the Merger, as well as $2,179 million paid to Historical Dow common stockholders for dividends declared prior to the Merger, and $330 million paid to Historical DuPont common stockholders after the Merger for dividends declared prior to the Merger. |
- Dividends paid to Historical Dow preferred shareholders in 2016 includes payment of the fourth quarter 2016 declared dividend. On December 30, 2016, Historical Dow converted all outstanding shares of its Historical Dow Preferred Stock into shares of Historical Dow's common stock. As a result of this conversion, no shares of Historical Dow Preferred Stock are issued or outstanding.
Share Repurchase Programs
On November 1, 2018, the Company announced a new $3.0 billion share buyback program, which expires on March 31, 2019 - commensurate with the expected timing of the materials science spin-off. At December 31, 2018, the Company had repurchased $1.4 billion of shares under this program. The Company intends to complete the program before March 31, 2019.
On November 2, 2017, the Company announced the Board authorized an initial $4.0 billion share repurchase program, which had no expiration date. Under this program, the Company spent $1.0 billion on repurchases in the fourth quarter of 2017 and $3.0 billion on repurchases in the first nine months of 2018, thereby completing this share repurchase program.
In connection with the Merger, Historical Dow's $9.5 billion share repurchase program was canceled. At the time of cancellation, Historical Dow had spent $8.1 billion on repurchases of Historical Dow common stock under the share buyback program.
For additional information related to the share repurchase program, see Part II. Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities and Note 17 to the Consolidated Financial Statements.
Rabbi Trust
Historical DuPont entered into a trust agreement in 2013 (as amended and restated in 2017) that established and requires Historical DuPont to fund a trust (the "Trust") for cash obligations under certain non-qualified benefit and deferred compensation plans upon a change in control event as defined in the Trust agreement. Under the Trust agreement, the consummation of the Merger was a change in control event. As a result, in November 2017 Historical DuPont contributed $571 million to the Trust. At December 31, 2018 and 2017, the balance in the Trust was $500 million and $558 million, respectively. Historical DuPont distributed $68 million during 2018, in accordance with the Trust agreement.
Pension Plans
Historical Dow and Historical DuPont did not merge their pension plans and other postretirement benefit plans as a result of the Merger. Historical Dow and Historical DuPont have defined benefit pension plans in the United States and a number of other countries. Historical Dow's funding policy is to contribute to plans when pension laws and/or economics either require or encourage funding. Historical DuPont's funding policy is to contribute to defined benefit pension plans based on pension funding laws and local country requirements. Contributions exceeding funding requirements may be and have been made at Historical Dow and Historical DuPont’s discretion.
In 2018, 2017 and 2016, Historical Dow contributed $1,656 million, $1,676 million and $629 million to its pension plans, respectively, including contributions to fund benefit payments for its non-qualified pension plans. Historical DuPont contributed $1,308 million in 2018 and $68 million post-Merger in 2017 to its pension plans, including contributions to fund benefit payments for its non-qualified pension plans. In the third quarter of 2018, Historical Dow and Historical DuPont each made $1,100 million discretionary contributions to their respective principal U.S. pension plans, which are included in the 2018 contribution amounts above. The discretionary contributions were based on Historical Dow and Historical DuPont's funding policies, which permit discretionary contributions to defined benefit pension plans when economics encourage funding, and reflected considerations relating to tax deductibility and capital structure.
Historical Dow expects to contribute approximately $240 million to its pension plans in 2019, which is subject to revision in accordance with Historical Dow's funding policy. Historical DuPont expects to contribute approximately $190 million to its pension plans in 2019. The amount and timing of Historical DuPont’s actual future contributions will depend on applicable funding requirements, discount rates, investment performance, plan design, and various other factors, including the Internal Reorganization, separations and distributions. See Note 19 to the Consolidated Financial Statements for additional information concerning the Company’s pension plans.
Historical Dow
The provisions of a U.S. non-qualified pension plan for Historical Dow require the payment of plan obligations to certain participants upon a change in control of Historical Dow, which occurred at the time of the Merger. Certain participants could elect to receive a lump-sum payment or direct Historical Dow to purchase an annuity on their behalf using the after-tax proceeds of the lump sum. In the fourth quarter of 2017, Historical Dow paid $940 million to plan participants and $230 million to an insurance company for the purchase of annuities, which were included in "Pension contributions" in the consolidated statements of cash flows. Historical Dow also paid $205 million for income and payroll taxes for participants electing the annuity option. Historical Dow recorded a settlement charge of $687 million associated with the payout in the fourth quarter of 2017.
Historical DuPont
Prior to the Merger, Historical DuPont made total contributions of $2.9 billion to its principal U.S pension plan in 2017, reflecting discretionary contributions. The $2.9 billion contribution was taken as a deduction on Historical DuPont’s 2016 federal tax return and resulted in a net operating loss for tax purposes. This loss generated an overpayment of taxes of approximately $800 million. A portion of the overpayment was applied against the 2017 tax liability. The remainder of the loss generated a refund of approximately $700 million, which was received during the fourth quarter of 2017.
Restructuring, Goodwill Impairment and Asset Related Charges - Net
DowDuPont Agriculture Division Restructuring Program
The activities related to the Agriculture Division Program are expected to result in additional cash expenditures of approximately $90 million, primarily by mid-2019, consisting of severance and related benefit costs and costs associated with exit and disposal activities. 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 segment in preparation for the Intended Business Separations. As a result of these actions, the Company expects to incur costs in the future related to its restructuring activities. These costs will be recognized as incurred. See Note 6 to the Consolidated Financial Statements for additional information.
