filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of DowDuPont Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DowDuPont Inc. and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes and the schedule listed in the Index at Item 15a(2) (collectively referred to as the "financial statements"). In our opinion, based on our audits and the report of the other auditors, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We did not audit the consolidated financial statements of E. I. du Pont de Nemours and Company (“DuPont”), a wholly-owned subsidiary of the Company, which consolidated financial statements reflect total assets of $101,025 million and $112,964 million as of December 31, 2018 and 2017, respectively, and total revenues of $26,279 million for the year ended December 31, 2018 and $7,053 million for the period from August 31, 2017 (date of merger) to December 31, 2017. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for DuPont as of December 31, 2018 and for the period from August 31, 2017 (date of the merger) to December 31, 2017 and the year ended December 31, 2018, is based solely on the report of the other auditors.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 11, 2019 expressed an unqualified opinion on the Company's internal control over financial reporting based on our audit and the report of the other auditors.
Changes in Accounting Principles
As discussed in Note 16 to the financial statements, in the fourth quarter of 2016, the Company changed its accounting policy from expensing asbestos-related defense and processing costs as incurred to the accrual of asbestos-related defense and processing costs when probable of occurring and estimable. As discussed in Note 4 to the financial statements, in the first quarter of 2018, the Company changed its method of accounting for revenue due to the adoption of Accounting Standards Codification Topic 606, Revenue From Contracts With Customers.
Merger
As discussed in Notes 1 and 3 to the financial statements, the Company was formed for the purpose of effecting the merger of The Dow Chemical Company and DuPont. On August 31, 2017, the merger was completed.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
| /s/ DELOITTE & TOUCHE LLP |
| Deloitte & Touche LLP |
| Midland, Michigan |
| February 11, 2019 |
We have served as the Company's auditor since 1905.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of E. I. du Pont de Nemours and Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the consolidated balance sheets of E. I. du Pont de Nemours and Company and its subsidiaries (Successor) (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive (loss) income, equity and cash flows for the year ended December 31, 2018 and for the period September 1, 2017 through December 31, 2017, including the related notes and financial statement schedule (collectively referred to as the “consolidated financial statements”) (not presented herein). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the year ended December 31, 2018 and for the period September 1, 2017 through December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting (not presented herein). Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ PRICEWATERHOUSECOOPERS LLP |
| PricewaterhouseCoopers LLP |
| Philadelphia, Pennsylvania |
| February 11, 2019 |
We have served as the Company’s auditor since 1954.
DowDuPont Inc.
Consolidated Statements of Income
| (In millions, except per share amounts) For the years ended Dec 31, | 2018 | 2017 | 2016 | ||||||
| Net sales | $ | 85,977 | $ | 62,484 | $ | 48,158 | |||
| Cost of sales | 65,333 | 49,791 | 37,668 | ||||||
| Research and development expenses | 3,060 | 2,141 | 1,593 | ||||||
| Selling, general and administrative expenses | 6,709 | 4,064 | 2,953 | ||||||
| Amortization of intangibles | 1,903 | 1,013 | 544 | ||||||
| Restructuring, goodwill impairment and asset related charges - net | 1,105 | 3,280 | 595 | ||||||
| Integration and separation costs | 2,463 | 1,101 | 349 | ||||||
| Asbestos-related charge | — | — | 1,113 | ||||||
| Equity in earnings of nonconsolidated affiliates | 1,001 | 764 | 442 | ||||||
| Sundry income (expense) - net | 592 | 417 | 1,486 | ||||||
| Interest expense and amortization of debt discount | 1,504 | 1,082 | 858 | ||||||
| Income from continuing operations before income taxes | 5,493 | 1,193 | 4,413 | ||||||
| Provision (Credit) for income taxes on continuing operations | 1,489 | (476 | ) | 9 | |||||
| Income from continuing operations, net of tax | 4,004 | 1,669 | 4,404 | ||||||
| Loss from discontinued operations, net of tax | (5 | ) | (77 | ) | — | ||||
| Net income | 3,999 | 1,592 | 4,404 | ||||||
| Net income attributable to noncontrolling interests | 155 | 132 | 86 | ||||||
| Net income attributable to DowDuPont Inc. | 3,844 | 1,460 | 4,318 | ||||||
| Preferred stock dividends | — | — | 340 | ||||||
| Net income available for DowDuPont Inc. common stockholders | $ | 3,844 | $ | 1,460 | $ | 3,978 | |||
| Per common share data: | |||||||||
| Earnings per common share from continuing operations - basic | $ | 1.66 | $ | 0.97 | $ | 3.57 | |||
| Loss per common share from discontinued operations - basic | — | (0.05 | ) | — | |||||
| Earnings per common share - basic | $ | 1.66 | $ | 0.92 | $ | 3.57 | |||
| Earnings per common share from continuing operations - diluted | $ | 1.65 | $ | 0.95 | $ | 3.52 | |||
| Loss per common share from discontinued operations - diluted | — | (0.04 | ) | — | |||||
| Earnings per common share - diluted | $ | 1.65 | $ | 0.91 | $ | 3.52 | |||
| Weighted-average common shares outstanding - basic | 2,301.0 | 1,579.8 | 1,108.1 | ||||||
| Weighted-average common shares outstanding - diluted | 2,315.5 | 1,598.1 | 1,123.2 |
See Notes to the Consolidated Financial Statements.
DowDuPont Inc.
Consolidated Statements of Comprehensive Income
| (In millions) For the years ended Dec 31, | 2018 | 2017 | 2016 | ||||||
| Net income | $ | 3,999 | $ | 1,592 | $ | 4,404 | |||
| Other comprehensive income (loss), net of tax | |||||||||
| Unrealized losses on investments | (67 | ) | (46 | ) | (4 | ) | |||
| Cumulative translation adjustments | (1,743 | ) | 446 | (644 | ) | ||||
| Pension and other postretirement benefit plans | (626 | ) | 466 | (620 | ) | ||||
| Derivative instruments | 51 | (16 | ) | 113 | |||||
| Total other comprehensive income (loss) | (2,385 | ) | 850 | (1,155 | ) | ||||
| Comprehensive income | 1,614 | 2,442 | 3,249 | ||||||
| Comprehensive income attributable to noncontrolling interests, net of tax | 118 | 174 | 83 | ||||||
| Comprehensive income attributable to DowDuPont Inc. | $ | 1,496 | $ | 2,268 | $ | 3,166 |
See Notes to the Consolidated Financial Statements.
DowDuPont Inc.
Consolidated Balance Sheets
| (In millions, except share amounts) At Dec 31, | 2018 | 2017 | ||||
| Assets | ||||||
| Current Assets | ||||||
| Cash and cash equivalents (variable interest entities restricted - 2018: $82; 2017: $107) | $ | 13,482 | $ | 13,438 | ||
| Marketable securities | 134 | 956 | ||||
| Accounts and notes receivable: | ||||||
| Trade (net of allowance for doubtful receivables - 2018: $191; 2017: $127) | 12,376 | 11,314 | ||||
| Other | 4,963 | 5,579 | ||||
| Inventories | 16,621 | 16,992 | ||||
| Other current assets | 2,027 | 1,614 | ||||
| Total current assets | 49,603 | 49,893 | ||||
| Investments | ||||||
| Investment in nonconsolidated affiliates | 5,204 | 5,336 | ||||
| Other investments (investments carried at fair value - 2018: $1,699; 2017: $1,512) | 2,701 | 2,564 | ||||
| Noncurrent receivables | 477 | 680 | ||||
| Total investments | 8,382 | 8,580 | ||||
| Property | ||||||
| Property | 75,343 | 73,304 | ||||
| Less accumulated depreciation | 39,495 | 37,057 | ||||
| Net property (variable interest entities restricted - 2018: $734; 2017: $907) | 35,848 | 36,247 | ||||
| Other Assets | ||||||
| Goodwill | 59,032 | 59,527 | ||||
| Other intangible assets (net of accumulated amortization - 2018: $7,414; 2017: $5,550) | 30,965 | 33,274 | ||||
| Deferred income tax assets | 1,724 | 1,869 | ||||
| Deferred charges and other assets | 2,476 | 2,774 | ||||
| Total other assets | 94,197 | 97,444 | ||||
| Total Assets | $ | 188,030 | $ | 192,164 | ||
| Liabilities and Equity | ||||||
| Current Liabilities | ||||||
| Notes payable | $ | 2,165 | $ | 1,948 | ||
| Long-term debt due within one year | 637 | 2,067 | ||||
| Accounts payable: | ||||||
| Trade | 9,457 | 9,134 | ||||
| Other | 3,656 | 3,727 | ||||
| Income taxes payable | 857 | 843 | ||||
| Accrued and other current liabilities | 7,943 | 8,409 | ||||
| Total current liabilities | 24,715 | 26,128 | ||||
| Long-Term Debt (variable interest entities nonrecourse - 2018: $75; 2017: $249) | 37,662 | 30,056 | ||||
| Other Noncurrent Liabilities | ||||||
| Deferred income tax liabilities | 5,435 | 6,266 | ||||
| Pension and other postretirement benefits - noncurrent | 15,909 | 18,581 | ||||
| Asbestos-related liabilities - noncurrent | 1,142 | 1,237 | ||||
| Other noncurrent obligations | 6,988 | 7,969 | ||||
| Total other noncurrent liabilities | 29,474 | 34,053 | ||||
| Stockholders' Equity | ||||||
| Common stock (authorized 5,000,000,000 shares of $0.01 par value each; issued 2018: 2,352,430,301 shares; 2017: 2,341,455,518 shares) | 24 | 23 | ||||
| Additional paid-in capital | 81,960 | 81,257 | ||||
| Retained earnings | 30,536 | 29,211 | ||||
| Accumulated other comprehensive loss | (12,394 | ) | (8,972 | ) | ||
| Unearned ESOP shares | (134 | ) | (189 | ) | ||
| Treasury stock at cost (2018: 83,452,554 shares; 2017: 14,123,049 shares) | (5,421 | ) | (1,000 | ) | ||
| DowDuPont's stockholders' equity | 94,571 | 100,330 | ||||
| Noncontrolling interests | 1,608 | 1,597 | ||||
| Total equity | 96,179 | 101,927 | ||||
| Total Liabilities and Equity | $ | 188,030 | $ | 192,164 |
See Notes to the Consolidated Financial Statements.
DowDuPont Inc.
Consolidated Statements of Cash Flows
| (In millions) For the years ended Dec 31, | 2018 | 2017 | 2016 | ||||||
| Operating Activities | |||||||||
| Net income | $ | 3,999 | $ | 1,592 | $ | 4,404 | |||
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | |||||||||
| Depreciation and amortization | 5,918 | 3,969 | 2,862 | ||||||
| Credit for deferred income tax | (434 | ) | (2,083 | ) | (1,259 | ) | |||
| Earnings of nonconsolidated affiliates less than dividends received | 83 | 128 | 243 | ||||||
| Net periodic pension benefit cost | 58 | 1,026 | 389 | ||||||
| Pension contributions | (2,964 | ) | (1,744 | ) | (629 | ) | |||
| Net gain on sales of assets, businesses and investments | (93 | ) | (1,172 | ) | (214 | ) | |||
| Net (gain) loss on step acquisition of nonconsolidated affiliate | 47 | — | (2,445 | ) | |||||
| Restructuring, goodwill impairment and asset related charges - net | 1,105 | 3,280 | 595 | ||||||
| Amortization of Merger-related inventory step-up | 1,628 | 1,573 | — | ||||||
| Asbestos-related charge | — | — | 1,113 | ||||||
| Other net loss | 673 | 470 | 361 | ||||||
| Changes in assets and liabilities, net of effects of acquired and divested companies: | |||||||||
| Accounts and notes receivable | (1,611 | ) | (9,782 | ) | (8,833 | ) | |||
| Inventories | (1,490 | ) | (2,218 | ) | 610 | ||||
| Accounts payable | 201 | 2,631 | 569 | ||||||
| Other assets and liabilities, net | (2,389 | ) | 1,565 | (723 | ) | ||||
| Cash provided by (used for) operating activities | 4,731 | (765 | ) | (2,957 | ) | ||||
| Investing Activities | |||||||||
| Capital expenditures | (3,837 | ) | (3,570 | ) | (3,804 | ) | |||
| Investment in gas field developments | (114 | ) | (121 | ) | (113 | ) | |||
| Purchases of previously leased assets | (26 | ) | (187 | ) | — | ||||
| Proceeds from sales of property and businesses, net of cash divested | 202 | 2,959 | 284 | ||||||
| Acquisitions of property and businesses, net of cash acquired | (20 | ) | 50 | (187 | ) | ||||
| Cash acquired in Merger transaction | — | 4,005 | — | ||||||
| Cash acquired in step acquisition of nonconsolidated affiliate | — | — | 1,070 | ||||||
| Investments in and loans to nonconsolidated affiliates | (26 | ) | (754 | ) | (1,020 | ) | |||
| Distributions and loan repayments from nonconsolidated affiliates | 55 | 106 | 109 | ||||||
| Proceeds from sales of ownership interests in nonconsolidated affiliates | 4 | 64 | 22 | ||||||
| Purchases of investments | (2,787 | ) | (1,690 | ) | (577 | ) | |||
| Proceeds from sales and maturities of investments | 3,402 | 4,101 | 733 | ||||||
| Proceeds from interests in trade accounts receivable conduits | 657 | 9,462 | 8,551 | ||||||
| Other investing activities, net | 28 | (100 | ) | 24 | |||||
| Cash provided by (used for) investing activities | (2,462 | ) | 14,325 | 5,092 | |||||
| Financing Activities | |||||||||
| Changes in short-term notes payable | 223 | (2,248 | ) | (33 | ) | ||||
| Proceeds from issuance of long-term debt | 15,455 | 499 | 32 | ||||||
| Payments on long-term debt | (9,009 | ) | (663 | ) | (588 | ) | |||
| Purchases of treasury stock | (4,421 | ) | (1,000 | ) | (916 | ) | |||
| Proceeds from issuance of company stock | 197 | 66 | — | ||||||
| Proceeds from sales of common stock | — | 453 | 398 | ||||||
| Transaction financing, debt issuance and other costs | (555 | ) | — | — | |||||
| Employee taxes paid for share-based payment arrangements | (128 | ) | (99 | ) | (65 | ) | |||
| Distributions to noncontrolling interests | (195 | ) | (136 | ) | (176 | ) | |||
| Purchases of noncontrolling interests | — | — | (202 | ) | |||||
| Dividends paid to stockholders | (3,491 | ) | (3,394 | ) | (2,462 | ) | |||
| Other financing activities, net | 6 | (32 | ) | (2 | ) | ||||
| Cash used for financing activities | (1,918 | ) | (6,554 | ) | (4,014 | ) | |||
| Effect of exchange rate changes on cash, cash equivalents and restricted 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 | |||
| Supplemental cash flow information | |||||||||
| Cash paid during the year for: | |||||||||
| Interest, net of amounts capitalized | $ | 2,116 | $ | 1,254 | $ | 1,192 | |||
| Income taxes | $ | 2,199 | $ | 1,368 | $ | 1,592 |
See Notes to the Consolidated Financial Statements.
DowDuPont Inc.
Consolidated Statements of Equity
| (In millions, except per share amounts) | Preferred Stock | Common Stock | Add'l Paid in Capital | Retained Earnings | Accum Other Comp Loss | Unearned ESOP | Treasury Stock | Non-controlling Interests | Total Equity | ||||||||||||||||||
| 2016 | |||||||||||||||||||||||||||
| Balance at Jan 1, 2016 | $ | 4,000 | $ | 3,107 | $ | 4,936 | $ | 28,425 | $ | (8,667 | ) | $ | (272 | ) | $ | (6,155 | ) | $ | 809 | $ | 26,183 | ||||||
| Net income available for DowDuPont Inc. common stockholders | — | — | — | 3,978 | — | — | — | — | 3,978 | ||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (1,155 | ) | — | — | — | (1,155 | ) | ||||||||||||||||
| Dividends ($1.84 per common share) | — | — | — | (2,037 | ) | — | — | — | — | (2,037 | ) | ||||||||||||||||
| Common stock issued/sold | — | — | 398 | — | — | — | 717 | — | 1,115 | ||||||||||||||||||
| Stock-based compensation and allocation of ESOP shares | — | — | (376 | ) | — | — | 51 | — | — | (325 | ) | ||||||||||||||||
| ESOP shares acquired | — | — | — | — | — | (18 | ) | — | — | (18 | ) | ||||||||||||||||
| Impact of noncontrolling interests | — | — | — | — | — | — | — | 433 | 433 | ||||||||||||||||||
| Treasury stock purchases | — | — | — | — | — | — | (916 | ) | — | (916 | ) | ||||||||||||||||
| Preferred stock converted to common stock | (4,000 | ) | — | (695 | ) | — | — | — | 4,695 | — | — | ||||||||||||||||
| Other | — | — | (1 | ) | (28 | ) | — | — | — | — | (29 | ) | |||||||||||||||
| Balance at Dec 31, 2016 | $ | — | $ | 3,107 | $ | 4,262 | $ | 30,338 | $ | (9,822 | ) | $ | (239 | ) | $ | (1,659 | ) | $ | 1,242 | $ | 27,229 | ||||||
| 2017 | |||||||||||||||||||||||||||
| Net income available for DowDuPont Inc. common stockholders | — | — | — | 1,460 | — | — | — | — | 1,460 | ||||||||||||||||||
| Other comprehensive income | — | — | — | — | 850 | — | — | — | 850 | ||||||||||||||||||
| Dividends ($1.76 per common share) | — | — | — | (2,558 | ) | — | — | — | — | (2,558 | ) | ||||||||||||||||
| Common stock issued/sold | — | — | 519 | — | — | — | 724 | — | 1,243 | ||||||||||||||||||
| Stock-based compensation and allocation of ESOP shares | — | — | (332 | ) | — | — | 50 | — | — | (282 | ) | ||||||||||||||||
| Impact of noncontrolling interests | — | — | — | — | — | — | — | 355 | 355 | ||||||||||||||||||
| Treasury stock purchases | — | — | — | — | — | — | (1,000 | ) | — | (1,000 | ) | ||||||||||||||||
| Merger impact | — | (3,084 | ) | 76,829 | — | — | — | 935 | — | 74,680 | |||||||||||||||||
| Other | — | — | (21 | ) | (29 | ) | — | — | — | — | (50 | ) | |||||||||||||||
| Balance at Dec 31, 2017 | $ | — | $ | 23 | $ | 81,257 | $ | 29,211 | $ | (8,972 | ) | $ | (189 | ) | $ | (1,000 | ) | $ | 1,597 | $ | 101,927 | ||||||
| 2018 | |||||||||||||||||||||||||||
| Adoption of accounting standards (Note 1) | — | — | — | 996 | (1,037 | ) | — | — | — | (41 | ) | ||||||||||||||||
| Net income available for DowDuPont Inc. common stockholders | — | — | — | 3,844 | — | — | — | — | 3,844 | ||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (2,385 | ) | — | — | — | (2,385 | ) | ||||||||||||||||
| Dividends ($1.52 per common share) | — | — | — | (3,491 | ) | — | — | — | — | (3,491 | ) | ||||||||||||||||
| Common stock issued/sold | — | 1 | 197 | — | — | — | — | — | 198 | ||||||||||||||||||
| Stock-based compensation and allocation of ESOP shares | — | — | 506 | — | — | 55 | — | — | 561 | ||||||||||||||||||
| Impact of noncontrolling interests | — | — | — | — | — | — | — | 11 | 11 | ||||||||||||||||||
| Treasury stock purchases | — | — | — | — | — | — | (4,421 | ) | — | (4,421 | ) | ||||||||||||||||
| Other | — | — | — | (24 | ) | — | — | — | — | (24 | ) | ||||||||||||||||
| Balance at Dec 31, 2018 | $ | — | $ | 24 | $ | 81,960 | $ | 30,536 | $ | (12,394 | ) | $ | (134 | ) | $ | (5,421 | ) | $ | 1,608 | $ | 96,179 |
See Notes to the Consolidated Financial Statements.
| DowDuPont Inc. | ||
| Notes to the Consolidated Financial Statements |
Table of Contents
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merger
Effective August 31, 2017, pursuant to the merger of equals transactions contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017 ("Merger Agreement"), The Dow Chemical Company ("Historical Dow") and E. I. du Pont de Nemours and Company ("Historical DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont" or the "Company") and, as a result, Historical Dow and Historical DuPont became subsidiaries of DowDuPont (the "Merger"). Prior to the Merger, DowDuPont did not conduct any business activities other than those required for its formation and matters contemplated by the Merger Agreement. Historical Dow was determined to be the accounting acquirer in the Merger. As a result, the financial statements of Historical Dow for periods prior to the Merger are considered to be the historical financial statements of DowDuPont.
On August 31, 2017, Historical Dow's common stock, par value $2.50 per share, and Historical DuPont's common stock, par value $0.30 per share, were voluntarily delisted from the New York Stock Exchange ("NYSE") in connection with the Merger and were suspended from trading on the NYSE prior to the open of trading on September 1, 2017. DowDuPont's common stock, par value $0.01 per share, commenced trading on the NYSE under ticker symbol DWDP on September 1, 2017.
Intended Business Separations
DowDuPont plans to separate into three, independent, publicly traded companies - one for each of its agriculture, materials science and specialty products businesses (the “Intended Business Separations” and the transactions to accomplish the Intended Business Separations, the “separations”). DowDuPont has formed two wholly owned subsidiaries: Dow Holdings Inc., to serve as a holding company for its materials science business, and Corteva, Inc., to serve as a holding company for its agriculture business.
In furtherance of the Intended Business Separations, DowDuPont is engaged in a series of internal reorganization and realignment steps (the “Internal Reorganization”) to realign its businesses into three subgroups: agriculture, materials science and specialty products. As part of the Internal Reorganization, the assets and liabilities aligned with the materials science business will be transferred or conveyed to legal entities that will ultimately be subsidiaries of Dow Holdings Inc. and the assets and liabilities aligned with the agriculture business will be transferred or conveyed to legal entities that will ultimately be subsidiaries of Corteva, Inc.
Following the Internal Reorganization, DowDuPont expects to distribute its materials science and agriculture businesses through two separate U.S. federal tax-free spin-offs in which DowDuPont stockholders, at the time of such spin-offs, will receive a pro rata dividend of the shares of the capital stock of Dow Holdings Inc. and of Corteva, Inc., as applicable (the “distributions”). The materials science business, after the consummation of the applicable Internal Reorganization, will be referred to as "Dow" and the agriculture business, after the consummation of the applicable Internal Reorganization, will be referred to as “Corteva.” Following the separation and distribution of Dow, which is targeted to occur on April 1, 2019, DowDuPont, as the remaining company, will continue to hold the agriculture and specialty products businesses. DowDuPont is then targeted to complete the separation and distribution of Corteva on June 1, 2019, resulting in DowDuPont holding the specialty products businesses of the combined Company. After the distribution of Corteva, it is expected that DowDuPont will become known as "DuPont."
Basis of Presentation
The consolidated financial statements of DowDuPont and its subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Company exercises control and, when applicable, entities for which the Company has a controlling financial interest or is the primary beneficiary. Intercompany transactions and balances are eliminated in consolidation. Investments in nonconsolidated affiliates (20-50 percent owned companies or less than 20 percent owned companies over which significant influence is exercised) are accounted for using the equity method.
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.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.
Significant Accounting Policies
Asbestos-Related Matters
Accruals for asbestos-related matters, including defense and processing costs of Union Carbide, are recorded based on an analysis of claim and resolution activity, defense spending, and pending and future claims. These accruals are assessed at each balance sheet date to determine if the asbestos-related liability remains appropriate. Accruals for asbestos-related matters are included in the consolidated balance sheets in “Accrued and other current liabilities” and “Asbestos-related liabilities - noncurrent.”
Legal Costs
The Company expenses legal costs as incurred, with the exception of Union Carbide's defense and processing costs associated with asbestos-related matters.
Foreign Currency Translation
The Company’s worldwide operations utilize the local currency or the U.S. dollar ("USD") as the functional currency, where applicable. For foreign entities where the local currency is the functional currency, assets and liabilities denominated in local currencies are translated into USD at end-of-period exchange rates and the resultant translation adjustments are reported, net of their related tax effects, as a component of “Accumulated other comprehensive loss” ("AOCL") in the equity section of the consolidated balance sheets. Income and expenses are translated at average exchange rates in effect during the period.
For certain subsidiaries, USD is used as the functional currency. This occurs when the subsidiary is considered an extension of the parent, or when the foreign subsidiary operates in a hyper-inflationary environment. Where USD is used as the functional currency, all foreign currency-denominated asset and liability amounts are remeasured into USD at end-of-period exchange rates, except for inventories, prepaid expenses, property, plant and equipment, goodwill and other intangible assets, which are remeasured at historical rates. Foreign currency income and expenses are remeasured at average exchange rates in effect during the year, except for expenses related to balance sheet amounts remeasured at historical exchange rates. Exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in income in the period in which they occur.
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the consolidated balance sheets in “Accrued and other current liabilities” and “Other noncurrent obligations” at undiscounted amounts. Accruals for related insurance or other third-party recoveries for environmental liabilities are recorded when it is probable that a recovery will be realized and are included in the consolidated balance sheets in “Accounts and notes receivable - Other.”
Environmental costs are capitalized if the costs extend the life of the property, increase its capacity and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and investments with maturities of three months or less at the time of purchase.
Financial Instruments
The Company calculates the fair value of financial instruments using quoted market prices when available. When quoted market prices are not available for financial instruments, the Company uses standard pricing models with market-based inputs that take into account the present value of estimated future cash flows.
The Company utilizes derivatives to manage exposures to foreign currency exchange rates, commodity prices and interest rate risk. The fair values of all derivatives are recognized as assets or liabilities at the balance sheet date. Changes in the fair values of these instruments are reported in income or AOCL, depending on the use of the derivative and whether the Company has elected hedge accounting treatment.
Gains and losses on derivatives that are designated and qualify as cash flow hedging instruments are recorded in AOCL until the underlying transactions are recognized in income. Gains and losses on derivative and non-derivative instruments used as hedges of the Company’s net investment in foreign operations are recorded in AOCL as part of the cumulative translation adjustment. Prior to the adoption of Accounting Standards Update ("ASU") 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" in 2018, the ineffective portions of hedges, if any, were recognized in income immediately. See Note 2 for additional information.
Gains and losses on derivatives designated and qualifying as fair value hedging instruments, as well as the offsetting losses and gains on the hedged items, are reported in income in the same accounting period. Derivatives not designated as hedging instruments are marked-to-market at the end of each accounting period with the results included in income.
Inventories
Inventories are stated at the lower of cost or net realizable value. The method of determining cost for each subsidiary varies among last-in, first-out (“LIFO”); first-in, first-out (“FIFO”); and average cost, and is used consistently from year to year. At December 31, 2018, approximately 19 percent, 61 percent and 20 percent of the Company's inventories were accounted for under the LIFO, FIFO and average cost methods, respectively. At December 31, 2017, approximately 18 percent, 63 percent and 19 percent of the Company's inventories were accounted for under the LIFO, FIFO and average cost methods, respectively.
The Company routinely exchanges and swaps raw materials and finished goods with other companies to reduce delivery time, freight and other transportation costs. These transactions are treated as non-monetary exchanges and are valued at cost.
Property
Land, buildings and equipment, including property under capital lease agreements, are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of depreciable assets and is calculated primarily using the straight-line method. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.
Impairment and Disposal of Long-Lived Assets
The Company evaluates long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value based on bids received from third parties, prices of similar assets or other valuation methodologies, including a discounted cash flow analysis based on market participant assumptions.
Long-lived assets to be disposed of by sale, if material, are classified as held for sale and reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of other than by sale are classified as held and used until they are disposed of and reported at the lower of carrying amount or fair value, and depreciation is recognized over the remaining useful life of the assets.
Goodwill and Other Intangible Assets
The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the reporting unit level annually during the fourth quarter, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial qualitative assessment identifies that it is more likely than not that the fair value of a reporting unit is less than its carrying value, additional quantitative testing is performed. The Company may also elect to skip the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, an impairment charge is recognized based on the difference between the reporting unit's carrying value and its fair value. The Company primarily utilizes a discounted cash flow methodology to calculate the fair value of its reporting units.
Finite-lived intangible assets such as purchased customer lists, developed technology, patents, trademarks and software, are amortized over their estimated useful lives, generally on a straight-line basis for periods ranging primarily from 3 to 20 years, or amortized based on units of production. Indefinite-lived intangible assets are reviewed for impairment or obsolescence annually, or more frequently when events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows.
Investments
Investments in debt securities, primarily held by the Company’s insurance operations, are classified as trading, available-for-sale or held-to-maturity. Investments classified as trading are reported at fair value with unrealized gains and losses related to mark-to-market adjustments included in income. Those classified as available-for-sale are reported at fair value with unrealized gains and losses recorded in AOCL. Those classified as held-to-maturity are recorded at amortized cost. The cost of investments sold is determined by FIFO or specific identification.
Investments in equity securities, primarily held by the Company’s insurance operations, with a readily determinable fair value are reported at fair value with unrealized gains and losses related to mark-to-market adjustments included in income. Equity securities without a readily determinable fair value are accounted for at cost, adjusted for impairments and observable price changes in orderly transactions.
The Company routinely reviews its investments for declines in fair value below the cost basis. When events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the security is written down to fair value, establishing a new cost basis.
Revenue
Effective with the January 1, 2018 adoption of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," and the associated ASUs (collectively, "Topic 606"), the Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of Topic 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in
the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 4 for additional information.
Revenue related to the Company's insurance operations includes third-party insurance premiums, which are earned over the terms of the related insurance policies and reinsurance contracts.
In periods prior to the adoption of Topic 606, the Company's accounting policy was to recognize revenue when it was realized or realizable, and the earnings process was complete. Revenue for product sales was recognized as risk and title to the product transferred to the customer, which usually occurred at the time shipment was made. As such, title to the product passed when the product was delivered to the freight carrier. The Company’s standard terms of delivery were included in its contracts of sale, order confirmation documents and invoices. Revenue related to the initial licensing of patent and technology was recognized when earned; revenue related to running royalties was recognized according to licensee production levels.
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.
Severance Costs
The Company routinely reviews its operations around the world in an effort to ensure competitiveness across its businesses and geographic regions. When the reviews result in a workforce reduction related to the shutdown of facilities or other optimization activities, severance benefits are provided to employees primarily under Historical Dow and Historical DuPont's ongoing benefit arrangements. These severance costs are accrued once management commits to a plan of termination and it becomes probable that employees will be entitled to benefits at amounts that can be reasonably estimated.
Integration and Separation Costs
The Company classifies expenses related to the Merger and the ownership restructure of Dow Silicones as "Integration and separation costs" in the consolidated statements of income. Merger-related costs include: costs incurred to prepare for and close the Merger, post-Merger integration expenses and costs incurred to prepare for the intended separation of the Company’s agriculture, materials science and specialty products businesses. The Dow Silicones-related costs include costs incurred to prepare for and close the ownership restructure, as well as integration expenses. These costs primarily consist of financial advisory, information technology, legal, accounting, consulting and other professional advisory fees associated with preparation and execution of these activities.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted tax rates. The effect of a change in tax rates on deferred tax assets or liabilities is recognized in income in the period that includes the enactment date. The Company uses the portfolio approach for releasing income tax effects from AOCL.
The Company recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company accrues for other tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. The current portion of uncertain income tax positions is included in “Income taxes payable” and the long-term portion is included in “Other noncurrent obligations” in the consolidated balance sheets.
See Note 8 for further information relating to the enactment of the Tax Cuts and Jobs Act ("The Act").
Earnings per Common Share
The calculation of earnings per common share is based on the weighted-average number of the Company’s common shares outstanding for the applicable period. The calculation of diluted earnings per common share reflects the effect of all potential common shares that were outstanding during the respective periods, unless the effect of doing so is antidilutive.
Changes to Prior Period Consolidated Financial Statements
In the first quarter of 2018, the Company adopted new accounting standards that required retrospective application. The Company updated the consolidated statements of income as a result of adopting ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The consolidated statements of cash flows were updated as a result of adopting ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" and ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." See Note 2 for additional information on the ASUs. In the third quarter of 2018, the U.S. Securities and Exchange Commission's ("SEC') Office of the Chief Accountant provided additional guidance related to ASU 2016-15 that indicated an entity must evaluate daily transaction activity to calculate the value of cash received from beneficial interests in conduits, resulting in additional retrospective updates to the consolidated statements of cash flows.
Changes to the consolidated financial statements as a result of the retrospective application of the new accounting standards are summarized as follows:
| Summary of Changes to the Consolidated Statements of Income | 2017 | 2016 | ||||||||||
| In millions | As Filed | Updated 1 | As Filed | Updated 1 | ||||||||
| Cost of sales | $ | 50,414 | $ | 49,791 | $ | 37,640 | $ | 37,668 | ||||
| Research and development expenses | $ | 2,110 | $ | 2,141 | $ | 1,584 | $ | 1,593 | ||||
| Selling, general and administrative expenses | $ | 4,021 | $ | 4,064 | $ | 2,956 | $ | 2,953 | ||||
| Sundry income (expense) - net | $ | 966 | $ | 417 | $ | 1,452 | $ | 1,486 |
- Reflects changes resulting from the adoption of ASU 2017-07. See Note 2 for additional information.
| Summary of Changes to the Consolidated Statements of Cash Flows | 2017 | 2016 | ||||||||||
| In millions | As Filed | Updated 1 | As Filed | Updated 1 | ||||||||
| Operating Activities | ||||||||||||
| Accounts and notes receivable | $ | (2,589 | ) | $ | (9,782 | ) | $ | (1,539 | ) | $ | (8,833 | ) |
| Proceeds from interests in trade accounts receivable conduits | $ | 2,269 | $ | — | $ | 1,257 | $ | — | ||||
| Other assets and liabilities, net | $ | 1,563 | $ | 1,565 | $ | (717 | ) | $ | (723 | ) | ||
| Cash provided by (used for) operating activities | $ | 8,695 | $ | (765 | ) | $ | 5,600 | $ | (2,957 | ) | ||
| Investing Activities | ||||||||||||
| Payment into escrow / trust accounts | $ | (701 | ) | $ | — | $ | (835 | ) | $ | — | ||
| Distribution from escrow / trust accounts | $ | 143 | $ | — | $ | 835 | $ | — | ||||
| Acquisitions of property and businesses, net of cash acquired | $ | 19 | $ | 50 | $ | (187 | ) | $ | (187 | ) | ||
| Cash acquired in step acquisition of nonconsolidated affiliate | $ | — | $ | — | $ | 1,050 | $ | 1,070 | ||||
| Proceeds from interests in trade accounts receivable conduits | $ | — | $ | 9,462 | $ | — | $ | 8,551 | ||||
| Cash provided by (used for) investing activities | $ | 4,274 | $ | 14,325 | $ | (3,479 | ) | $ | 5,092 | |||
| Financing Activities | ||||||||||||
| Other financing activities, net | $ | (1 | ) | $ | (32 | ) | $ | (2 | ) | $ | (2 | ) |
| Cash used for financing activities | $ | (6,523 | ) | $ | (6,554 | ) | $ | (4,014 | ) | $ | (4,014 | ) |
| Summary | ||||||||||||
| Increase (Decrease) in cash, cash equivalents and restricted cash | $ | 6,831 | $ | 7,391 | $ | (1,970 | ) | $ | (1,956 | ) | ||
| Cash, cash equivalents and restricted cash at beginning of period | $ | 6,607 | $ | 6,624 | $ | 8,577 | $ | 8,580 | ||||
| Cash, cash equivalents and restricted cash at end of period | $ | 13,438 | $ | 14,015 | $ | 6,607 | $ | 6,624 |
| 1. | Reflects the adoption of ASU 2016-15 and ASU 2016-18. In connection with the review and implementation of ASU 2016-15, the Company also changed the value of “Proceeds from interests in trade accounts receivable conduits” due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits, including additional guidance from the SEC's Office of the Chief Accountant issued in the third quarter of 2018. |
Opening Balance Sheet Impact of Accounting Standards Adoption
In the first quarter of 2018, the Company adopted Topic 606, ASU 2016-01 and ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." See Note 2 for additional information on these ASUs. The cumulative effect on the Company's January 1, 2018, consolidated balance sheet as a result of adopting these accounting standards is summarized in the following table:
| Summary of Impacts to the Consolidated Balance Sheet | Dec 31, 2017 | Adjustments due to: | Jan 1, 2018 | ||||||||||||
| In millions | As Filed | Topic 606 | ASU 2016-01 | ASU 2016-16 | Updated | ||||||||||
| Assets | |||||||||||||||
| Accounts and notes receivable - Trade | $ | 11,314 | $ | 87 | $ | — | $ | — | $ | 11,401 | |||||
| Accounts and notes receivable - Other | $ | 5,579 | $ | (8 | ) | $ | — | $ | — | $ | 5,571 | ||||
| Inventories | $ | 16,992 | $ | (64 | ) | $ | — | $ | — | $ | 16,928 | ||||
| Other current assets | $ | 1,614 | $ | 130 | $ | — | $ | 31 | $ | 1,775 | |||||
| Total current assets | $ | 49,893 | $ | 145 | $ | — | $ | 31 | $ | 50,069 | |||||
| Deferred income tax assets | $ | 1,869 | $ | 26 | $ | — | $ | 10 | $ | 1,905 | |||||
| Deferred charges and other assets | $ | 2,774 | $ | 43 | $ | — | $ | — | $ | 2,817 | |||||
| Total other assets | $ | 97,444 | $ | 69 | $ | — | $ | 10 | $ | 97,523 | |||||
| Total Assets | $ | 192,164 | $ | 214 | $ | — | $ | 41 | $ | 192,419 | |||||
| Liabilities | |||||||||||||||
| Accounts payable - Trade | $ | 9,134 | $ | (3 | ) | $ | — | $ | — | $ | 9,131 | ||||
| Accounts payable - Other | $ | 3,727 | $ | 10 | $ | — | $ | — | $ | 3,737 | |||||
| Income taxes payable | $ | 843 | $ | (2 | ) | $ | — | $ | — | $ | 841 | ||||
| Accrued and other current liabilities | $ | 8,409 | $ | 171 | $ | — | $ | — | $ | 8,580 | |||||
| Total current liabilities | $ | 26,128 | $ | 176 | $ | — | $ | — | $ | 26,304 | |||||
| Deferred income tax liabilities | $ | 6,266 | $ | 3 | $ | — | $ | — | $ | 6,269 | |||||
| Other noncurrent obligations | $ | 7,969 | $ | 117 | $ | — | $ | — | $ | 8,086 | |||||
| Total other noncurrent liabilities | $ | 34,053 | $ | 120 | $ | — | $ | — | $ | 34,173 | |||||
| Stockholders' Equity | |||||||||||||||
| Retained earnings | $ | 29,211 | $ | (82 | ) | $ | (20 | ) | $ | 41 | $ | 29,150 | |||
| Accumulated other comprehensive loss | $ | (8,972 | ) | $ | — | $ | 20 | $ | — | $ | (8,952 | ) | |||
| DowDuPont's stockholders' equity | $ | 100,330 | $ | (82 | ) | $ | — | $ | 41 | $ | 100,289 | ||||
| Total equity | $ | 101,927 | $ | (82 | ) | $ | — | $ | 41 | $ | 101,886 | ||||
| Total Liabilities and Equity | $ | 192,164 | $ | 214 | $ | — | $ | 41 | $ | 192,419 |
The most significant changes as a result of adopting Topic 606 relate to the reclassification of the Company's return assets and refund liabilities in the Agriculture segment in the consolidated balance sheets. Under previous guidance, the Company accrued the amount of expected product returns as a reduction of "Accounts and notes receivable - Trade" with the value associated with the expected returns recorded in "Inventories" in the consolidated balance sheets. Under Topic 606, the Company now records the amount of expected product returns as refund liabilities, included in "Accrued and other current liabilities" and the products expected to be recovered as return assets, included in "Other current assets" in the consolidated balance sheets. The reclassifications of return assets and refund liabilities were $61 million and $119 million, respectively, at January 1, 2018. In addition, deferred revenue, included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets, increased as certain performance obligations, which were previously recognized over time and related to the licensing of certain rights to patents and technology, as well as other performance obligations, are now recognized at a point in time as none of the three criteria for 'over time' recognition under Topic 606 are met.