DowDuPont Cost Synergy Program
The activities related to the Synergy Program are expected to result in additional cash expenditures of approximately $705 million to $790 million, primarily by the end of 2019, consisting of severance and related benefit costs and costs associated with exit and disposal activities. The Company expects to incur additional costs in the future related to its restructuring activities. Future costs are expected to include demolition costs related to closed facilities and restructuring plan implementation costs; these costs will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time. See Note 6 to the Consolidated Financial Statements for additional information.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to the Merger, post-Merger integration and Intended Business Separation activities and costs related to the ownership restructure of Dow Silicones, were $2,463 million in 2018, $1,101 million in 2017 and $349 million in 2016. Integration and separation costs related to post-Merger integration and Intended Business Separation activities are expected to continue to be significant in 2019.
Contractual Obligations
The following table summarizes the Company's and the Subsidiaries' contractual obligations, commercial commitments and expected cash requirements for interest at December 31, 2018. Additional information related to these obligations can be found in Notes 15, 16 and 19 to the Consolidated Financial Statements.
| Contractual Obligations at Dec 31, 2018 | Payments Due In | ||||||||||||||
| In millions | 2019 | 2020-2021 | 2022-2023 | 2024 & Beyond | Total | ||||||||||
| Long-term debt obligations 1 | $ | 635 | $ | 15,068 | $ | 5,199 | $ | 17,759 | $ | 38,661 | |||||
| Expected cash requirements for interest 2 | 1,702 | 2,992 | 2,233 | 12,028 | 18,955 | ||||||||||
| Pension and other postretirement benefits | 799 | 1,569 | 4,238 | 9,804 | 16,410 | ||||||||||
| Operating leases | 654 | 915 | 660 | 1,063 | 3,292 | ||||||||||
| Purchase obligations 3 | 3,870 | 5,542 | 4,205 | 6,521 | 20,138 | ||||||||||
| Other noncurrent obligations 4 | 460 | 1,435 | 989 | 2,010 | 4,894 | ||||||||||
| Total contractual obligations | $ | 8,120 | $ | 27,521 | $ | 17,524 | $ | 49,185 | $ | 102,350 |
| 1. | Excludes unamortized debt discount and issuance costs of $440 million and unamortized debt step-up premium of $78 million. Includes capital lease obligations of $486 million. Assumes the option to extend the Dow Silicones Term Loan facility will be exercised. |
| 2. | Cash requirements for interest on long-term debt was calculated using current interest rates at December 31, 2018 and includes $5,200 million of various floating rate notes. |
| 3. | Includes take-or-pay and throughput obligations, outstanding purchase orders and other commitments greater than $1 million obtained through a survey conducted by the Subsidiaries. |
| 4. | Includes liabilities related to asbestos litigation, environmental remediation, legal settlements and other noncurrent liabilities. The table also includes future payments under Historical DuPont Pioneer license agreements of $911 million on an undiscounted basis ($806 million on a discounted basis). The table excludes uncertain tax positions due to uncertainties in the timing of the effective settlement of tax positions with the respective taxing authorities and deferred tax liabilities as it is impractical to determine whether there will be a cash impact related to these liabilities. The table also excludes deferred revenue as it does not represent future cash requirements arising from contractual payment obligations. |
The Subsidiaries expect to meet their contractual obligations through their normal sources of liquidity and believe they have the financial resources to satisfy these contractual obligations.
Off-balance Sheet Arrangements
Off-balance sheet arrangements are obligations the Company has with nonconsolidated entities related to transactions, agreements or other contractual arrangements. The Company holds variable interests in joint ventures accounted for under the equity method of accounting. The Company is not the primary beneficiary of these joint ventures and therefore is not required to consolidate these entities (see Note 23 to the Consolidated Financial Statements). In addition, see Note 14 to the Consolidated Financial Statements for information regarding the transfer of financial assets.
Guarantees arise in the ordinary course of business from relationships with customers and nonconsolidated affiliates when the Subsidiaries undertake an obligation to guarantee the performance of others if specific triggering events occur. The Subsidiaries had combined outstanding guarantees at December 31, 2018 of $5,667 million, compared with $5,960 million at December 31, 2017. Additional information related to the guarantees of the Subsidiaries can be found in the “Guarantees” section of Note 16 to the Consolidated Financial Statements.
Fair Value Measurements
See Note 19 to the Consolidated Financial Statements for information related to fair value measurements of pension and other postretirement benefit plan assets; see Note 21 for information related to other-than-temporary impairments; and, see Note 22 for additional information concerning fair value measurements.
OUTLOOK
The Company expects global economic expansion to continue in 2019 at a moderately slower pace than 2018. The Company continues to closely monitor macroeconomic and geopolitical developments, including ongoing trade negotiations and the pace of economic activity in China. In this environment, DowDuPont remains focused on the actions in the Company's control, including capitalizing on growth investments, capturing cost synergy savings, delivering productivity actions and advancing the spin milestones.
Impact From Recently Enacted Tariffs
Certain countries where the Company’s products are manufactured, distributed or sold have recently enacted tariffs on certain products. The Company has analyzed the direct impacts from the enacted tariffs and does not expect such direct impacts to have a materially adverse affect on the results of operations in 2019. The Company is taking actions to mitigate the impact by leveraging its global asset base to adjust its product and raw material flows.
OTHER MATTERS
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. DowDuPont’s accounting policies that are impacted by judgments, assumptions and estimates are described below.
Litigation
The Company and its subsidiaries are subject to legal proceedings and claims arising out of the normal course of business including product liability, patent infringement, governmental regulation, contract and commercial litigation, and other actions. The Company routinely assesses the legal and factual circumstances of each matter, the likelihood of any adverse outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known claim. The Company has an active risk management program consisting of numerous insurance policies secured from many carriers covering various timeframes. These policies may provide coverage that could be utilized to minimize the financial impact, if any, of certain contingencies. The required reserves may change in the future due to new developments in each matter. For further discussion see Note 16 to the Consolidated Financial Statements.