In the second quarter of 2018, the Company early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This standard was adopted on April 1, 2018, and resulted in a $1,057 million increase to retained earnings due to the reclassification from accumulated other comprehensive loss. The reclassification was primarily related to the change in the federal corporate tax rate and the effect of The Act on the Company's pension plans, derivative instruments, available-for-sale securities and cumulative translation adjustments. This reclassification is reflected in the "Adoption of accounting standards" line in the consolidated statements of equity. See Note 2 for additional information.
Current Period Impact of Topic 606
The following table summarizes the effects of adopting Topic 606 on the Company's consolidated balance sheets, which was applied prospectively to contracts not completed at January 1, 2018. The effects of adopting Topic 606 did not have a material impact on the consolidated statements of income and the consolidated statements of cash flows.
| Summary of Impacts to the Consolidated Balance Sheets | As Reported at Dec 31, 2018 | Adjustments | Balance at Dec 31, 2018 Excluding Adoption of Topic 606 | ||||||
| In millions | |||||||||
| Assets | |||||||||
| Accounts and notes receivable - Trade | $ | 12,376 | $ | (81 | ) | $ | 12,295 | ||
| Accounts and notes receivable - Other | $ | 4,963 | $ | 41 | $ | 5,004 | |||
| Inventories | $ | 16,621 | $ | 38 | $ | 16,659 | |||
| Other current assets | $ | 2,027 | $ | (96 | ) | $ | 1,931 | ||
| Total current assets | $ | 49,603 | $ | (98 | ) | $ | 49,505 | ||
| Deferred income tax assets | $ | 1,724 | $ | (27 | ) | $ | 1,697 | ||
| Deferred charges and other assets | $ | 2,476 | $ | (43 | ) | $ | 2,433 | ||
| Total other assets | $ | 94,197 | $ | (70 | ) | $ | 94,127 | ||
| Total Assets | $ | 188,030 | $ | (168 | ) | $ | 187,862 | ||
| Liabilities | |||||||||
| Accounts payable - Other | $ | 3,656 | $ | (10 | ) | $ | 3,646 | ||
| Income taxes payable | $ | 857 | $ | 2 | $ | 859 | |||
| Accrued and other current liabilities | $ | 7,943 | $ | (95 | ) | $ | 7,848 | ||
| Total current liabilities | $ | 24,715 | $ | (103 | ) | $ | 24,612 | ||
| Deferred income tax liabilities | $ | 5,435 | $ | (3 | ) | $ | 5,432 | ||
| Other noncurrent obligations | $ | 6,988 | $ | (140 | ) | $ | 6,848 | ||
| Total other noncurrent liabilities | $ | 29,474 | $ | (143 | ) | $ | 29,331 | ||
| Stockholders' Equity | |||||||||
| Retained earnings | $ | 30,536 | $ | 78 | $ | 30,614 | |||
| DowDuPont's stockholders' equity | $ | 94,571 | $ | 78 | $ | 94,649 | |||
| Total equity | $ | 96,179 | $ | 78 | $ | 96,257 | |||
| Total Liabilities and Equity | $ | 188,030 | $ | (168 | ) | $ | 187,862 |
NOTE 2 - RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In the fourth quarter of 2018, the Company early adopted ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans," which, as part of the Financial Accounting Standards Board ("FASB") disclosure framework project, removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of certain disclosures and adds new disclosure requirements that are considered relevant for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The new standard is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The new guidance should be applied on a retrospective basis for all periods presented. See Note 19 for updated disclosures for defined benefit pension and other postretirement benefit plans.
In the second quarter of 2018, the Company early adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends the hedge accounting recognition and presentation under Topic 815, with the objectives of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities and simplifying the application of hedge accounting by preparers. The new standard expands the strategies eligible for hedge accounting, relaxes the timing requirements of hedge documentation and effectiveness assessments, and permits, in certain cases, the use of qualitative assessments on an ongoing basis to assess hedge effectiveness. The new guidance also requires new disclosures and presentation. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted in any interim or annual period after issuance of the ASU. Entities must adopt the new guidance by applying a modified retrospective approach to hedging relationships
existing as of the adoption date. The adoption of the new guidance did not have a material impact on the consolidated financial statements.
In the second quarter of 2018, the Company early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from The Act, which was enacted on December 22, 2017, and requires certain disclosures about stranded tax effects. An entity has the option of applying the new guidance at the beginning of the period of adoption or retrospectively to each period (or periods) in which the tax effects related to items remaining in accumulated other comprehensive income are recognized. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period for reporting periods for which financial statements have not yet been issued. The Company's adoption of the new standard was applied prospectively at the beginning of the second quarter of 2018, with a reclassification of the stranded tax effects as a result of The Act from accumulated other comprehensive loss to retained earnings. See Note 1 for additional information.
In the first quarter of 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition," and most industry specific guidance. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In 2015 and 2016, the FASB issued additional ASUs related to Topic 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance obligations, and accounting for licenses, and included other improvements and practical expedients. The new guidance was effective for annual and interim periods beginning after December 15, 2017. The Company elected to adopt the new guidance using the modified retrospective transition method for all contracts not completed as of the date of adoption. The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of the first quarter of 2018. The comparative periods have not been restated and continue to be accounted for under Topic 605. The adoption of the new guidance did not have a material impact on the consolidated financial statements. See Notes 1 and 4 for additional disclosures regarding the Company's contracts with customers as well as the impact of adopting Topic 606.
In the first quarter of 2018, the Company adopted ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company applied the amendments in the new guidance by means of a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the first quarter of 2018. The adoption of the new guidance did not have a material impact on the consolidated financial statements. See Notes 1 and 21 for additional information.
In the first quarter of 2018, the Company adopted ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statements of cash flows and addresses eight specific cash flow issues. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A key provision in the new guidance impacted the presentation of proceeds from interests in certain trade accounts receivable conduits, which were retrospectively reclassified from "Operating Activities" to "Investing Activities" in the consolidated statements of cash flows. See Note 1 for additional information.
In the first quarter of 2018, the Company adopted ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The new guidance was applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the first quarter of 2018. The adoption of this guidance did not have a material impact on the consolidated financial statements. See Note 1 for additional information.
In the first quarter of 2018, the Company adopted ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which clarifies how entities should present restricted cash and restricted cash equivalents in the statements of cash flows, and as a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statements of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose
information about the nature of the restrictions. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The new guidance changed the presentation of restricted cash in the consolidated statements of cash flows and was implemented on a retrospective basis in the first quarter of 2018. See Notes 1 and 7 for additional information.
In the first quarter of 2018, the Company adopted ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance requires an entity to evaluate if substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively the "set") is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs, as defined by the ASU. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied prospectively. The Company will apply the new guidance to all applicable transactions after the adoption date.
In the first quarter of 2018, the Company adopted ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost must be presented separately from the line items that includes the service cost. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Entities were required to use a retrospective transition method to adopt the requirement for separate income statement presentation of the service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. Accordingly, in the first quarter of 2018, the Company used a retrospective transition method to reclassify net periodic benefit cost, other than the service component, from "Cost of sales," "Research and development expenses" and "Selling, general and administrative expenses" to "Sundry income (expense) - net" in the consolidated statements of income. See Note 1 and 7 for additional information.
Accounting Guidance Issued But Not Adopted at December 31, 2018
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," and associated ASUs related to Topic 842, which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognize assets and liabilities for leases, and recognition, presentation and measurement in the financial statements will depend on its classification as a finance or operating lease. In addition, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. Lessor accounting remains largely unchanged from current U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014 (Topic 606). The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted.
The Company has a cross-functional team in place to evaluate and implement the new guidance and the Company has substantially completed the implementation of third-party software solutions to facilitate compliance with accounting and reporting requirements. The team continues to review existing lease arrangements and has collected and loaded a significant portion of the lease portfolio into the software. The Company continues to enhance accounting systems and update business processes and controls related to the new guidance for leases. Collectively, these activities are expected to facilitate the Company's ability to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019.
The ASU requires a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial adoption. An entity may choose to use either (1) the effective date or (2) the beginning of the earliest comparative period presented in the financial statements at the date of initial application. The Company has elected to apply the transition requirements at the January 1, 2019, effective date rather than at the beginning of the earliest comparative period presented. This approach allows for a cumulative effect adjustment in the period of adoption, and prior periods will not be restated. In addition, the Company has elected the package of practical expedients permitted under the transition guidance, which does not require reassessment of prior conclusions related to contracts containing a lease, lease classification and initial direct lease costs. As an accounting policy election, the Company will exclude short-term leases (term of 12 months or less) from the balance sheet presentation and will account for non-lease and lease components in a contract as a single lease component for most asset classes. The Company is finalizing the evaluation of the January 1, 2019, impact and estimates a material increase of lease-related assets and liabilities,
ranging from $3.0 billion to $3.6 billion in the consolidated balance sheets. The impact to the Company's consolidated statements of income and consolidated statements of cash flows is not expected to be material.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which is part of the FASB disclosure framework project to improve the effectiveness of disclosures in the notes to the financial statements. The amendments in the new guidance remove, modify and add certain disclosure requirements related to fair value measurements covered in Topic 820, "Fair Value Measurement." The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for either the entire standard or only the requirements that modify or eliminate the disclosure requirements, with certain requirements applied prospectively, and all other requirements applied retrospectively to all periods presented. The Company is currently evaluating the impact of adopting this guidance.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract," which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Topic 350, "Intangibles - Goodwill and Other" to determine which implementation costs to capitalize as assets or expense as incurred. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and an entity can elect to apply the new guidance on a prospective or retrospective basis. The Company is currently evaluating the impact of adopting this guidance.
NOTE 3 - BUSINESS COMBINATIONS
Merger of Equals of Historical Dow and Historical DuPont
At the effective time of the Merger, each share of common stock, par value $2.50 per share, of Historical Dow ("Historical Dow Common Stock") (excluding any shares of Historical Dow Common Stock that were held in treasury immediately prior to the effective time of the Merger, which were automatically canceled and retired for no consideration) was converted into the right to receive one fully paid and non-assessable share of common stock, par value $0.01 per share, of DowDuPont ("DowDuPont Common Stock"). Upon completion of the Merger, (i) each share of common stock, par value $0.30 per share, of Historical DuPont (“Historical DuPont Common Stock”) (excluding any shares of Historical DuPont Common Stock that were held in treasury immediately prior to the effective time of the Merger, which were automatically canceled and retired for no consideration) was converted into the right to receive 1.2820 fully paid and non-assessable shares of DowDuPont Common Stock, in addition to cash in lieu of any fractional shares of DowDuPont Common Stock, and (ii) each share of Historical DuPont Preferred Stock $4.50 Series and Historical DuPont Preferred Stock $3.50 Series (collectively, the “Historical DuPont Preferred Stock”) issued and outstanding immediately prior to the effective time of the Merger remains issued and outstanding and was unaffected by the Merger.
As provided in the Merger Agreement, at the effective time of the Merger, Historical Dow stock options and other equity awards were generally automatically converted into stock options and equity awards with respect to DowDuPont Common Stock and Historical DuPont stock options and other equity awards, after giving effect to the exchange ratio, were converted into stock options and equity awards with respect to DowDuPont Common Stock, and otherwise generally on the same terms and conditions under the applicable plans and award agreements immediately prior to the effective time of the Merger. See Notes 17 and 20 for additional information.
DowDuPont intends to pursue the Intended Business Separations, subject to certain customary conditions, including, among others, the effectiveness of registration statements filed with the SEC and approval by the Board of Directors ("Board") of DowDuPont.
Allocation of Purchase Price
Based on an evaluation of the provisions of Accounting Standards Codification ("ASC") 805, "Business Combinations" ("ASC 805"), Historical Dow was determined to be the accounting acquirer in the Merger. DowDuPont applied the acquisition method of accounting with respect to the assets and liabilities of DuPont, which were measured at fair value as of the date of the Merger.
Historical DuPont's assets and liabilities were measured at estimated fair values at August 31, 2017, primarily using Level 3 inputs. Estimates of fair value represent management's best estimate and require a complex series of judgments about future events and uncertainties. Third-party valuation specialists were engaged to assist in the valuation of these assets and liabilities.
The total fair value of consideration transferred for the Merger was $74,680 million. Total consideration is comprised of the equity value of the DowDuPont shares at August 31, 2017, that were issued in exchange for Historical DuPont shares, the cash value for fractional shares, and the portion of Historical DuPont's share awards and share options earned at August 31, 2017. Share awards
and share options converted to DowDuPont equity instruments, but not vested, were $144 million at August 31, 2017, which will be expensed over the remaining future vesting period.
The following table summarizes the fair value of consideration exchanged as a result of the Merger:
| Merger Consideration | |||
| In millions (except exchange ratio) | |||
| Historical DuPont Common Stock outstanding at Aug 31, 2017 | 868.3 | ||
| Historical DuPont exchange ratio | 1.2820 | ||
| DowDuPont Common Stock issued in exchange for Historical DuPont Common Stock | 1,113.2 | ||
| Fair value of DowDuPont Common Stock issued 1 | $ | 74,195 | |
| Fair value of DowDuPont equity awards issued in exchange for outstanding Historical DuPont equity awards 2 | 485 | ||
| Total consideration | $ | 74,680 |
| 1. | Amount was determined based on the price per share of Historical Dow Common Stock of $66.65 on August 31, 2017. |
| 2. | Represents the fair value of replacement awards issued for Historical DuPont's equity awards outstanding immediately before the Merger and attributable to the service periods prior to the Merger. The previous Historical DuPont equity awards were converted into the right to receive 1.2820 shares of DowDuPont Common Stock. |
The acquisition method of accounting requires, among other things, that identifiable assets acquired and liabilities assumed be recognized on the balance sheet at their respective fair value as of the acquisition date. In determining the fair value, DowDuPont utilized various forms of the income, cost and market approaches depending on the asset or liability being fair valued. The estimation of fair value required significant judgments related to future net cash flows (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), discount rates reflecting the risk inherent in each cash flow stream, competitive trends, market comparables and other factors. Inputs were generally determined by taking into account historical data, supplemented by current and anticipated market conditions, and growth rates.
The table below presents the final fair value that was allocated to Historical DuPont's assets and liabilities based upon fair values as determined by DowDuPont. The valuation process to determine the fair values is complete. For the year ended December 31, 2018, DowDuPont made measurement period adjustments to reflect facts and circumstances in existence as of the effective time of the Merger. These adjustments primarily included a $392 million increase in goodwill, a $257 million decrease in property, and a $150 million decrease in indefinite-lived trademarks and trade names and customer-related assets.
| Historical DuPont Assets Acquired and Liabilities Assumed on Aug 31, 2017 | Final fair value | ||
| In millions | |||
| Fair Value of Assets Acquired | |||
| Cash and cash equivalents | $ | 4,005 | |
| Marketable securities | 2,849 | ||
| Accounts and notes receivable - Trade | 6,199 | ||
| Accounts and notes receivable - Other | 1,635 | ||
| Inventories | 8,805 | ||
| Other current assets | 420 | ||
| Assets held for sale | 3,732 | ||
| Investment in nonconsolidated affiliates | 1,596 | ||
| Other investments | 50 | ||
| Noncurrent receivables | 84 | ||
| Property | 11,684 | ||
| Goodwill | 45,497 | ||
| Other intangible assets | 27,071 | ||
| Deferred income tax assets | 279 | ||
| Deferred charges and other assets | 1,932 | ||
| Total Assets | $ | 115,838 | |
| Fair Value of Liabilities Assumed | |||
| Notes payable | $ | 4,046 | |
| Long-term debt due within one year | 1,273 | ||
| Accounts payable - Trade | 2,346 | ||
| Accounts payable - Other | 952 | ||
| Income taxes payable | 261 | ||
| Accrued and other current liabilities | 3,517 | ||
| Liabilities held for sale | 125 | ||
| Long-Term Debt | 9,878 | ||
| Deferred income tax liabilities | 8,259 | ||
| Pension and other postretirement benefits - noncurrent | 8,056 | ||
| Other noncurrent obligations | 1,967 | ||
| Total Liabilities | $ | 40,680 | |
| Noncontrolling interests | 478 | ||
| Net Assets (Consideration for the Merger) | $ | 74,680 |
The significant fair value adjustments included in the allocation of purchase price are discussed below.
Inventories
Acquired inventory is comprised of finished goods of $4,927 million, work in process of $3,055 million and raw materials and supplies of $823 million. The fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort. The fair value of work in process inventory was primarily calculated as the estimated selling price, adjusted for estimated costs to complete the manufacturing, estimated costs of the selling effort, as well as a reasonable profit margin on the remaining manufacturing and selling effort. The fair value of raw materials and supplies was determined to approximate the historical carrying value. For inventory accounted for under the FIFO method and average cost method, the fair value step-up of inventories will be recognized in "Cost of sales" as the inventory is sold. For inventory accounted for under the LIFO method, the acquired inventory becomes the LIFO base layer inventory. The pretax amounts of inventory step-up recognized for the year ended December 31, 2018 and the period ended December 31, 2017, were $1,563 million and $1,538 million, respectively. For the year ended December 31, 2018, the pretax amount is reflected within "Cost of sales" within "Income from continuing operations before income taxes." For the period ended December 31, 2017, $1,434 million was reflected within "Cost of sales" within "Income from continuing operations before income taxes" and $104 million was reflected in "Loss from discontinued operations, net of tax" in the consolidated statements of income.
Property
Property, plant and equipment is comprised of machinery and equipment of $7,344 million, buildings of $2,418 million, construction in progress of $995 million and land and land improvements of $927 million. The fair value was primarily determined using a market approach for land and certain types of equipment, and a replacement cost approach for property, plant and equipment. The market approach for certain types of equipment represents a sales comparison that measures the value of an asset through an analysis of sales and offerings of comparable assets. The replacement cost approach used for all other depreciable property, plant and equipment measures the value of an asset by estimating the cost to acquire or construct comparable assets and adjusts for age and condition of the asset.
Goodwill
The excess of the consideration for the Merger over the net fair value of assets and liabilities acquired was recorded as goodwill. The Merger resulted in the recognition of $45,497 million of goodwill, which is not deductible for tax purposes. Goodwill largely consists of expected cost synergies resulting from the Merger and the Intended Business Separations, the assembled workforce of Historical DuPont and future technology and customers.
Other Intangible Assets
Other intangible assets primarily consist of acquired customer-related assets, developed technology, trademarks/trade names and germplasm. The customer-related value was determined using the excess earnings method while the developed technology, trademarks/trade names and germplasm values were primarily determined utilizing the relief from royalty method. Both the excess earnings and relief from royalty methods are forms of the income approach. See Note 13 for further information on other intangible assets.
Deferred Income Tax Assets and Liabilities
The deferred income tax assets and liabilities include the expected future federal, state and foreign tax consequences associated with temporary differences between the fair values of the assets acquired and liabilities assumed and the respective tax bases. Tax rates utilized in calculating deferred income taxes generally represent the enacted statutory tax rates at the effective date of the Merger in the jurisdictions in which legal title of the underlying asset or liability resides. See Note 8 for further information related to the remeasurement of deferred income tax assets and liabilities as a result of the enactment of The Act.
Deferred income tax assets includes a $172 million adjustment to derecognize certain deferred income tax assets on historical net operating losses that will not be fully realized as a result of the Merger. Deferred income tax liabilities include a $546 million adjustment reflecting a change in determination as to the reinvestment strategy of certain foreign operations of Historical DuPont.
Pension and Other Postretirement Liabilities
DowDuPont recognized a pretax net liability of $8,413 million, representing the unfunded portion of Historical DuPont’s defined-benefit pension and other postretirement benefit ("OPEB") plans. Historical Dow and Historical DuPont did not merge their pension and OPEB plans as a result of the Merger. See Note 19 for further information on pension and OPEB.
Other Assets Acquired and Liabilities Assumed
DowDuPont utilized the carrying values net of allowances to value accounts and notes receivable and accounts payable as well as other current assets and liabilities as it was determined that carrying values represented the fair value of those items at the Merger date.
The following table provides "Net sales" and "Loss from continuing operations before income taxes" of Historical DuPont included in the Company's results for the period September 1 through December 31, 2017. Included in the results from Historical DuPont was $180 million of "Restructuring, goodwill impairment and asset related charges - net" (see Note 6 for additional information), $1,434 million that was recognized in "Cost of sales" as inventory was sold related to the fair value step-up of inventories and $314 million of "Integration and separation costs" in the consolidated statements of income.
| Historical DuPont Results of Operations | Sep 1 - | ||
| In millions | Dec 31, 2017 | ||
| Net sales | $ | 7,033 | |
| Loss from continuing operations before income taxes | $ | (1,578 | ) |
Unaudited Supplemental Pro Forma Information
The DowDuPont unaudited pro forma results presented below were prepared pursuant to the requirements of ASC 805 and give effect to the Merger as if it had been consummated on January 1, 2016. The pro forma results have been prepared for comparative purposes only and do not necessarily represent what the revenue or results of operations would have been had the Merger been completed on January 1, 2016. In addition, these results are not intended to be a projection of future operating results and do not reflect synergies that might be achieved from DowDuPont.
The pro forma results include adjustments for the purchase accounting impact (including, but not limited to, depreciation and amortization associated with the acquired tangible and intangible assets, amortization of the fair value adjustment to investment in nonconsolidated affiliates, and reduction of interest expense related to the fair value adjustment to long-term debt, along with the related tax impacts), the alignment of accounting policies, and the elimination of transactions between Historical Dow and Historical DuPont. Other adjustments were reflected in the pro forma results as follows:
| • | From January 1, 2016 through December 31, 2017, Historical Dow and Historical DuPont collectively incurred $455 million of after tax costs ($553 million pretax) to prepare for and close the Merger. These Merger costs were reflected within the results of operations in the pro forma results presented below as if they were incurred on January 1, 2016. The costs incurred related to integration and to prepare for the Intended Business Separations were reflected in the pro forma results in the period in which they were incurred. |
| • | The Company incurred an after tax charge of $931 million ($1,113 million pretax) in 2017 related to the fair value step‑up of inventories acquired and sold, excluding the acquired inventory related to Historical DuPont's Seed business. The 2017 pro forma results were adjusted to exclude this charge. The pro forma results for 2016 were adjusted to include this charge, as well as estimated charges of $60 million after tax ($69 million pretax) related to the remaining fair value step-up of inventories to be sold, excluding acquired inventory related to Historical DuPont's Seed business. |
| • | To align with seasonality, charges related to the fair value step-up of acquired inventory related to Historical DuPont’s Seed business were reflected in the pro forma results based on actual quantity of units sold during those periods as if the fair value step‑up of inventories had occurred on January 1, 2016. Accordingly, $300 million of after tax charges ($431 million pretax) for the year ended December 31, 2017 and $1,222 million of after tax charges ($1,667 million pretax) for the year ended December 31, 2016, were reflected in the pro forma results. |
| • | The pro forma results for the year ended December 31, 2016 were adjusted to include charges related to change in control provisions within a U.S. non-qualified pension plan for Historical Dow and within other certain employee agreements as if they were incurred on January 1, 2016. The majority of which related to charges for the payment of pension plan obligations of $594 million after tax ($892 million pretax) recorded in the fourth quarter of 2017. See Note 19 for further information. |
| • | The 2017 pro forma results were adjusted to exclude a $170 million after tax charge incurred in September 2017 related to the impact of changes in tax attributes. The pro forma results for the year ended December 31, 2016, were adjusted to include this charge as if it were incurred on January 1, 2016. |
The unaudited pro forma results for all periods presented below exclude the results of operations of the Historical DuPont Divested Ag Business, as defined in the "Acquisition of H&N Business" section below, as this divestiture was reflected as discontinued operations. The Historical Dow global Ethylene Acrylic Acid copolymers and ionomers business ("EAA Business"), through August 31, 2017, and a portion of Historical Dow Agrosciences’ Brazil corn seed business ("DAS Divested Ag Business") divestitures are included in the results from continuing operations in the unaudited pro forma results presented below, for all periods presented, as these divestitures did not qualify for discontinued operations.
| DowDuPont Pro Forma Results of Operations | 2017 | 2016 | ||||
| In millions (except share amounts) | ||||||
| Net sales | $ | 79,686 | $ | 71,321 | ||
| Income from continuing operations, net of tax | $ | 4,677 | $ | 2,341 | ||
| Earnings per common share from continuing operations - basic | $ | 1.94 | $ | 0.84 | ||
| Earnings per common share from continuing operations - diluted | $ | 1.92 | $ | 0.83 |
Integration and Separation Costs
The Company incurred "Integration and separation costs," reflected in "Income from continuing operations before income taxes" in the consolidated statements of income, of $2,463 million, $1,101 million and $349 million for the years ended December 31, 2018, 2017 and 2016, respectively. These costs to date primarily consisted of financial advisory, information technology, legal, accounting, consulting, and other professional advisory fees associated with the preparation and execution of activities related to the Merger, post-merger integration and separation, and the ownership restructure of Dow Silicones. "Integration and separation costs" related to post-Merger integration and Intended Business Separation activities are expected to continue to be significant in 2019.
Acquisition of H&N Business
On March 31, 2017, Historical DuPont entered into a definitive agreement (the "FMC Transaction Agreement") with FMC Corporation ("FMC") for FMC to acquire the assets related to Historical DuPont's crop protection business and research and development ("R&D") organization (the "Divested Ag Business") that Historical DuPont was required to divest in order to obtain European Commission ("EC") approval of the Merger Transaction. In addition, under the FMC Transaction Agreement, Historical DuPont agreed to acquire certain assets relating to FMC’s Health and Nutrition segment, excluding its Omega-3 products (the "H&N Business") (the sale of the Divested Ag Business and acquisition of the H&N Business referred to collectively as the "FMC Transactions"). See Note 5 for further discussion of the Divested Ag Business.
On November 1, 2017, Historical DuPont completed the FMC Transactions through the acquisition of the H&N Business and the divestiture of the Divested Ag Business. The acquisition was integrated into Nutrition & Biosciences to enhance the Company’s position as a leading provider of sustainable, bio-based food ingredients and allow for expanded capabilities in the pharma excipients space. Historical DuPont accounted for the acquisition in accordance with ASC 805, which requires the assets acquired and liabilities assumed to be recognized on the balance sheet at their fair values as of the acquisition date.
The following table summarizes the fair value of consideration exchanged as a result of the FMC Transactions:
| Consideration Exchanged in FMC Transactions | |||
| In millions | |||
| Fair Value of Divested Ag Business 1 | $ | 3,665 | |
| Less: Cash received 2 | 1,200 | ||
| Less: Favorable contracts 3 | 495 | ||
| Fair Value of the H&N Business | $ | 1,970 |
| 1. | See Note 5 for additional information. |
| 2. | The FMC Transactions include a cash consideration payment to Historical DuPont of approximately $1,200 million, which reflected the difference in value between the Divested Ag Business and the H&N Business, subject to certain customary inventory and net working capital adjustments. |
| 3. | Upon closing and pursuant to the terms of the FMC Transaction Agreement, Historical DuPont entered into favorable supply contracts with FMC. Historical DuPont recorded these contracts as intangible assets recognized at the fair value of off-market contracts. See Notes 5 and 13 for additional information. |
The table below presents the fair value that was allocated to the assets acquired and liabilities assumed. The purchase accounting and purchase price allocation for the H&N Business is complete. There were no material updates to the preliminary purchase accounting and purchase price allocation during 2018.
| H&N Business Assets Acquired and Liabilities Assumed on Nov 1, 2017 | |||
| In millions | |||
| Fair Value of Assets Acquired | |||
| Cash and cash equivalents | $ | 16 | |
| Accounts and notes receivable - Trade and other | 144 | ||
| Inventories | 304 | ||
| Property | 489 | ||
| Goodwill | 732 | ||
| Other intangible assets | 435 | ||
| Other current assets, deferred charges and other non-current assets | 14 | ||
| Total Assets | $ | 2,134 | |
| Fair Value of Liabilities Assumed | |||
| Accounts payable, accrued and other current liabilities | 72 | ||
| Deferred income tax liabilities | 92 | ||
| Total Liabilities | $ | 164 | |
| Net Assets (Consideration for the H&N Business) | $ | 1,970 |
The significant fair value adjustments included in the allocation of purchase price are discussed below.
Inventories
Acquired inventory is comprised of finished goods of $143 million, work in process of $85 million, raw materials and supplies of $76 million. Fair value of inventory was calculated using a net realizable value approach for finished goods and work in process and a replacement cost approach for raw materials and supplies. For inventory accounted for under the FIFO method and average cost method, the fair value step-up of inventory of $100 million was recognized in "Costs of sales" in the consolidated statements of income as the inventory was sold. The pretax amounts recognized for the year ended December 31, 2018 and the period November 1 through December 31, 2017, was $65 million and $35 million, respectively.
Property
Property, plant and equipment is comprised of machinery and equipment of $347 million, buildings of $63 million, land and land improvements of $39 million, construction in progress of $31 million and other property of $9 million. The estimated fair values were determined using a combination of a market approach and replacement cost approach.
Goodwill
The excess of the consideration for the H&N Business over the net fair value of assets acquired and liabilities assumed resulted in the recognition of $732 million of goodwill, of which $208 million is tax-deductible. Goodwill is attributable to the H&N Business’s workforce and expected cost synergies in procurement, production and market access.
Other Intangible Assets
Other intangible assets includes acquired customer-related intangible assets of $268 million, developed technology of $130 million and trademarks/trade names of $37 million. The customer-related fair value was determined using the excess earnings method while the developed technology and trademarks/trade names fair values were primarily determined utilizing the relief from royalty method.
DowDuPont evaluated the disclosure requirements under ASC 805 and determined the H&N Business was not considered a material business combination for purposes of disclosing the revenue and earnings of the H&N Business since the date of acquisition or supplemental pro forma information.
Ownership Restructure of Dow Silicones
On June 1, 2016, Historical Dow announced the closing of the transaction with Corning Incorporated ("Corning"), Dow Silicones and HS Upstate Inc., (“Splitco”), pursuant to which Corning exchanged with Dow Silicones its 50 percent equity interest in Dow Silicones for 100 percent of the stock of Splitco which held Corning's historical proportional interest in the Hemlock Semiconductor Group ("HSC Group") and approximately $4.8 billion in cash. As a result, Dow Silicones, previously a 50:50 joint venture between Historical Dow and Corning, became a wholly owned subsidiary of Historical Dow. In connection with the ownership restructure,
on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness in order to fund the contribution of cash to Splitco. See Notes 12, 15 and 23 for additional information.
At June 1, 2016, Historical Dow's equity interest in Dow Silicones, excluding the HSC Group, was $1,968 million. This equity interest was remeasured to fair value. As a result, Historical Dow recognized a non-taxable gain of $2,445 million in the second quarter of 2016, net of closing costs and other comprehensive loss related to Historical Dow's interest in Dow Silicones. The gain was included in "Sundry income (expense) - net" in the consolidated statements of income and related to Performance Materials & Coatings ($1,617 million), Electronics & Imaging ($512 million) and Transportation & Advanced Polymers ($316 million). Historical Dow recognized a tax benefit of $141 million on the ownership restructure in the second quarter of 2016, primarily due to the reassessment of a previously recognized deferred tax liability related to the basis difference in Historical Dow’s investment in Dow Silicones. In addition, the fair value step-up of "Inventories" acquired was an increase of $317 million, which was expensed to "Cost of sales" over a three-month period beginning on June 1, 2016, and related to Performance Materials & Coatings ($213 million), Electronics & Imaging ($69 million) and Transportation & Advanced Polymers ($35 million). In 2018, Historical Dow recorded a pretax loss of $47 million for post-closing adjustments related to the Dow Silicones ownership restructure, included in "Sundry income (expense) - net" in the consolidated statements of income and related to Electronics & Imaging ($27 million) and Performance Materials & Coatings ($20 million).
The ownership restructure resulted in the recognition of $3,229 million of "Goodwill" which was not deductible for tax purposes. Goodwill largely consisted of expected synergies resulting from the ownership restructure. Cost synergies were achieved through a combination of workforce consolidation and savings from actions such as harmonizing energy contracts at large sites, optimizing warehouse and logistics footprints, implementing materials and maintenance best practices, combining information technology service structures and leveraging existing R&D knowledge management systems.
Historical Dow evaluated the disclosure requirements under ASC 805 and determined the ownership restructure was not considered a material business combination for purposes of disclosing the revenue and earnings of Dow Silicones since the date of the ownership restructure as well as supplemental pro forma information.
Beginning in June 2016, the results of Dow Silicones, excluding the HSC Group, were fully consolidated in Historical Dow’s consolidated statements of income. Prior to June 2016, Historical Dow’s 50 percent share of Dow Silicones' results of operations was reported in “Equity in earnings of nonconsolidated affiliates” in the consolidated statements of income. The results of the HSC Group continue to be treated as an equity method investment and reported as “Equity in earnings of nonconsolidated affiliates” in the consolidated statements of income.
NOTE 4 - REVENUE
Revenue Recognition
The majority of the Company's revenue is derived from product sales. In 2018, 99 percent of the Company's sales related to product sales (98 percent in 2017 and 99 percent in 2016). The remaining sales were primarily related to Historical Dow's insurance operations and licensing of patents and technologies. As of January 1, 2018, the Company accounts for revenue in accordance with Topic 606, except for revenue from Historical Dow's insurance operations, which is accounted for in accordance with Topic 944, "Financial Services - Insurance."
Product Sales
Product sales consist of sales of the Company's products to manufacturers, distributors and farmers. The Company considers order confirmations or purchase orders, which in some cases are governed by master supply agreements, to be contracts with a customer. Product sale contracts are generally short-term contracts where the time between order confirmation and satisfaction of all performance obligations is less than one year. However, the Company has some long-term contracts which can span multiple years.
Revenue from product sales is recognized when the customer obtains control of the Company’s product, which occurs at a point in time, usually upon shipment, with payment terms typically in the range of 30 to 60 days after invoicing depending on business and geographic region, with the exception of the Agriculture segment, where payment terms are generally less than one year after invoicing. The Company elected the practical expedient to not adjust the amount of consideration for the effects of a significant financing component for all instances in which the period between payment and transfer of the goods will be one year or less. When the Company performs shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to shipment), these are considered fulfillment activities, and accordingly, the costs are accrued when the related revenue is recognized. Taxes collected from customers relating to product sales and remitted to governmental authorities are
excluded from revenues. The Company elected to use the practical expedient to expense cash and non-cash sales incentives as the amortization period for the costs to obtain the contract would have been one year or less.
Certain long-term contracts include a series of distinct goods that are delivered continuously to the customer through a pipeline (e.g., feedstocks). For these types of product sales, the Company invoices the customer in an amount that directly corresponds with the value to the customer of the Company’s performance-to-date. As a result, the Company recognizes revenue based on the amount billable to the customer in accordance with the right to invoice practical expedient.
The transaction price includes estimates for reductions in revenue from customer rebates and rights of return on product sales. These amounts are estimated based upon the most likely amount of consideration to which the customer will be entitled. The Company’s obligation for rights of returns is limited primarily to the Agriculture segment. All estimates are based on historical experience, anticipated performance, and the Company’s best judgment at the time to the extent it is probable, that a significant reversal of revenue recognized will not occur. All estimates for variable consideration are reassessed periodically.
For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative standalone selling price. The standalone selling price is the observable price which depicts the price as if sold to a similar customer in similar circumstances.
Patents, Trademarks and Licenses
The Company enters into licensing arrangements in which it licenses certain rights of its patents and technology to customers. Revenue from the majority of the Company’s licenses for patents and technology is derived from sales-based royalties. The Company estimates the amount of sales-based royalties to which it expects to be entitled to based on historical sales to the customer. For the remaining revenue from licensing arrangements, payments are typically received from the Company’s licensees based on billing schedules established in each contract. Revenue is recognized by the Company when the performance obligation is satisfied.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. At December 31, 2018, the Company had remaining performance obligations related to material rights granted to customers for contract renewal options of $102 million and unfulfilled performance obligations for the licensing of technology of $407 million. The Company expects revenue to be recognized for the remaining performance obligations over the next one to six years.
The remaining performance obligations are for product sales that have expected durations of one year or less, product sales of materials delivered through a pipeline for which the Company has elected the right to invoice practical expedient, or variable consideration attributable to royalties for licenses of patents and technology. The Company has received advance payments from customers related to long-term supply agreements and royalty payments that are deferred and recognized over the life of the contract, with remaining contract terms that range up to 22 years. The Company will have rights to future consideration for revenue recognized when product is delivered to the customer. These payments are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets.
Disaggregation of Revenue
The Company disaggregates its revenue from contracts with customers by segment and business or major product line and geographic region, as the Company believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash flows. See details in the tables below:
| Net Trade Revenue by Segment and Business or Major Product Line | 2018 | ||
| In millions | |||
| Crop Protection | $ | 6,332 | |
| Seed | 7,969 | ||
| Agriculture | $ | 14,301 | |
| Coatings & Performance Monomers | $ | 3,915 | |
| Consumer Solutions | 5,660 | ||
| Performance Materials & Coatings | $ | 9,575 | |
| Industrial Solutions | $ | 4,733 | |
| Polyurethanes & CAV | 10,363 | ||
| Others | 20 | ||
| Industrial Intermediates & Infrastructure | $ | 15,116 | |
| Hydrocarbons & Energy | $ | 7,486 | |
| Packaging and Specialty Plastics | 16,610 | ||
| Packaging & Specialty Plastics | $ | 24,096 | |
| Advanced Printing | $ | 512 | |
| Display Technologies | 313 | ||
| Interconnect Solutions | 1,174 | ||
| Photovoltaic & Advanced Materials | 1,085 | ||
| Semiconductor Technologies | 1,636 | ||
| Electronics & Imaging | $ | 4,720 | |
| Industrial Biosciences | $ | 2,152 | |
| Nutrition & Health | 4,649 | ||
| Nutrition & Biosciences | $ | 6,801 | |
| Engineering Polymers | $ | 2,730 | |
| Performance Resins | 1,309 | ||
| Performance Solutions | 1,581 | ||
| Transportation & Advanced Polymers | $ | 5,620 | |
| Aramids | $ | 1,566 | |
| Construction | 1,661 | ||
| TYVEK® Enterprise | 1,211 | ||
| Water Solutions | 1,015 | ||
| Safety & Construction | $ | 5,453 | |
| Corporate | $ | 295 | |
| Total | $ | 85,977 |
| Net Trade Revenue by Geographic Region | 2018 | ||
| In millions | |||
| U.S. & Canada | $ | 32,090 | |
| EMEA 1 | 24,371 | ||
| Asia Pacific | 20,416 | ||
| Latin America | 9,100 | ||
| Total | $ | 85,977 |
| 1. | Europe, Middle East and Africa. |
Contract Balances
The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Contract liabilities include payments received in
advance of performance under the contract, and are realized when the associated revenue is recognized under the contract. "Contract liabilities - current" primarily reflects deferred revenue from prepayments in the Agriculture segment for contracts with customers where the Company receives advance payments for product to be delivered in future periods. "Contract liabilities - noncurrent" includes advance payment for product that the Company has received from customers related to long-term supply agreements and royalty payments that are deferred and recognized over the life of the contract. The Company classifies deferred revenue as current (12 months or less) or noncurrent based on the timing of when the Company expects to recognize revenue.
Revenue recognized in 2018, from amounts included in contract liabilities at the beginning of the period, was approximately $2,215 million. In 2018, the amount of contract assets reclassified to receivables as a result of the right to the transaction consideration becoming unconditional was insignificant. The Company did not recognize any asset impairment charges related to contract assets in 2018.
The following table summarizes the contract balances at December 31, 2018 and 2017:
| Contract Balances | Dec 31, 2018 | Topic 606 Adjustments Jan 1, 2018 | Dec 31, 2017 | ||||||
| In millions | |||||||||
| Accounts and notes receivable - Trade | $ | 12,376 | $ | 87 | $ | 11,314 | |||
| Contract assets - current 1 | $ | 85 | $ | 58 | $ | — | |||
| Contract assets - noncurrent 2 | $ | 47 | $ | 43 | $ | — | |||
| Contract liabilities - current 3 | $ | 2,092 | $ | 52 | $ | 2,131 | |||
| Contract liabilities - noncurrent 4 | $ | 1,420 | $ | 117 | $ | 1,413 |
| 1. | Included in "Other current assets" in the consolidated balance sheets. |
| 2. | Included in "Deferred charges and other assets" in the consolidated balance sheets. |
| 3. | Included in "Accrued and other current liabilities" in the consolidated balance sheets. |
| 4. | Included in "Other noncurrent obligations" in the consolidated balance sheets. |
NOTE 5 - DIVESTITURES
Merger Related Divestitures
As a condition of the European Commission ("EC"), Chinese Ministry of Commerce, Brazilian Administrative Council for Economic Defense and the U.S. Department of Justice ("DOJ") approval of the Merger, Historical Dow and Historical DuPont were required to divest the following:
Historical Dow Merger Remedy - Divestiture of the Global Ethylene Acrylic Acid Copolymers and Ionomers Business
On February 2, 2017, Historical Dow announced it would divest the EAA Business to SK Global Chemical Co., Ltd. The divestiture included production assets located in Freeport, Texas, and Tarragona, Spain, along with associated intellectual property and product trademarks. Under terms of the purchase agreement, SK Global Chemical Co., Ltd will honor certain customer and supplier contracts and other agreements. On September 1, 2017, the sale was completed for $296 million, net of working capital adjustments, costs to sell and other adjustments, with proceeds subject to customary post-closing adjustments. In 2017, the Company recognized a pretax gain of $227 million on the sale, included in "Sundry income (expense) - net" in the consolidated statements of income and related to the Packaging & Specialty Plastics segment.
Historical Dow Merger Remedy - Divestiture of a Portion of Dow AgroSciences' Brazil Corn Seed Business
On July 11, 2017, Historical Dow announced it had entered into a definitive agreement with CITIC Agri Fund to sell the DAS Divested Ag Business, including some seed processing plants and seed research centers, a copy of Historical Dow AgroSciences' Brazilian corn germplasm bank, the MORGAN™ brand and a license for the use of the DOW SEMENTES™ brand for a certain period of time. On November 30, 2017, the sale was completed for $1,093 million, net of working capital adjustments, costs to sell and other adjustments, with proceeds subject to customary post-closing adjustments. In 2017, the Company recognized a pretax gain of $635 million on the sale, included in "Sundry income (expense) - net" in the consolidated statements of income and related to the Agriculture segment.
The Company evaluated the divestiture of the EAA Business and determined it did not represent a strategic shift that had a major effect on the Company’s operations and financial results and did not qualify as an individually significant component of the Company. The divestiture of the DAS Divested Ag Business did not qualify as a component of the Company. As a result, these divestitures were not reported as discontinued operations.
Historical DuPont Merger Remedy - Divested Ag Business
Historical DuPont was required to sell its Divested Ag Business, specifically Historical DuPont’s Cereal Broadleaf Herbicides and Chewing Insecticides portfolios, including Rynaxypyr®, Cyazypyr®, and Indoxacarb as well as the crop protection R&D pipeline and organization, excluding seed treatment, nematicides, and late-stage R&D programs. On March 31, 2017, Historical DuPont and FMC entered into the FMC Transaction Agreement under which FMC agreed to acquire the Divested Ag Business; in addition, Historical DuPont agreed to acquire the H&N Business. The sale of the Divested Ag Business met the criteria for discontinued operations and as such, earnings were included within "Loss from discontinued operations, net of tax" in periods subsequent to the Merger.
On November 1, 2017, Historical DuPont completed the FMC Transactions through the disposition of the Divested Ag Business and the acquisition of the H&N Business. The final fair value as determined by Historical DuPont of the H&N Business was $1,970 million. The FMC Transactions included a cash consideration payment to Historical DuPont of approximately $1,200 million, which reflected the difference in value between the Divested Ag Business and the H&N Business, as well as favorable contracts with FMC of $495 million, subject to adjustments for inventory of the Divested Ag Business and net working capital of the H&N Business. Due to the proximity of the Merger and the closing of the sale, the carrying value of the Divested Ag Business approximated the fair value of the consideration received, thus no resulting gain or loss was recognized on the sale. Refer to Note 3 for further information on the H&N Business.
The results of operations of Historical DuPont's Divested Ag Business were presented as discontinued operations as summarized below, representing activity subsequent to the Merger:
| Results of Operations of Historical DuPont's Divested Ag Business | Period Ended | ||
| In millions | Sep 1 - Dec 31, 2017 1 | ||
| Net sales | $ | 199 | |
| Cost of sales | 194 | ||
| Research and development expenses | 30 | ||
| Selling, general and administrative expenses 2 | 102 | ||
| Restructuring, goodwill impairment and asset related charges - net | (1 | ) | |
| Sundry income (expense) - net | (1 | ) | |
| Loss from discontinued operations before income taxes | $ | (127 | ) |
| Benefit from income taxes | (50 | ) | |
| Loss from discontinued operations, net of tax | $ | (77 | ) |
| 1. | The Divested Ag Business was disposed of on November 1, 2017. |
| 2. | Includes $44 million of transaction costs associated with the disposal of the Divested Ag Business. |
Upon closing and pursuant to the terms of the FMC Transaction Agreement, Historical DuPont and FMC entered into favorable supply agreements and certain ancillary agreements, including manufacturing service agreements and transition service agreements. Under the terms of the favorable supply agreements, FMC will supply product to Historical DuPont at cost for a period of up to five years and, as a result, Historical DuPont recorded an intangible asset of $495 million upon closing that is being amortized over a period of five years.
NOTE 6 - RESTRUCTURING, GOODWILL IMPAIRMENT AND ASSET RELATED CHARGES - NET
Charges for restructuring programs, goodwill impairments, and other asset related charges, which includes other asset impairments, were $1,105 million in 2018, $3,280 million in 2017 and $595 million in 2016. These charges were recorded in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and consist 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 pretax restructuring charges of $84 million, consisting of severance and related benefit costs of $78 million and asset write-downs and write-offs of $6 million. The impact of these charges was shown as "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. The Company expects actions related to the Agriculture Division Program to be substantially complete by mid 2019.
The following table summarizes the activities related to the Agriculture Division Program. At December 31, 2018, $77 million was included in "Accrued and other current liabilities" in the consolidated balance sheets.
| Agriculture Division Program | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Total | ||||||
| (In millions) | |||||||||
| 2018 restructuring charges | |||||||||
| Agriculture | $ | — | $ | 6 | $ | 6 | |||
| Corporate | 78 | — | 78 | ||||||
| Total 2018 restructuring charges | $ | 78 | $ | 6 | $ | 84 | |||
| Charges against the reserve | — | (6 | ) | (6 | ) | ||||
| Cash payments | (1 | ) | — | (1 | ) | ||||
| Reserve balance at Dec 31, 2018 | $ | 77 | $ | — | $ | 77 |
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, the Company recorded pretax restructuring charges of $874 million in 2017, consisting 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 impact of these charges was shown as "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. For the year ended December 31, 2018, the Company recorded pretax restructuring charges of $873 million of which $869 million was recorded in "Restructuring, goodwill impairment and asset related charges - net" and $4 million was recorded in "Equity in earnings of nonconsolidated affiliates" in the consolidated statements of income. These charges consisted of severance and related benefit costs of $423 million, asset write-downs and write-offs of $289 million and costs associated with exit and disposal activities of $161 million. The Company expects to record additional restructuring charges during 2019 and substantially complete the Synergy Program by the end of 2019.
The following table summarizes the activities related to the Synergy Program. At December 31, 2018, $490 million was included in "Accrued and other current liabilities" ($377 million at December 31, 2017) and $84 million was included in "Other noncurrent obligations" ($133 million at December 31, 2017) in the consolidated balance sheets.
| DowDuPont Synergy Program | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Costs Associated with Exit and Disposal Activities | Total | ||||||||
| In millions | ||||||||||||
| 2017 restructuring charges | ||||||||||||
| Agriculture | $ | — | $ | 94 | $ | 40 | $ | 134 | ||||
| Performance Materials & Coatings | — | 9 | 2 | 11 | ||||||||
| Industrial Intermediates & Infrastructure | — | 12 | — | 12 | ||||||||
| Packing & Specialty Plastics | — | 33 | 3 | 36 | ||||||||
| Electronics & Imaging | — | 86 | — | 86 | ||||||||
| Nutrition & Biosciences | — | 1 | — | 1 | ||||||||
| Transportation & Advanced Polymers | — | 1 | 1 | 2 | ||||||||
| Safety & Construction | — | 21 | — | 21 | ||||||||
| Corporate | 510 | 33 | 28 | 571 | ||||||||
| Total 2017 restructuring charges | $ | 510 | $ | 290 | $ | 74 | $ | 874 | ||||
| Charges against the reserve | — | (290 | ) | — | (290 | ) | ||||||
| Non-cash compensation | (7 | ) | — | — | (7 | ) | ||||||
| Cash payments | (64 | ) | — | (3 | ) | (67 | ) | |||||
| Reserve balance at Dec 31, 2017 | $ | 439 | $ | — | $ | 71 | $ | 510 | ||||
| 2018 restructuring charges | ||||||||||||
| Agriculture | $ | — | $ | 207 | $ | 133 | $ | 340 | ||||
| Performance Materials & Coatings | — | 7 | — | 7 | ||||||||
| Industrial Intermediates & Infrastructure | — | — | 11 | 11 | ||||||||
| Packing & Specialty Plastics | — | 10 | 3 | 13 | ||||||||
| Electronics & Imaging | — | 2 | — | 2 | ||||||||
| Nutrition & Biosciences | — | 29 | — | 29 | ||||||||
| Transportation & Advanced Polymers | 4 | 3 | (1 | ) | 6 | |||||||
| Safety & Construction | — | 7 | 17 | 24 | ||||||||
| Corporate | 419 | 24 | (2 | ) | 441 | |||||||
| Total 2018 restructuring charges | $ | 423 | $ | 289 | $ | 161 | $ | 873 | ||||
| Charges against the reserve | — | (289 | ) | — | (289 | ) | ||||||
| Impact of currency | (5 | ) | — | — | (5 | ) | ||||||
| Cash payments | (366 | ) | — | (149 | ) | (515 | ) | |||||
| Reserve balance at Dec 31, 2018 | $ | 491 | $ | — | $ | 83 | $ | 574 |
Asset Write-downs and Write-offs
The restructuring charges related to the write-down and write-off of assets in 2017 totaled $290 million. Details regarding the write-downs and write-offs are as follows:
| • | The Company will close or consolidate several manufacturing, R&D and administrative facilities around the world aligned with Seed and Crop Protection businesses, including the write-down of other non-manufacturing assets. As a result, the Company recorded a charge of $94 million, related to Agriculture. These facilities will be shut down or consolidated by the end of 2019. |
| • | The Company recorded a charge of $86 million for asset write-downs and write-offs in Electronics & Imaging, including the shutdown of a metalorganic manufacturing facility in Cheonan, South Korea, the write-off of in-process research and development (“IPR&D") and other intangible assets and the consolidation of certain R&D facilities. The South Korean facility was shut down in the second quarter of 2018. |
| • | The Company recorded a charge of $22 million for asset write-downs and write-offs aligned with an energy project, including the write-off of capital projects and other non-manufacturing assets in Packaging & Specialty Plastics. |
| • | The Company wrote-off $21 million of assets in Safety & Construction, including intangible assets as a result of the Clean Filtration Technologies plant shutdown in the fourth quarter of 2017. |
| • | The Company recorded a charge of $67 million for other miscellaneous asset write-downs and write-offs, including the shutdown of several small manufacturing facilities and the write-off of non-manufacturing assets, certain corporate facilities and data centers. The charge related to Performance Materials & Coatings ($9 million), Industrial Intermediates & Infrastructure ($12 million), Packaging & Specialty Plastics ($11 million), Nutrition & Biosciences ($1 million), Transportation & Advanced Polymers ($1 million) and Corporate ($33 million). These manufacturing facilities will be shut down primarily by the end of 2019. |
The restructuring charges related to the write-down and write-off of assets in 2018 totaled $289 million. Details regarding the write-downs and write-offs are as follows:
| • | The Company recorded a charge of $207 million in Agriculture related primarily to the consolidation or shutdown of manufacturing, R&D and other non-manufacturing facilities and the write-down of inventory. These facilities will be shut down primarily by the end of the third quarter of 2019. |
| • | The Company recorded a charge of $29 million for asset write-downs and write-offs in Nutrition & Biosciences, including the shutdown of a microbial control manufacturing facility. The manufacturing facility will be shut down by the end of 2019. |
| • | The Company recorded a charge of $53 million for other miscellaneous asset write-downs and write-offs, including the shutdown of several small manufacturing facilities and the write-off of non-manufacturing assets and certain corporate facilities. The charge related to Packaging & Specialty Plastics ($10 million), Performance Materials & Coatings ($7 million), Electronics & Imaging ($2 million), Transportation & Advanced Polymers ($3 million), Safety & Construction ($7 million) and Corporate ($24 million). These manufacturing facilities will be shut down by the end of the third quarter of 2019. |
Costs Associated with Exit and Disposal Activities
The restructuring charges for costs associated with exit and disposal activities, including contract cancellation penalties and environmental remediation liabilities, totaled $74 million in 2017 and $161 million in 2018.
The Company expects to incur additional costs in the future related to its restructuring activities. Future costs are expected to include demolition costs related to closed facilities and restructuring plan implementation costs; these costs will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.
Restructuring Plans Initiated Prior to Merger
Historical 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. The impact of these charges is shown as "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. The 2016 restructuring activities were substantially complete at June 30, 2018, with remaining liabilities for severance and related benefit costs and costs associated with exit and disposal activities to be settled over time.
The following table summarizes the activities related to Historical Dow's 2016 restructuring reserve.
| 2016 Restructuring Charges | Severance and Related Benefit Costs | Asset Write-downs and Write-offs | Costs Associated with Exit and Disposal Activities | Total | ||||||||
| In millions | ||||||||||||
| Performance Materials & Coatings | $ | — | $ | 27 | $ | 15 | $ | 42 | ||||
| Industrial Intermediates & Infrastructure | — | 70 | 13 | 83 | ||||||||
| Packaging & Specialty Plastics | — | 10 | — | 10 | ||||||||
| Corporate | 268 | 46 | — | 314 | ||||||||
| 2016 restructuring charges | $ | 268 | $ | 153 | $ | 28 | $ | 449 | ||||
| Charges against the reserve | — | (153 | ) | — | (153 | ) | ||||||
| Cash payments | (67 | ) | — | (1 | ) | (68 | ) | |||||
| Reserve balance at Dec 31, 2016 | $ | 201 | $ | — | $ | 27 | $ | 228 | ||||
| Adjustments to the reserve 1 | — | — | (7 | ) | (7 | ) | ||||||
| Cash payments | (150 | ) | — | (3 | ) | (153 | ) | |||||
| Reserve balance at Dec 31, 2017 | $ | 51 | $ | — | $ | 17 | $ | 68 | ||||
| Adjustments to the reserve 1 | (8 | ) | — | 14 | 6 | |||||||
| Cash payments | (37 | ) | — | (4 | ) | (41 | ) | |||||
| Reserve balance at Dec 31, 2018 | $ | 6 | $ | — | $ | 27 | $ | 33 |
| 1. | Included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. Charges for severance and related benefit costs related to Corporate and costs associated with exit and disposal activities related to Performance Materials & Coatings. |
Asset Write-downs and Write-offs
The restructuring charges related to the write-down and write-off of assets in the second quarter of 2016 totaled $153 million. Details regarding the write-downs and write-offs are as follows:
| • | Historical Dow recorded a charge of $70 million for asset write-downs and write-offs including the shutdown of a solar manufacturing facility in Midland, Michigan; the write-down of a solar facility in Milpitas, California; and, the write-off of capital projects and IPR&D. The charge was related to Industrial Intermediates & Infrastructure. The Midland facility was shut down in the third quarter of 2016. |
| • | To enhance competitiveness and streamline costs associated with the ownership restructure of Dow Silicones, a silicones manufacturing facility in Yamakita, Japan, was shut down in the fourth quarter of 2018. In addition, an idled facility was shut down in the second quarter of 2016. As a result, Historical Dow recorded a charge of $25 million related to Performance Materials & Coatings. |
| • | Historical Dow recorded a charge of $25 million related to Corporate to close and/or consolidate certain corporate facilities and data centers. |
| • | A decision was made to shut down a small manufacturing facility and to write-down other non-manufacturing assets, including a cost method investment and certain aircraft. Write-downs of $33 million were recorded, related to Performance Materials & Coatings ($2 million), Packaging & Specialty Plastics ($10 million) and Corporate ($21 million). The manufacturing facility was shut down in the second quarter of 2016. |
Costs Associated with Exit and Disposal Activities
The restructuring charges for costs associated with exit and disposal activities, including contract cancellation penalties, environmental remediation and warranty liabilities, were $28 million in the second quarter of 2016.
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, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Performance Materials & Coatings. See Note 13 for additional information 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 IPR&D assets within the Agriculture segment. See Notes 13 and 22 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 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 Note 22 for additional information.
In 2018, the Company recognized an additional pretax impairment charge of $34 million related primarily to capital additions made to the biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017. The impairment charge was included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Packaging & Specialty Plastics. See Note 22 for additional information.
2017 Charges
In the fourth quarter of 2017, the Company recognized a $622 million pretax impairment charge related to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil. 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 included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Packaging & Specialty Plastics. See Notes 22 and 23 for additional information.
The Company also recognized other pretax impairment charges of $317 million in the fourth quarter of 2017, including charges related to manufacturing assets of $230 million, an equity method investment of $81 million and other assets of $6 million. The impairment charges were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and 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 Note 22 for additional information.
2016 Charges
In the fourth quarter of 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 was included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to Corporate. See Notes 12, 22 and 23 for additional information.
NOTE 7 - SUPPLEMENTARY INFORMATION
| Sundry Income (Expense) - Net | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Non-operating pension and other postretirement benefit plan net credits (costs) 1 | $ | 487 | $ | (549 | ) | $ | 34 | ||
| Gain on sales of other assets and investments 2 | 110 | 198 | 170 | ||||||
| Interest income | 210 | 147 | 107 | ||||||
| Foreign exchange losses, net 3 | (234 | ) | (63 | ) | (126 | ) | |||
| Loss on early extinguishment of debt 4 | (135 | ) | — | — | |||||
| Gain and post-close adjustments on Historical Dow's ownership restructure of Dow Silicones 5 | (47 | ) | — | 2,445 | |||||
| Loss on divestitures | (14 | ) | — | (26 | ) | ||||
| Gain on DAS Divested Ag Business 6 | — | 635 | — | ||||||
| Gain on divestiture of Historical Dow's EAA Business 6 | — | 227 | — | ||||||
| Gain related to Historical Dow's Nova patent infringement award 7 | — | 137 | — | ||||||
| Loss related to Historical Dow's Bayer CropScience arbitration matter 7 | — | (469 | ) | — | |||||
| Impact of split-off of Historical Dow's chlorine value chain | — | 7 | 6 | ||||||
| Settlement of Historical Dow's urethane matters class action lawsuit and opt-out cases 7 | — | — | (1,235 | ) | |||||
| Costs associated with Historical Dow's portfolio and productivity actions | — | — | (41 | ) | |||||
| Other - net | 215 | 147 | 152 | ||||||
| Total sundry income (expense) - net | $ | 592 | $ | 417 | $ | 1,486 |
| 1. | Presented in accordance with ASU 2017-07. See Notes 1, 2 and 19 for additional information. |
| 2. | The 2018 amount includes a $20 million gain related to Historical Dow's sale of its equity interest in MEGlobal and a $22 million gain related to Agriculture asset sales. |
| 3. | The 2018 amount includes a $50 million foreign exchange loss related to adjustments to Historical DuPont's foreign currency exchange contracts as a result of U.S. tax reform. |
| 4. | See Note 15 for additional information. |
| 5. | See Note 3 for additional information. |
| 6. | See Note 5 for additional information. |
| 7. | See Note 16 for additional information. |
Accrued and Other Current Liabilities
“Accrued and other current liabilities” were $7,943 million at December 31, 2018 and $8,409 million at December 31, 2017. Components of "Accrued and other current liabilities" that were more than 5 percent of total current liabilities were:
| Accrued and Other Current Liabilities at Dec 31 | 2018 | 2017 | ||||
| In millions | ||||||
| Accrued payroll | $ | 1,686 | $ | 1,931 | ||
| Deferred revenue | $ | 2,565 | $ | 2,606 |
Cash, Cash Equivalents and Restricted Cash
The Company is required to set aside funds for various activities that arise in the normal course of business including, but not limited to, insurance contracts, legal matters and other agreements. These funds typically have legal restrictions associated with them and are deposited in an escrow account or held in a separately identifiable account by the Company. At December 31, 2018, the Company had restricted cash and cash equivalents of $540 million ($577 million at December 31, 2017), included in "Other current assets" in the consolidated balance sheets.
Historical DuPont entered into a trust agreement in 2013 (as amended and restated in 2017), establishing and requiring 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. At December 31, 2018, $500 million of the restricted cash and cash equivalents balance was related to the Trust ($558 million at December 31, 2017).
NOTE 8 - INCOME TAXES
On December 22, 2017, The Act was enacted. The Act reduces the U.S. federal corporate income tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves to a hybrid territorial system. At December 31, 2017, the Company had not completed its accounting for the tax effects of The Act; however, as described below, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118 ("SAB 118"), income tax effects of The Act were refined upon obtaining, preparing, and analyzing additional information during the measurement period. At December 31, 2018, the Company had completed its accounting for the tax effects of The Act.
| • | As a result of The Act, the Company remeasured its U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. The Company recorded a cumulative benefit of $2,784 million ($118 million benefit in 2018 and $2,666 million benefit in 2017) to “Provision (Credit) for income taxes on continuing operations” in the consolidated statements of income with respect to the remeasurement of the Company's deferred tax balances. |
| • | The Act requires a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits (“E&P”), which results in a one-time transition tax. The Company recorded a cumulative charge of $1,639 million ($59 million charge in 2018 and $1,580 million charge in 2017) to "Provision (Credit) for income taxes on continuing operations" with respect to the one-time transition tax. |
| • | In the year ended December 31, 2018, the Company recorded an indirect impact of The Act related to prepaid tax on the intercompany sale of inventory. The amount recorded related to the inventory was a $54 million charge to "Provision (Credit) for income taxes on continuing operations." |
| • | For tax years beginning after December 31, 2017, The Act introduces new provisions for U.S. taxation of certain global intangible low-taxed income (“GILTI”). The Company has made the policy election to record any liability associated with GILTI in the period in which it is incurred. |
| Geographic Allocation of Income (Loss) and Provision (Credit) for Income Taxes | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Income (Loss) from continuing operations before income taxes | |||||||||
| Domestic 1, 2,3 | $ | 230 | $ | (2,804 | ) | $ | 485 | ||
| Foreign 1,2 | 5,263 | 3,997 | 3,928 | ||||||
| Income from continuing operations before income taxes | $ | 5,493 | $ | 1,193 | $ | 4,413 | |||
| Current tax expense (benefit) | |||||||||
| Federal | $ | (60 | ) | $ | (98 | ) | $ | 91 | |
| State and local | 13 | 22 | 21 | ||||||
| Foreign | 1,970 | 1,766 | 1,156 | ||||||
| Total current tax expense | $ | 1,923 | $ | 1,690 | $ | 1,268 | |||
| Deferred tax (benefit) expense | |||||||||
| Federal 4 | $ | (160 | ) | $ | (1,764 | ) | $ | (1,255 | ) |
| State and local | (36 | ) | 8 | (10 | ) | ||||
| Foreign | (238 | ) | (410 | ) | 6 | ||||
| Total deferred tax benefit | $ | (434 | ) | $ | (2,166 | ) | $ | (1,259 | ) |
| Provision (Credit) for income taxes on continuing operations | $ | 1,489 | $ | (476 | ) | $ | 9 | ||
| Income from continuing operations, net of tax | $ | 4,004 | $ | 1,669 | $ | 4,404 |
| 1. | In 2018, the domestic component of "Income (Loss) from continuing operations before income taxes" included $2.1 billion of integration and separation costs and a $1.0 billion charge recognized in "Cost of sales" related to the fair value step-up of inventories assumed in the Merger and the acquisition of the H&N Business. The foreign component included a $0.6 billion charge recognized in "Cost of sales" related to the fair value step-up of inventories assumed in the Merger and the acquisition of the H&N Business. See Note 3 for additional information. |
| 2. | In 2017, the domestic component of "Income (Loss) from continuing operations before income taxes" included a $1.5 billion goodwill impairment charge, $1.0 billion of integration and separation costs, $0.5 billion of restructuring charges related to the Synergy Program and $0.3 billion of income from portfolio actions, primarily related to the Merger remedy actions. The foreign component included a $1.1 billion charge recognized in "Cost of sales" related to the fair value step-up of inventories assumed in the Merger and the acquisition of the H&N Business, $0.6 billion of income from portfolio actions and $0.4 billion of restructuring charges. See Notes 3, 6 and 13 for additional information. |
| 3. | In 2016, the domestic component of "Income (Loss) from continuing operations before income taxes" included approximately $2.1 billion of income from portfolio actions, primarily related to the Dow Silicones ownership restructure, and approximately $2.6 billion of expenses related to the urethane matters class action lawsuit and opt-out cases settlements, asbestos-related charge and charges for environmental matters. See Notes 3, 6 and 16 for additional information. |
| 4. | The 2016 amount reflects the tax impact of accrued one-time items and reduced domestic income which limited the utilization of tax credits. |
In 2017, as a result of the Merger and subsequent change in ownership, certain net operating loss carryforwards available for Historical Dow's consolidated German tax group were derecognized. In addition, the sale of stock between two Historical Dow consolidated subsidiaries in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the Intended Business Separations. As a result, in 2017, the Company recorded a charge of $267 million to “Provision (Credit) for income taxes on continuing operations” in the consolidated statements of income.
| Reconciliation to U.S. Statutory Rate | 2018 | 2017 | 2016 | |||
| Statutory U.S. federal income tax rate | 21.0 | % | 35.0 | % | 35.0 | % |
| Equity earnings effect | (2.5 | ) | (11.0 | ) | (1.2 | ) |
| Foreign income taxed at rates other than the statutory U.S. federal income tax rate 1 | 6.1 | (26.7 | ) | (7.0 | ) | |
| U.S. tax effect of foreign earnings and dividends | (0.2 | ) | (2.5 | ) | (4.6 | ) |
| Unrecognized tax benefits | — | 2.9 | (0.8 | ) | ||
| Acquisitions, divestitures and ownership restructuring activities 2, 3 | 1.7 | 6.5 | (21.2 | ) | ||
| Exchange gains, net | 0.5 | 2.4 | — | |||
| SAB 118 Impact of Enactment of U.S. Tax Reform | (0.1 | ) | (90.9 | ) | — | |
| State and local income taxes | — | 6.1 | 0.2 | |||
| Goodwill impairment | — | 44.9 | — | |||
| Excess tax benefits from stock-based compensation 4 | (1.0 | ) | (8.5 | ) | — | |
| Other - net | 1.6 | 1.9 | (0.2 | ) | ||
| Effective tax rate | 27.1 | % | (39.9 | )% | 0.2 | % |
| 1. | Includes the impact of valuation allowances in foreign jurisdictions. |
| 2. | See Notes 3 and 5 for additional information. |
| 3. | Includes a net tax charge of $25 million and a net tax benefit of $261 million related to an internal entity restructuring associated with the Intended Business Separations for the years ended December 31, 2018 and 2017, respectively. |
| 4. | Reflects the impact of the adoption of ASU 2016-09, "Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting," which was adopted January 1, 2017, and resulted in the recognition of excess tax benefits related to stock-based compensation in "Provision (Credit) for income taxes on continuing operations." |
| Deferred Tax Balances at Dec 31 | 2018 | 2017 | ||||||||||
| In millions | Assets | Liabilities | Assets | Liabilities | ||||||||
| Property | $ | 460 | $ | 3,593 | $ | 508 | $ | 3,634 | ||||
| Tax loss and credit carryforwards 1 | 3,634 | — | 3,187 | — | ||||||||
| Postretirement benefit obligations | 3,845 | 376 | 4,227 | 199 | ||||||||
| Other accruals and reserves | 1,639 | 168 | 1,661 | 190 | ||||||||
| Intangibles | 471 | 6,818 | 460 | 7,296 | ||||||||
| Inventory | 197 | 534 | 165 | 768 | ||||||||
| Long-term debt | 24 | — | 109 | — | ||||||||
| Investments | 295 | 641 | 295 | 611 | ||||||||
| Unrealized exchange gains (losses), net | — | 141 | — | 71 | ||||||||
| Other – net | 984 | 582 | 806 | 535 | ||||||||
| Subtotal | $ | 11,549 | $ | 12,853 | $ | 11,418 | $ | 13,304 | ||||
| Valuation allowances 1,2,3 | (2,407 | ) | — | (2,511 | ) | — | ||||||
| Total | $ | 9,142 | $ | 12,853 | $ | 8,907 | $ | 13,304 | ||||
| Net Deferred Tax Liability | $ | (3,711 | ) | $ | (4,397 | ) |
| 1. | The Company has corrected its valuation allowance (with a corresponding reduction in tax loss and credit carryforwards) in the amount of $238 million for the year ended December 31, 2017 as a result of a change in the Delaware state apportionment methodology. |
| 2. | Primarily related to the realization of recorded tax benefits on tax loss carryforwards from operations in the United States, Brazil, Luxembourg and Asia Pacific. |
| 3. | In 2018, the Company established a full valuation allowance against the net deferred tax asset position of a legal entity in Brazil due to revised financial projections, resulting in a charge of $75 million to "Provision (Credit) for income taxes on continuing operations" in the consolidated statements of income. |
| Operating Loss and Tax Credit Carryforwards | Deferred Tax Asset | |||||
| In millions | 2018 | 2017 | ||||
| Operating loss carryforwards | ||||||
| Expire within 5 years | $ | 344 | $ | 288 | ||
| Expire after 5 years or indefinite expiration 1 | 2,456 | 2,550 | ||||
| Total operating loss carryforwards | $ | 2,800 | $ | 2,838 | ||
| Tax credit carryforwards | ||||||
| Expire within 5 years | $ | 40 | $ | 49 | ||
| Expire after 5 years or indefinite expiration | 794 | 300 | ||||
| Total tax credit carryforwards | $ | 834 | $ | 349 | ||
| Total operating loss and tax credit carryforwards | $ | 3,634 | $ | 3,187 |
| 1. | The Company has corrected its valuation allowance (with a corresponding reduction in tax loss and credit carryforwards) in the amount of $238 million for the year ended December 31, 2017 as a result of a change in the Delaware state apportionment methodology. |
Undistributed earnings of foreign subsidiaries and related companies that are deemed to be permanently invested amounted to $22,365 million at December 31, 2018 and $22,460 million at December 31, 2017. In addition to the U.S. federal tax imposed by The Act on all accumulated unrepatriated earnings through December 31, 2017, The Act introduced additional U.S. federal tax on foreign earnings, effective as of January 1, 2018. The undistributed foreign earnings as of December 31, 2018 may still be subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply. It is not practicable to calculate the unrecognized deferred tax liability on undistributed 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 following table provides a reconciliation of the Company's unrecognized tax benefits:
| Total Gross Unrecognized Tax Benefits | |||||||||
| In millions | 2018 | 2017 1 | 2016 | ||||||
| Total unrecognized tax benefits at Jan 1 | $ | 994 | $ | 231 | $ | 280 | |||
| Decreases related to positions taken on items from prior years | (51 | ) | (6 | ) | (12 | ) | |||
| Increases related to positions taken on items from prior years 2 | 142 | 46 | 153 | ||||||
| Increases related to positions taken in the current year 3 | 11 | 747 | 135 | ||||||
| Settlement of uncertain tax positions with tax authorities 2 | (13 | ) | (11 | ) | (325 | ) | |||
| Decreases due to expiration of statutes of limitations | (6 | ) | (14 | ) | — | ||||
| Exchange (gain) loss | (15 | ) | 1 | — | |||||
| Total unrecognized tax benefits at Dec 31 | $ | 1,062 | $ | 994 | $ | 231 | |||
| Total unrecognized tax benefits that, if recognized, would impact the effective tax rate | $ | 393 | $ | 496 | $ | 223 | |||
| Total amount of interest and penalties (benefit) recognized in "Provision (Credit) for income taxes on continuing operations" | $ | (1 | ) | $ | 3 | $ | (55 | ) | |
| Total accrual for interest and penalties associated with unrecognized tax benefits | $ | 154 | $ | 157 | $ | 89 |
| 1. | The prior year amounts have been revised for amounts previously omitted. |
| 2. | The 2016 balance includes the impact of a settlement agreement related to a historical change in the legal ownership structure of a nonconsolidated affiliate discussed below. |
| 3. | The 2017 balance includes $709 million assumed in the Merger. The 2016 balance includes $126 million assumed in the Dow Silicones ownership restructure. |
On January 9, 2017, the U.S. Supreme Court denied certiorari in Historical Dow’s tax treatment of partnerships and transactions associated with Chemtech, a wholly owned subsidiary of Historical Dow. Historical Dow has fully accrued the position and does not expect a future impact to “Provision (Credit) for income taxes on continuing operations” in the consolidated statements of income as a result of the ruling.