Asbestos-Related Matters of Union Carbide Corporation
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. ("Amchem"). Each year, Ankura Consulting Group, LLC ("Ankura") performs a review for Union Carbide based upon historical asbestos claims, resolution and historical defense spending. Union Carbide compares current asbestos claim, resolution and defense spending activity with the results of the most recent Ankura study at each balance sheet date to determine whether the asbestos-related liability continues to be appropriate.
In 2016, Historical Dow and Union Carbide elected to change their method of accounting for Union Carbide's asbestos-related defense and processing costs from expensing as incurred to estimating and accruing a liability. In addition to performing their annual review of pending and future asbestos claim resolution activity, Ankura also performed a review of Union Carbide's asbestos-related defense and processing costs to determine a reasonable estimate of future defense and processing costs to be included in the asbestos-related liability, through the terminal year of 2049.
For additional information, see Part I, Item 3. Legal Proceedings; Asbestos-Related Matters of Union Carbide Corporation in Management's Discussion and Analysis of Financial Condition and Results of Operations; and Notes 1 and 16 to the Consolidated Financial Statements.
Environmental Matters
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. At December 31, 2018, the Company had accrued obligations of $1,201 million for probable environmental remediation and restoration costs, including $210 million for the remediation of Superfund sites. As remediation activities vary substantially in duration and cost from site to site, it is difficult to develop precise estimates of future site remediation costs. The Company's estimates are based on a number of factors, including the complexity of the geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and other Potentially Responsible Parties ("PRPs") at multi-party sites and the number of and financial viability of other PRPs. Therefore, considerable uncertainty exists with respect to environmental remediation and costs, and under adverse changes in circumstances, it is reasonably possible that the ultimate cost with respect to these particular matters could range up to two and a half times above that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s
results of operations, financial condition or cash flows. For further discussion, see Environmental Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 1 and 16 to the Consolidated Financial Statements.
Goodwill
The Company performs goodwill impairment testing at the reporting unit level which is defined as the operating segment or one level below the operating segment. One level below the operating segment, or component, is a business in which discrete financial information is available and regularly reviewed by segment management. The Company aggregates certain components into reporting units based on economic similarities. The operating segment is the reporting unit for Agriculture, Electronics & Imaging, Nutrition & Health, and Transportation & Advanced Polymers operating segments. The Company tests goodwill for impairment annually (during the fourth quarter), or more frequently when events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit has declined below its carrying value. Goodwill is evaluated for impairment using qualitative and/or quantitative testing procedures. At December 31, 2018, the Company had defined 9 operating segments and 15 reporting units; goodwill was carried by 14 of these reporting units.
The Company has the option to first perform qualitative testing to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors assessed at the Company level include, but are not limited to, GDP growth rates, long-term hydrocarbon and energy prices, equity and credit market activity, discount rates, foreign exchange rates and overall financial performance. Qualitative factors assessed at the reporting unit level include, but are not limited to, changes in industry and market structure, competitive environments, planned capacity and new product launches, cost factors such as raw material prices, and financial performance of the reporting unit. If the Company chooses not to complete a qualitative assessment for a given reporting unit or if the initial assessment indicates that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying value, additional quantitative testing is required.
Quantitative testing requires the fair value of the reporting unit to be compared with its carrying value. If the reporting unit's carrying value exceeds its fair value, an impairment charge is recognized for the difference. The Company utilizes a discounted cash flow methodology to calculate the fair value of its reporting units. This valuation technique has been selected by management as the most meaningful valuation method due to the limited number of market comparables for the Company's reporting units. However, where market comparables are available, the Company includes EBIT/EBITDA multiples as part of the reporting unit valuation analysis. The discounted cash flow valuations are completed using the following key assumptions: projected revenue growth rates, or compounded annual growth rates, over a five to ten-year cash flow forecast period, which varied by reporting unit based on underlying business fundamentals and future expectations; discount rates; tax rates; terminal values, differentiated based on the cash flow projection of each reporting unit and the projected net operating profit after tax ("NOPAT") growth rate; currency exchange rates; and forecasted long-term hydrocarbon and energy prices, by geographic region and by year, which included the Company's key feedstocks as well as natural gas and crude oil (due to its correlation to naphtha). These key assumptions are determined through evaluation of the Company as a whole and underlying business fundamentals and industry risk.
The Company also monitors and evaluates its market capitalization relative to book value. When the market capitalization of the Company falls below book value, management undertakes a process to evaluate whether a change in circumstances has occurred that would indicate it is more likely than not that the fair value of any of its reporting units has declined below carrying value. This evaluation process includes the use of third-party, market-based valuations and internal discounted cash flow analysis.
2018 Interim Goodwill Impairment Testing
As a result of the Merger and the related acquisition method of accounting, Historical DuPont’s assets and liabilities were measured at fair value, and any declines in financial projections could have a material, negative impact on the fair value of the Company’s reporting units and assets, particularly within the Agriculture and Specialty Products divisions, and therefore could result in an impairment.
The Company commenced strategic business reviews during the third quarter of 2018 inclusive of assembling updated financial projections. In connection with these strategic business reviews and the update to financial projections, DowDuPont’s subsidiary, Historical DuPont, a separate SEC registrant, was required to perform an interim test of goodwill for its agriculture reporting unit. As a result of the analysis performed, Historical DuPont recorded a pretax, noncash goodwill impairment charge of $4.5 billion. However, the impairment charge did not survive at the DowDuPont level. The Agriculture operating segment was determined to be the reporting unit for DowDuPont, which includes the operations of the agriculture reporting units of both Historical DuPont and Historical Dow. As a result of the Merger accounting considerations and the differences in the composition in the carrying value of the agriculture reporting unit of Historical DuPont (assets and liabilities measured at fair value) and the combined Agriculture reporting unit of DowDuPont (excess fair value over carrying value associated with the Historical Dow business is retained), the fair value of the combined Agriculture reporting unit of DowDuPont exceeded its carrying value by more than 10 percent, and therefore no goodwill impairment existed for DowDuPont.