In the fourth quarter of 2016, a settlement of $206 million was reached on a tax matter associated with a historical change in the legal ownership structure of a nonconsolidated affiliate of Historical Dow. As a result of the settlement, Historical Dow recorded a charge of $13 million to “Provision (Credit) for income taxes on continuing operations” in the consolidated statements of income.
Each year Historical Dow, Historical DuPont and/or the Company file tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities.
Positions challenged by the tax authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. The impact on the Company’s results of operations is not expected to be material.
Tax years that remain subject to examination for the Company’s major tax jurisdictions are shown below:
| Tax Years Subject to Examination by Major Tax Jurisdiction at Dec 31, 2018 | Earliest Open Year |
| Jurisdiction | |
| Argentina | 2009 |
| Brazil | 2006 |
| Canada | 2012 |
| China | 2008 |
| Denmark | 2012 |
| Germany | 2006 |
| India | 2001 |
| Italy | 2013 |
| The Netherlands | 2016 |
| Switzerland | 2012 |
| United States: | |
| Federal income tax | 2004 |
| State and local income tax | 2004 |
NOTE 9 - EARNINGS PER SHARE CALCULATIONS
The following tables provide earnings per share calculations for the years ended December 31, 2018, 2017, and 2016:
| Net Income for Earnings Per Share Calculations - Basic | 2018 | 2017 | 2016 | ||||||
| In millions | |||||||||
| Income from continuing operations, net of tax | $ | 4,004 | $ | 1,669 | $ | 4,404 | |||
| Net income attributable to noncontrolling interests | (155 | ) | (132 | ) | (86 | ) | |||
| Preferred stock dividends 1 | — | — | (340 | ) | |||||
| Net income attributable to participating securities 2 | (17 | ) | (13 | ) | (22 | ) | |||
| Income from continuing operations attributable to common stockholders | $ | 3,832 | $ | 1,524 | $ | 3,956 | |||
| Loss from discontinued operations, net of tax | (5 | ) | (77 | ) | — | ||||
| Net income attributable to common stockholders | $ | 3,827 | $ | 1,447 | $ | 3,956 |
| Earnings Per Share Calculations - Basic | 2018 | 2017 | 2016 | ||||||
| Dollars per share | |||||||||
| Income from continuing operations attributable to common stockholders | $ | 1.66 | $ | 0.97 | $ | 3.57 | |||
| Loss from discontinued operations, net of tax | — | (0.05 | ) | — | |||||
| Net income attributable to common stockholders | $ | 1.66 | $ | 0.92 | $ | 3.57 |
| Net Income for Earnings Per Share Calculations - Diluted | 2018 | 2017 | 2016 | ||||||
| In millions | |||||||||
| Income from continuing operations, net of tax | $ | 4,004 | $ | 1,669 | $ | 4,404 | |||
| Net income attributable to noncontrolling interests | (155 | ) | (132 | ) | (86 | ) | |||
| Preferred stock dividends 1, 3 | — | — | (340 | ) | |||||
| Net income attributable to participating securities 2 | (17 | ) | (13 | ) | (22 | ) | |||
| Income from continuing operations attributable to common stockholders | $ | 3,832 | $ | 1,524 | $ | 3,956 | |||
| Loss from discontinued operations, net of tax | (5 | ) | (77 | ) | — | ||||
| Net income attributable to common stockholders | $ | 3,827 | $ | 1,447 | $ | 3,956 |
| Earnings Per Share Calculations - Diluted | 2018 | 2017 | 2016 | ||||||
| Dollars per share | |||||||||
| Income from continuing operations attributable to common stockholders | $ | 1.65 | $ | 0.95 | $ | 3.52 | |||
| Loss from discontinued operations, net of tax | — | (0.04 | ) | — | |||||
| Net income attributable to common stockholders | $ | 1.65 | $ | 0.91 | $ | 3.52 |
| Share Count Information | 2018 | 2017 | 2016 | |||
| Shares in millions | ||||||
| Weighted-average common shares - basic 4, 5 | 2,301.0 | 1,579.8 | 1,108.1 | |||
| Plus dilutive effect of equity compensation plans 4 | 14.5 | 18.3 | 15.1 | |||
| Weighted-average common shares - diluted 4, 6 | 2,315.5 | 1,598.1 | 1,123.2 | |||
| Stock options and restricted stock units excluded from EPS calculations 7 | 9.6 | 1.4 | 1.9 |
| 1. | On December 30, 2016, Historical Dow converted all shares of its Cumulative Convertible Perpetual Preferred Stock, Series A ("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. See Note 17 for additional information. |
| 2. | Historical Dow restricted stock units (formerly termed deferred stock) are considered participating securities due to Historical Dow's practice of paying dividend equivalents on unvested shares. |
| 3. | Preferred Stock dividends were not added back in the calculation of diluted earnings per share for the period ended December 31, 2016, because the effect of an assumed conversion of Historical Dow's Preferred Stock would have been antidilutive. |
| 4. | As a result of the Merger, the share amounts for the year ended December 31, 2017, reflect a weighted averaging effect of Historical Dow shares outstanding prior to August 31, 2017 and DowDuPont shares outstanding on and after August 31, 2017. |
| 5. | On December 30, 2016, Historical Dow converted 4 million shares of Historical Dow Preferred Stock into 96.8 million shares of Historical Dow's common stock. As a result of this conversion, 0.5 million shares of Historical Dow common stock are included in "Weighted-average common shares - basic" for the year ended December 31, 2016. |
| 6. | The calculation of diluted earnings per share for the year ended December 31, 2016, excludes 96.3 million shares of Historical Dow common stock because the effect of an assumed conversion of Historical Dow Preferred Stock for the full period would have been antidilutive. |
| 7. | These outstanding options to purchase shares of common stock and restricted stock units were excluded from the calculation of diluted earnings per share because the effect of including them would have been antidilutive. |
NOTE 10 - INVENTORIES
The following table provides a breakdown of inventories:
| Inventories at Dec 31 | 2018 | 2017 | ||||
| In millions | ||||||
| Finished goods | $ | 9,814 | $ | 9,701 | ||
| Work in process | 3,969 | 4,512 | ||||
| Raw materials | 1,419 | 1,267 | ||||
| Supplies | 1,321 | 1,296 | ||||
| Total | $ | 16,523 | $ | 16,776 | ||
| Adjustment of inventories to a LIFO basis | 98 | 216 | ||||
| Total inventories | $ | 16,621 | $ | 16,992 |
NOTE 11 - PROPERTY
The following table provides a breakdown of property:
| Property at Dec 31 | Estimated Useful Lives (Years) | 2018 | 2017 | |||||
| In millions | ||||||||
| Land and land improvements | 0-25 | $ | 3,472 | $ | 3,448 | |||
| Buildings | 1-50 | 8,723 | 8,667 | |||||
| Machinery and equipment | 1-25 | 53,864 | 51,312 | |||||
| Other property | 3-50 | 5,414 | 5,277 | |||||
| Construction in progress | — | 3,870 | 4,600 | |||||
| Total property | $ | 75,343 | $ | 73,304 |
| In millions | 2018 | 2017 | 2016 | ||||||
| Depreciation expense | $ | 3,740 | $ | 2,755 | $ | 2,130 | |||
| Capitalized interest | $ | 108 | $ | 247 | $ | 243 |
The increase in depreciation expense in 2018 compared with 2017, is primarily related to the inclusion of a full year of depreciation expense for the property acquired as a result of the Merger.
NOTE 12 - NONCONSOLIDATED AFFILIATES AND RELATED COMPANY TRANSACTIONS
The Company’s investments in companies accounted for using the equity method (“nonconsolidated affiliates”), by classification in the consolidated balance sheets, and dividends received from nonconsolidated affiliates are shown in the following tables:
| Investments in Nonconsolidated Affiliates at Dec 31 | ||||||
| In millions | 2018 1 | 2017 1 | ||||
| Investment in nonconsolidated affiliates | $ | 5,204 | $ | 5,336 | ||
| Accrued and other current liabilities | (81 | ) | (46 | ) | ||
| Other noncurrent obligations | (495 | ) | (752 | ) | ||
| Net investment in nonconsolidated affiliates | $ | 4,628 | $ | 4,538 |
| 1. | The carrying amount of the Company’s investments in nonconsolidated affiliates at December 31, 2018, was $23 million less than its share of the investees’ net assets ($32 million less at December 31, 2017), exclusive of additional differences relating to the Merger, EQUATE Petrochemical K.S.C.C. ("EQUATE") and AFSI, which are discussed separately in the disclosures that follow. |
| Dividends Received from Nonconsolidated Affiliates | |||||||||
| In millions | 2018 | 2017 1 | 2016 | ||||||
| Dividends from nonconsolidated affiliates | $ | 1,084 | $ | 900 | $ | 685 |
- Includes a non-cash dividend of $8 million.
Except for AFSI, the nonconsolidated affiliates in which the Company has investments are privately held companies; therefore, quoted market prices are not available.
Merger with Historical DuPont
In connection with the Merger, the net investment in nonconsolidated affiliates increased by $1,551 million (consisting of $1,596 million in "Investment in nonconsolidated affiliates" and $45 million in "Accrued and other current liabilities"), which represented the fair value of investments acquired at August 31, 2017. At December 31, 2018, the carrying value of investments acquired in the Merger was $822 million more than the Company's proportionate share of underlying net assets of the investees ($930 million more at December 31, 2017). An aggregate basis difference of $246 million at December 31, 2018 ($290 million at December 31, 2017), is being amortized through 2029 and the remainder is considered a permanent difference.
Dow Silicones and the HSC Group
As a result of the Dow Silicones ownership restructure, Dow Silicones, previously a 50:50 joint venture between Historical Dow and Corning, became a wholly owned subsidiary of Historical Dow as of June 1, 2016. Historical Dow's equity interest in Dow Silicones, which was previously classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets, was remeasured to fair value. See Note 3 for additional information on the Dow Silicones ownership restructure. Dow Silicones continues to maintain equity interests in the HSC Group, which includes Hemlock Semiconductor L.L.C. and DC HSC Holdings LLC. The negative investment balance in Hemlock Semiconductor L.L.C. was $495 million at December 31, 2018 ($752 million at December 31, 2017).
EQUATE
At December 31, 2018, the Company had an investment balance in EQUATE of $131 million ($42 million at December 31, 2017), which is classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets. The Company's investment in EQUATE was $502 million less than the Company's proportionate share of EQUATE's underlying net assets at December 31, 2018 ($516 million less at December 31, 2017), which represents the difference between the fair values of certain MEGlobal assets acquired by EQUATE and the Company's related valuation on a U.S. GAAP basis. A basis difference of $184 million at December 31, 2018 ($200 million at December 31, 2017) is being amortized over the remaining useful lives of the assets and the remainder is considered a permanent difference.
AFSI
On July 31, 2015, Historical Dow sold its AgroFresh business to AFSI. Proceeds received on the divestiture of AgroFresh included 17.5 million common shares of AFSI, which were valued at $210 million and represented an approximate 35 percent ownership interest in AFSI. Based on the December 31, 2016 closing stock price of AFSI, the value of this investment would have been lower than the carrying value by $143 million. In the fourth quarter of 2016, Historical Dow determined the decline in market value of AFSI was other-than-temporary and recognized a $143 million pretax impairment charge related to its equity interest in AFSI. The impairment charge was included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income and related to the Corporate segment. At December 31, 2018, the Company's investment in AFSI was $101 million less than the Company's proportionate share of AFSI's underlying net assets ($92 million less at December 31, 2017). This amount primarily relates to the other-than-temporary decline in the Company's investment in AFSI.
On April 4, 2017, Historical Dow and AFSI revised certain agreements related to the divestiture of the AgroFresh business and Historical Dow entered into a stock purchase agreement to purchase up to 5,070,358 shares of AFSI's common stock, which represented approximately 10 percent of AFSI's common stock outstanding at signing of the agreement, subject to certain terms and conditions. On November 19, 2018, the stock purchase agreement concluded. At December 31, 2018, Historical Dow held a 42 percent ownership interest in AFSI (36 percent at December 31, 2017). See Notes 22 and 23 for further information on this investment.
Sadara
Historical Dow and Saudi Arabian Oil Company formed Sadara Chemical Company ("Sadara") to build and operate a world-scale, fully integrated chemicals complex in Jubail Industrial City, Kingdom of Saudi Arabia. Sadara achieved its first polyethylene production in December 2015 and announced the start-up of its mixed feed cracker and a third polyethylene train (which added to the two polyethylene trains already in operation) in August 2016. Sadara achieved successful startup of its remaining production units in 2017. In 2018, 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. At December 31, 2018, Historical Dow's note receivable with Sadara was zero. 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, included in "Noncurrent receivables" in the consolidated balance sheets.
Transactions with Nonconsolidated Affiliates
Historical Dow has service agreements with certain nonconsolidated affiliates, including contracts to manage the operations of manufacturing sites and the construction of new facilities; licensing and technology agreements; and marketing, sales, purchase, lease and sublease agreements.
Historical Dow sells excess ethylene glycol produced at Historical Dow's manufacturing facilities in the United States and Europe to MEGlobal, an EQUATE subsidiary. Historical Dow also sells ethylene to MEGlobal as a raw material for its ethylene glycol plants in Canada. Sales of these products to MEGlobal represented 1 percent of total net sales in 2018, 2017 and 2016. Sales of ethylene glycol to MEGlobal are reflected in Industrial Intermediates & Infrastructure and represented 2 percent of the segment's sales in 2018, 2017 and 2016. Sales of ethylene to MEGlobal are reflected in the Packaging & Specialty Plastics segment and represented 1 percent of the segment's sales in 2018, 2017 and 2016.
Dow Silicones supplies trichlorosilane, a raw material used in the production of polycrystalline silicon, to the HSC Group. Sales of this material to the HSC Group represented less than 1 percent of total net sales in 2018, 2017 and from June 1, 2016 through December 31, 2016. Sales of this material to the HSC Group are reflected in Electronics & Imaging and represented 8 percent of the segment's sales in 2018 (11 percent in 2017 and 9 percent from June 1, 2016 through December 31, 2016).
Historical Dow is responsible for marketing the majority of Sadara products outside of the Middle East zone through Historical Dow’s established sales channels. Under this arrangement, Historical Dow purchases and sells Sadara products for a marketing fee. Purchases of Sadara products represented 6 percent of "Cost of sales" in 2018 (3 percent in 2017 and not material in 2016).
Historical Dow purchases products from The SCG-Dow Group, primarily for marketing and distribution in Asia Pacific. Purchases of products from the The SCG-Dow Group represented 1 percent of "Cost of sales" in 2018 (2 percent in 2017 and 3 percent in 2016).
Sales to and purchases from other nonconsolidated affiliates were not material to the consolidated financial statements.
Balances due to or due from nonconsolidated affiliates at December 31, 2018 and 2017 were as follows:
| Balances Due To or Due From Nonconsolidated Affiliates at Dec 31 | ||||||
| In millions | 2018 | 2017 | ||||
| Accounts and notes receivable - Other | $ | 582 | $ | 496 | ||
| Noncurrent receivables | 8 | 283 | ||||
| Total assets | $ | 590 | $ | 779 | ||
| Notes payable | $ | 42 | $ | 40 | ||
| Accounts payable - Other | 1,328 | 1,260 | ||||
| Total current liabilities | $ | 1,370 | $ | 1,300 |
Principal Nonconsolidated Affiliates
The Company had an ownership interest in 77 nonconsolidated affiliates at December 31, 2018 (82 at December 31, 2017). The Company's principal nonconsolidated affiliates and its ownership interest (direct and indirect) for each at December 31, 2018, 2017 and 2016 are as follows:
| Principal Nonconsolidated Affiliates at Dec 31 | Country | Ownership Interest | |||||
| 2018 | 2017 | 2016 | |||||
| EQUATE Petrochemical Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| The HSC Group: | |||||||
| DC HSC Holdings LLC 1 | United States | 50 | % | 50 | % | 50 | % |
| Hemlock Semiconductor L.L.C. | United States | 50.1 | % | 50.1 | % | 50.1 | % |
| The Kuwait Olefins Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| The Kuwait Styrene Company K.S.C.C. | Kuwait | 42.5 | % | 42.5 | % | 42.5 | % |
| Map Ta Phut Olefins Company Limited 2 | Thailand | 32.77 | % | 32.77 | % | 32.77 | % |
| Sadara Chemical Company | Saudi Arabia | 35 | % | 35 | % | 35 | % |
| The SCG-Dow Group: | |||||||
| Siam Polyethylene Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Polystyrene Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Styrene Monomer Co., Ltd. | Thailand | 50 | % | 50 | % | 50 | % |
| Siam Synthetic Latex Company Limited | Thailand | 50 | % | 50 | % | 50 | % |
| 1. | DC HSC Holdings LLC holds an 80.5 percent indirect ownership interest in Hemlock Semiconductor Operations LLC. |
| 2. | Historical Dow's effective ownership of Map Ta Phut Olefins Company Limited is 32.77 percent, of which Historical Dow directly owns 20.27 percent and indirectly owns 12.5 percent through its equity interest in Siam Polyethylene Company Limited. |
The Company's investment in and equity earnings from its principal nonconsolidated affiliates are shown in the tables below:
| Investment in Principal Nonconsolidated Affiliates at Dec 31 | ||||||
| In millions | 2018 | 2017 | ||||
| Investment in principal nonconsolidated affiliates | $ | 3,411 | $ | 3,323 | ||
| Other noncurrent obligations | (495 | ) | (752 | ) | ||
| Net investment in principal nonconsolidated affiliates | $ | 2,916 | $ | 2,571 |
| Equity Earnings from Principal Nonconsolidated Affiliates | |||||||||
| In millions | 2018 | 2017 | 2016 1 | ||||||
| Equity in earnings of principal nonconsolidated affiliates | $ | 950 | $ | 701 | $ | 449 |
| 1. | Equity in earnings of principal nonconsolidated affiliates for 2016 includes the results of Dow Silicones through May 31, 2016. |
The summarized financial information that follows represents the combined accounts (at 100 percent) of the principal nonconsolidated affiliates:
| Summarized Balance Sheet Information at Dec 31 | ||||||
| In millions | 2018 | 2017 | ||||
| Current assets | $ | 8,741 | $ | 8,039 | ||
| Noncurrent assets | 27,385 | 28,300 | ||||
| Total assets | $ | 36,126 | $ | 36,339 | ||
| Current liabilities | $ | 5,706 | $ | 5,164 | ||
| Noncurrent liabilities | 20,807 | 22,240 | ||||
| Total liabilities | $ | 26,513 | $ | 27,404 | ||
| Noncontrolling interests | $ | 332 | $ | 304 |
| Summarized Income Statement Information 1 | |||||||||
| In millions | 2018 | 2017 | 2016 2 | ||||||
| Sales | $ | 15,619 | $ | 13,345 | $ | 12,003 | |||
| Gross profit | $ | 3,130 | $ | 2,461 | $ | 2,518 | |||
| Net income | $ | 1,943 | $ | 1,401 | $ | 831 |
| 1. | The results in this table reflect purchase and sale activity between certain principal nonconsolidated affiliates and Historical Dow, as previously discussed in the "Transactions with Nonconsolidated Affiliates" section. |
| 2. | The summarized income statement information for 2016 includes the results of Dow Silicones through May 31, 2016. |
NOTE 13 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company changed its reportable segments as a result of the Merger to reflect the manner in which the Company's chief operating decision maker assesses performance and allocates resources. Effective with the Merger, the Company also updated its reporting units to align with the level at which discrete financial information is available for review by management. In connection with the Merger, the Company recorded $45,497 million of goodwill, representing the final fair value as of the effective date of the Merger. Goodwill resulting from the Merger was assigned to reporting units based on the acquisition method of accounting. For the remaining goodwill balance, a relative fair value method was used to reallocate goodwill for reporting units of which the composition had changed. The following table reflects the carrying amounts of goodwill by reportable segment. Prior year data has been updated to conform with the current year presentation for changes in reportable segments discussed in Note 24.
| Goodwill | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Total | ||||||||||||||||||
| In millions | |||||||||||||||||||||||||||
| Balance at Jan 1, 2017 1 | $ | 1,472 | $ | 4,938 | $ | 1,085 | $ | 1,518 | $ | 4,155 | $ | 320 | $ | 601 | $ | 1,183 | $ | 15,272 | |||||||||
| Goodwill recognized from Merger 2 | 13,644 | — | — | 3,521 | 4,040 | 12,201 | 6,283 | 5,416 | 45,105 | ||||||||||||||||||
| Goodwill impairment | — | (1,491 | ) | — | — | — | — | — | — | (1,491 | ) | ||||||||||||||||
| Sale of SKC Haas Display Films 3 | — | — | — | — | (34 | ) | — | — | — | (34 | ) | ||||||||||||||||
| Divestiture of EAA Business 4 | — | — | — | (23 | ) | — | — | — | — | (23 | ) | ||||||||||||||||
| Goodwill recognized from H&N acquisition 5 | — | — | — | — | — | 718 | — | — | 718 | ||||||||||||||||||
| Divestiture of DAS Divested Ag Business 6 | (128 | ) | — | — | — | — | — | — | — | (128 | ) | ||||||||||||||||
| Dissolution of joint venture 7 | — | 48 | — | — | — | — | — | — | 48 | ||||||||||||||||||
| Other | — | — | — | (5 | ) | — | — | — | — | (5 | ) | ||||||||||||||||
| Foreign currency impact | (115 | ) | 194 | 16 | 33 | 14 | (59 | ) | (14 | ) | (4 | ) | 65 | ||||||||||||||
| Balance at Dec 31, 2017 | $ | 14,873 | $ | 3,689 | $ | 1,101 | $ | 5,044 | $ | 8,175 | $ | 13,180 | $ | 6,870 | $ | 6,595 | $ | 59,527 | |||||||||
| Measurement period adjustments - Merger 2 | 94 | — | — | 82 | 57 | (201 | ) | 162 | 198 | 392 | |||||||||||||||||
| Measurement period adjustments - H&N Business 5 | — | — | — | — | — | 14 | — | — | 14 | ||||||||||||||||||
| Foreign currency impact | (278 | ) | (39 | ) | (5 | ) | (25 | ) | (44 | ) | (350 | ) | (65 | ) | (85 | ) | (891 | ) | |||||||||
| Other | — | — | — | — | — | — | — | (10 | ) | (10 | ) | ||||||||||||||||
| Balance at Dec 31, 2018 | $ | 14,689 | $ | 3,650 | $ | 1,096 | $ | 5,101 | $ | 8,188 | $ | 12,643 | $ | 6,967 | $ | 6,698 | $ | 59,032 |
| 1. | Updated for changes in reportable segments effective in the third quarter of 2018. Refer to Note 24 for additional information. |
| 2. | See Note 3 for further information on goodwill recognized in connection with the Merger. |
| 3. | On June 30, 2017, Historical Dow sold its ownership interest in the SKC Haas Display Films group of companies. See Note 18 for additional information. |
| 4. | On September 1, 2017, Historical Dow divested its EAA Business to SK Global Chemical Co., Ltd. See Note 5 for additional information. |
| 5. | On November 1, 2017, Historical DuPont acquired FMC's H&N Business. See Note 3 for additional information. |
| 6. | On November 30, 2017, Historical Dow divested the DAS Divested Ag Business. See Note 5 for additional information. |
| 7. | On December 31, 2017, Historical Dow dissolved a crude acrylic acid joint venture. See Note 23 for additional information. |
Goodwill Impairments
The carrying amounts for all periods presented were net of accumulated impairments of $120 million in Transportation & Advanced Polymers and $309 million in Industrial Intermediates & Infrastructure. In addition, the carrying amount of goodwill at December 31, 2018 and 2017, was net of accumulated impairments of $1,491 million in Performance Materials & Coatings as discussed below.
Goodwill Impairment Testing
The Company performs an impairment test of goodwill annually in the fourth quarter.
In 2018, the Company performed quantitative testing for four reporting units (12 in 2017 and 3 in 2016) and a qualitative assessment was performed for the remaining reporting units that carry goodwill. The qualitative assessment indicated that it was not more likely than not that fair value was less than the carrying value for those reporting units included in the qualitative test. Based on the quantitative testing performed on the remaining four reporting units, the Company concluded that fair value exceeded carrying value for all reporting units and no impairments were identified as a result of the 2018 testing. Due to the fair value and carrying value of two of these reporting units, Industrial Biosciences and Clean Technologies, 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. 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. The Industrial Biosciences and Clean Technologies reporting units both relate to the Nutrition & Biosciences segment.
Upon completion of quantitative testing in the fourth quarter of 2017, the Company determined the Coatings & Performance Monomers reporting unit was impaired. Throughout 2017, the Coatings & Performance Monomers reporting unit did not consistently meet expected financial performance targets, primarily due to increasing commoditization in coatings markets and competition, as well as customer consolidation in end markets which reduced growth opportunities. As a result, the Coatings & Performance Monomers reporting unit lowered future revenue and profitability expectations. The fair value of the Coatings & Performance Monomers reporting unit was determined using a discounted cash flow methodology that reflected reductions in projected revenue growth rates, primarily driven by modified sales volume and pricing assumptions, as well as revised expectations for future growth rates. These discounted cash flows did not support the carrying value of the Coatings & Performance Monomers reporting unit. As a result, the Company recorded a goodwill impairment charge for the Coatings & Performance Monomers reporting unit of $1,491 million in the fourth quarter of 2017, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Performance Materials & Coatings. The Coatings & Performance Monomers reporting unit carried $1,071 million of goodwill at December 31, 2017.
No other goodwill impairments were identified as a result of the 2017 testing. Impairment tests conducted in 2016 concluded that no goodwill impairments existed.
Other Intangible Assets
The following table provides information regarding the Company's other intangible assets:
| Other Intangible Assets | Dec 31, 2018 | Dec 31, 2017 | ||||||||||||||||
| In millions | Gross Carrying Amount | Accum Amort | Net | Gross Carrying Amount | Accum Amort | Net | ||||||||||||
| Intangible assets with finite lives: | ||||||||||||||||||
| Developed technology | $ | 7,761 | $ | (2,562 | ) | $ | 5,199 | $ | 7,627 | $ | (1,834 | ) | $ | 5,793 | ||||
| Software | 1,529 | (876 | ) | 653 | 1,420 | (780 | ) | 640 | ||||||||||
| Trademarks/trade names | 1,772 | (745 | ) | 1,027 | 1,814 | (596 | ) | 1,218 | ||||||||||
| Customer-related | 14,236 | (2,895 | ) | 11,341 | 14,537 | (2,151 | ) | 12,386 | ||||||||||
| Microbial cell factories | 386 | (22 | ) | 364 | 397 | (6 | ) | 391 | ||||||||||
| Favorable supply contracts | 475 | (111 | ) | 364 | 495 | (17 | ) | 478 | ||||||||||
| Other 1 | 620 | (203 | ) | 417 | 703 | (166 | ) | 537 | ||||||||||
| Total other intangible assets with finite lives | $ | 26,779 | $ | (7,414 | ) | $ | 19,365 | $ | 26,993 | $ | (5,550 | ) | $ | 21,443 | ||||
| Intangible assets with indefinite lives: | ||||||||||||||||||
| IPR&D 2 | 594 | — | 594 | 710 | — | 710 | ||||||||||||
| Germplasm | 6,265 | — | 6,265 | 6,265 | — | 6,265 | ||||||||||||
| Trademarks/trade names | 4,741 | — | 4,741 | 4,856 | — | 4,856 | ||||||||||||
| Total other intangible assets | $ | 38,379 | $ | (7,414 | ) | $ | 30,965 | $ | 38,824 | $ | (5,550 | ) | $ | 33,274 |
| 1. | Primarily consists of sales and farmer networks, marketing and manufacturing alliances and noncompetition agreements. |
| 2. | Refer to discussion of interim impairment test that follows. |
In connection with the Merger, the Company recorded $27,071 million of intangible assets, as shown in the table below, representing the final fair values at the Merger date. See Note 3 for additional information on the Merger.
| Merger Intangible Assets | Gross Carrying Amount | Weighted-average Amort Period | ||
| Amounts in millions | ||||
| Intangible assets with finite lives: | ||||
| Developed technology | $ | 4,239 | 12 years | |
| Trademarks/trade names | 1,045 | 16 years | ||
| Customer-related | 9,215 | 17 years | ||
| Microbial cell factories | 400 | 23 years | ||
| Other | 461 | 17 years | ||
| Total other intangible assets with finite lives | $ | 15,360 | ||
| Intangible assets with indefinite lives: | ||||
| IPR&D | 660 | |||
| Germplasm | 6,263 | |||
| Trademarks/trade names | 4,788 | |||
| Total other intangible assets | $ | 27,071 |
The following table provides information regarding amortization expense related to intangible assets:
| Amortization Expense | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Other intangible assets, excluding software | $ | 1,903 | $ | 1,013 | $ | 544 | |||
| Software, included in "Cost of sales" | $ | 100 | $ | 87 | $ | 73 |
In the third quarter of 2018, the Company determined that the fair value of certain IPR&D assets in the Agriculture segment had declined as a result of delays in timing of commercialization and increases to expected research and development costs. The Company performed an analysis of the fair value using the relief from royalty method (a form of the income approach) using Level 3 inputs within the fair value hierarchy. The key assumptions used in the calculation included projected revenue, royalty rates and discount rates. These key assumptions involve management judgment and estimates relating to future operating performance and economic conditions that may differ from actual cash flows. As a result, the Company recorded a pretax, non-cash intangible asset impairment charge of $85 million, which is reflected in “Restructuring, goodwill impairment and asset related charges - net,” in the consolidated statements of income, and related to the Agriculture segment.
In the fourth quarter of 2017, Historical Dow wrote off $69 million of intangible assets (including $11 million of IPR&D) as part of the Synergy Program. In 2016, Historical Dow wrote off $11 million of IPR&D as part of the 2016 restructuring charge. See Note 6 for additional information.
Total estimated amortization expense for the next five fiscal years is as follows:
| Estimated Amortization Expense for Next Five Years | |||
| In millions | |||
| 2019 | $ | 1,876 | |
| 2020 | $ | 1,825 | |
| 2021 | $ | 1,784 | |
| 2022 | $ | 1,698 | |
| 2023 | $ | 1,566 |
NOTE 14 - TRANSFERS OF FINANCIAL ASSETS
Historical Dow has sold trade accounts receivable of select North American entities and qualifying trade accounts receivable of select European entities on a revolving basis to certain multi-seller commercial paper conduit entities ("conduits"). The proceeds received are comprised of cash and interests in specified assets of the conduits (the receivables sold by Historical Dow) that entitle Historical Dow to the residual cash flows of such specified assets in the conduits after the commercial paper has been repaid. Neither the conduits nor the investors in those entities have recourse to other assets of Historical Dow in the event of nonpayment by the debtors.
In the fourth quarter of 2017, Historical Dow suspended further sales of trade accounts receivable through these facilities and began reducing outstanding balances through collections of trade accounts receivable previously sold to such conduits. In September and October 2018, the North American and European facilities, respectively, were amended and the terms of the agreements changed from off-balance sheet arrangements to secured borrowing arrangements. See Note 15 for additional information on the secured borrowing arrangements.
For the year ended December 31, 2018, Historical Dow recognized a loss of $7 million on the sale of these receivables ($25 million loss for the year ended December 31, 2017 and $20 million loss for the year ended December 31, 2016), which is included in “Interest expense and amortization of debt discount” in the consolidated statements of income.
The following table summarizes the carrying value of interests held, which represents Historical Dow's maximum exposure to loss related to the receivables sold, and the percentage of anticipated credit losses related to the trade accounts receivable sold. Also provided is the sensitivity of the fair value of the interests held to hypothetical adverse changes in the anticipated credit losses; amounts shown below are the corresponding hypothetical decreases in the carrying value of interests.
| Interests Held at Dec 31 | ||||||
| In millions | 2018 | 2017 | ||||
| Carrying value of interests held 1 | $ | — | $ | 677 | ||
| Percentage of anticipated credit losses | — | % | 2.64 | % | ||
| Impact to carrying value - 10% adverse change | $ | — | $ | — | ||
| Impact to carrying value - 20% adverse change | $ | — | $ | 1 |
| 1. | Included in "Accounts and notes receivable - other" in the consolidated balance sheets. |
Credit losses, net of any recoveries, on receivables were insignificant for the years ended December 31, 2018, 2017 and 2016.
Following is an analysis of certain cash flows between Historical Dow and the conduits:
| Cash Proceeds | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Sale of receivables | $ | — | $ | 1 | $ | 1 | |||
| Collections reinvested in revolving receivables | $ | — | $ | 21,293 | $ | 21,652 | |||
| Interests in conduits 1 | $ | 657 | $ | 9,462 | $ | 8,551 |
| 1. | Presented in "Investing Activities" in the consolidated statements of cash flows in accordance with ASU 2016-15. See Notes 1 and 2 for additional information. In connection with the review and implementation of ASU 2016-15, Historical Dow also changed the prior year value of “Interests in conduits” due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits, including additional guidance from the SEC's Office of the Chief Accountant issued in the third quarter of 2018 that indicated an entity must evaluate daily transaction activity to calculate the value of cash received from beneficial interests in conduits. |
Following is additional information related to the sale of receivables under these facilities:
| Trade Accounts Receivable Sold at Dec 31 | ||||||
| In millions | 2018 | 2017 | ||||
| Delinquencies on sold receivables still outstanding | $ | — | $ | 82 | ||
| Trade accounts receivable outstanding and derecognized | $ | — | $ | 612 |
In 2017, Historical Dow repurchased $5 million of previously sold receivables.
NOTE 15 - NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
The following tables summarize the consolidated notes payable and long-term debt of the DowDuPont holding company, Historical Dow and Historical DuPont:
| Notes Payable | Dec 31, 2018 | Dec 31, 2017 | ||||||||||||||||
| In millions | Historical Dow | Historical DuPont | Total | Historical Dow | Historical DuPont | Total | ||||||||||||
| Commercial paper | $ | 10 | $ | 1,847 | $ | 1,857 | $ | 231 | $ | 1,436 | $ | 1,667 | ||||||
| Notes payable to banks and other lenders | 292 | 16 | 308 | 253 | 28 | 281 | ||||||||||||
| Total notes payable | $ | 302 | $ | 1,863 | $ | 2,165 | $ | 484 | $ | 1,464 | $ | 1,948 | ||||||
| Period-end average interest rates | 8.61 | % | 3.07 | % | 4.42 | % | 1.95 | % |
| Long-Term Debt | Dec 31, 2018 | ||||||||||||||||||
| In millions | DowDuPont Weighted Average Rate | DowDuPont 1 | Historical Dow Weighted Average Rate | Historical Dow | Historical DuPont Weighted Average Rate | Historical DuPont | Total | ||||||||||||
| Promissory notes and debentures: | |||||||||||||||||||
| Final maturity 2019 | — | % | $ | — | 9.80 | % | $ | 7 | 2.23 | % | $ | 263 | $ | 270 | |||||
| Final maturity 2020 | 3.68 | % | 2,000 | 4.46 | % | 1,547 | 2.14 | % | 2,496 | 6,043 | |||||||||
| Final maturity 2021 | — | % | — | 4.71 | % | 1,424 | 2.08 | % | 475 | 1,899 | |||||||||
| Final maturity 2022 | — | % | — | 3.50 | % | 1,373 | — | % | — | 1,373 | |||||||||
| Final maturity 2023 | 4.16 | % | 2,800 | 7.64 | % | 325 | 2.48 | % | 386 | 3,511 | |||||||||
| Final maturity 2024 and thereafter | 4.98 | % | 7,900 | 5.73 | % | 8,859 | 3.69 | % | 249 | 17,008 | |||||||||
| Other facilities: | |||||||||||||||||||
| U.S. dollar loans, various rates and maturities | — | % | — | 3.59 | % | 4,533 | 3.47 | % | 2,015 | 6,548 | |||||||||
| Foreign currency loans, various rates and maturities | — | % | — | 3.21 | % | 713 | — | % | — | 713 | |||||||||
| Medium-term notes, varying maturities through 2043 | — | % | — | 3.26 | % | 778 | 2.37 | % | 110 | 888 | |||||||||
| Capital lease obligations | — | 369 | 117 | 486 | |||||||||||||||
| Unamortized debt discount and issuance costs | (104 | ) | (334 | ) | (2 | ) | (440 | ) | |||||||||||
| Long-term debt due within one year 2, 3 | — | (340 | ) | (297 | ) | (637 | ) | ||||||||||||
| Long-term debt | $ | 12,596 | $ | 19,254 | $ | 5,812 | $ | 37,662 |
| 1. | Represents the DowDuPont holding company. |
| 2. | Presented net of current portion of unamortized debt issuance costs. |
| 3. | Includes capital lease obligations due within a year. |
| Long-Term Debt | Dec 31, 2017 | |||||||||||||
| In millions | Historical Dow Weighted Average Rate | Historical Dow | Historical DuPont Weighted Average Rate | Historical DuPont | Total | |||||||||
| Promissory notes and debentures: | ||||||||||||||
| Final maturity 2018 | 5.78 | % | $ | 339 | 1.59 | % | $ | 1,280 | $ | 1,619 | ||||
| Final maturity 2019 | 8.55 | % | 2,122 | 2.23 | % | 521 | 2,643 | |||||||
| Final maturity 2020 | 4.46 | % | 1,547 | 1.79 | % | 3,070 | 4,617 | |||||||
| Final maturity 2021 | 4.71 | % | 1,424 | 2.07 | % | 1,580 | 3,004 | |||||||
| Final maturity 2022 | 3.50 | % | 1,373 | — | % | — | 1,373 | |||||||
| Final maturity 2023 and thereafter | 6.00 | % | 7,182 | 3.32 | % | 3,492 | 10,674 | |||||||
| Other facilities: | ||||||||||||||
| U.S. dollar loans, various rates and maturities | 2.44 | % | 4,564 | 2.37 | % | 1,518 | 6,082 | |||||||
| Foreign currency loans, various rates and maturities | 3.00 | % | 814 | 2.85 | % | 30 | 844 | |||||||
| Medium-term notes, varying maturities through 2043 | 3.20 | % | 873 | 1.22 | % | 110 | 983 | |||||||
| Tax-exempt bonds, varying maturities through 2038 | 5.66 | % | 343 | — | % | — | 343 | |||||||
| Capital lease obligations | 282 | 5 | 287 | |||||||||||
| Unamortized debt discount and issuance costs | (346 | ) | — | (346 | ) | |||||||||
| Long-term debt due within one year 1 | (752 | ) | (1,315 | ) | (2,067 | ) | ||||||||
| Long-term debt | $ | 19,765 | $ | 10,291 | $ | 30,056 |
| 1. | Presented net of current portion of unamortized debt issuance costs. |
| Maturities of Long-Term Debt for Next Five Years at Dec 31, 2018 | DowDuPont 1 | Historical Dow 2 | Historical DuPont 3 | Total | ||||||||
| In millions | ||||||||||||
| 2019 | $ | — | $ | 340 | $ | 295 | $ | 635 | ||||
| 2020 | $ | 2,000 | $ | 1,833 | $ | 4,504 | $ | 8,337 | ||||
| 2021 | $ | — | $ | 6,247 | $ | 484 | $ | 6,731 | ||||
| 2022 | $ | — | $ | 1,510 | $ | 17 | $ | 1,527 | ||||
| 2023 | $ | 2,800 | $ | 480 | $ | 392 | $ | 3,672 |
| 1. | Represents the DowDuPont holding company. |
| 2. | Assumes the option to extend a term loan facility related to the Dow Silicones ownership restructure will be exercised. |
| 3. | Excludes unamortized debt step-up premium. |
2018 Activity
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 eight series of senior unsecured notes (the "DowDuPont Notes") in an aggregate principal amount of $12.7 billion. The DowDuPont Notes are a senior unsecured obligation of the Company and will rank equally with Company's future senior unsecured debt outstanding from time to time.
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, resulting in a pretax loss of $81 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income. In addition, proceeds were used to purchase $1.4 billion of shares under the $3.0 billion share buyback program; as well as costs and expenses associated with the DowDuPont Notes offering, the Historical DuPont tender offers and related premiums, fees and expenses.
In November 2018, Historical Dow issued $2.0 billion of senior unsecured notes in an offering under Rule 144A of the Securities Act of 1933. The offering included $900 million aggregate principal amount of 5.55 percent notes due 2048; $600 million aggregate principal amount of 4.80 percent notes due 2028; and $500 million aggregate principal amount of 4.55 percent notes due 2025.
In December 2018, Historical Dow tendered and redeemed $2.1 billion of 8.55 percent notes issued by Historical Dow with maturity in 2019. As a result, Historical Dow recognized a pretax loss of $48 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income.
In 2018, Historical Dow redeemed $333 million of 5.70 percent notes at maturity and an aggregate principal amount of $91 million of International Notes ("InterNotes") at maturity. In addition, approximately $138 million of long-term debt was repaid by consolidated variable interest entities. Historical Dow also called an aggregate principal amount of $343 million tax-exempt bonds of various interest rates and maturities in 2029, 2033 and 2038. As a result of these redemptions, Historical Dow recognized a pretax loss of $6 million on the early extinguishment of debt, included in “Sundry income (expense) - net” in the consolidated statements of income.
In July 2018, Historical DuPont fully repaid $1,250 million of 6.00 percent coupon bonds at maturity.
2017 Activity
In 2017, Historical Dow redeemed $436 million of 6.00 percent notes that matured on September 15, 2017, and $32 million aggregate principal amount of International Notes ("InterNotes") at maturity. In addition, approximately $119 million of Historical Dow's long-term debt was repaid by consolidated variable interest entities.
In connection with the Merger, the fair value of debt assumed was $15,197 million and was reflected in the preceding Notes Payable and Long-Term Debt tables. See Note 3 for additional information.
2016 Activity
In 2016, Historical Dow redeemed $349 million of 2.50 percent notes that matured on February 15, 2016, and $52 million principal amount of InterNotes at maturity. In addition, approximately $128 million of Historical Dow's long-term debt (net of $28 million of additional borrowings) was repaid by consolidated variable interest entities.
As part of the Dow Silicones ownership restructure, the fair value of debt assumed by Historical Dow was $4,672 million.
Available Credit Facilities
The following table summarizes the Company's credit facilities:
| Committed and Available Credit Facilities at Dec 31, 2018 | ||||||||||
| In millions | Subsidiary | Effective Date | Committed Credit | Credit Available | Maturity Date | Interest | ||||
| Five Year Competitive Advance and Revolving Credit Facility | Historical Dow | October 2018 | $ | 5,000 | $ | 5,000 | October 2023 | Floating rate | ||
| Bilateral Revolving Credit Facility | Historical Dow | August 2015 | 100 | 100 | March 2019 | Floating rate | ||||
| Bilateral Revolving Credit Facility | Historical Dow | August 2015 | 100 | 100 | October 2019 | Floating rate | ||||
| Bilateral Revolving Credit Facility | Historical Dow | August 2015 | 100 | 100 | March 2020 | Floating rate | ||||
| Bilateral Revolving Credit Facility | Historical Dow | August 2015 | 280 | 280 | March 2020 | Floating rate | ||||
| Bilateral Revolving Credit Facility | Historical Dow | August 2015 | 100 | 100 | March 2020 | Floating rate | ||||
| Bilateral Revolving Credit Facility | Historical Dow | August 2015 | 200 | 200 | March 2020 | Floating rate | ||||
| Historical Dow Term Loan Facility | Historical Dow | February 2016 | 4,500 | — | December 2021 | Floating rate | ||||
| Bilateral Revolving Credit Facility | Historical Dow | May 2016 | 200 | 200 | May 2020 | Floating rate | ||||
| Bilateral Revolving Credit Facility | Historical Dow | July 2016 | 200 | 200 | July 2020 | Floating rate | ||||
| Bilateral Revolving Credit Facility | Historical Dow | August 2016 | 100 | 100 | August 2020 | Floating rate | ||||
| North American Securitization Facility | Historical Dow | September 2018 | 800 | 800 | September 2019 | Floating rate | ||||
| European Securitization Facility 1 | Historical Dow | October 2018 | 457 | 457 | October 2020 | Floating rate | ||||
| Revolving Credit Facility | Historical DuPont | March 2018 | 3,000 | 2,956 | June 2020 | Floating rate | ||||
| Term Loan Facility | Historical DuPont | March 2018 | 4,500 | 2,500 | June 2020 | Floating rate | ||||
| Total Committed and Available Credit Facilities | $ | 19,637 | $ | 13,093 |
| 1. | Equivalent to Euro 400 million. |
Historical Dow Term Loan Facility
In connection with the ownership restructure of Dow Silicones, on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness under a certain third party credit agreement ("Historical Dow Term Loan Facility"). Historical Dow subsequently guaranteed the obligations of Dow Silicones under the Historical Dow Term Loan Facility and, as a result, the covenants and events of default applicable to the Historical Dow Term Loan Facility are substantially similar to the covenants and events of default set forth in Historical Dow's Five Year Competitive Advance and Revolving Credit Facility. In the second quarter of 2018,
Dow Silicones exercised the 19-month extension option making amounts borrowed under the Historical Dow Term Loan Facility repayable on December 20, 2019. In addition, Dow Silicones amended the Historical Dow Term Loan Facility to include an additional 2-year extension option, at Dow Silicones' election, upon satisfaction of certain customary conditions precedent. Dow Silicones intends to exercise the 2-year extension option on the Historical Dow Term Loan Facility. See Note 3 for additional information on the Dow Silicones ownership restructure.
Historical Dow Secured Borrowings
In September 2018, Historical Dow renewed its North American accounts receivable securitization facility for a one year term and amended the terms of the agreement from an off-balance sheet arrangement to a secured borrowing arrangement, with a borrowing capacity up to $800 million. Under the structure of the amended agreement, Historical Dow will use select trade accounts receivable to collateralize the credit facility with certain lenders. At December 31, 2018, the facility had not been drawn upon.
In October 2018, Historical Dow renewed its European accounts receivable securitization facility for a two year term and amended the terms of the agreement from an off-balance sheet arrangement to a secured borrowing arrangement, with a borrowing capacity up to Euro 400 million. Under the structure of the amended agreement, Historical Dow will use select trade accounts receivable to collateralize the credit facility with certain lenders. At December 31, 2018, the facility had not been drawn upon.
Historical DuPont Term Loan and Revolving Credit Facilities
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
The Subsidiaries had uncommitted credit facilities in the form of unused bank credit lines of approximately $3,480 million for Historical Dow and $663 million for Historical DuPont at December 31, 2018. These lines can be used to support short-term liquidity needs and general corporate purposes, including letters of credit. Outstanding letters of credit were $439 million for Historical Dow ($433 million at December 31, 2017) and $172 million for Historical DuPont at December 31, 2018 ($177 million at December 31, 2017). These letters of credit support commitments made in the ordinary course of business.
Debt Covenants and Default Provisions
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 Subsidiaries outstanding long-term debt obligations have been issued primarily under indentures which contain, among other provisions, certain customary restrictive covenants with which each of the Subsidiaries must comply while the underlying notes are outstanding. Failure of either Historical Dow or Historical DuPont to comply with any of its respective covenants, could result in a default under the applicable indenture and allow the note holders to accelerate the due date of the outstanding principal and accrued interest on the underlying notes.
Historical Dow Debt Covenants and Default Provisions
Historical Dow's indenture covenants include obligations to not allow liens on principal U.S. manufacturing facilities, enter into sale and lease-back transactions with respect to principal U.S. manufacturing facilities, merge or consolidate with any other corporation, or sell, lease or convey, directly or indirectly, all or substantially all of Historical Dow's assets. The outstanding debt also contains customary default provisions.
Historical Dow’s primary, private credit agreements also contain certain customary restrictive covenant and default provisions in addition to the covenants set forth above with respect to Historical Dow's debt. Significant other restrictive covenants and default provisions related to these agreements include:
| (a) | the obligation to maintain the ratio of Historical Dow’s consolidated indebtedness to consolidated capitalization at no greater than 0.65 to 1.00 at any time the aggregate outstanding amount of loans under the Five Year Competitive Advance and Revolving Credit Facility Agreement dated October 30, 2018 equals or exceeds $500 million, |
| (b) | a default if Historical Dow or an applicable subsidiary fails to make any payment, including principal, premium or interest, under the applicable agreement on other indebtedness of, or guaranteed by, Historical Dow or such applicable subsidiary in an aggregate amount of $100 million or more when due, or any other default or other event under the applicable agreement with respect to such indebtedness occurs which permits or results in the acceleration of $400 million or more in the aggregate of principal, and |
| (c) | a default if Historical Dow or any applicable subsidiary fails to discharge or stay within 60 days after the entry of a final judgment against Historical Dow or such applicable subsidiary of more than $400 million. |
Failure of Historical Dow to comply with any of the covenants or default provisions could result in a default under the applicable credit agreement which would allow the lenders to not fund future loan requests and to accelerate the due date of the outstanding principal and accrued interest on any outstanding Historical Dow indebtedness.
Historical DuPont Debt Covenants and Default Provisions
Historical DuPont's indenture covenants include customary limitations on liens, sale and leaseback transactions, and mergers and consolidations affecting manufacturing plants, mineral producing properties or research facilities located in the U.S. and the consolidated subsidiaries owning such plants, properties and facilities subject to certain limitations. The outstanding long-term debt also contains customary default provisions. In addition, in May 2017, Historical DuPont issued $1,250 million of 2.20 percent notes due 2020 and $750 million of floating rate notes due 2020 that must be redeemed upon the announcement of the record date for the separation of Historical DuPont's agriculture line or specialty products line of business or the entry into an agreement to sell all or substantially all of the assets of either line of business to a third party.
The Historical DuPont Term Loan Facility and the amended Historical DuPont Revolving Credit Facility contain customary representations and warranties, affirmative and negative covenants, and events of default that are typical for companies with similar credit ratings and generally consistent with Historical DuPont’s indenture covenants. The Historical DuPont Term Loan Facility and the amended Historical DuPont Revolving Credit Facility also 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.
The Historical DuPont Term Loan Facility and the amended Historical DuPont Revolving Credit Facility impose additional affirmative and negative covenants on Historical DuPont and its subsidiaries after the closing of the Merger, subject to certain limitations, including to:
(a) not sell, lease or otherwise convey to DowDuPont, its shareholders or its non-Historical DuPont subsidiaries, any assets or properties of Historical DuPont or its subsidiaries unless the aggregate amount of revenues attributable to all such assets and properties so conveyed after the Merger does not exceed 30 percent of the consolidated revenues of Historical DuPont and its subsidiaries as of December 31, 2015, and
(b) not guarantee any indebtedness or other obligations of DowDuPont, Historical Dow or their respective subsidiaries (other than of Historical DuPont and its subsidiaries).
The Historical DuPont Term Loan Facility and the amended Historical DuPont Revolving Credit Facility will terminate, and the loans and other amounts thereunder will become due and payable, upon the sale, transfer, lease or other disposition of all or substantially all of the assets of Historical DuPont's agriculture line of business to DowDuPont, its shareholders or any of its non-Historical DuPont subsidiaries.
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
Asbestos-Related Matters of Union Carbide Corporation
Introduction
Union Carbide Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.
Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
Estimating the Asbestos-Related Liability
Based on a study completed in January of 2003 by Ankura Consulting Group, LLC ("Ankura"), Union Carbide increased its December 31, 2002 asbestos-related liability for pending and future claims for a 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, Union Carbide has compared current asbestos claim and resolution activity with the results of the most recent Ankura study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, Union Carbide has requested Ankura to review Union Carbide’s historical asbestos claim and resolution activity each year since 2004 to determine the appropriateness of updating the most recent Ankura study.
In October 2016, Union Carbide requested Ankura to review its historical asbestos claim and resolution activity and determine the appropriateness of updating its December 2014 study. In response to that request, Ankura reviewed and analyzed asbestos-related claim and resolution data through September 30, 2016. The resulting study, completed by Ankura in December 2016, provided estimates for the undiscounted cost of disposing of pending and future claims against Union Carbide and Amchem, excluding future defense and processing costs, for both a 15-year period and through the terminal year of 2049.
Based on the study completed in December 2016 by Ankura, and Union Carbide's own review, it was determined that an adjustment to the accrual was necessary. Union Carbide determined that using the estimate through the terminal year of 2049 was more appropriate due to increasing knowledge and data about the costs to resolve claims and diminished volatility in filing rates. Using the range in the Ankura December 2016 study, which was estimated to be between $502 million and $565 million for the undiscounted cost of disposing of pending and future claims, Union Carbide increased its asbestos-related liability for pending and future claims through the terminal year of 2049 by $104 million, included in "Asbestos‑related charge" in the consolidated statements of income.
In September 2014, Union Carbide began to implement a strategy designed to reduce and to ultimately stabilize and forecast defense costs associated with asbestos-related matters. The strategy included a number of important changes including: invoicing protocols including capturing costs by plaintiff; review of existing counsel roles, work processes and workflow; and the utilization of enterprise legal management software, which enabled claim-specific tracking of asbestos-related defense and processing costs. Union Carbide reviewed the information generated from this new strategy and determined that it now had the ability to reasonably estimate asbestos-related defense and processing costs for the same periods that it estimates its asbestos-related liability for pending and future claims. Union Carbide believes that including estimates of the liability for asbestos-related defense and processing costs provides a more complete assessment and measure of the liability associated with resolving asbestos-related matters, which Union Carbide and Historical Dow believe is preferable in these circumstances.
In October 2016, in addition to the study for asbestos claim and resolution activity, Union Carbide requested Ankura to review asbestos-related defense and processing costs and provide an estimate of defense and processing costs associated with resolving pending and future asbestos-related claims facing Union Carbide and Amchem for the same periods of time that Union Carbide uses for estimating resolution costs. In December 2016, Ankura conducted the study and provided Union Carbide with an estimate of future defense and processing costs for both a 15-year period and through the terminal year of 2049. The resulting study estimated asbestos-related defense and processing costs for pending and future asbestos claims to be between $1,009 million and $1,081 million through the terminal year of 2049.
In the fourth quarter of 2016, Union Carbide and Historical Dow elected to change their method of accounting for asbestos-related defense and processing costs from expensing as incurred to estimating and accruing a liability. This change is believed to be preferable as asbestos-related defense and processing costs represent expenditures related to legacy activities that do not contribute
to current or future revenue generating activities of Union Carbide or Historical Dow. The change is also reflective of the manner in which Union Carbide manages its asbestos-related exposure, including careful monitoring of the correlation between defense spending and resolution costs. Together, these two sources of cost more accurately represent the “total cost” of resolving asbestos-related claims now and in the future.
This accounting policy change was reflected as a change in accounting estimate effected by a change in accounting principle. As a result of this accounting policy change and based on the December 2016 Ankura study of asbestos-related defense and processing costs and Union Carbide's own review of the data, Union Carbide recorded a pretax charge for asbestos-related defense and processing costs of $1,009 million in the fourth quarter of 2016, included in “Asbestos-related charge” in the consolidated statements of income.
In October 2017, Union Carbide requested Ankura to review its historical asbestos claim and resolution activity (including asbestos-related defense and processing costs) and determine the appropriateness of updating its December 2016 study. In response to that request, Ankura reviewed and analyzed data through September 30, 2017. In December 2017, Ankura stated that an update of its December 2016 study would not provide a more likely estimate of future events than the estimate reflected in the study and, therefore, the estimate in that study remained applicable. Based on Union Carbide's own review of the asbestos claim and resolution activity (including asbestos-related defense and processing costs) and Ankura's response, Union Carbide determined that no change to the accrual was required. At December 31, 2017, the asbestos-related liability for pending and future claims against Union Carbide and Amchem, including future asbestos-related defense and processing costs, was $1,369 million, and approximately 16 percent of the recorded liability related to pending claims and approximately 84 percent related to future claims.
In October 2018, Union Carbide requested Ankura to review its historical asbestos claim and resolution activity (including asbestos-related defense and processing costs) and determine the appropriateness of updating its December 2016 study. In response to that request, Ankura reviewed and analyzed data through September 30, 2018. The resulting study, completed by Ankura in December 2018, provided estimates for the undiscounted cost of disposing of pending and future claims against Union Carbide and Amchem, including future defense and processing costs, through the terminal year of 2049. Based on the study completed in December 2018 by Ankura, and Union Carbide's own review, it was determined that no adjustment to the accrual was required. At December 31, 2018, Union Carbide's asbestos-related liability for pending and future claims and defense and processing costs was $1,260 million, and approximately 16 percent of the recorded liability related to pending claims and approximately 84 percent related to future claims.
Summary
The Company's management believes the amounts recorded by Union Carbide for the asbestos-related liability (including defense and processing costs) reflect reasonable and probable estimates of the liability based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of defending and disposing of each such claim, as well as the numerous uncertainties surrounding asbestos litigation in the United States over a significant period of time, could cause the actual costs for Union Carbide to be higher or lower than those projected or those recorded. Any such events could result in an increase or decrease in the recorded liability.
Because of the uncertainties described above, Union Carbide cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing Union Carbide and Amchem. As a result, it is reasonably possible that an additional cost of disposing of Union Carbide's asbestos-related claims, including future defense and processing costs, could have a material impact on the Company's results of operations and cash flows for a particular period and on the consolidated financial position.
Urethane Matters
Class Action Lawsuit
On February 16, 2006, Historical Dow, among others, received a subpoena from the DOJ as part of a previously announced antitrust investigation of manufacturers of polyurethane chemicals, including methylene diphenyl diisocyanate, toluene diisocyanate, polyether polyols and system house products. Historical Dow cooperated with the DOJ and, following an extensive investigation, on December 10, 2007, Historical Dow received notice from the DOJ that it had closed its investigation of potential antitrust violations involving these products without indictments or pleas.
In 2005, Historical Dow, among others, was named as a defendant in multiple civil class action lawsuits alleging a conspiracy to fix the price of various urethane chemical products, namely the products that were the subject of the above described DOJ antitrust investigation. On July 29, 2008, a Kansas City federal district court (the "district court") certified a class of purchasers of the products for the six-year period from 1999 through 2004 ("plaintiff class"). In January 2013, the class action lawsuit went to trial with Historical Dow as the sole remaining defendant, the other defendants having previously settled. On February 20, 2013, the federal jury returned a damages verdict of approximately $400 million against Historical Dow, which ultimately was trebled under applicable antitrust laws, less offsets from other settling defendants, resulting in a judgment entered in July 2013 in the amount
of $1.06 billion. Historical Dow appealed this judgment to the U.S. Tenth Circuit Court of Appeals ("Court of Appeals"), and on September 29, 2014, the Court of Appeals issued an opinion affirming the district court judgment.
On March 9, 2015, Historical Dow filed a petition for writ of certiorari ("Writ Petition") with the United States Supreme Court, seeking judicial review and requesting that it correct fundamental errors in the Court of Appeals decision. In the first quarter of 2016, Historical Dow changed its risk assessment on this matter as a result of growing political uncertainties due to events within the Supreme Court, including Justice Scalia's death, and the increased likelihood for unfavorable outcomes for businesses involved in class action lawsuits. On February 26, 2016, Historical Dow announced a proposed settlement under which it would pay the plaintiff class $835 million, which included damages, class attorney fees and post-judgment interest. On July 29, 2016, the U.S. District Court for the District of Kansas granted final approval of the settlement. The settlement resolved the $1.06 billion judgment and any subsequent claim for attorneys' fees, costs and post-judgment interest against Historical Dow. As a result, in the first quarter of 2016, Historical Dow recorded a loss of $835 million, included in "Sundry income (expense) - net" in the consolidated statements of income and related to the Industrial Intermediates & Infrastructure segment. Historical Dow continues to believe that it was not part of any conspiracy and the judgment was fundamentally flawed as a matter of class action law. The case is now concluded.
Opt-Out Cases
Shortly after the July 2008 class certification ruling, a series of "opt-out" cases were filed by a number of large volume purchasers who elected not to be class members in the district court case. These opt-out cases were substantively identical to the class action lawsuit, but expanded the period of time to include 1994 through 1998. A consolidated jury trial of the opt-out cases began on March 8, 2016. Prior to a jury verdict, on April 5, 2016, Historical Dow entered into a binding settlement for the opt-out cases under which Historical Dow would pay the named plaintiffs $400 million, inclusive of damages and attorney fees. Payment of this settlement occurred on May 4, 2016. Historical Dow changed its risk assessment on this matter as a result of the class settlement and the uncertainty of a jury trial outcome along with the automatic trebling of an adverse verdict. As a result, Historical Dow recorded a loss of $400 million in the first quarter of 2016, included in "Sundry income (expense) - net" in the consolidated statements of income and related to the Industrial Intermediates & Infrastructure segment. As with the class action case, Historical Dow continues to deny allegations of price fixing and maintains that it was not part of any conspiracy. The case is now concluded.
Bayer CropScience v. Dow AgroSciences ICC Arbitration
On August 13, 2012, Bayer CropScience AG and Bayer CropScience NV (together, “Bayer”) filed a request for arbitration with the International Chamber of Commerce ("ICC") International Court of Arbitration against Dow AgroSciences LLC, a wholly owned subsidiary of Historical Dow, and other subsidiaries of Historical Dow (collectively, “DAS”) under a 1992 license agreement executed by predecessors of the parties (the “License Agreement”). In its request for arbitration, Bayer alleged that (i) DAS breached the License Agreement, (ii) the License Agreement was properly terminated with no ongoing rights to DAS, (iii) DAS infringed its patent rights related to the use of the pat gene in certain soybean and cotton seed products, and (iv) Bayer was entitled to monetary damages and injunctive relief. DAS denied that it breached the License Agreement and asserted that the License Agreement remained in effect because it was not properly terminated. DAS also asserted that all of Bayer’s patents at issue are invalid and/or not infringed, and, therefore, for these reasons (and others), a license was not required. During the pendency of the arbitration proceeding, DAS filed six re-examination petitions with the United States Patent & Trademark Office (“USPTO”) against the Bayer patents, asserting that each patent is invalid based on the doctrine against double-patenting and/or prior art. The USPTO granted all six petitions, and, on February 26, 2015, the USPTO issued an office action rejecting the patentability of the sole Bayer patent claim in the only asserted Bayer patent that has not expired and that forms the basis for the vast majority of the damages in the arbitral award discussed below.
A three-member arbitration tribunal presided over the arbitration proceeding (the “tribunal”). In a decision dated October 9, 2015, the tribunal determined that (i) DAS breached the License Agreement, (ii) Bayer properly terminated the License Agreement, (iii) all of the patents remaining in the proceeding are valid and infringed, and (iv) that Bayer is entitled to monetary damages in the amount of $455 million inclusive of pre-judgment interest and costs (the “arbitral award”). One of the arbitrators, however, issued a partial dissent finding that all of the patents are invalid based on the double-patenting doctrine. The tribunal also denied Bayer’s request for injunctive relief.
On October 16, 2015, Bayer filed a motion in U.S. District Court for the Eastern District of Virginia ("Federal District Court") seeking to confirm the arbitral award. DAS opposed the motion and filed separate motions to vacate the award, or in the alternative, to stay enforcement of the award until the USPTO issues final office actions with respect to the re-examination proceedings. On January 15, 2016, the Federal District Court denied DAS's motions and confirmed the award. DAS appealed the Federal District Court's decision. On March 1, 2017, the U.S. Court of Appeals for the Federal Circuit ("Federal Circuit") affirmed the arbitral award. As a result of this action, in the first quarter of 2017, DAS recorded a loss of $469 million, inclusive of the arbitral award and post-judgment interest, which was included in "Sundry income (expense) - net" in the consolidated statements of income and related to the Agriculture segment. On May 19, 2017, the Federal Circuit issued a mandate denying DAS's request to stay the
arbitral award pending judicial review by the United States Supreme Court. On May 26, 2017, DAS paid the $469 million arbitral award to Bayer as a result of that decision. On September 11, 2017, DAS filed a petition for writ of certiorari with the United States Supreme Court to review the case, but the Court denied DAS’s petition.
The litigation is now concluded with no risk of further liability. Historical Dow continues to believe that the arbitral award is fundamentally flawed because, among other things, it allowed for the enforcement of invalid patents. The arbitral award and subsequent related judicial decisions will not impact DAS’s commercialization of its soybean and cotton seed products, including those containing the ENLIST™ technologies.
Rocky Flats Matter
Historical Dow and Rockwell International Corporation ("Rockwell") (collectively, the "defendants") were defendants in a class action lawsuit filed in 1990 on behalf of property owners ("plaintiffs") in Rocky Flats, Colorado, who asserted claims for nuisance and trespass based on alleged property damage caused by plutonium releases from a nuclear weapons facility owned by the U.S. Department of Energy ("DOE") (the "facility"). Historical Dow and Rockwell were both DOE contractors that operated the facility - Historical Dow from 1952 to 1975 and Rockwell from 1975 to 1989. The facility was permanently shut down in 1989.
In 1993, the United States District Court for the District of Colorado ("District Court") certified the class of property owners. The plaintiffs tried their case as a public liability action under the Price Anderson Act ("PAA"). In 2005, the jury returned a damages verdict of $926 million. Historical Dow and Rockwell appealed the jury award to the U.S. Tenth Circuit Court of Appeals ("Court of Appeals") which concluded the PAA had its own injury requirements, on which the jury had not been instructed, and also vacated the District Court's class certification ruling, reversed and remanded the case, and vacated the District Court's judgment. The plaintiffs argued on remand to the District Court that they were entitled to reinstate the judgment as a state law nuisance claim, independent of the PAA. The District Court rejected that argument and entered judgment in favor of the defendants. The plaintiffs appealed to the Court of Appeals, which reversed the District Court's ruling, holding that the PAA did not preempt the plaintiffs' nuisance claim under Colorado law and that the plaintiffs could seek reinstatement of the prior nuisance verdict under Colorado law.
Historical Dow and Rockwell continued to litigate this matter in the District Court and in the United States Supreme Court following the appellate court decision. On May 18, 2016, Historical Dow, Rockwell and the plaintiffs entered into a settlement agreement for $375 million, of which $131 million was paid by Historical Dow. The DOE authorized the settlement pursuant to the PAA and the nuclear hazards indemnity provisions contained in Historical Dow's and Rockwell's contracts. The District Court granted preliminary approval to the class settlement on August 5, 2016. On April 28, 2017, the District Court conducted a fairness hearing and granted final judgment approving the class settlement and dismissed class claims against the defendants ("final judgment order").
On December 13, 2016, the United States Civil Board of Contract Appeals unanimously ordered the United States government to pay the amounts stipulated in the Settlement Agreement. On January 17, 2017, Historical Dow received a full indemnity payment of $131 million from the United States government for Historical Dow's share of the class settlement. On January 26, 2017, Historical Dow placed $130 million in an escrow account for the settlement payment owed to the plaintiffs. The funds were subsequently released from escrow as a result of the final judgment order. The litigation is now concluded.
Dow Silicones Chapter 11 Related Matters
Introduction
In 1995, Dow Silicones, then a 50:50 joint venture between Historical Dow and Corning, voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code in order to resolve Dow Silicones' breast implant liabilities and related matters (the “Chapter 11 Proceeding”). Dow Silicones emerged from the Chapter 11 Proceeding on June 1, 2004 (the “Effective Date”) and is implementing the Joint Plan of Reorganization (the “Plan”). The Plan provides funding for the resolution of breast implant and other product liability litigation covered by the Chapter 11 Proceeding and provides a process for the satisfaction of commercial creditor claims in the Chapter 11 Proceeding. As of June 1, 2016, Dow Silicones is a wholly owned subsidiary of Historical Dow.
Breast Implant and Other Product Liability Claims
Under the Plan, a product liability settlement program administered by an independent claims office (the “Settlement Facility”) was created to resolve breast implant and other product liability claims. Product liability claimants rejecting the settlement program in favor of pursuing litigation must bring suit against a litigation facility (the “Litigation Facility”). Under the Plan, total payments committed by Dow Silicones to resolving product liability claims are capped at a maximum $2,350 million net present value (“NPV”) determined as of the Effective Date using a discount rate of seven percent (approximately $3,876 million undiscounted at December 31, 2018). Of this amount, no more than $400 million NPV determined as of the Effective Date can be used to fund the Litigation Facility.
Dow Silicones has an obligation to fund the Settlement Facility and the Litigation Facility over a 16-year period, commencing at the Effective Date. At December 31, 2018, Dow Silicones and its insurers have made life-to-date payments of $1,762 million to the Settlement Facility and the Settlement Facility reported an unexpended balance of $118 million.
On June 1, 2016, as part of the ownership restructure of Dow Silicones and in accordance with ASC 450 "Accounting for Contingencies," Historical Dow recorded a liability of $290 million for breast implant and other product liability claims (“Implant Liability”), which reflected the estimated impact of the settlement of future claims primarily based on reported claim filing levels in the Revised Settlement Program (the “RSP”) and on the resolution of almost all cases pending against the Litigation Facility. The RSP was a program sponsored by certain other breast implant manufacturers in the context of multi-district, coordinated federal breast implant cases and was open from 1995 through 2010. The RSP was also a revised successor to an earlier settlement plan involving Dow Silicones (prior to its bankruptcy filing). While Dow Silicones withdrew from the RSP, many of the benefit categories and payment levels in Dow Silicones' settlement program were drawn from the RSP. Based on the comparability in design and actual claim experience of both plans, management concluded that claim information from the RSP provides a reasonable basis to estimate future claim filing levels for the Settlement Facility.