2018 Annual Goodwill Impairment Testing
In the fourth quarter of 2018, quantitative testing was performed on four reporting units and a qualitative assessment was performed on the remaining reporting units that carry goodwill. For the qualitative assessments, management considered the factors at both the Company level and the reporting unit level. Based on the qualitative assessments, management concluded it is not more likely than not that the fair values of the reporting units were less than the carrying values of the reporting units.
Upon completion of quantitative testing in the fourth quarter of 2018, the Company determined the fair value of these reporting units exceeded the carrying value of the reporting units. Two of these reporting units, Industrial Biosciences and Clean Technologies, are comprised of Historical DuPont assets and liabilities only. Due to the fair value and carrying value of these two reporting units being equal at the date of the Merger resulting in little margin of fair value in excess of carrying value, the Company believes these reporting units are at risk to have impairment charges in future periods. Changes in factors, circumstances and key assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time in which such impairments are recognized. The carrying amount of goodwill for the Industrial Biosciences and Clean Technologies reporting units at December 31, 2018 was $3,113 million and $461 million, respectively.
Pension and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could have been settled at December 31, 2018, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually and are disclosed in Note 19 to the Consolidated Financial Statements. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect expense recognized and obligations recorded in future periods. The U.S. pension plans represent the majority of Historical Dow and Historical DuPont’s pension plan assets and pension obligations.
Historical Dow uses the spot rate approach to determine the discount rate utilized to measure the service cost and interest cost components of net periodic pension and other postretirement benefit costs for the U.S. and other selected countries. Historical DuPont also uses the spot rate approach for its U.S. plans. Under the spot rate approach, Historical Dow and Historical DuPont calculate service costs and interest costs by applying individual spot rates from a yield curve (based on high-quality corporate bond yields) for each selected country to the separate expected cash flow components of service cost and interest cost. Service cost and interest cost for all other plans are determined on the basis of the single equivalent discount rates derived in determining those plan obligations.
The following information relates to Historical Dow and Historical DuPont's U.S. plans only; a similar approach is used for Historical Dow and Historical DuPont's non-U.S. plans.
Historical Dow and Historical DuPont determine the expected long-term rate of return on assets by performing a detailed analysis of historical and expected returns based on the strategic asset allocation and the underlying return fundamentals of each asset class. The historical experience of the pension fund asset performance is also considered. The expected return of each asset class is derived from a forecasted future return confirmed by historical experience. The expected long-term rate of return is an assumption and not what is expected to be earned in any one particular year. The weighted-average long-term rate of return assumption used for determining net periodic pension expense for 2018 was 7.08 percent. The weighted-average assumption to be used for determining 2019 net periodic pension expense is 7.10 percent. Future actual pension expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Company’s pension plans.
The discount rates utilized to measure the pension and other postretirement obligations of the U.S. plans are based on the yield on high-quality corporate fixed income investments at the measurement date. Future expected actuarially determined cash flows are individually discounted at spot rates under the Willis Towers Watson U.S. RATE:Link 60-90 corporate yield curve for Historical Dow's plans and under the Aon AA_Above Median yield curve for Historical DuPont's plans to arrive at the plan's obligations as of the measurement date. The weighted average discount rate utilized to measure pension obligations increased to 4.36 percent at December 31, 2018, from 3.66 percent at December 31, 2017.
The assumption for the long-term rate of increase in compensation levels for the Historical Dow U.S. plans was 4.25 percent. As of November 30, 2018, active employees who participate in Historical DuPont's U.S. pension plans no longer accrue additional benefits for future service and eligible compensation. Historical Dow and Historical DuPont use generational mortality tables to value their U.S. pension and other postretirement obligations.
The following discussion relates to Historical Dow's significant pension plans and Historical DuPont's U.S. qualified plan.
Historical Dow and Historical DuPont base the determination of pension expense on a market-related valuation of plan assets that reduces year-to-year volatility. For Historical Dow, this market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. For Historical DuPont, the market-related value of assets is calculated by averaging market returns over 36 months. As a result, changes in the fair value of assets are not immediately reflected in the Company’s calculation of net periodic pension cost. Over the life of the plans, both gains and losses have been recognized and amortized. At December 31, 2018, net losses of $2,365 million remain to be recognized in the calculation of the market-related value of plan assets. These net losses will result in increases in future pension expense as they are recognized in the market-related value of assets.
The net decrease in the market-related value of assets due to the recognition of prior losses is presented in the following table:
| Net Decrease in Market-Related Asset Value Due to Recognition of Prior Losses | |||
| In millions | |||
| 2019 | $ | 1,075 | |
| 2020 | 588 | ||
| 2021 | 263 | ||
| 2022 | 439 | ||
| Total | $ | 2,365 |
The Company expects pension expense to decrease in 2019 by approximately $100 million. The decrease in pension expense is primarily the result of higher discount rates and the full year impact of discretionary contributions of $1,100 million made to each of Historical Dow's and Historical DuPont's principal U.S. pension plans in the third quarter of 2018.
A 25 basis point increase or decrease in the long-term return on assets assumption would change the Company’s total pension expense for 2019 by $106 million. A 25 basis point increase in the discount rate assumption would lower the Company's total pension expense for 2019 by $24 million. A 25 basis point decrease in the discount rate assumption would increase the Company's total pension expense for 2019 by $33 million. A 25 basis point change in the long-term return and discount rate assumptions would have an immaterial impact on the other postretirement benefit expense for 2019.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of available evidence, both positive and negative, the Company recognizes future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not.