In the fourth quarter of 2016, with the assistance of a third party consultant ("consultant"), Dow Silicones updated its estimate of its Implant Liability to $263 million, primarily reflecting a decrease in Class 7 costs (claimants who have breast implants made by certain other manufacturers using primarily Dow Silicones silicone gel), a decrease resulting from the passage of time, decreased claim filing activity and administrative costs compared with the previous estimate, and an increase in investment income resulting from insurance proceeds. Based on the consultant's updated estimate and Dow Silicones' own review of claim filing activity, Dow Silicones determined that an adjustment to the Implant Liability was required. Accordingly, Dow Silicones decreased its Implant Liability in the fourth quarter of 2016 by $27 million, which was included in "Sundry income (expense) - net" in the consolidated statements of income. At December 31, 2018, the Implant Liability was $263 million, of which $111 million was included in "Accrued and other current liabilities" and $152 million was included in "Other noncurrent obligations" in the consolidated balance sheets. At December 31, 2017, the Implant Liability was $263 million, which was included in "Other noncurrent obligations" in the consolidated balance sheets.
Dow Silicones is not aware of circumstances that would change the factors used in estimating the Implant Liability and believes the recorded liability reflects the best estimate of the remaining funding obligations under the Plan; however, the estimate relies upon a number of significant assumptions, including: future claim filing levels in the Settlement Facility will be similar to those in a revised settlement program, which management uses to estimate future claim filing levels for the Settlement Facility; future acceptance rates, disease mix, and payment values will be materially consistent with historical experience; no material negative outcomes in future controversies or disputes over Plan interpretation will occur; and the Plan will not be modified. If actual outcomes related to any of these assumptions prove to be materially different, the future liability to fund the Plan may be materially different than the amount estimated. If Dow Silicones was ultimately required to fund the full liability up to the maximum capped value, the liability would be $2,114 million at December 31, 2018.
Commercial Creditor Issues
The Plan provides that each of Dow Silicones commercial creditors (the “Commercial Creditors”) would receive in cash the sum of (a) an amount equal to the principal amount of their claims and (b) interest on such claims. The actual amount of interest that will ultimately be paid to these Commercial Creditors is uncertain due to pending litigation between Dow Silicones and the Commercial Creditors regarding the appropriate interest rates to be applied to outstanding obligations from the 1995 bankruptcy filing date through the Effective Date, as well as the presence of any recoverable fees, costs, and expenses. Upon the Plan becoming effective, Dow Silicones paid approximately $1,500 million to the Commercial Creditors, representing principal and an amount of interest that Dow Silicones considers undisputed.
In 2006, the U.S. Court of Appeals for the Sixth Circuit concluded that there is a general presumption that contractually specified default interest should be paid by a solvent debtor to unsecured creditors (the “Interest Rate Presumption”) and permitting the Commercial Creditors to recover fees, costs, and expenses where allowed by relevant loan agreements. The matter was remanded to the U.S. District Court for the Eastern District of Michigan ("District Court") for further proceedings, including rulings on the facts surrounding specific claims and consideration of any equitable factors that would preclude the application of the Interest Rate Presumption. On May 10, 2017, the District Court entered a stipulated order resolving pending discovery motions and established a discovery schedule for the Commercial Creditors matter. As a result, Dow Silicones and its third party consultants conducted further analysis of the Commercial Creditors claims and defenses. This analysis indicated the estimated remaining liability to the Commercial Creditors to be within a range of $77 million to $260 million. No single amount within the range appears to be a better estimate than any other amount within the range. Therefore, Dow Silicones recorded the minimum liability within the range, which resulted in a decrease to the Commercial Creditor liability of $33 million in the second quarter of 2017, which was included in "Sundry income (expense) - net" in the consolidated statements of income. At December 31, 2018, the liability related to Dow Silicones' potential obligation to pay additional interest to the Commercial Creditors in the Chapter 11
Proceeding was $82 million ($78 million at December 31, 2017) and included in "Accrued and other current liabilities" in the consolidated balance sheets. The actual amount of interest that will be paid to these creditors is uncertain and will ultimately be resolved through continued proceedings in the District Court.
Indemnifications
In connection with the June 1, 2016 ownership restructure of Dow Silicones, Historical Dow is indemnified by Corning for 50 percent of future losses associated with certain pre-closing liabilities, including the Implant Liability and Commercial Creditors matters described above, subject to certain conditions and limits. The maximum amount of indemnified losses which may be recovered are subject to a cap that declines over time. Indemnified losses are capped at (1) $1 billion between May 31, 2018 and May 31, 2023, and (2) no recoveries are permitted after May 31, 2023. No indemnification assets were recorded at December 31, 2018 or 2017.
Summary
The amounts recorded by Dow Silicones for the Chapter 11 related matters described above were based upon current, known facts, which management believes reflect reasonable and probable estimates of the liability. However, future events could cause the actual costs for Dow Silicones to be higher or lower than those projected or those recorded. Any such events could result in an increase or decrease in the recorded liability.
Separation of Historical DuPont's Performance Chemicals Segment
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, Chemours indemnifies Historical DuPont against certain litigation, environmental, workers' compensation and other liabilities that arose prior to the Chemours Separation. The term of this indemnification is generally indefinite and includes defense costs and expenses, as well as monetary and non-monetary settlements and judgments. In connection with the recognition of liabilities related to these matters, Historical DuPont records an indemnification asset when recovery is deemed probable. At December 31, 2018, the indemnified assets were $80 million included in "Accounts and notes receivable - Other" and $298 million included in "Noncurrent receivables" along with the corresponding liabilities of $80 million recorded in "Accrued and other current liabilities" and $298 million included in "Other noncurrent obligations" in the consolidated balance sheets.
PFOA Liabilities
Historical DuPont is a party to legal proceedings relating to the use of PFOA (collectively, perfluorooctanoic acids and its salts, including the ammonium salt) by its former Performance Chemicals segment. While it is reasonably possible that Historical DuPont could incur liabilities related to PFOA, any such liabilities are not expected to be material. Pursuant to the Chemours Separation Agreement discussed above, Historical DuPont is indemnified by Chemours for the PFOA matters discussed below and has recorded a total liability of $20 million and a total indemnification asset of $20 million at December 31, 2018, primarily related to testing drinking water in and around certain Historical DuPont sites and offering treatment or an alternative supply of drinking water if tests indicate the presence of PFOA in drinking water at or greater than the national health advisory level established from time to time by the EPA.
Leach Settlement and MDL Settlement
Historical DuPont has residual liabilities under its 2004 settlement of a West Virginia state court class action, Leach v. DuPont, which alleged that PFOA from Historical DuPont’s former Washington Works facility had contaminated area drinking water supplies and affected the health of area residents. The settlement class has about 80,000 members. In addition to relief that was provided to class members years ago, the settlement requires Historical DuPont to continue providing PFOA water treatment to six area water districts and private well users and to fund, through an escrow account, up to $235 million for a medical monitoring program for eligible class members. As of December 31, 2018, approximately $2 million had been contributed to the account since its establishment in 2012 and $1 million disbursed.
The Leach settlement permits class members to pursue personal injury claims for six health conditions (and no others) that an expert panel appointed under the settlement reported in 2012 had a “probable link” (as defined in the settlement) with PFOA: pregnancy-induced hypertension, including preeclampsia; kidney cancer; testicular cancer; thyroid disease; ulcerative colitis; and diagnosed high cholesterol. After the expert panel reported its findings, approximately 3,550 personal injury lawsuits were filed in federal and state courts in Ohio and West Virginia and consolidated in multi-district litigation in the U.S. District Court for the Southern District of Ohio (“MDL”). The MDL was settled in early 2017 for $671 million in cash, with Chemours and Historical DuPont (without indemnification from Chemours) each paying half.
Post-MDL Settlement PFOA Personal Injury Claims
The MDL settlement did not resolve claims of plaintiffs who did not have claims in the MDL or whose claims are based on diseases first diagnosed after February 11, 2017. At December 31, 2018, approximately 43 lawsuits were pending alleging personal injury, including kidney and testicular cancer, thyroid disease and ulcerative colitis, from exposure to PFOA through air or water, only three of which are not part of the MDL or were not otherwise filed on behalf of Leach class members.
Other PFOA Actions
Historical DuPont is a party to other PFOA lawsuits that do not involve claims for personal injury. Chemours, pursuant to the Chemours Separation Agreement, is defending all of these lawsuits.
New York. Historical DuPont is a defendant in about 25 lawsuits, including a putative class action, brought by persons who live in and around Hoosick Falls, New York. These lawsuits assert claims for medical monitoring and property damage based on alleged PFOA releases from manufacturing facilities owned and operated by co-defendants in Hoosick Falls and allege that Historical DuPont and 3M supplied some of the materials used at these facilities. Historical DuPont is also one of more than ten defendants in a lawsuit brought by the Town of East Hampton, New York alleging PFOA and perfluorooctanesulfonic acid ("PFOS") contamination of the town’s well water.
New Jersey. Historical DuPont is a defendant in two lawsuits alleging that PFOA from Historical DuPont’s former Chambers Works facility contaminated drinking water sources. One lawsuit is by a local water utility and the other is a putative class action on behalf of persons who live within two to three miles of the Chambers Works facility.
Alabama. Historical DuPont is one of more than thirty defendants in a lawsuit by a local water utility alleging contamination from perfluorinated chemicals and compounds (“PFCs”), including PFOA, used by co-defendant carpet manufacturers to make their products more stain and grease resistant.
Ohio. Historical DuPont is a defendant in two lawsuits, one brought by the State of Ohio based on alleged damage to natural resources, and the other a putative nationwide class action brought on behalf of anyone who has detectable levels of perfluorinated chemicals, including PFOA, in their blood.
Chemours Separation Agreement Amendment
Concurrent with the MDL Settlement, Historical DuPont and Chemours amended the Chemours Separation Agreement to provide for a limited sharing of potential future PFOA liabilities for a five-year period that began on July 6, 2017. During that five-year period, Chemours will annually pay the first $25 million of future PFOA liabilities and, if that amount is exceeded, Historical DuPont will pay any excess amount up to the next $25 million, with Chemours annually bearing any excess liabilities above that amount. At the end of the five-year period, this limited sharing agreement will expire, and Chemours’ indemnification obligations under the Chemours Separation Agreement will continue unchanged. As part of this amendment, Chemours also agreed that it would not contest its liability for PFOA liabilities on the basis of certain ostensible defenses it had previously raised, including defenses relating to punitive damages, and would waive any such defenses with respect to PFOA liabilities. Chemours has, however, retained defenses as to whether any particular PFOA claim is within the scope of the indemnification provisions of the Chemours Separation Agreement.
There have been no charges incurred by Historical DuPont under this arrangement through December 31, 2018.
Fayetteville Works Facility, North Carolina
Prior to the separation of Chemours, Historical DuPont introduced GenX as a polymerization processing aid and a replacement for PFOA at the Fayetteville Works facility in Bladen County, North Carolina. The facility is now owned and operated by Chemours, which continues to manufacture and use GenX. In 2017, the facility became and continues to be the subject of inquiries and government investigations relating to the alleged discharge of GenX and certain similar compounds into the air and Cape Fear River.
In August 2017, the U.S. Attorney’s Office for the Eastern District of North Carolina served Historical DuPont with a grand jury subpoena for testimony and documents related to these discharges. Historical DuPont was served with additional subpoenas relating to the same issue and in the second quarter of 2018, received a subpoena expanding the scope to any PFCs discharged from the Fayetteville Works facility into the Cape Fear River. It is possible that these ongoing inquiries and investigations, including the grand jury subpoena, could result in penalties or sanctions, or that additional litigation will be instituted against Chemours, Historical DuPont, or both.
At December 31, 2018, several actions are pending in federal court against Chemours and Historical DuPont. One of these actions is a consolidated putative class action that asserts claims for medical monitoring and property damage on behalf of putative classes of property owners and residents in areas near or who draw drinking water from the Cape Fear River. Another action is a consolidated action brought by various North Carolina water authorities, including the Cape Fear Public Utility Authority and Brunswick County, that seek actual and punitive damages as well as injunctive relief. In addition, an action is pending in North Carolina state court on behalf of about 100 plaintiffs who own wells and property near the Fayetteville Works facility. The plaintiffs seek damages for nuisance allegedly caused by releases of certain PFCs from the site.
While it is reasonably possible that Historical DuPont could incur liabilities related to the actions described above, any such liabilities are not expected to be material.
Historical DuPont has an indemnification claim against Chemours with respect to current and future inquiries and claims, including lawsuits, related to the foregoing. At December 31, 2018, Chemours, with reservations, is defending and indemnifying Historical DuPont in the pending civil actions.
Other Litigation Matters
In addition to the specific matters described above, Historical Dow and Historical DuPont are parties to a number of other claims and lawsuits arising out of the normal course of business with respect to product liability, patent infringement, governmental regulation, contract and commercial litigation, and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. Historical Dow and Historical DuPont have active risk management programs consisting of numerous insurance policies secured from many carriers at various times. These policies may provide coverage that could be utilized to minimize the financial impact, if any, of certain contingencies described above. It is the opinion of the Company’s management that the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, financial condition and cash flows of the Company.
Gain Contingency - Historical Dow v. Nova Chemicals Corporation Patent Infringement Matter
On December 9, 2010, Historical Dow filed suit in the Federal Court in Ontario, Canada ("Federal Court") alleging that Nova Chemicals Corporation ("Nova") was infringing Historical Dow's Canadian polyethylene patent 2,106,705 (the "'705 Patent"). Nova counterclaimed on the grounds of invalidity and non-infringement. In accordance with Canadian practice, the suit was bifurcated into a merits phase, followed by a damages phase. Following trial in the merits phase, in May 2014 the Federal Court ruled that Historical Dow's '705 Patent was valid and infringed by Nova. Nova appealed to the Canadian Federal Court of Appeal, which affirmed the Federal Court decision in August 2016. Nova then sought leave to appeal its loss to the Supreme Court of Canada, which dismissed Nova’s petition in April 2017. As a result, Nova has exhausted all appeal rights on the merits, and it is undisputed that Nova owes Historical Dow the profits it earned from its infringing sales as determined in the trial for the damages phase.
On April 19, 2017, the Federal Court issued a Public Judgment in the damages phase, which detailed its conclusions on how to calculate the profits to be awarded to Historical Dow. Historical Dow and Nova submitted their respective calculations of the damages to the Federal Court in May 2017. On June 29, 2017, the Federal Court issued a Confidential Supplemental Judgment, concluding that Nova must pay $645 million Canadian dollars (equivalent to $495 million U.S. dollars) to Historical Dow, plus pre- and post-judgment interest, for which Historical Dow received payment of $501 million from Nova on July 6, 2017. Although Nova is appealing portions of the damages judgment, certain portions of it are indisputable and will be owed to Historical Dow regardless of the outcome of any further appeals by Nova. As a result of these actions and in accordance with ASC 450-30 "Gain Contingencies," Historical Dow recorded a $160 million pretax gain in the second quarter of 2017, related to the Packaging & Specialty Plastics segment, of which $137 million is included in "Sundry income (expense) - net" and $23 million is included in "Selling, general and administrative expenses" in the consolidated statements of income. At December 31, 2018, Historical Dow had $341 million ($341 million at December 31, 2017) included in "Other noncurrent obligations" related to the disputed portion of the damages judgment. Historical Dow is confident of its chances of defending the entire judgment on appeal, particularly the trial court's determinations on important factual issues, which will be accorded deferential review on appeal.
Guarantees
The following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for each type of guarantee:
| Guarantees | Dec 31, 2018 | Dec 31, 2017 | |||||||||||||
| In millions | Final Expiration | Maximum Future Payments | Recorded Liability | Final Expiration | Maximum Future Payments | Recorded Liability | |||||||||
| Historical Dow guarantees | 2023 | $ | 4,523 | $ | 25 | 2023 | $ | 4,774 | $ | 49 | |||||
| Historical Dow residual value guarantees | 2028 | 885 | 130 | 2027 | 889 | 135 | |||||||||
| Total Historical Dow guarantees | $ | 5,408 | $ | 155 | $ | 5,663 | $ | 184 | |||||||
| Historical DuPont guarantees | 2022 | $ | 255 | $ | — | 2022 | $ | 260 | $ | — | |||||
| Historical DuPont residual value guarantees | 2025 | 4 | — | 2029 | 37 | — | |||||||||
| Total Historical DuPont guarantees | $ | 259 | $ | — | $ | 297 | $ | — | |||||||
| Total guarantees | $ | 5,667 | $ | 155 | $ | 5,960 | $ | 184 |
Guarantees
The Subsidiaries have entered into guarantee agreements arising during the ordinary course of business from relationships with customers and nonconsolidated affiliates when the Subsidiaries undertake an obligation to guarantee the performance of others (via delivery of cash or other assets) if specified triggering events occur. With guarantees, such as commercial or financial contracts, non-performance by the guaranteed party triggers the obligation of the Subsidiaries to make payments to the beneficiary of the guarantee. The majority of these guarantees relate to debt of nonconsolidated affiliates, which have expiration dates ranging from less than one year to less than five years, and trade financing transactions in Latin America, which typically expire within one year of inception. The Subsidiaries' current expectation is that future payment or performance related to the non-performance of others is considered remote.
Historical Dow entered into guarantee agreements (“Guarantees”) related to project financing for Sadara. The total of an Islamic bond and additional project financing (collectively “Total Project Financing”) obtained by Sadara is approximately $12.5 billion. Sadara had $11.7 billion of Total Project Financing outstanding at December 31, 2018 ($12.4 billion at December 31, 2017). Historical Dow's guarantee of the Total Project Financing is in proportion to Historical Dow's 35 percent ownership interest in Sadara, or up to approximately $4.2 billion when the project financing is fully drawn. Sadara successfully completed an extensive operational testing program in December 2018, however, the Guarantees will be released upon the satisfactory fulfillment of certain project completion conditions, which is expected by the middle of 2019, and must occur no later than December 2020.
Residual Value Guarantees
The Subsidiaries provide guarantees related to leased assets specifying the residual value that will be available to the lessor at lease termination through sale of the assets to the lessee or third parties.
Operating Leases
Historical Dow and Historical DuPont routinely lease premises for use as sales and administrative offices, warehouses and tanks for product storage, motor vehicles, railcars, computers, office machines and equipment. In addition, Historical Dow and Historical DuPont lease aircraft in the United States. The terms for these leased assets vary depending on the lease agreement. Some leases contain renewal provisions, purchase options and escalation clauses.
Rental expense under operating leases, net of sublease rental income, was $1,042 million in 2018, $862 million in 2017 and $661 million in 2016. Future minimum payments under leases with remaining non-cancelable terms in excess of one year are as follows:
| Minimum Lease Commitments | Dec 31, 2018 | ||||||||
| In millions | Historical Dow | Historical DuPont | Total | ||||||
| 2019 | $ | 412 | $ | 242 | $ | 654 | |||
| 2020 | 369 | 128 | 497 | ||||||
| 2021 | 328 | 90 | 418 | ||||||
| 2022 | 297 | 66 | 363 | ||||||
| 2023 | 253 | 44 | 297 | ||||||
| 2024 and thereafter | 978 | 85 | 1,063 | ||||||
| Total | $ | 2,637 | $ | 655 | $ | 3,292 |
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. See Note 1 for further information regarding the Company's accounting policy for environmental matters. 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. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately 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. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. At December 31, 2017, the Company had accrued obligations of $1,311 million for probable environmental remediation and restoration costs, including $219 million for the remediation of Superfund sites.
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. These charges were included in "Cost of sales" in the consolidated statements of income.
Pursuant to the Historical DuPont and Chemours Separation Agreement, Historical DuPont is indemnified by Chemours for certain environmental matters that have an estimated liability of $193 million as of December 31, 2018, which is included in the Company's liability of $1,201 million, 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 its accrual balance related to these matters at December 31, 2018, including $35 million related to the Superfund sites.
Midland Off-Site Environmental Matters
On June 12, 2003, the Michigan Department of Environmental Quality ("MDEQ") issued a Hazardous Waste Operating License (the "License") to Historical Dow's Midland, Michigan, manufacturing site (the “Midland site”), which was renewed and replaced by the MDEQ on September 25, 2015, and included provisions requiring Historical Dow to conduct an investigation to determine the nature and extent of off-site contamination in the City of Midland soils, the Tittabawassee River and Saginaw River sediment and floodplain soils, and the Saginaw Bay, and, if necessary, undertake remedial action. In 2016, final regulatory approval was received from the MDEQ for the City of Midland and Historical Dow is continuing the long term monitoring requirements of the Remedial Action Plan.
Tittabawassee and Saginaw Rivers, Saginaw Bay
Historical Dow, the EPA and the State of Michigan ("State") entered into an administrative order on consent (“AOC”), effective January 21, 2010, 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 Comprehensive Environmental Response, Compensation, and Liability Act. These actions, to be
conducted under the lead oversight of the EPA, will build upon the investigative work completed under the State Resource Conservation Recovery Act program from 2005 through 2009.
The Tittabawassee River, beginning at the Midland Site and extending down to the first six miles of the Saginaw River, are designated as the first Operable Unit for purposes of conducting the remedial investigation, feasibility study and remedial design work. This work will be performed in a largely upriver to downriver sequence for eight geographic segments of the Tittabawassee and upper Saginaw Rivers. In the first quarter of 2012, the EPA requested Historical Dow address the Tittabawassee River floodplain ("Floodplain") as an additional segment. In January 2015, Historical Dow and the EPA entered into an order to address remediation of the Floodplain. The remedial work is expected to take place over the next three years. The remainder of the Saginaw River and the Saginaw Bay are designated as a second Operable Unit and the work associated with that unit may also be geographically segmented. The AOC does not obligate Historical Dow to perform removal or remedial action; that action can only be required by a separate order. Historical Dow and the EPA have been negotiating orders separate from the AOC that obligate Historical Dow to perform remedial actions under the scope of work of the AOC. Historical Dow and the EPA have entered into four separate orders to perform limited remedial actions in five of the eight geographic segments in the first Operable Unit, and the order to address the Floodplain.
Alternative Dispute Resolution Process
Historical Dow, the EPA, the U.S. Department of Justice, and the natural resource damage trustees (which include the Michigan Office of the Attorney General, the MDEQ, the U.S. Fish and Wildlife Service, the U.S. Bureau of Indian Affairs and the Saginaw‑Chippewa tribe) have been engaged in negotiations to seek to resolve potential governmental claims against Historical Dow related to historical off-site contamination associated with the City of Midland, the Tittabawassee and Saginaw Rivers and the Saginaw Bay. Historical Dow and the governmental parties started meeting in the fall of 2005 and entered into a Confidentiality Agreement in December 2005. Historical Dow continues to conduct negotiations under the Federal Alternative Dispute Resolution Act with all of the governmental parties, except the EPA which withdrew from the alternative dispute resolution process on September 12, 2007.
On September 28, 2007, Historical Dow and the natural resource damage trustees entered into a Funding and Participation Agreement that addressed Historical Dow’s payment of past costs incurred by the natural resource damage trustees, payment of the costs of a trustee coordinator and a process to review additional cooperative studies that Historical Dow might agree to fund or conduct with the natural resource damage trustees. On March 18, 2008, Historical Dow and the natural resource damage trustees entered into a Memorandum of Understanding ("MOU") to provide a mechanism for Historical Dow to fund cooperative studies related to the assessment of natural resource damages. This MOU was amended and funding of cooperative studies was extended until March 2014. All cooperative studies have been completed. On April 7, 2008, the natural resource damage trustees released their “Natural Resource Damage Assessment Plan for the Tittabawassee River System Assessment Area.”
At December 31, 2018, the accrual for these off-site matters was $95 million (included in the total accrued obligation of $1,201 million). At December 31, 2017, Historical Dow had an accrual for these off-site matters of $83 million (included in the total accrued obligation of $1,311 million).
Purchase Commitments
Historical Dow and Historical DuPont have outstanding purchase commitments and various commitments for take-or-pay or throughput agreements. The Company was not aware of any purchase commitments that were negotiated as part of a financing arrangement for the facilities that will provide the contracted goods or services or for the costs related to those goods or services at December 31, 2018 and 2017.
NOTE 17 - STOCKHOLDERS' EQUITY
Merger of Equals of Historical Dow and Historical DuPont
In the third quarter of 2017, the conversion of Historical Dow Common Stock and Historical DuPont Common Stock into shares of DowDuPont Common Stock resulted in a $3,084 million decrease to "Common stock" with a corresponding increase to "Additional paid-in capital" in stockholders' equity. Each share of Historical Dow Common Stock held in treasury immediately prior to the Merger was canceled, as set forth in the Merger Agreement. The elimination of Historical Dow's treasury stock at cost resulted in a $935 million decrease in "Treasury stock" and "Additional paid-in capital" in stockholders' equity. The total fair value of consideration transferred for the Merger was $74,680 million, resulting in an increase to "Additional paid-in capital" in stockholders' equity (see Note 3 for additional information).
Cumulative Convertible Perpetual Preferred Stock, Series A
Equity securities in the form of Cumulative Convertible Perpetual Preferred Stock, Series A (“Historical Dow Series A”) were issued by Historical Dow on April 1, 2009 to Berkshire Hathaway Inc. in the amount of $3 billion (3 million shares) and the Kuwait Investment Authority in the amount of $1 billion (1 million shares). Shareholders of Historical Dow Series A could convert all or any portion of their shares, at their option, at any time, into shares of Historical Dow Common Stock at an initial conversion ratio of 24.2010 shares of Historical Dow Common Stock for each share of Historical Dow Series A. On or after the fifth anniversary of the issuance date, if the Historical Dow Common Stock price exceeded $53.72 per share for any 20 trading days in a consecutive 30-day window, Historical Dow had the option, at any time, in whole or in part, to convert the Historical Dow Series A into Historical Dow Common Stock at the then applicable conversion rate.
On December 15, 2016, the trading price of Historical Dow's common stock closed at $58.35, marking the 20th trading day in the previous 30 trading days that the common stock closed above $53.72, triggering the right of Historical Dow to exercise its conversion right. On December 16, 2016, Historical Dow sent a Notice of Conversion at the Option of the Company (the "Notice") to all holders of its Historical Dow Series A. Pursuant to the Notice, on December 30, 2016 (the "Conversion Date") all 4 million outstanding shares of Historical Dow Series A (with a carrying value of $4,000 million) were converted into shares of Historical Dow Common Stock at a conversion ratio of 24.2010 shares of Historical Dow Common Stock for each share of Historical Dow Series A, resulting in the issuance of 96.8 million shares of Historical Dow Common Stock from treasury stock. The treasury stock issued was carried at an aggregate historical cost of $4,695 million, resulting in a reduction to "Additional paid-in capital" in stockholders' equity of $695 million. From and after the Conversion Date, no shares of the Historical Dow Series A are issued or outstanding and all rights of the holders of the Historical Dow Series A have terminated. On January 6, 2017, Historical Dow filed an amendment to its Restated Certificate of Incorporation by way of a certificate of elimination (the “Certificate of Elimination”) with the Secretary of State of the State of Delaware which had the effect of: (a) eliminating the previously designated 4 million shares of Historical Dow Series A, none of which were outstanding at the time of the filing; (b) upon such elimination, causing such Historical Dow Series A to resume the status of authorized and unissued shares of preferred stock, par value $1.00 per share, of Historical Dow, without designation as to series; and (c) eliminating from Historical Dow's Restated Certificate of Incorporation all references to, and all matters set forth in, the certificates of designations for the Historical Dow Series A.
Historical Dow paid cumulative dividends on Historical Dow Series A shares at a rate of 8.5 percent per annum, or $85 million per quarter. The final dividend for the Historical Dow Series A was declared on December 15, 2016 and payable on the earlier of the Conversion Date (if applicable) or January 3, 2017, to shareholders of record at December 15, 2016. The dividend was paid in full on the Conversion Date.
Common Stock
In connection with the Merger, Historical Dow Common Stock and Historical DuPont Common Stock were converted into shares of DowDuPont Common Stock. At the effective time of the Merger, Historical Dow Common Stock and Historical DuPont Common Stock were voluntarily delisted from the NYSE, and their respective common stock were deregistered under the Securities Exchange Act of 1934, as amended. The shares of DowDuPont common stock commenced trading on the NYSE on September 1, 2017.
The following table provides a summary of the common stock activity resulting from the Merger:
| Merger Impact on Historical Dow, Historical DuPont and DowDuPont Common Stock | Prior to Merger 1 | Effect of Merger 2 | ||||
| In thousands, except per share values | ||||||
| Historical Dow | ||||||
| Common Stock, par value per share | $ | 2.50 | N/A | |||
| Common Stock, shares authorized | 1,500,000 | — | ||||
| Common Stock, shares issued and outstanding | 1,225,328 | — | ||||
| Historical DuPont | ||||||
| Common Stock, par value per share | $ | 0.30 | N/A | |||
| Common Stock, shares authorized | 1,800,000 | — | ||||
| Common Stock, shares issued and outstanding | 868,338 | — | ||||
| DowDuPont | ||||||
| Common Stock, par value per share | $ | — | $ | 0.01 | ||
| Common Stock, shares authorized | — | 5,000,000 | ||||
| Common Stock, shares issued for Dow shares converted | — | 1,225,328 | ||||
| Common Stock, shares issued for DuPont shares converted (Ratio of 1.2820 to 1) | — | 1,113,209 |
| 1. | Immediately prior to the effective time of the Merger. |
| 2. | At the effective time of the Merger. |
Prior to the Merger, Historical Dow could issue common stock shares out of treasury stock or as new common stock shares for purchases under the Historical Dow 2012 Employee Stock Purchase Plan, for options exercised and for the release of deferred, performance deferred and restricted stock. The number of new common stock shares issued to employees and non-employee directors prior to the Merger was zero in 2017 (zero in 2016).
DowDuPont may issue new common stock shares for options exercised and for the release of restricted stock, restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs"). The number of new common stock shares issued by DowDuPont to employees and non-employee directors was approximately 10,974,000 in 2018 (approximately 2,919,000 in 2017).
Retained Earnings
There are no significant restrictions limiting the Company’s ability to pay dividends. Dividends declared and paid to common stockholders during the years ended December 31, 2018, 2017 and 2016 are summarized in the following table:
| Dividends Declared and Paid | |||||||||
| In millions | 2018 | 2017 1 | 2016 | ||||||
| Dividends declared to common stockholders | $ | 3,491 | $ | 2,558 | $ | 2,037 | |||
| Dividends paid to common stockholders | $ | 3,491 | $ | 3,394 | $ | 2,037 |
| 1. | Dividends declared consists of $1,673 million declared to Historical Dow common stockholders prior to the Merger and $885 million declared to DowDuPont common stockholders after the Merger. Dividends paid consists of $2,179 million paid to Historical Dow common stockholders and $330 million paid to Historical DuPont common stockholders for dividends declared prior to the Merger, and $885 million paid to DowDuPont common stockholders for dividends declared after the Merger. |
Undistributed earnings of nonconsolidated affiliates included in retained earnings were $1,760 million at December 31, 2018 and $1,731 million at December 31, 2017.
Employee Stock Ownership Plan
The Historical Dow Employee Stock Ownership Plan (the “ESOP”) is an integral part of The Dow Chemical Company Employees’ Savings Plan (the “Plan”). A significant majority of full-time employees in the United States are eligible to participate in the Plan. Historical Dow uses the ESOP to provide Historical Dow’s matching contribution in the form of stock to Plan participants. Prior to the Merger, contributions were in the form of Historical Dow Common Stock. Effective with the Merger, shares of Historical Dow stock held by the ESOP were converted into shares of DowDuPont Common Stock at a ratio of 1:1.
In connection with the acquisition of Rohm and Haas on April 1, 2009, the Rohm and Haas Employee Stock Ownership Plan (the "Rohm and Haas ESOP") was merged into the Plan, and Historical Dow assumed the $78 million balance of debt at 9.8 percent interest with final maturity in 2020 that was used to finance share purchases by the Rohm and Haas ESOP in 1990. The outstanding balance of the debt was $10 million at December 31, 2018 and $17 million at December 31, 2017.
Dividends on unallocated shares held by the ESOP are used by the ESOP to make debt service payments and to purchase additional shares if dividends exceed the debt service payments. Dividends on allocated shares are used by the ESOP to make debt service payments to the extent needed; otherwise, they are paid to the Plan participants. Shares are released for allocation to participants based on the ratio of the current year’s debt service to the sum of the principal and interest payments over the life of the loan. The shares are allocated to Plan participants in accordance with the terms of the Plan.
Compensation expense for allocated shares is recorded at the fair value of the shares on the date of allocation. ESOP shares that have not been released or committed to be released are not considered outstanding for purposes of computing basic and diluted earnings per share. Compensation expense for ESOP shares was $175 million in 2018, $248 million in 2017 and $192 million in 2016. At December 31, 2018, 15.3 million shares out of a total 21.8 million shares held by the ESOP had been allocated to participants’ accounts; 1.5 million shares were released but unallocated; and 5.0 million shares, at a fair value of $267 million, were considered unearned.
Treasury Stock
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. The Company spent $1.0 billion on repurchases of DowDuPont common stock under the program in the fourth quarter of 2017. In the first nine months of 2018, the Company spent $3.0 billion on repurchases of DowDuPont common stock under the program, thereby completing this share repurchase program.
In 2013, Historical Dow's Board of Directors approved a share buy-back program. As a result of subsequent authorizations approved by Historical Dow's Board of Directors, the total authorized amount of the Historical Dow share repurchase program was $9.5 billion. Effective with the Merger, the share repurchase program was canceled. Over the duration of the program, a total of $8.1 billion was spent on the repurchase of Historical Dow Common Stock.