At December 31, 2018, the Company had a net deferred tax liability balance of $3,711 million, after valuation allowances of $2,407 million.
In evaluating the ability to realize the deferred tax assets, the Company relies on, in order of increasing subjectivity, taxable income in prior carryback years, the future reversals of existing taxable temporary differences, tax planning strategies and forecasted taxable income using historical and projected future operating results.
At December 31, 2018, the Company had deferred tax assets for tax loss and tax credit carryforwards of $3,634 million, $384 million of which is subject to expiration in the years 2019 through 2023.
The Company recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on technical merits, that the position will be sustained upon examination. At December 31, 2018, the Company had uncertain tax positions for both domestic and foreign issues of $1,062 million.
Indemnification Assets
On July 1, 2015, Historical DuPont completed the separation of its Performance Chemicals segment through the spin-off of all of the issued and outstanding stock of The Chemours Company (the "Chemours Separation"). In connection with the Chemours Separation, Historical DuPont and The Chemours Company ("Chemours") entered into a Separation Agreement (as amended, the "Chemours Separation Agreement"). Pursuant to the Chemours Separation Agreement, discussed in Note 16 to the Consolidated Financial Statements, Historical DuPont is indemnified by Chemours against certain litigation, environmental, workers' compensation and other liabilities that arose prior to the Chemours Separation. The term of this indemnification is indefinite and
includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments. In connection with the recognition of liabilities related to these indemnified matters, Historical DuPont records an indemnification asset when recovery is deemed probable. In assessing the probability of recovery, Historical DuPont considers the contractual rights under the Chemours Separation Agreement and any potential credit risk. Future events, such as potential disputes related to recovery as well as the solvency of Chemours, could cause the indemnification assets to have a lower value than anticipated and recorded. The Company evaluates the recovery of the indemnification assets recorded when events or changes in circumstances indicate the carrying values may not be fully recoverable.
Purchase Accounting
Due to the Merger and the related accounting determination, Historical DuPont’s assets and liabilities were measured at fair value as of the date of the Merger. Estimates of fair value require a complex series of judgments about future events and uncertainties. In determining the fair value, DowDuPont utilized various forms of the income, cost and market approaches depending on the asset or liability being fair valued. The estimation of fair value required significant judgments related to future net cash flows (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), discount rates reflecting the risk inherent in each cash flow stream, competitive trends, market comparables and other factors. Inputs were generally determined by taking into account historical data, supplemented by current and anticipated market conditions and growth rates. The estimates and assumptions used to determine the estimated fair value assigned to each class of assets and liabilities, as well as asset lives, have a material impact to the Company's consolidated financial statements, and are based upon assumptions believed to be reasonable but that are inherently uncertain. Third party valuation specialists were engaged to assist in the valuation of certain of these assets and liabilities. The valuation process to determine the fair value of the acquired assets and liabilities is complete.
Prepaid Royalties
The Company’s Agriculture segment currently has certain third-party biotechnology trait license agreements, which require up-front and variable payments subject to the licensor meeting certain conditions. These payments are reflected as “Other current assets” and “Deferred charges and other assets” in the consolidated balance sheets and are amortized to “Cost of sales” in the consolidated statements of income as seeds containing the respective trait technology are utilized over the life of the license. At December 31, 2018, the balance of prepaid royalties reflected in “Other current assets” and “Deferred charges and other assets” was $239 million and $1,139 million, respectively. The Company evaluates the carrying value of the prepaid royalties when events or changes in circumstances indicate the carrying value may not be recoverable. The recoverability of the prepaid royalties and the rate of royalty amortization expense recognized are based on the Company’s strategic plans which include various assumptions and estimates including product portfolio, market dynamics, farmer preferences, growth rates and projected planted acres. Changes in factors and assumptions included in the strategic plans, including potential changes to the product portfolio in favor of internally developed biotechnology, could impact the recoverability and/or rate of recognition of the relevant prepaid royalty.
Environmental Matters
Environmental Policies - Historical Dow
Historical Dow is committed to world-class environmental, health and safety ("EH&S") performance, as demonstrated by industry-leading performance, a long-standing commitment to RESPONSIBLE CARE®, a strong commitment to achieve the 2025 Sustainability Goals - goals that set the standard for sustainability in the chemical industry by focusing on improvements in Historical Dow's local corporate citizenship and product stewardship, and by actively pursuing methods to reduce the environmental impact.
To meet Historical Dow’s public commitments, as well as the stringent laws and government regulations related to environmental protection and remediation to which its global operations are subject, Historical Dow has well-defined policies, requirements and management systems. Historical Dow’s EH&S Management System (“EMS”) defines the “who, what, when and how” needed for the businesses to achieve Dow’s policies, requirements, performance objectives, leadership expectations and public commitments. To ensure effective utilization, the EMS is integrated into a company-wide management system for EH&S, Operations, Quality and Human Resources.
It is Historical Dow’s policy to adhere to a waste management hierarchy that minimizes the impact of wastes and emissions on the environment. First, Historical Dow works to eliminate or minimize the generation of waste and emissions at the source through research, process design, plant operations and maintenance. Second, Historical Dow finds ways to reuse and recycle materials. Finally, unusable or non-recyclable hazardous waste is treated before disposal to eliminate or reduce the hazardous nature and volume of the waste. Treatment may include destruction by chemical, physical, biological or thermal means. Disposal of waste materials in landfills is considered only after all other options have been thoroughly evaluated. Historical Dow has specific requirements for waste that is transferred to non-Historical Dow facilities, including the periodic auditing of these facilities.
Historical Dow believes third-party verification and transparent public reporting are cornerstones of world-class EH&S performance and building public trust. Numerous Historical Dow sites in Europe, Latin America, Asia Pacific and U.S. & Canada have received third‑party verification of Historical Dow’s compliance with RESPONSIBLE CARE® and with outside specifications such as ISO-14001. Historical Dow continues to be a global champion of RESPONSIBLE CARE® and has worked to broaden the application and impact of RESPONSIBLE CARE® around the world through engagement with suppliers, customers and joint venture partners.
Historical Dow’s EH&S policies helped achieve improvements in many aspects of EH&S performance in 2018. Historical Dow’s process safety performance was excellent in 2018 and improvements were made in injury/illness rates. Safety remains a priority for Historical Dow. Further improvement in these areas, as well as environmental compliance, remains a top management priority, with initiatives underway to further improve performance and compliance in 2019 as Historical Dow continues to implement its 2025 Sustainability Goals.
Detailed information on Historical Dow’s performance regarding environmental matters and goals can be found online on Historical Dow’s Science & Sustainability webpage at www.dow.com. Historical Dow's website and its content are not deemed incorporated by reference into this report.
Environmental Policies - Historical DuPont
Historical DuPont operates global manufacturing, product handling and distribution facilities that are subject to a broad array of environmental laws and regulations. Such rules are subject to change by the implementing governmental agency, and Historical DuPont monitors these changes closely. Historical DuPont's policy requires that all operations fully meet or exceed legal and regulatory requirements. In addition, Historical DuPont implements voluntary programs to reduce air emissions, minimize the generation of hazardous waste, decrease the volume of water use and discharges, increase the efficiency of energy use and reduce the generation of persistent, bioaccumulative and toxic materials. Management has noted a global upward trend in the amount and complexity of proposed chemicals regulation. The costs to comply with complex environmental laws and regulations, as well as internal voluntary programs and goals, are significant and will continue to be significant for the foreseeable future.
Climate Change - Historical Dow
Climate change matters for Historical Dow are likely to be driven by changes in regulations, public policy and physical climate parameters.
Regulatory Matters
Regulatory matters include cap and trade schemes; increased greenhouse gas (“GHG”) limits; and taxes on GHG emissions, fuel and energy. The potential implications of each of these matters are all very similar, including increased costs of purchased energy, additional capital costs for installation or modification of GHG emitting equipment, and additional costs associated directly with GHG emissions (such as cap and trade systems or carbon taxes), which are primarily related to energy use. It is difficult to estimate the potential impact of these regulatory matters on energy prices.
Reducing Historical Dow's overall energy usage and GHG emissions through new and unfolding projects will decrease the potential impact of these regulatory matters. Historical Dow also has a dedicated commercial group to handle energy contracts and purchases, including managing emissions trading. Historical Dow has not experienced any material impact related to regulated GHG emissions and continues to evaluate and monitor this area for future developments.
Physical Climate Parameters
Many scientific academies throughout the world have concluded that it is very likely that human activities are contributing to global warming. At this point, it is difficult to predict and assess the probability and opportunity of a global warming trend on Historical Dow specifically. Preparedness plans are developed that detail actions needed in the event of severe weather. These measures have historically been in place and these activities and associated costs are driven by normal operational preparedness. Historical Dow continues to study the long-term implications of changing climate parameters on water availability, plant siting issues, and impacts and opportunities for products.
Historical Dow’s Energy business and Public Affairs and Sustainability functions are tasked with developing and implementing a comprehensive strategy that addresses the potential challenges of energy security and GHG emissions. Historical Dow continues to elevate its internal focus and external positions - to focus on the root causes of GHG emissions - including the unsustainable use of energy. Historical Dow's energy plan provides the roadmap:
| • | Conserve - aggressively pursue energy efficiency and conservation |
| • | Optimize - increase and diversify energy resources |
| • | Accelerate - develop cost-effective, clean, renewable and alternative energy sources |
| • | Transition - to a sustainable energy future |
Through corporate energy efficiency programs and focused GHG management efforts, Historical Dow has and is continuing to reduce its GHG emissions footprint. Historical Dow’s manufacturing intensity, measured in Btu per pound of product, has improved by more than 40 percent since 1990. As part of its 2025 Sustainability Goals, Historical Dow will maintain GHG emissions below 2006 levels on an absolute basis for all GHGs.
Historical Dow intends to implement the recommendations of the Financial Stability Board's Task Force on Climate-Related Disclosures ("Task Force") over the next two to four years, which is aligned with the recommendations of the Task Force.
Climate Change - Historical DuPont
Historical DuPont believes that climate change is an important global issue that presents risks and opportunities. For instance, Historical DuPont continuously evaluates opportunities for existing and new product and service offerings to meet the anticipated demands of a low-carbon economy. Historical DuPont also manages and reports its operational resource efficiency. Expanding upon significant GHG emissions and other environmental footprint reductions made in the period 1990-2010, in 2015, Historical DuPont announced its 2020 Sustainability Goals, including a goal to achieve a 7 percent reduction in GHG emissions intensity (2015 baseline) and a 10 percent improvement in energy intensity (2010 baseline). While Historical DuPont's 2017 GHG intensity held relatively flat with its 2015 goal baseline, Historical DuPont has achieved a 12.7 percent reduction in GHG intensity since 2010. In addition, Historical DuPont has achieved a 14.9 percent improvement in non-renewable energy intensity since 2010.