Historical Dow previously issued shares for purchases under the Employee Stock Purchase Plan, for options exercised as well as for the release of deferred, performance deferred and restricted stock out of treasury stock or as new common stock shares. The number of treasury shares issued to employees and non-employee directors under Historical Dow’s stock-based compensation programs are summarized in the following table.
| Historical Dow Treasury Shares Issued Under Historical Dow Stock-Based Compensation Programs | |||||
| In thousands | 2018 | 2017 | 2016 | ||
| To employees and non-employee directors | N/A | 14,195 | 14,494 |
The following table provides a reconciliation of Historical Dow Common Stock activity for the years ended December 31, 2017 and 2016:
| Shares of Historical Dow Common Stock | Issued | Held in Treasury | ||
| In thousands | ||||
| Balance at Jan 1, 2016 | 1,242,795 | 125,853 | ||
| Issued 1 | — | (14,494 | ) | |
| Repurchased | — | 17,107 | ||
| Preferred stock converted to common stock | — | (96,804 | ) | |
| Balance at Dec 31, 2016 | 1,242,795 | 31,662 | ||
| Issued 1 | — | (14,195 | ) | |
| Converted to DowDuPont shares or canceled on Aug 31, 2017 2 | (1,242,795 | ) | (17,467 | ) |
| Balance at Aug 31, 2017 | — | — |
| 1. | Shares issued to employees and non-employee directors under Historical Dow's equity compensation plans. |
| 2. | Each share of Historical Dow Common Stock issued and outstanding immediately prior to the Merger was converted into one share of DowDuPont Common Stock; Treasury shares were canceled as a result of the Merger. |
The following table provides a reconciliation of DowDuPont Common Stock activity for the year ended December 31, 2018 and 2017:
| Shares of DowDuPont Common Stock | Issued | Held in Treasury | ||
| In thousands | ||||
| Balance at Sep 1, 2017 | 2,338,537 | — | ||
| Issued | 2,919 | — | ||
| Repurchased | — | 14,123 | ||
| Balance at Dec 31, 2017 | 2,341,456 | 14,123 | ||
| Issued | 10,974 | — | ||
| Repurchased | — | 69,330 | ||
| Balance at Dec 31, 2018 | 2,352,430 | 83,453 |
Accumulated Other Comprehensive Loss
The following table summarizes the changes and after-tax balances of each component of AOCL for the years ended December 31, 2018, 2017, and 2016:
| Accumulated Other Comprehensive Loss | Unrealized Gains (Losses) on Investments | Cumulative Translation Adj | Pension and Other Postretire Benefits | Derivative Instruments | Total Accum Other Comp Loss | ||||||||||
| In millions | |||||||||||||||
| 2016 | |||||||||||||||
| Balance at Jan 1, 2016 | $ | 47 | $ | (1,737 | ) | $ | (6,769 | ) | $ | (208 | ) | $ | (8,667 | ) | |
| Other comprehensive income (loss) before reclassifications | 32 | (644 | ) | (1,354 | ) | 84 | (1,882 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | (36 | ) | — | 734 | 29 | 727 | |||||||||
| Net other comprehensive income (loss) | $ | (4 | ) | $ | (644 | ) | $ | (620 | ) | $ | 113 | $ | (1,155 | ) | |
| Balance at Dec 31, 2016 | $ | 43 | $ | (2,381 | ) | $ | (7,389 | ) | $ | (95 | ) | $ | (9,822 | ) | |
| 2017 | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 25 | 454 | 52 | (1 | ) | 530 | |||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | (71 | ) | (8 | ) | 414 | (15 | ) | 320 | |||||||
| Net other comprehensive income (loss) | $ | (46 | ) | $ | 446 | $ | 466 | $ | (16 | ) | $ | 850 | |||
| Balance at Dec 31, 2017 | $ | (3 | ) | $ | (1,935 | ) | $ | (6,923 | ) | $ | (111 | ) | $ | (8,972 | ) |
| 2018 | |||||||||||||||
| Balance at Jan 1, 2018 1 | $ | 17 | $ | (1,935 | ) | $ | (6,923 | ) | $ | (111 | ) | $ | (8,952 | ) | |
| Other comprehensive loss before reclassifications | (74 | ) | (1,739 | ) | (1,086 | ) | (15 | ) | (2,914 | ) | |||||
| Amounts reclassified from accumulated other comprehensive income (loss) | 7 | (4 | ) | 460 | 66 | 529 | |||||||||
| Net other comprehensive income (loss) | $ | (67 | ) | $ | (1,743 | ) | $ | (626 | ) | $ | 51 | $ | (2,385 | ) | |
| Reclassification of stranded tax effects 2 | (1 | ) | (107 | ) | (927 | ) | (22 | ) | (1,057 | ) | |||||
| Balance at Dec 31, 2018 | $ | (51 | ) | $ | (3,785 | ) | $ | (8,476 | ) | $ | (82 | ) | $ | (12,394 | ) |
| 1. | The beginning balance of "Unrealized gains (losses) on investments" was increased by $20 million to reflect the impact of adoption of ASU 2016-01. See Notes 1 and 2 for additional information. |
| 2. | Amounts reclassified to retained earnings as a result of the adoption of ASU 2018-02. See Notes 1 and 2 for additional information. |
The tax effects on the net activity related to each component of other comprehensive income (loss) for the years ended December 31, 2018, 2017, and 2016 were as follows:
| Tax Benefit (Expense) 1 | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Unrealized gains (losses) on investments | $ | 17 | $ | 26 | $ | (2 | ) | ||
| Cumulative translation adjustments | (6 | ) | (98 | ) | (171 | ) | |||
| Pension and other postretirement benefit plans | 152 | (235 | ) | 438 | |||||
| Derivative instruments | (14 | ) | (2 | ) | (32 | ) | |||
| Tax benefit (expense) from income taxes related to other comprehensive income (loss) items | $ | 149 | $ | (309 | ) | $ | 233 |
| 1. | Prior year amounts have been updated to conform with the current year presentation. |
A summary of the reclassifications out of AOCL for the years ended December 31, 2018, 2017, and 2016 is provided as follows:
| Reclassifications Out of Accumulated Other Comprehensive Loss | 2018 | 2017 | 2016 | Consolidated Statements of Income Classification | |||||||
| In millions | |||||||||||
| Unrealized (gains) losses on investments | $ | 9 | $ | (110 | ) | $ | (56 | ) | See (1) below | ||
| Tax (benefit) expense | (2 | ) | 39 | 20 | See (2) below | ||||||
| After tax | $ | 7 | $ | (71 | ) | $ | (36 | ) | |||
| Cumulative translation adjustments | $ | (4 | ) | $ | (8 | ) | $ | — | See (3) below | ||
| Pension and other postretirement benefit plans | $ | 599 | $ | 607 | $ | 913 | See (4) below | ||||
| Tax benefit | (139 | ) | (193 | ) | (179 | ) | See (2) below | ||||
| After tax | $ | 460 | $ | 414 | $ | 734 | |||||
| Derivative instruments | $ | 83 | $ | (13 | ) | $ | 34 | See (5) below | |||
| Tax benefit | (17 | ) | (2 | ) | (5 | ) | See (2) below | ||||
| After tax | $ | 66 | $ | (15 | ) | $ | 29 | ||||
| Total reclassifications for the period, after tax | $ | 529 | $ | 320 | $ | 727 |
| 1. | "Net sales" and "Sundry income (expense) - net." |
| 2. | "Provision (Credit) for income taxes on continuing operations." |
| 3. | "Sundry income (expense) - net." |
| 4. | These AOCL components are included in the computation of net periodic benefit cost of the Company's defined benefit pension and other postretirement benefit plans. See Note 19 for additional information. In the year ended December 31, 2016, $360 million was included in "Sundry income (expense) - net" (zero impact to "Provision (Credit) for income taxes on continuing operations") related to the Dow Silicones ownership restructure. See Note 3 for additional information. |
| 5. | "Cost of sales," "Sundry income (expense) - net" and "Interest expense and amortization of debt discount." |
NOTE 18 - NONCONTROLLING INTERESTS
Ownership interests in the Company's subsidiaries held by parties other than the Company are presented separately from the Company's equity in the consolidated balance sheets as "Noncontrolling interests." The amount of consolidated net income attributable to the Company and the noncontrolling interests are both presented on the face of the consolidated statements of income.
The following table summarizes the activity for equity attributable to noncontrolling interests in the years ended December 31, 2018, 2017 and 2016:
| Noncontrolling Interests | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Balance at Jan 1 | $ | 1,597 | $ | 1,242 | $ | 809 | |||
| Net income attributable to noncontrolling interests | 155 | 132 | 86 | ||||||
| Distributions to noncontrolling interests 1 | (168 | ) | (116 | ) | (123 | ) | |||
| Acquisition of noncontrolling interests 2 | — | 3 | 473 | ||||||
| Noncontrolling interests from Merger 3 | 61 | 417 | — | ||||||
| Deconsolidation of noncontrolling interests 4 | — | (123 | ) | — | |||||
| Cumulative translation adjustments | (39 | ) | 41 | (4 | ) | ||||
| Other | 2 | 1 | 1 | ||||||
| Balance at Dec 31 | $ | 1,608 | $ | 1,597 | $ | 1,242 |
| 1. | Distributions to noncontrolling interests is net of $27 million in 2018 ($20 million in 2017 and $53 million in 2016) in dividends paid to a joint venture, which were reclassified to "Equity in earnings of nonconsolidated affiliates" in the consolidated statements of income. |
| 2. | The 2016 value reflects the amount assumed in the ownership restructure of Dow Silicones. See Note 3 for additional information. |
| 3. | Relates to Merger and subsequent measurement period adjustments. See Note 3 for additional information. |
| 4. | On June 30, 2017, Historical Dow sold its ownership interest in the SKC Haas Display Films group of companies. See Note 13 for additional information. |
Historical DuPont Preferred Stock
Each share of Historical DuPont Preferred Stock - $4.50 Series and Historical DuPont Preferred Stock - $3.50 Series issued and outstanding at the effective date of the Merger remains issued and outstanding as to Historical DuPont and was unaffected by the Merger.
Below is a summary of the Historical DuPont Preferred Stock at December 31, 2018 and December 31, 2017, which was classified as "Noncontrolling Interests" in the consolidated balance sheets:
| Historical DuPont Preferred Stock | Number of Shares | |
| Shares in thousands | ||
| Authorized | 23,000 | |
| $4.50 Series, callable at $120 | 1,673 | |
| $3.50 Series, callable at $102 | 700 |
NOTE 19 - PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Historical Dow and Historical DuPont did not merge their defined benefit pension and OPEB plans as a result of the Merger. See Note 3 for additional information on the Merger. The significant defined benefit pension and OPEB plans of Historical Dow and Historical DuPont are summarized below. Information provided for Historical DuPont represents activity subsequent to the effective date of the Merger.
Defined Benefit Pension Plans
Historical Dow
Historical Dow has both funded and unfunded defined benefit pension plans that cover employees in the United States and a number of other countries. The U.S. qualified plan covering the parent company is the largest plan. Benefits for employees hired before January 1, 2008, are based on length of service and the employee’s three highest consecutive years of compensation. Employees hired after January 1, 2008, earn benefits that are based on a set percentage of annual pay, plus interest.
Historical Dow's funding policy is to contribute to the plans when pension laws and/or economics either require or encourage funding. In 2018, Historical Dow contributed $1,656 million to its pension plans, which included a $1,100 million discretionary
contribution to its principal U.S. pension plan in the third quarter of 2018. Total contributions in 2018 also included contributions to fund benefit payments for Historical Dow's non-qualified pension plans. Historical Dow expects to contribute approximately $240 million to its pension plans in 2019.
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, of which $201 million was included in "Cost of sales" and $4 million was included in "Selling, general and administrative expenses" in the consolidated statements of income and related to Corporate. Historical Dow recorded a settlement charge of $687 million associated with the payout in the fourth quarter of 2017, which was included in "Sundry income (expense) - net" in the consolidated statements of income and related to Corporate.
Historical DuPont
Historical DuPont has both funded and unfunded noncontributory defined benefit pension plans covering a majority of the U.S. employees. The U.S. qualified plan is the largest pension plan held by Historical DuPont. Most employees hired on or after January 1, 2007, are not eligible to participate in the U.S. defined benefit pension plans. The benefits under these plans are based primarily on years of service and employees' pay near retirement. Historical DuPont froze the pay and service amounts used to calculate pension benefits for employees who participate in the U.S. pension plans as of November 30, 2018. Therefore, as of November 30, 2018, employees participating in the U.S. pension plans no longer accrue additional benefits for future service and eligible compensation received.
Historical DuPont's funding policy is consistent with the funding requirements of federal laws and regulations. Pension coverage for employees of Historical DuPont's non-U.S. consolidated subsidiaries is provided, to the extent deemed appropriate, through separate plans. Obligations under such plans are funded by depositing funds with trustees, covered by insurance contracts, or remain unfunded. In 2018, Historical DuPont contributed $1,308 million to its pension plans, which included a $1,100 million discretionary contribution to its principal U.S. pension plan in the third quarter of 2018. Total 2018 contributions also includes contributions to fund benefit payments for Historical DuPont's pension plans where funding is not customary. Historical DuPont expects to contribute approximately $190 million to its pension plans in 2019.
In the fourth quarter of 2017, approximately $140 million of lump-sum payments were made from the U.S. qualified pension plan trust fund to a group of separated, vested plan participants who were extended a limited-time opportunity and voluntarily elected to receive their pension benefits in a single lump-sum payment. Since Historical DuPont recognizes pension settlements only when the lump-sum payments exceed the sum of the plan's service and interest cost components of net periodic pension cost for the year, these lump-sum payments did not result in the recognition of a pension settlement charge.
The weighted-average assumptions used to determine pension plan obligations and net periodic benefit costs for all plans are summarized in the table below:
| Weighted-Average Assumptions for All Pension Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended | ||||||||
| 2018 | 2017 | 2018 | 2017 1 | 2016 | ||||||
| Discount rate | 3.80 | % | 3.26 | % | 3.26 | % | 3.50 | % | 3.85 | % |
| Interest crediting rate for applicable benefits | 3.72 | % | 3.61 | % | 3.61 | % | 3.45 | % | 4.81 | % |
| Rate of compensation increase 2 | 3.42 | % | 3.95 | % | 3.95 | % | 3.88 | % | 4.04 | % |
| Expected return on plan assets | — | — | 6.68 | % | 6.94 | % | 7.22 | % |
| 1. | Includes Historical DuPont plans subsequent to the Merger date. |
| 2. | The December 31, 2018 rate does not include Historical DuPont's U.S. pension plans as employees of these plans no longer accrue additional benefits for future service and eligible compensation. |
The weighted-average assumptions used to determine pension plan obligations and net periodic benefit costs for U.S. plans are summarized in the table below:
| Weighted-Average Assumptions for U.S. Pension Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended | ||||||||
| 2018 | 2017 | 2018 | 2017 1 | 2016 | ||||||
| Discount rate | 4.36 | % | 3.66 | % | 3.66 | % | 4.02 | % | 4.40 | % |
| Interest crediting rate for applicable benefits | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % |
| Rate of compensation increase 2 | 4.25 | % | 4.25 | % | 4.25 | % | 4.18 | % | 4.50 | % |
| Expected return on plan assets | — | — | 7.08 | % | 7.46 | % | 7.77 | % |
| 1. | Includes Historical DuPont plans subsequent to the Merger date. |
| 2. | The December 31, 2018 rate does not include Historical DuPont's U.S. pension plans as active employees of these plans no longer accrue additional benefits for future service and eligible compensation. |
Other Postretirement Benefit Plans
Historical Dow
Historical Dow provides certain health care and life insurance benefits to retired employees and survivors. Historical Dow’s plans outside of the United States are not significant; therefore, this discussion relates to the U.S. plans only. The plans provide health care benefits, including hospital, physicians’ services, drug and major medical expense coverage, and life insurance benefits. In general, for employees hired before January 1, 1993, the plans provide benefits supplemental to Medicare when retirees are eligible for these benefits. Historical Dow and the retiree share the cost of these benefits, with the Historical Dow portion increasing as the retiree has increased years of credited service, although there is a cap on the Historical Dow portion. Historical Dow has the ability to change these benefits at any time. Employees hired after January 1, 2008, are not covered under the plans.
Historical Dow funds most of the cost of these health care and life insurance benefits as incurred. In 2018, Historical Dow did not make any contributions to its other postretirement benefit plan trusts. The trusts did not hold assets at December 31, 2018. Historical Dow does not expect to contribute assets to its other postretirement benefit plan trusts in 2019.
Historical DuPont
Historical DuPont provides medical, dental and life insurance benefits to pensioners and survivors. The associated plans for retiree benefits are unfunded and the cost of the approved claims is paid from Historical DuPont company funds. Essentially all of the cost and liabilities for these retiree benefit plans are attributable to the U.S. benefit plans. The non-Medicare eligible retiree medical plan is contributory with pensioners and survivors' contributions adjusted annually to achieve a 50/50 target for sharing of cost increases between Historical DuPont and pensioners and survivors. In addition, limits are applied to Historical DuPont's portion of the retiree medical cost coverage. For Medicare eligible pensioners and survivors, Historical DuPont provides a Historical DuPont-funded Health Reimbursement Arrangement ("HRA"). In November 2016, Historical DuPont announced that OPEB eligible employees who will be under the age of 50 as of November 30, 2018, as defined above, will not receive postretirement medical, dental and life insurance benefits. Beginning January 1, 2015, eligible employees who retire on and after that date will receive the same life insurance benefit payment, regardless of the employee's age or pay. The majority of U.S. employees hired on or after January 1, 2007, are not eligible to participate in the postretirement medical, dental and life insurance plans.
The weighted-average assumptions used to determine other postretirement benefit obligations and net periodic benefit costs for the U.S. plans are provided below:
| Weighted-Average Assumptions for U.S. Other Postretirement Benefits Plans | Benefit Obligations at Dec 31 | Net Periodic Costs for the Year Ended | ||||||||
| 2018 | 2017 | 2018 | 2017 1 | 2016 | ||||||
| Discount rate | 4.23 | % | 3.54 | % | 3.54 | % | 3.76 | % | 3.96 | % |
| Health care cost trend rate assumed for next year | 7.15 | % | 6.52 | % | 6.52 | % | 7.00 | % | 7.25 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate health cost care trend rate) | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % |
| Year that the rate reaches the ultimate health care cost trend rate: | ||||||||||
| Historical Dow plans | 2025 | 2025 | 2025 | 2025 | 2025 | |||||
| Historical DuPont plans | 2028 | 2023 | 2023 | 2023 |
| 1. | Includes Historical DuPont plans subsequent to the Merger date. |
Assumptions
Historical Dow and Historical DuPont determine the expected long-term rate of return on plan assets by performing a detailed analysis of key economic and market factors driving historical returns for each asset class and formulating a projected return based on factors in the current environment. Factors considered include, but are not limited to, inflation, real economic growth, interest rate yield, interest rate spreads, and other valuation measures and market metrics. The expected long-term rate of return for each asset class is then weighted based on the strategic asset allocation approved by the governing body for each plan. Historical Dow and Historical DuPont experience with the pension fund asset performance is also considered.
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 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 Hewitt AA_Above Median yield curve for Historical DuPont's plans to arrive at the plan's obligations as of the measurement date.
Historical Dow utilizes a modified version of the Society of Actuaries’ ("SOA") mortality tables released in 2014 and a modified version of the generational mortality improvement scale released in 2018 for purposes of measuring the U.S. pension and other postretirement obligations, based on an evaluation of the mortality experience of its pension plans. Historical DuPont adopted the mortality tables released by SOA in 2014 and the most recent available SOA mortality improvement scale in measuring its U.S. pension and other postretirement obligations.
Summarized information on the Company's pension and other postretirement benefit plans is as follows:
| Change in Projected Benefit Obligations, Plan Assets and Funded Status of All Significant Plans | Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||
| In millions | 2018 | 2017 1 | 2018 | 2017 1 | ||||||||
| Change in projected benefit obligations: | ||||||||||||
| Benefit obligations at beginning of year | $ | 57,401 | $ | 30,280 | $ | 4,377 | $ | 1,835 | ||||
| Merger impact 2 | — | 26,036 | — | 2,772 | ||||||||
| Service cost | 651 | 555 | 21 | 17 | ||||||||
| Interest cost | 1,638 | 1,130 | 130 | 80 | ||||||||
| Plan participants' contributions | 29 | 20 | — | — | ||||||||
| Actuarial changes in assumptions and experience | (2,832 | ) | 1,781 | (185 | ) | (130 | ) | |||||
| Benefits paid 3 | (3,223 | ) | (2,170 | ) | (339 | ) | (210 | ) | ||||
| Plan amendments | 34 | 14 | — | — | ||||||||
| Acquisitions/divestitures/other 4 | (57 | ) | 72 | — | — | |||||||
| Effect of foreign exchange rates | (627 | ) | 875 | (12 | ) | 13 | ||||||
| Termination benefits/curtailment cost/settlements 5 | — | (1,192 | ) | — | — | |||||||
| Benefit obligations at end of year | $ | 53,014 | $ | 57,401 | $ | 3,992 | $ | 4,377 | ||||
| Change in plan assets: | ||||||||||||
| Fair value of plan assets at beginning of year | $ | 43,685 | $ | 21,208 | $ | — | $ | — | ||||
| Merger impact 2 | — | 20,395 | — | — | ||||||||
| Actual return on plan assets | (1,524 | ) | 3,049 | — | — | |||||||
| Employer contributions | 2,964 | 1,744 | — | — | ||||||||
| Plan participants' contributions | 29 | 20 | — | — | ||||||||
| Benefits paid 3 | (3,223 | ) | (2,170 | ) | — | — | ||||||
| Acquisitions/divestitures/other 6 | (7 | ) | 14 | — | — | |||||||
| Effect of foreign exchange rates | (462 | ) | 613 | — | — | |||||||
| Settlements 7 | — | (1,188 | ) | — | — | |||||||
| Fair value of plan assets at end of year | $ | 41,462 | $ | 43,685 | $ | — | $ | — | ||||
| Funded status: | ||||||||||||
| U.S. plans with plan assets | $ | (6,956 | ) | $ | (8,991 | ) | $ | — | $ | — | ||
| Non-U.S. plans with plan assets | (2,751 | ) | (2,780 | ) | — | — | ||||||
| All other plans 8 | (1,845 | ) | (1,945 | ) | (3,992 | ) | (4,377 | ) | ||||
| Funded status at end of year | $ | (11,552 | ) | $ | (13,716 | ) | $ | (3,992 | ) | $ | (4,377 | ) |
| 1. | Includes Historical DuPont activity subsequent to the Merger Date. |
| 2. | Plan assets and liabilities assumed in the Merger. Represents remeasurement of the projected benefit obligation and fair value of plan assets for Historical DuPont's plans as of the Merger date. |
| 3. | In the fourth quarter of 2017, approximately $140 million of lump-sum payments were made from Historical DuPont's U.S. qualified pension plan trust fund to a group of separated, vested plan participants who were extended a limited-time opportunity and voluntarily elected to receive their pension benefits in a single lump-sum payment. |
| 4. | The 2018 impact includes the divestiture of a business with pension benefit obligations of $37 million. The 2017 impact includes the reclassification of a China pension liability of $69 million from "Other noncurrent obligations" to "Pension and other postretirement benefits - noncurrent" and the divestiture of a South Korean company with pension benefit obligations of $25 million. |
| 5. | The 2017 impact includes the settlement of certain plan obligations for a Historical Dow U.S. non-qualified pension plan of $1,170 million required due to a change in control provision. The 2017 impact also includes the conversion of a South Korean pension plan of $22 million to a defined contribution plan. |
| 6. | The 2017 impact relates to the divestiture of a South Korean company. |
| 7. | The 2017 impact includes payments made of $1,170 million to settle certain plan obligations of a Historical Dow U.S. non-qualified pension plan required due to a change in control provision. The 2017 impact also includes payments made of $18 million to convert a South Korean pension plan to a defined contribution plan. |
| 8. | As of December 31, 2018 and December 31, 2017, $349 million and $389 million, respectively, of the benefit obligations are supported by funding under the Trust agreement, defined in the "Trust Assets" section. |
The following tables summarize the amounts recognized in the consolidated balance sheets for all significant plans:
| Amounts Recognized in the Consolidated Balance Sheets for All Significant Plans | Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||
| In millions | 2018 | 2017 1 | 2018 | 2017 1 | ||||||||
| Amounts recognized in the consolidated balance sheets at Dec 31: | ||||||||||||
| Deferred charges and other assets | $ | 502 | $ | 595 | $ | — | $ | — | ||||
| Accrued and other current liabilities | (147 | ) | (134 | ) | (374 | ) | (375 | ) | ||||
| Pension and other postretirement benefits - noncurrent | (11,907 | ) | (14,177 | ) | (3,618 | ) | (4,002 | ) | ||||
| Net amount recognized | $ | (11,552 | ) | $ | (13,716 | ) | $ | (3,992 | ) | $ | (4,377 | ) |
| Pretax amounts recognized in accumulated other comprehensive loss at Dec 31: | ||||||||||||
| Net loss (gain) | $ | 11,578 | $ | 10,734 | $ | (419 | ) | $ | (258 | ) | ||
| Prior service credit | (207 | ) | (265 | ) | — | — | ||||||
| Pretax balance in accumulated other comprehensive loss at end of year | $ | 11,371 | $ | 10,469 | $ | (419 | ) | $ | (258 | ) |
| 1. | Includes Historical DuPont activity subsequent to the Merger Date. |
A significant component of the overall decrease in the Company's benefit obligation for the year ended December 31, 2018 was due to the weighted-average change in discount rates, which increased from 3.26 percent at December 31, 2017 to 3.80 percent at December 31, 2018. The overall increase in the Company's benefit obligations for the year ended December 31, 2017 was primarily due to the Historical DuPont plan liabilities assumed as of the Merger date, and due to the change in weighted-average discount rates, which decreased from 3.52 percent at December 31, 2016 to 3.26 percent at December 31, 2017, which was partially offset by the settlement of certain plan obligations for a Historical Dow U.S. non-qualified pension plan.
The accumulated benefit obligation for all pension plans was $51.4 billion and $55.5 billion at December 31, 2018 and 2017, respectively.
| Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at Dec 31 | 2018 | 2017 | ||||
| In millions | ||||||
| Accumulated benefit obligations | $ | 47,577 | $ | 51,563 | ||
| Fair value of plan assets | $ | 36,803 | $ | 38,850 |
| Pension Plans with Projected Benefit Obligations in Excess of Plan Assets at Dec 31 | 2018 | 2017 | ||||
| In millions | ||||||
| Projected benefit obligations | $ | 49,742 | $ | 53,830 | ||
| Fair value of plan assets | $ | 37,687 | $ | 39,519 |
| Net Periodic Benefit Costs for All Significant Plans for the Year Ended Dec 31 | Defined Benefit Pension Plans | Other Postretirement Benefits | ||||||||||||||||
| In millions | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||
| Net Periodic Benefit Costs: | ||||||||||||||||||
| Service cost | $ | 651 | $ | 555 | $ | 463 | $ | 21 | $ | 17 | $ | 13 | ||||||
| Interest cost | 1,638 | 1,130 | 846 | 130 | 80 | 52 | ||||||||||||
| Expected return on plan assets | (2,846 | ) | (1,955 | ) | (1,447 | ) | — | — | — | |||||||||
| Amortization of prior service credit | (24 | ) | (25 | ) | (24 | ) | — | — | (3 | ) | ||||||||
| Amortization of unrecognized (gain) loss | 649 | 638 | 587 | (24 | ) | (6 | ) | (7 | ) | |||||||||
| Curtailment/settlement/other 1 | (10 | ) | 683 | (36 | ) | — | — | — | ||||||||||
| Net periodic benefit costs - Total | $ | 58 | $ | 1,026 | $ | 389 | $ | 127 | $ | 91 | $ | 55 | ||||||
| Less: Discontinued operations | — | 1 | — | — | — | — | ||||||||||||
| Net periodic benefit costs - Continuing operations | $ | 58 | $ | 1,025 | $ | 389 | $ | 127 | $ | 91 | $ | 55 | ||||||
| Changes in plan assets and benefit obligations recognized in other comprehensive (income) loss: | ||||||||||||||||||
| Net (gain) loss | $ | 1,490 | $ | 680 | $ | 1,954 | $ | (185 | ) | $ | (131 | ) | $ | 14 | ||||
| Prior service cost | 34 | 14 | — | — | — | — | ||||||||||||
| Amortization of prior service credit | 24 | 25 | 24 | — | — | 3 | ||||||||||||
| Amortization of unrecognized gain (loss) | (649 | ) | (638 | ) | (587 | ) | 24 | 6 | 7 | |||||||||
| Settlement loss 2 | 2 | (687 | ) | — | — | — | — | |||||||||||
| Effect of foreign exchange rates | 1 | — | — | — | — | — | ||||||||||||
| Total recognized in other comprehensive (income) loss | $ | 902 | $ | (606 | ) | $ | 1,391 | $ | (161 | ) | $ | (125 | ) | $ | 24 | |||
| Total recognized in net periodic benefit cost and other comprehensive (income) loss | $ | 960 | $ | 420 | $ | 1,780 | $ | (34 | ) | $ | (34 | ) | $ | 79 |
| 1. | The 2017 impact relates to the settlement of a Historical Dow U.S. non-qualified plan triggered by a change in control provision. The 2016 impact relates to the curtailment of benefits for certain participants of a Dow Silicones plan in the U.S. |
| 2. | The 2017 impact relates to the settlement of a Historical Dow U.S. non-qualified plan triggered by a change in control provision. |
Estimated Future Benefit Payments
The estimated future benefit payments, reflecting expected future service, as appropriate, are presented in the following table:
| Estimated Future Benefit Payments at Dec 31, 2018 | Defined Benefit Pension Plans | Other Postretirement Benefits | ||||
| In millions | ||||||
| 2019 | $ | 3,197 | $ | 373 | ||
| 2020 | 3,172 | 364 | ||||
| 2021 | 3,182 | 355 | ||||
| 2022 | 3,198 | 344 | ||||
| 2023 | 3,219 | 330 | ||||
| 2024-2028 | 16,078 | 1,380 | ||||
| Total | $ | 32,046 | $ | 3,146 |
Plan Assets
Historical Dow
Plan assets consist primarily of equity and fixed income securities of U.S. and foreign issuers, and include alternative investments such as real estate, private market securities and absolute return strategies. At December 31, 2018, plan assets totaled $22.5 billion and included no directly held common stock of DowDuPont. At December 31, 2017, plan assets totaled $23.4 billion and included no directly held common stock of DowDuPont.
Historical Dow's investment strategy for the plan assets is to manage the assets in relation to the liability in order to pay retirement benefits to plan participants over the life of the plans. This is accomplished by identifying and managing the exposure to various market risks, diversifying investments across various asset classes and earning an acceptable long-term rate of return consistent with an acceptable amount of risk, while considering the liquidity needs of the plans.
The plans are permitted to use derivative instruments for investment purposes, as well as for hedging the underlying asset and liability exposure and rebalancing the asset allocation. The plans use value-at-risk, stress testing, scenario analysis and Monte Carlo simulations to monitor and manage both the risk within the portfolios and the surplus risk of the plans.
Equity securities primarily include investments in large- and small-cap companies located in both developed and emerging markets around the world. Fixed income securities include investment and non-investment grade corporate bonds of companies diversified across industries, U.S. treasuries, non-U.S. developed market securities, U.S. agency mortgage-backed securities, emerging market securities and fixed income related funds. Alternative investments primarily include investments in real estate, private equity limited partnerships and absolute return strategies. Other significant investment types include various insurance contracts and interest rate, equity, commodity and foreign exchange derivative investments and hedges.
Historical Dow mitigates the credit risk of investments by establishing guidelines with investment managers that limit investment in any single issue or issuer to an amount that is not material to the portfolio being managed. These guidelines are monitored for compliance both by Historical Dow and external managers. Credit risk related to derivative activity is mitigated by utilizing multiple counterparties, collateral support agreements and centralized clearing, where appropriate.
The Northern Trust Collective Government Short Term Investment money market fund is utilized as the sweep vehicle for the U.S. plans, which from time to time can represent a significant investment. For one U.S. plan, approximately 35 percent of the liability is covered by a participating group annuity issued by Prudential Insurance Company.
Historical DuPont
Plan assets consist primarily of equity and fixed income securities of U.S. and foreign issuers, and include alternative investments such as real estate and private market securities. At December 31, 2018, plan assets totaled $18.9 billion and included directly held common stock of DowDuPont of $684 million. At December 31, 2017, plan assets totaled $20.3 billion and included directly held common stock of DowDuPont of $910 million.
All pension plan assets in the U.S. are invested through a single master trust fund. The strategic asset allocation for this trust fund is approved by management. The general principles guiding U.S. pension asset investment policies are those embodied in the Employee Retirement Income Security Act of 1974 ("ERISA"). These principles include discharging Historical DuPont's investment responsibilities for the exclusive benefit of plan participants and in accordance with the "prudent expert" standard and other ERISA rules and regulations. Historical DuPont establishes strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. Strategic asset allocations in other countries are selected in accordance with the laws and practices of those countries. Where appropriate, asset liability studies are utilized in this process. U.S. plan assets and a portion of non-U.S. plan assets are managed by investment professionals employed by Historical DuPont. The remaining assets are managed by professional investment firms unrelated to Historical DuPont. Historical DuPont's pension investment professionals have discretion to manage the assets within established asset allocation ranges approved by management. Additionally, pension trust funds are permitted to enter into certain contractual arrangements generally described as derivative instruments. Derivatives are primarily used to reduce specific market risks, hedge currency and adjust portfolio duration and asset allocation in a cost-effective manner.
Global equity securities include varying market capitalization levels. U.S. equity investments are primarily large-cap companies. Global fixed income investments include corporate-issued, government-issued and asset-backed securities. Corporate debt investments include a range of credit risk and industry diversification. U.S. fixed income investments are weighted heavier than non-U.S fixed income securities. Other investments include cash and cash equivalents, hedge funds, real estate and private market securities such as interests in private equity and venture capital partnerships.
DowDuPont
The weighted-average target allocation for plan assets of Historical Dow and Historical DuPont's pension plans is summarized as follows:
| Target Allocation for Plan Assets at Dec 31, 2018 | Historical Dow | Historical DuPont | ||
| Asset Category | ||||
| Equity securities | 36 | % | 35 | % |
| Fixed income securities | 35 | 50 | ||
| Alternative investments | 28 | 13 | ||
| Other investments | 1 | 2 | ||
| Total | 100 | % | 100 | % |
Fair value calculations may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
For pension plan assets classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For pension plan assets classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance and quality checks. For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources. For other pension plan assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.
For pension plan assets classified as Level 3 measurements, total fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity for the investment. Investment managers, fund managers or investment contract issuers provide valuations of the investment on a monthly or quarterly basis. These valuations are reviewed for reasonableness based on applicable sector, benchmark and company performance. Adjustments to valuations are made where appropriate. Where available, audited financial statements are obtained and reviewed for the investments as support for the manager’s investment valuation.
Certain pension plan assets are held in funds where fair value is based on an estimated net asset value per share (or its equivalent) as of the most recently available fund financial statements which are received on a monthly or quarterly basis. These valuations are reviewed for reasonableness based on applicable sector, benchmark and company performance. Adjustments to valuations are made where appropriate to arrive at an estimated net asset value per share at the measurement date. These funds are not classified within the fair value hierarchy.
The following table summarizes the bases used to measure the Company’s pension plan assets at fair value for the years ended December 31, 2018 and 2017:
| Basis of Fair Value Measurements | Dec 31, 2018 | Dec 31, 2017 | ||||||||||||||||||||||
| In millions | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Cash and cash equivalents | $ | 2,701 | $ | 2,642 | $ | 59 | $ | — | $ | 3,829 | $ | 3,728 | $ | 101 | $ | — | ||||||||
| Equity securities: | ||||||||||||||||||||||||
| U.S. equity securities 1 | $ | 7,030 | $ | 6,772 | $ | 243 | $ | 15 | $ | 7,798 | $ | 7,428 | $ | 353 | $ | 17 | ||||||||
| Non - U.S. equity securities | 6,824 | 6,062 | 722 | 40 | 8,615 | 7,399 | 1,173 | 43 | ||||||||||||||||
| Total equity securities | $ | 13,854 | $ | 12,834 | $ | 965 | $ | 55 | $ | 16,413 | $ | 14,827 | $ | 1,526 | $ | 60 | ||||||||
| Fixed income securities: | ||||||||||||||||||||||||
| Debt - government-issued | $ | 8,410 | $ | 496 | $ | 7,914 | $ | — | $ | 7,859 | $ | 655 | $ | 7,203 | $ | 1 | ||||||||
| Debt - corporate-issued | 5,966 | 664 | 5,288 | 14 | 6,481 | 621 | 5,819 | 41 | ||||||||||||||||
| Debt - asset-backed | 811 | 39 | 771 | 1 | 807 | 17 | 787 | 3 | ||||||||||||||||
| Total fixed income securities | $ | 15,187 | $ | 1,199 | $ | 13,973 | $ | 15 | $ | 15,147 | $ | 1,293 | $ | 13,809 | $ | 45 | ||||||||
| Alternative investments: 2 | ||||||||||||||||||||||||
| Hedge funds | $ | 162 | $ | 162 | $ | — | $ | — | $ | 85 | $ | — | $ | 83 | $ | 2 | ||||||||
| Private market securities | 2 | — | — | 2 | 14 | — | — | 14 | ||||||||||||||||
| Real estate | 355 | 262 | — | 93 | 363 | 260 | 7 | 96 | ||||||||||||||||
| Derivatives - asset position | 461 | 18 | 443 | — | 285 | 5 | 280 | — | ||||||||||||||||
| Derivatives - liability position | (524 | ) | (19 | ) | (505 | ) | — | (321 | ) | (2 | ) | (319 | ) | — | ||||||||||
| Total alternative investments | $ | 456 | $ | 423 | $ | (62 | ) | $ | 95 | $ | 426 | $ | 263 | $ | 51 | $ | 112 | |||||||
| Other investments 2 | $ | 586 | $ | 47 | $ | 333 | $ | 206 | $ | 275 | $ | 37 | $ | 238 | $ | — | ||||||||
| Subtotal | $ | 32,784 | $ | 17,145 | $ | 15,268 | $ | 371 | $ | 36,090 | $ | 20,148 | $ | 15,725 | $ | 217 | ||||||||
| Investments measured at net asset value: 2 | ||||||||||||||||||||||||
| Debt - government-issued | $ | 208 | $ | — | ||||||||||||||||||||
| Hedge funds | 2,315 | 2,342 | ||||||||||||||||||||||
| Private market securities | 4,057 | 2,773 | ||||||||||||||||||||||
| Real estate | 2,192 | 2,637 | ||||||||||||||||||||||
| Total investments measured at net asset value | $ | 8,772 | $ | 7,752 | ||||||||||||||||||||
| Items to reconcile to fair value of plan assets: | ||||||||||||||||||||||||
| Pension trust receivables 3 | $ | 239 | $ | 154 | ||||||||||||||||||||
| Pension trust payables 4 | (333 | ) | (311 | ) | ||||||||||||||||||||
| Total | $ | 41,462 | $ | 43,685 |
| 1. | Historical DuPont's pension plans directly held $684 million (2 percent of total plan assets) of DowDuPont common stock at December 31, 2018 and $910 million (2 percent of total plan assets) at December 31, 2017. |
| 2. | Historical Dow reviewed its fair value technique and elected to present assets valued at net asset value per share as a practical expedient outside of the fair value hierarchy. The assets are presented as "Investments measured at net asset value." Prior period amounts were updated to conform with the current year presentation. |
| 3. | Primarily receivables for investment securities sold. |
| 4. | Primarily payables for investment securities purchased. |
The following table summarizes the changes in the fair value of Level 3 pension plan assets for the years ended December 31, 2018 and 2017:
| Fair Value Measurement of Level 3 Pension Plan Assets | Equity Securities | Fixed Income Securities | Alternative Investments | Other Investments | Total | ||||||||||
| In millions | |||||||||||||||
| Balance at Jan 1, 2017, as previously reported | $ | 33 | $ | 17 | $ | 4,117 | $ | 95 | $ | 4,262 | |||||
| Reclassification of investments measured at net asset value 1 | — | — | (4,061 | ) | (95 | ) | (4,156 | ) | |||||||
| Balance at Jan 1, 2017, as restated | $ | 33 | $ | 17 | $ | 56 | $ | — | $ | 106 | |||||
| Assumed in Merger | 18 | 48 | 115 | — | 181 | ||||||||||
| Actual return on assets: | |||||||||||||||
| Relating to assets sold during 2017 | (1 | ) | (3 | ) | 5 | — | 1 | ||||||||
| Relating to assets held at Dec 31, 2017 | 5 | 6 | — | — | 11 | ||||||||||
| Purchases, sales and settlements, net | 5 | (23 | ) | (64 | ) | — | (82 | ) | |||||||
| Balance at Dec 31, 2017 | $ | 60 | $ | 45 | $ | 112 | $ | — | $ | 217 | |||||
| Actual return on assets: | |||||||||||||||
| Relating to assets sold during 2018 | (5 | ) | (76 | ) | 1 | 1 | (79 | ) | |||||||
| Relating to assets held at Dec 31, 2018 | (4 | ) | 83 | (3 | ) | (11 | ) | 65 | |||||||
| Purchases, sales and settlements, net | 5 | (30 | ) | (1 | ) | 216 | 190 | ||||||||
| Transfers out of Level 3, net | (1 | ) | (7 | ) | (14 | ) | — | (22 | ) | ||||||
| Balance at Dec 31, 2018 | $ | 55 | $ | 15 | $ | 95 | $ | 206 | $ | 371 |
| 1. | Historical Dow reviewed its fair value technique and elected to present assets valued at net asset value per share as a practical expedient outside of the fair value hierarchy, including those classified as Level 3 pension plan assets. The assets are presented as "Investments measured at net asset value." |
Trust Assets
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. In the fourth quarter of 2017, $13 million was distributed to Historical DuPont according to the Trust agreement and at December 31, 2017, the balance in the Trust was $558 million. During the year ended December 31, 2018, $68 million was distributed to Historical DuPont according to the Trust agreement and at December 31, 2018, the balance in the Trust was $500 million.