Historical DuPont is actively engaged in efforts to develop constructive public policies to reduce GHG emissions and encourage lower-carbon forms of energy. Such policies may bring higher operating costs as well as greater revenue and margin opportunities. Legislative efforts to control or limit GHG emissions could affect Historical DuPont's energy source and supply choices as well as increase the cost of energy and raw materials derived from fossil fuels. Such efforts are also anticipated to provide the business community with greater certainty for the regulatory future, help guide investment decisions and drive growth in demand for low-carbon and energy-efficient products, technologies and services. Similarly, demand is expected to grow for products that facilitate adaptation to a changing climate. However, the current unsettled policy environment in the U.S., where many Historical DuPont facilities are located, adds an element of uncertainty to business decisions, particularly those relating to long-term capital investments.
In addition, significant differences in regional or national approaches could present challenges in a global marketplace. An effective global climate policy framework will help drive the market changes that are needed to stimulate and efficiently deploy new innovations in science and technology, while maintaining open and competitive global markets.
DowDuPont Environmental Remediation
Environmental Capital Expenditures
Capital expenditures for environmental projects, either required by law or necessary to meet the Company’s internal environmental goals, were $105 million in 2018.
Environmental Operating Costs and Remediation
As a result of the Historical Dow and Historical DuPont operations, DowDuPont incurs environmental operating costs for pollution abatement activities including waste collection and disposal, installation and maintenance of air pollution controls and wastewater treatment, emissions testing and monitoring and obtaining permits. The Company also incurs environmental operating costs related to environmental related research and development activities including environmental field and treatment studies as well as toxicity and degradation testing to evaluate the environmental impact of products and raw materials.
Pretax environmental expenses charged to income from continuing operations are summarized below:
| Environmental Expenses Charged to Income | |||||||||
| In millions | 2018 | 2017 1 | 2016 | ||||||
| Environmental operating costs | $ | 1,012 | $ | 725 | $ | 623 | |||
| Environmental remediation costs | 232 | 179 | 504 | ||||||
| Total | $ | 1,244 | $ | 904 | $ | 1,127 |
| 1. | Includes Historical DuPont costs for the period September 1, 2017 through December 31, 2017. |
Based on existing facts and circumstances, management does not believe that year over year changes in environmental expenses charged to current operations will have a material impact on the Company's financial position, liquidity or results of operations.
Annual expenditures in the near term are not expected to vary significantly from the range of such expenditures experienced in the past few years. Longer term, expenditures are subject to considerable uncertainty and may fluctuate significantly.
Changes in the remediation accrual balance are summarized below:
| Accrued Obligations for Environmental Matters | ||||||
| In millions | 2018 | 2017 | ||||
| Balance at Jan 1 | $ | 1,311 | $ | 909 | ||
| Liabilities assumed 1 | — | 483 | ||||
| Accrual adjustment | 233 | 180 | ||||
| Payments against reserve | (270 | ) | (260 | ) | ||
| Foreign currency impact | (24 | ) | 17 | |||
| Net change, indemnification 2 | (49 | ) | (18 | ) | ||
| Balance at Dec 31 | $ | 1,201 | $ | 1,311 |
| 1. | Remediation obligations assumed upon completion of the Merger. |
| 2. | Represents the net change in indemnified remediation obligations based on activity as well as the removal from Historical DuPont's accrued remediation liabilities of obligations have been fully transferred to Chemours. Pursuant to the Chemours Separation Agreement, as discussed below and in Note 16 to the Consolidated Financial Statements, Historical DuPont is indemnified by Chemours for certain environmental matters. |
Considerable uncertainty exists with respect to environmental remediation and costs, and under adverse changes in circumstances, it is reasonably possible that the ultimate cost with respect to these particular matters could range up to two and a half times times above the amount accrued. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s results of operations, financial condition or cash flows. For further discussion, see Environmental Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 1 and 16 to the Consolidated Financial Statements.
Information regarding environmental sites is provided below:
| Environmental Sites 1 | Historical DuPont | Historical Dow | ||||||||||||||
| Sites 2 | Superfund Sites 3, 4 | Sites 5 | Superfund Sites 3 | |||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||
| Number of sites at Jan 1 | 99 | — | 62 | — | 244 | 189 | 131 | 131 | ||||||||
| Sites added during year 6 | 1 | 99 | 7 | 62 | 3 | 60 | 2 | 2 | ||||||||
| Sites closed during year | — | — | — | — | (9 | ) | (5 | ) | (2 | ) | (2 | ) | ||||
| Number of sites at Dec 31 | 100 | 99 | 69 | 62 | 238 | 244 | 131 | 131 |
| 1. | Active sites. |
| 2. | Sites currently or formerly owned by Historical DuPont. Remediation obligations are imposed by the Resource Conservation and Recovery Act or similar state law in the United States and by similar federal, state, provincial or local law in non-U.S. locations. At December 31, 2018, Chemours is indemnifying Historical DuPont for activities at 31 of these sites. See discussion below and Note 16 to the Consolidated Financial Statements for additional information. |
| 3. | Superfund sites are sites, including sites not owned by Historical DuPont or Historical Dow, where remediation obligations may be imposed on either company under federal or state Superfund laws or similar laws in non-U.S. locations. The total includes approximately 40 sites that have been counted twice as Historical DuPont and Historical Dow are separately named. |
| 4. | At December 31, 2018, Chemours is indemnifying Historical DuPont for activities at 28 of these Superfund sites. See discussion below and Note 16 to the Consolidated Financial Statements for additional information. |
| 5. | Sites currently or formerly owned by Historical Dow. Remediation obligations are imposed by the Resource Conservation and Recovery Act or similar state law in the United States and by similar federal, state, provincial or local law in non-U.S. locations. At December 31, 2018, 32 of these sites (35 sites at December 31, 2017) were formerly owned by Dowell Schlumberger, Inc., a group of companies in which Historical Dow previously owned a 50 percent interest. Historical Dow sold its interest in Dowell Schlumberger in 1992. |
| 6. | Includes Historical DuPont remediation obligations transferred as a result of the Merger in 2017. |
Additional information is provided below for Historical Dow’s Midland, Michigan, manufacturing site and Midland off-site locations (collectively, the "Midland sites"), as well as a Superfund site in Wood-Ridge, New Jersey, the locations for Historical Dow that have the largest potential environmental liabilities.
In the early days of operations at the Historical Dow Midland manufacturing site, wastes were usually disposed of on-site, resulting in soil and groundwater contamination, which has been contained and managed on-site under a series of Resource Conservation and Recovery Act permits and regulatory agreements. The Hazardous Waste Operating License for the Midland manufacturing
site, issued in 2003, and renewed and replaced in September 2015, also included provisions for Historical Dow to conduct an investigation to determine the nature and extent of off-site contamination from historic Midland manufacturing site operations. In January 2010, Historical Dow, the EPA and the State of Michigan ("State") entered into an Administrative Order on Consent that requires Historical Dow to conduct a remedial investigation, a feasibility study and a remedial design for the Tittabawassee River, the Saginaw River and the Saginaw Bay, and pay the oversight costs of the EPA and the State under the authority of the federal Comprehensive Environmental Response, Compensation and Liability Act. See Note 16 to the Consolidated Financial Statements for additional information. At December 31, 2018, Historical Dow had an accrual of $134 million ($131 million at December 31, 2017) for environmental remediation and investigation associated with the Midland sites. In 2018, Historical Dow spent $26 million ($24 million in 2017) for environmental remediation at the Midland sites.
Rohm and Haas, a wholly owned subsidiary of Historical Dow, is a PRP at the Wood-Ridge, New Jersey Ventron/Velsicol Superfund Site, and the adjacent Berry’s Creek Study Area ("BCSA") (collectively, the "Wood-Ridge sites"). Rohm and Haas is a successor in interest to a company that owned and operated a mercury processing facility, where wastewater and waste handling resulted in contamination of soils and adjacent creek sediments. The Berry’s Creek Study Area PRP group completed a multi-stage Remedial Investigation ("RI") pursuant to an Administrative Order on Consent with U.S. EPA Region 2 to identify contamination in surface water, sediment and biota related to numerous contaminated sites in the Berry's Creek watershed, and submitted the report to the EPA in June 2016. That same month, the EPA concluded that an "iterative or adaptive approach" was appropriate for cleaning up the BCSA. Thus, each phase of remediation will be followed by a period of monitoring to assess its effectiveness and determine if there is a need for more work. The Feasibility Study ("FS") for the first phase of work was submitted in the third quarter of 2018. The EPA selected the interim remedy and issued an interim Record of Decision ("ROD"). The PRP group is negotiating agreements among the PRP's to fund design of the selected remedy and with the EPA to design the selected remedy. Although there is currently much uncertainty as to what will ultimately be required to remediate the BCSA and Rohm and Haas's share of these costs has yet to be determined, the range of activities that will be required in the interim ROD is known in general terms. Based on the interim remedy selected by the EPA, the overall remediation accrual for the Wood-Ridge sites was increased by $21 million in the fourth quarter of 2018. At December 31, 2018, the Company had an accrual of $106 million ($88 million at December 31, 2017) for environmental remediation at the Wood-Ridge sites. In 2018, Historical Dow spent $6 million ($7 million in 2017) on environmental remediation at the Wood-Ridge sites.
In the fourth quarter of 2016, Historical Dow recorded a pretax charge of $295 million for environmental remediation at a number of historical locations, including the Midland manufacturing site/off-site matters and the Wood-Ridge sites, primarily resulting from the culmination of negotiations with regulators and/or final agency approval. This charge was included in "Cost of sales" in the consolidated statements of income. In total, the Company’s accrued liability for probable environmental remediation and restoration costs was $1,201 million at December 31, 2018, compared with $1,311 million at December 31, 2017. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s results of operations, financial condition and cash flows.
Separation of Historical DuPont's Performance Chemicals Segment
Pursuant to the Chemours Separation Agreement discussed in Note 16 to the Consolidated Financial Statements, Historical DuPont is indemnified by Chemours for certain environmental matters, included in the liability of $1,201 million, that had an estimated liability of $193 million at December 31, 2018, and a potential exposure that ranges up to approximately $310 million above the current accrual. As such, Historical DuPont has recorded an indemnification asset of $193 million corresponding to Historical DuPont's accrual balance related to these matters at December 31, 2018.
Asbestos-Related Matters of Union Carbide Corporation
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem. In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.
The table below provides information regarding asbestos-related claims pending against Union Carbide and Amchem based on criteria developed by Union Carbide and its external consultants.
| Asbestos-Related Claim Activity | 2018 | 2017 | 2016 | |||
| Claims unresolved at Jan 1 | 15,427 | 16,141 | 18,778 | |||
| Claims filed | 6,599 | 7,010 | 7,813 | |||
| Claims settled, dismissed or otherwise resolved | (9,246 | ) | (7,724 | ) | (10,450 | ) |
| Claims unresolved at Dec 31 | 12,780 | 15,427 | 16,141 | |||
| Claimants with claims against both Union Carbide and Amchem | (4,675 | ) | (5,530 | ) | (5,741 | ) |
| Individual claimants at Dec 31 | 8,105 | 9,897 | 10,400 |
Plaintiffs’ lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous claimants. As a result, the damages alleged are not expressly identified as to Union Carbide, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only Union Carbide and/or Amchem are the sole named defendants. For these reasons and based upon Union Carbide’s litigation and settlement experience, Union Carbide does not consider the damages alleged against Union Carbide and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.
For additional information, see Part I, Item 3. Legal Proceedings and Asbestos-Related Matters of Union Carbide Corporation and Note 16 to the Consolidated Financial Statements.
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