Defined Contribution Plans
Historical Dow
U.S. employees may participate in defined contribution plans (Employee Savings Plans or 401(k) plans) by contributing a portion of their compensation, which is partially matched by Historical Dow. Defined contribution plans also cover employees in some subsidiaries in other countries, including Australia, Brazil, Canada, Italy, Spain and the United Kingdom. Expense recognized for all defined contribution plans was $242 million in 2018, $367 million in 2017 and $283 million in 2016.
Historical DuPont
Historical DuPont provides defined contribution benefits to its employees. The most significant is the U.S. Retirement Savings Plan ("the Plan"), which covers all U.S. full-service employees. This Plan includes a non-leveraged Employee Stock Ownership Plan ("ESOP"). Employees are not required to participate in the ESOP and those who do are free to diversify out of the ESOP. The purpose of the Plan is to provide retirement savings benefits for employees and to provide employees an opportunity to become stockholders of the Company. The Plan is a tax qualified contributory profit sharing plan, with cash or deferred arrangement and any eligible employee of Historical DuPont may participate. Currently, Historical DuPont contributes 100 percent of the first 6 percent of the employee's contribution election and also contributes 3 percent of each eligible employee's eligible compensation regardless of the employee's contribution.
Historical DuPont's contributions to the Plan were $183 million in 2018 and post-Merger contributions were $53 million in 2017. Historical DuPont's matching contributions vest immediately upon contribution. The 3 percent nonmatching employer contribution vests after employees complete 3 years of service. In addition, Historical DuPont made contributions to other defined contribution plans of $51 million in 2018 and post-Merger contributions to other defined contribution plans of $17 million in 2017. Included in Historical DuPont's contributions are amounts related to discontinued operations of $1 million in 2017.
NOTE 20 - STOCK-BASED COMPENSATION
Through the Historical Dow and Historical DuPont equity incentive plans, the Company grants stock-based compensation to employees and non-employee directors. Effective with the Merger, on August 31, 2017, DowDuPont assumed all Historical Dow and Historical DuPont equity incentive compensation awards outstanding immediately prior to the Merger. The previous Historical DuPont equity awards were converted into the right to receive 1.2820 shares of DowDuPont Common Stock and had a fair value of approximately $629 million at the Merger closing date and included $485 million as consideration exchanged and $144 million which is being amortized to stock compensation expense over the remaining vesting period of the awards. The fair values of the converted awards were based on valuation assumptions developed by management and other information including, but not limited to, historical volatility and exercise trends of Historical Dow and Historical DuPont. All outstanding Historical Dow stock options and restricted stock unit ("RSU") (formerly termed deferred stock) awards were converted into stock options and RSU awards with respect to DowDuPont Common Stock. All outstanding and nonvested Historical Dow performance stock unit ("PSU") (formerly termed performance deferred stock) awards were converted into RSU awards with respect to DowDuPont Common Stock at the greater of the applicable performance target or the actual performance as of the effective time of the Merger.
In addition, the Company also assumed sponsorship of each equity incentive compensation plan of Historical Dow and Historical DuPont. Historical Dow and Historical DuPont did not merge their equity incentive plans as a result of the Merger. The plans continue in place with the ability to grant and issue DowDuPont common stock. A description of Historical Dow and Historical DuPont stock-based compensation is discussed below.
The total stock-based compensation expense included in continuing operations in the consolidated statements of income was $380 million, $392 million and $261 million in 2018, 2017 and 2016, respectively. The income tax benefits related to stock-based compensation arrangements were $83 million, $145 million and $97 million in 2018, 2017 and 2016, respectively.
Accounting for Stock-Based Compensation
The Company grants stock-based compensation awards that vest over a specified period or upon employees meeting certain performance and/or retirement eligibility criteria. The fair value of equity instruments issued to employees is measured on the grant date. The fair value of liability instruments issued to employees is measured at the end of each quarter. The fair value of equity and liability instruments is expensed over the vesting period or, in the case of retirement, from the grant date to the date on which retirement eligibility provisions have been met and additional service is no longer required. The Company estimates expected forfeitures.
Historical Dow Plans
Historical Dow grants stock-based compensation to employees and non-employee directors in the form of stock incentive plans, which include stock options, RSUs and restricted stock. Historical Dow also provides stock-based compensation in the form of PSUs and the Employee Stock Purchase Plan ("ESPP"), which grants eligible employees the right to purchase shares of Historical Dow Common Stock at a discounted price.
Historical Dow Valuation Methods and Assumptions
Historical Dow previously used a lattice-based option valuation model to estimate the fair value of stock options and used a Monte Carlo simulation for the market portion of PSU awards. Effective with the first quarter of 2018 grant, Historical Dow began using the Black-Scholes option valuation model to estimate the fair value of stock options. This valuation methodology was adopted as a result of the Merger to align valuation methodologies with Historical DuPont and better align with industry practice. Historical Dow used the Black-Scholes option valuation model for subscriptions to purchase shares under the ESPP. The weighted-average assumptions used to calculate total stock-based compensation are included in the following table:
| Historical Dow Weighted-Average Assumptions | 2018 | 2017 | 2016 | |||
| Dividend yield | 2.13 | % | 3.01 | % | 4.13 | % |
| Expected volatility | 23.34 | % | 23.71 | % | 31.60 | % |
| Risk-free interest rate | 2.83 | % | 1.28 | % | 1.12 | % |
| Expected life of stock options granted during period (years) | 6.2 | 7.5 | 7.8 | |||
| Life of Employee Stock Purchase Plan (months) | — | 3 | 4 |
The dividend yield assumption was equal to the dividend yield on the grant date, which reflected the most recent DowDuPont quarterly dividend payment of $0.38 per share in 2018 ($0.46 per share in 2017 and 2016 on Historical Dow Common Stock). The expected volatility assumptions for the 2016 and 2017 stock options and ESPP were based on an equal weighting of the historical daily volatility for the contractual term of the awards and current implied volatility from exchange-traded options. The expected volatility assumptions for the 2018 stock options were based on an equal weighting of the historical daily volatility for
the expected term of the awards and current implied volatility from exchange-traded options. The expected volatility assumption for the market portion of the 2016 and 2017 PSU awards were based on historical daily volatility for the term of the award. The risk-free interest rate was based on the weighted-average of U.S. Treasury strip rates over the contractual term of the 2016 and 2017 options. The risk-free interest rate was based on the U.S. Treasury strip rates over the expected life of the 2018 options. The expected life of stock options granted was based on an analysis of historical exercise patterns.
Historical Dow Stock Incentive Plan
Historical Dow previously granted equity awards under various plans (the "Prior Plans"). On February 9, 2012, Historical Dow's Board of Directors authorized The Dow Chemical Company 2012 Stock Incentive Plan (the "2012 Plan"), which was approved by stockholders at Historical Dow's annual meeting on May 10, 2012 ("Original Effective Date") and became effective on that date. On February 13, 2014, Historical Dow's Board of Directors adopted The Dow Chemical Company Amended and Restated 2012 Stock Incentive Plan (the "2012 Restated Plan"). The 2012 Restated Plan was approved by stockholders at Historical Dow's annual meeting on May 15, 2014, and became effective on that date. The Prior Plans were superseded by the 2012 Plan and the 2012 Restated Plan (collectively, the "2012 Plan"). Under the 2012 Plan, Historical Dow may grant options, RSUs, PSUs, restricted stock, stock appreciation rights and stock units to employees and non-employee directors until the tenth anniversary of the Original Effective Date, subject to an aggregate limit and annual individual limits. The terms of the grants are fixed at the grant date. Historical Dow's stock-based compensation programs were assumed by DowDuPont and continue in place with the ability to grant and issue DowDuPont common stock. At December 31, 2018, there were 19 million shares of DowDuPont common stock available for grant under the 2012 Plan.
In connection with the Merger, on August 31, 2017 ("Conversion Date") all outstanding Historical Dow stock options and RSU awards were converted into stock options and RSU awards with respect to DowDuPont Common Stock. The stock options and RSU awards have the same terms and conditions under the applicable plans and award agreements prior to the Merger. All outstanding and nonvested PSU awards were converted into RSU awards with respect to DowDuPont Common Stock at the greater of the applicable performance target or the actual performance as of the effective time of the Merger. Changes in the fair value of liability instruments are recognized as compensation expense each quarter.
Historical Dow Stock Options
Historical Dow grants stock options to certain employees, subject to certain annual and individual limits, with terms of the grants fixed at the grant date. The exercise price of each stock option equals the market price of Historical Dow’s stock on the grant date. Options vest from one to three years, and have a maximum term of 10 years.
The following table summarizes stock option activity for 2018:
| Historical Dow Stock Options | 2018 | |||||
| Shares in thousands | Shares | Exercise Price 1 | ||||
| Outstanding at Jan 1, 2018 | 26,628 | $ | 38.30 | |||
| Granted | 6,571 | $ | 71.43 | |||
| Exercised | (4,074 | ) | $ | 30.65 | ||
| Forfeited/Expired | (279 | ) | $ | 61.47 | ||
| Outstanding at Dec 31, 2018 | 28,846 | $ | 46.70 | |||
| Remaining contractual life in years | 5.46 | |||||
| Aggregate intrinsic value in millions | $ | 327 | ||||
| Exercisable at Dec 31, 2018 | 21,813 | $ | 39.99 | |||
| Remaining contractual life in years | 4.40 | |||||
| Aggregate intrinsic value in millions | $ | 322 |
- Weighted-average per share.
| Additional Information about Historical Dow Stock Options | |||||||||
| In millions, except per share amounts | 2018 | 2017 | 2016 | ||||||
| Weighted-average fair value per share of options granted | $ | 15.38 | $ | 14.44 | $ | 10.95 | |||
| Total compensation expense for stock options plans | $ | 68 | $ | 37 | $ | 32 | |||
| Related tax benefit | $ | 15 | $ | 14 | $ | 12 | |||
| Total amount of cash received from the exercise of options | $ | 112 | $ | 310 | $ | 312 | |||
| Total intrinsic value of options exercised 1 | $ | 160 | $ | 286 | $ | 153 | |||
| Related tax benefit | $ | 36 | $ | 106 | $ | 57 |
- Difference between the market price at exercise and the price paid by the employee to exercise the options.
Total unrecognized pretax compensation cost related to nonvested stock option awards of $36 million at December 31, 2018, is expected to be recognized over a weighted-average period of 1.91 years.
Historical Dow Restricted Stock Units
Historical Dow grants restricted stock units to certain employees. The grants vest after a designated period of time, generally one to five years. The following table shows changes in nonvested RSUs:
| Historical Dow RSU Awards | 2018 | ||||
| Shares in thousands | Shares | Grant Date Fair Value 1 | |||
| Nonvested at Jan 1, 2018 | 13,346 | $ | 50.71 | ||
| Granted | 2,022 | $ | 71.46 | ||
| Vested | (5,409 | ) | $ | 46.04 | |
| Canceled | (224 | ) | $ | 59.40 | |
| Nonvested at Dec 31, 2018 | 9,735 | $ | 57.41 |
- Weighted-average per share.
| Additional Information about Historical Dow RSUs | |||||||||
| In millions, except per share amounts | 2018 | 2017 | 2016 | ||||||
| Weighted-average fair value per share of RSUs granted | $ | 71.46 | $ | 61.29 | $ | 46.25 | |||
| Total fair value of RSUs vested | $ | 382 | $ | 179 | $ | 166 | |||
| Related tax benefit | $ | 86 | $ | 66 | $ | 61 | |||
| Total compensation expense for RSU awards | $ | 144 | $ | 178 | $ | 97 | |||
| Related tax benefit | $ | 32 | $ | 66 | $ | 36 |
In 2018, Historical Dow paid $45 million in cash, equal to the value of the stock award on the date of delivery, to certain executive employees to settle approximately 625,000 RSUs (there were no RSUs settled in cash in 2017 and 2016). Total unrecognized pretax compensation cost related to RSU awards of $126 million at December 31, 2018, is expected to be recognized over a weighted-average period of 1.68 years. At December 31, 2018, approximately 18,000 RSUs with a grant date weighted-average fair value per share of $35.12 had previously vested, but were not issued. These shares are scheduled to be issued to employees within six months to three years or upon retirement.
Total incremental pretax compensation expense resulting from the conversion of PSU awards into RSU awards was $25 million ($20 million was recognized in the second half of 2017 and $5 million to be recognized over the remaining service period). Approximately 5,000 employees were impacted by the conversion.
Historical Dow Performance Stock Units
Historical Dow grants performance stock units to certain employees. The grants vest when specified performance targets are attained, such as return on capital and relative total shareholder return, over a predetermined period, generally one to three years. In November 2017, DowDuPont granted PSUs to senior leadership measured on the realization of cost savings in connection with cost synergy commitments, as well as the Company’s ability to complete the Intended Business Separations. Performance and payouts are determined independently for each metric. Compensation expense related to PSU awards is recognized over the lesser of the service or performance period. Changes in the fair value of liability instruments are recognized as compensation expense each quarter.
The following table shows the PSU awards granted:
| Historical Dow PSU Awards | Target Shares Granted 1 | Grant Date Fair Value 2 | ||||
| Shares in thousands | ||||||
| Year | Performance Period | |||||
| 2017 | Sep 1, 2017 - Aug 31, 2019 | 232 | $ | 71.16 | ||
| 2017 3 | Jan 1, 2017 - Dec 31, 2019 | 1,728 | $ | 81.99 | ||
| 2016 3 | Jan 1, 2016 - Dec 31, 2018 | 2,283 | $ | 52.68 |
-
At the end of the performance period, the actual number of shares issued can range from zero to 200 percent of the target shares granted.
-
Weighted-average per share.
-
Converted to RSU awards at Conversion Date.
There was no activity in nonvested PSUs in 2018. At January 1, 2018 and December 31, 2018, there were 232,000 target shares of nonvested PSUs outstanding with a grant date fair value of $71.16.
| Additional Information about Historical Dow PSUs | |||||||||
| In millions, except share amounts | 2018 | 2017 | 2016 | ||||||
| Total fair value of PSUs vested and delivered 1 | $ | — | $ | 202 | $ | 103 | |||
| Related tax benefit | $ | — | $ | 75 | $ | 38 | |||
| Total compensation expense for PSU awards | $ | 12 | $ | 106 | $ | 125 | |||
| Related tax benefit | $ | 3 | $ | 39 | $ | 46 | |||
| Shares of PSUs settled in cash (in thousands) 2 | — | 616 | 861 | ||||||
| Total cash paid to settle PSU awards 3 | $ | — | $ | 38 | $ | 40 |
-
Includes the fair value of shares vested in prior years and delivered in the reporting year.
-
PSU awards vested in prior years and delivered in the reporting year.
-
Cash paid to certain executive employees for PSU awards vested in prior periods and delivered in the reporting year, equal to the value of the stock award on the date of delivery.
Total unrecognized compensation cost related to PSU awards of $8 million at December 31, 2018, is expected to be recognized over a weighted-average period of 0.67 years.
Historical Dow Restricted Stock
Under the 2012 Plan, Historical Dow may grant shares (including options, stock appreciation rights, stock units and restricted stock) to non-employee directors over the 10-year duration of the program, subject to the plan's aggregate limit as well as annual individual limits. The restricted stock issued under this plan cannot be sold, assigned, pledged or otherwise transferred by the non-employee director, until retirement or termination of service to Historical Dow. The following table shows the restricted stock issued under this plan:
| Historical Dow Restricted Stock | Shares Issued (in thousands) | Weighted-Average Fair Value | |||
| Year | |||||
| 2018 | 36 | $ | 62.82 | ||
| 2017 | 33 | $ | 62.04 | ||
| 2016 | 32 | $ | 50.55 |
Historical Dow Employee Stock Purchase Plan
On February 9, 2012, Historical Dow's Board of Directors authorized The Dow Chemical Company 2012 Employee Stock Purchase Plan (the "2012 ESPP") which was approved by stockholders at Historical Dow’s annual meeting on May 10, 2012. When offered, most employees are eligible to purchase shares of common stock of Historical Dow valued at up to 10 percent of their annual base salary. The value is determined using the plan price multiplied by the number of shares subscribed to by the employee. The plan price of the stock is set at an amount equal to at least 85 percent of the fair market value (closing price) of the common stock on a date during the fourth quarter of the year prior to the offering, or the average fair market value (closing price) of the common stock over a period during the fourth quarter of the year prior to the offering, in each case, specified by Historical Dow's Executive Vice President of Human Resources. The most recent offering of Historical Dow's 2012 ESPP closed on July 15, 2017. The ESPP was not offered in 2018 and no current offerings remain outstanding.
| Additional Information about Historical Dow Employee Stock Purchase Plan | |||||||||
| In millions, except per share amounts | 2018 | 2017 | 2016 | ||||||
| Weighted-average fair value per share of purchase rights granted | $ | — | $ | 10.70 | $ | 3.40 | |||
| Total compensation expense for ESPP | $ | — | $ | 38 | $ | 7 | |||
| Related tax benefit | $ | — | $ | 14 | $ | 3 | |||
| Total amount of cash received from the exercise of purchase rights | $ | — | $ | 179 | $ | 86 | |||
| Total intrinsic value of purchase rights exercised 1 | $ | — | $ | 48 | $ | 23 | |||
| Related tax benefit | $ | — | $ | 18 | $ | 9 |
- Difference between the market price at exercise and the price paid by the employee to exercise the purchase rights.
Historical DuPont Plans
Prior to the Merger, Historical DuPont provided share-based compensation to its employees through grants of stock options, RSUs and PSUs. Most of these awards have been granted annually in the first quarter of each calendar year. Subsequent to the Merger, DowDuPont assumed sponsorship of the equity incentive compensation plan of Historical DuPont.
Historical DuPont Equity Incentive Plan
Historical DuPont's Equity Incentive Plan ("Historical DuPont EIP"), as amended and restated effective August 31, 2017, provides for equity-based and cash incentive awards to certain employees, directors and consultants. Under the Historical DuPont EIP, the maximum number of shares reserved for the grant or settlement of awards is 110 million shares, provided that each share in excess of 30 million that is issued with respect to any award that is not an option or stock appreciation right will be counted against the 110 million share limit as four and one-half shares. Historical DuPont will satisfy stock option exercises and vesting of RSUs and PSUs with newly issued shares of DowDuPont Common Stock. At December 31, 2018, approximately 30 million shares were authorized for future grants under the Historical DuPont EIP.
Historical DuPont Stock Options
The exercise price of shares subject to option is equal to the market price of Historical DuPont's stock on the date of grant. When converted into the right to receive 1.2820 shares of DowDuPont Common Stock, the exercise price was also adjusted by the 1.2820 conversion factor. All options vest serially over a three-year period. Stock option awards granted between 2010 and 2015 expire seven years after the grant date and options granted between 2016 and 2018 expire ten years after the grant date. The plan allows retirement-eligible employees of Historical DuPont to retain any granted awards upon retirement provided the employee has rendered at least six months of service following the grant date. The awards have the same terms and conditions as were applicable to such equity awards immediately prior to the Merger closing date.
Historical DuPont uses the Black-Scholes option pricing model to determine the fair value of stock option awards and the assumptions set forth in the table below. The weighted-average grant-date fair value of options granted for the year ended December 31, 2018 and the period September 1, 2017 through December 31, 2017 was $15.46 and $28.56, respectively. The weighted-average assumptions used to calculate total stock-based compensation are included in the following table:
| Historical DuPont Weighted-Average Assumptions | 2018 | 2017 | ||
| Dividend yield | 2.1 | % | 2.2 | % |
| Expected volatility | 23.3 | % | 23.59 | % |
| Risk-free interest rate | 2.8 | % | 2.1 | % |
| Expected life of stock options granted during period (years) | 6.2 | 7.2 |
Historical DuPont determines the dividend yield by dividing the annualized dividend on DowDuPont's Common Stock by the option exercise price. A historical daily measurement of volatility (using DowDuPont stock information after the Merger date and a weighted average of Historical Dow and Historical DuPont prior to Merger date) is determined based on the expected life of the option granted. The risk-free interest rate is determined by reference to the yield on an outstanding U.S. Treasury note with a term equal to the expected life of the option granted. Expected life is determined by reference to Historical DuPont's historical experience, adjusted for expected exercise patterns of in-the-money options.
The following table summarizes stock option activity for 2018 under Historical DuPont's EIP:
| Historical DuPont Stock Options | 2018 | |||||
| Shares in thousands | Shares | Exercise Price 1 | ||||
| Outstanding at Jan 1, 2018 | 15,889 | $ | 48.43 | |||
| Granted | 3,251 | $ | 71.85 | |||
| Exercised | (1,920 | ) | $ | 44.49 | ||
| Forfeited/Expired | (141 | ) | $ | 56.63 | ||
| Outstanding at Dec 31, 2018 | 17,079 | $ | 53.26 | |||
| Remaining contractual life in years | 4.77 | |||||
| Aggregate intrinsic value in millions | $ | 910 | ||||
| Exercisable at Dec 31, 2018 | 12,103 | $ | 48.14 | |||
| Remaining contractual life in years | 3.17 | |||||
| Aggregate intrinsic value in millions | $ | 583 |
- Weighted-average per share.
The aggregate intrinsic values in the table above represent the total pretax intrinsic value (the difference between the closing stock price on the last trading day of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options at year end.
At December 31, 2018, $32 million of total unrecognized pretax compensation cost related to stock options is expected to be recognized over a weighted average period of 1.82 years. Total intrinsic value of options exercised for the year ended December 31, 2018 and the period September 1 through December 31, 2017, was $50 million and $19 million, respectively. For the year ended December 31, 2018, DuPont realized tax benefits from options exercised of $10 million.
Historical DuPont RSUs and PSUs
Historical DuPont issues non-vested RSUs that serially vest over a three-year period and, upon vesting, convert one-for-one to DowDuPont Common Stock. A retirement eligible employee retains any granted awards upon retirement provided the employee has rendered at least six months of service following the grant date. Additional RSUs are also granted periodically to key senior management employees. These RSUs generally vest over periods ranging from three to five years. The fair value of all stock-settled RSUs is based upon the market price of the underlying common stock as of the grant date. The awards have the same terms and conditions as were applicable to such equity awards immediately prior to the Merger closing date.
Historical DuPont grants PSUs to senior leadership. Upon a change in control, Historical DuPont's EIP provisions required PSUs to be converted into RSUs based on the number of PSUs that would vest by assuming that target levels of performance are achieved. Service requirements for vesting in the RSUs replicate those inherent in the exchanged PSUs.
Vesting for PSUs granted in 2016 and for the period January 1 through August 31, 2017 is based upon total shareholder return ("TSR") relative to peer companies. Vesting for PSUs granted in 2015 is equally based upon change in operating net income relative to target and TSR relative to peer companies. Operating net income is net income attributable to Historical DuPont excluding income from discontinued operations after taxes, significant after-tax benefits (charges), and non-operating pension and other postretirement benefit costs. Performance and payouts are determined independently for each metric. The actual award, delivered as DowDuPont Common Stock, can range from zero percent to 200 percent of the original grant. The weighted-average grant‑date fair value of the PSUs granted for the period January 1 through August 31, 2017, subject to the TSR metric, was $91.56, and estimated using a Monte Carlo simulation. The weighted-average grant-date fair value of the PSUs, subject to the revenue metric, was based upon the market price of the underlying common stock as of the grant date.
In accordance with the Merger Agreement, PSUs converted to RSU awards based on an assessment of the underlying market conditions in the PSUs at the greater of target or actual performance levels as of the closing date. As the actual performance levels were not in excess of target as of the closing date, all PSUs converted to RSUs based on target and there was no incremental benefit from the Merger Agreement when compared with Historical DuPont’s EIP.
In November 2017, DowDuPont granted PSUs to senior leadership that vest partially based on the realization of cost savings in connection with cost synergy commitments, as well as DowDuPont’s ability to complete the Intended Business Separations. Performance and payouts are determined independently for each metric. The actual award, delivered in DowDuPont Common Stock, can range from zero percent to 200 percent of the original grant. The weighted-average grant date fair value of the PSUs granted in November 2017 of $71.16 was based upon the market price of the underlying common stock as of the grant date. There were no PSUs granted in the year ended December 31, 2018.
At December 31, 2018, $71 million of total unrecognized pretax compensation cost related to RSUs and PSUs is expected to be recognized over a weighted average period of 1.45 years.
Nonvested awards of RSUs and PSUs are shown below.
| Historical DuPont RSUs and PSUs | 2018 | ||||
| Shares in thousands | Shares | Weighted Average Grant Date Fair Value | |||
| Nonvested at Jan 1, 2018 | 4,198 | $ | 68.28 | ||
| Granted | 965 | $ | 70.37 | ||
| Vested | (1,904 | ) | $ | 67.49 | |
| Canceled | (112 | ) | $ | 66.86 | |
| Nonvested at Dec 31, 2018 | 3,147 | $ | 68.18 |
The total fair value of RSUs and PSUs vested in the year ended December 31, 2018 and for the period September 1, 2017 through December 31, 2017 was $128 million and $9 million, respectively. The weighted average grant-date fair value of stock units granted during 2018 and the period September 1, 2017 through December 31, 2017 was $70.37 and $70.02, respectively.
NOTE 21 - FINANCIAL INSTRUMENTS
The following table summarizes the fair value of financial instruments at December 31, 2018 and 2017:
| Fair Value of Financial Instruments at Dec 31 | 2018 | 2017 | ||||||||||||||||||||||
| In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value | ||||||||||||||||
| Cash equivalents 1 | $ | 9,951 | $ | 12 | $ | — | $ | 9,963 | $ | 6,927 | $ | — | $ | — | $ | 6,927 | ||||||||
| Restricted cash equivalents 1, 2 | $ | 500 | $ | — | $ | — | $ | 500 | $ | 558 | $ | — | $ | — | $ | 558 | ||||||||
| Marketable securities | ||||||||||||||||||||||||
| Available-for-sale 3 | $ | 100 | $ | — | $ | — | $ | 100 | $ | 4 | $ | — | $ | — | $ | 4 | ||||||||
| Held-to-maturity 1, 4 | 34 | — | — | 34 | 952 | — | — | 952 | ||||||||||||||||
| Total marketable securities | $ | 134 | $ | — | $ | — | $ | 134 | $ | 956 | $ | — | $ | — | $ | 956 | ||||||||
| Other investments: | ||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| Government debt 5 | $ | 714 | $ | 9 | $ | (23 | ) | $ | 700 | $ | 637 | $ | 13 | $ | (11 | ) | $ | 639 | ||||||
| Corporate bonds | 1,026 | 20 | (63 | ) | 983 | 704 | 32 | (3 | ) | 733 | ||||||||||||||
| Total debt securities | $ | 1,740 | $ | 29 | $ | (86 | ) | $ | 1,683 | $ | 1,341 | $ | 45 | $ | (14 | ) | $ | 1,372 | ||||||
| Equity securities 6 | $ | 17 | $ | 1 | $ | (2 | ) | $ | 16 | $ | 164 | $ | 2 | $ | (26 | ) | $ | 140 | ||||||
| Total other investments | $ | 1,757 | $ | 30 | $ | (88 | ) | $ | 1,699 | $ | 1,505 | $ | 47 | $ | (40 | ) | $ | 1,512 | ||||||
| Total cash and restricted cash equivalents, marketable securities and other investments | $ | 12,342 | $ | 42 | $ | (88 | ) | $ | 12,296 | $ | 9,946 | $ | 47 | $ | (40 | ) | $ | 9,953 | ||||||
| Long-term debt including debt due within one year 7 | $ | (38,299 | ) | $ | 390 | $ | (1,457 | ) | $ | (39,366 | ) | $ | (32,123 | ) | $ | 69 | $ | (2,121 | ) | $ | (34,175 | ) | ||
| Derivatives relating to: | ||||||||||||||||||||||||
| Interest rates | $ | — | $ | — | $ | (64 | ) | $ | (64 | ) | $ | — | $ | — | $ | (4 | ) | $ | (4 | ) | ||||
| Foreign currency 8 | — | 157 | (49 | ) | 108 | — | 31 | (159 | ) | (128 | ) | |||||||||||||
| Commodities 8 | — | 91 | (178 | ) | (87 | ) | — | 130 | (256 | ) | (126 | ) | ||||||||||||
| Total derivatives | $ | — | $ | 248 | $ | (291 | ) | $ | (43 | ) | $ | — | $ | 161 | $ | (419 | ) | $ | (258 | ) |
| 1. | Prior period amounts were updated to conform with the current year presentation. |
| 2. | Classified as "Other current assets" in the consolidated balance sheets. |
| 3. | Available-for-sale securities with maturities of less than one year at the time of purchase. |
| 4. | Held-to-maturity securities with maturities of more than three months to less than one year at the time of purchase. |
| 5. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations. |
| 6. | Equity securities with a readily determinable fair value. Presented in accordance with ASU 2016-01. See Notes 1 and 2 for additional information. |
| 7. | Cost includes fair value adjustments of $78 million at December 31, 2018 and $492 million at December 31, 2017, related to the accounting for the Merger. Cost also includes fair value hedge adjustments of $18 million at December 31, 2018 and $19 million at December 31, 2017 on $2,290 million of debt at December 31, 2018 and $2,390 million of debt at December 31, 2017. |
| 8. | Presented net of cash collateral where master netting arrangements allow. |
Cost approximates fair value for all other financial instruments.
Cash Equivalents and Restricted Cash Equivalents
At December 31, 2018, the Company had $3,461 million ($6,418 million at December 31, 2017) of held-to-maturity securities (primarily treasury bills and time deposits) classified as cash equivalents, as these securities had maturities of three months or less at the time of purchase. The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At December 31, 2018, the Company had investments in money market funds of $6,502 million classified as cash equivalents ($509 million at December 31, 2017) and $500 million classified as "Other current assets" in the consolidated balance sheets ($558 million at December 31, 2017) due to the restricted nature of its use.
Marketable Securities
At December 31, 2018, the Company had $34 million ($952 million at December 31, 2017) of held-to-maturity securities (primarily time deposits) classified as "Marketable securities" in the consolidated balance sheets as these securities had maturities of more than three months to less than one year at the time of purchase. At December 31, 2018, the Company had $100 million ($4 million at December 31, 2017) of debt securities with maturities of less than one year at the time of purchase. In 2018, $2,186 million of these marketable securities matured.
Debt Securities
The following table provides the investing results from available-for-sale securities for the years ended December 31, 2018, 2017 and 2016.
| Investing Results 1 | |||||||||
| In millions | 2018 | 2017 | 2016 | ||||||
| Proceeds from sales of available-for-sale securities | $ | 1,053 | $ | 245 | $ | 396 | |||
| Gross realized gains | $ | 21 | $ | 5 | $ | 15 | |||
| Gross realized losses | $ | 30 | $ | — | $ | 1 |
| 1. | Prior period amounts were updated to conform with the current year presentation as a result of the adoption of ASU 2016-01. |
The following table summarizes the contractual maturities of the Company’s investments in debt securities:
| Contractual Maturities of Debt Securities at Dec 31, 2018 1 | Amortized Cost | Fair Value | ||||
| In millions | ||||||
| Within one year | $ | 124 | $ | 124 | ||
| One to five years | 455 | 444 | ||||
| Six to ten years | 717 | 683 | ||||
| After ten years | 444 | 432 | ||||
| Total | $ | 1,740 | $ | 1,683 |
| 1. | Includes marketable securities with maturities of less than one year. |
Portfolio managers regularly review the Company’s holdings to determine if any investments in debt securities are other-than-temporarily impaired. The analysis includes reviewing the amount of the impairment, as well as the length of time it has been impaired.
The credit rating of the issuer, current credit rating trends, the trends of the issuer’s overall sector, the ability of the issuer to pay expected cash flows and the length of time the security has been in a loss position are considered in determining whether unrealized losses represent an other-than-temporary impairment. The Company did not have any credit-related losses in 2018, 2017 or 2016.
The following tables provide the fair value and gross unrealized losses of the Company’s investments in debt securities that were deemed to be temporarily impaired at December 31, 2018 and 2017, aggregated by investment category:
| Temporarily Impaired Debt Securities at Dec 31, 2018 | Less than 12 months | 12 months or more | Total | |||||||||||||||
| Fair Value | Unrealized losses | Fair Value | Unrealized losses | Fair Value | Unrealized losses | |||||||||||||
| In millions | ||||||||||||||||||
| Government debt 1 | $ | 287 | $ | (17 | ) | $ | 187 | $ | (6 | ) | $ | 474 | $ | (23 | ) | |||
| Corporate bonds | 724 | (58 | ) | 64 | (5 | ) | 788 | (63 | ) | |||||||||
| Total temporarily impaired debt securities | $ | 1,011 | $ | (75 | ) | $ | 251 | $ | (11 | ) | $ | 1,262 | $ | (86 | ) |
- U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities' obligations.
| Temporarily Impaired Debt Securities at Dec 31, 2017 | Less than 12 months | 12 months or more | Total | |||||||||||||||
| Fair Value | Unrealized losses | Fair Value | Unrealized losses | Fair Value | Unrealized losses | |||||||||||||
| In millions | ||||||||||||||||||
| Government debt 1 | $ | 295 | $ | (4 | ) | $ | 151 | $ | (7 | ) | $ | 446 | $ | (11 | ) | |||
| Corporate bonds | 163 | (2 | ) | 19 | (1 | ) | 182 | (3 | ) | |||||||||
| Total temporarily impaired debt securities | $ | 458 | $ | (6 | ) | $ | 170 | $ | (8 | ) | $ | 628 | $ | (14 | ) |
- U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities' obligations.
Equity Securities
The Company's investments in equity securities with a readily determinable fair value totaled $16 million at December 31, 2018 ($140 million at December 31, 2017). The aggregate carrying value of the Company’s investments in equity securities where fair value is not readily determinable totaled $258 million at December 31, 2018, reflecting the carrying value of the investments. There were no material adjustments to the carrying value of the not readily determinable investments for impairment or observable
price changes for the year ended December 31, 2018. The net unrealized gain recognized in earnings on equity securities totaled $6 million for the year ended December 31, 2018.
Repurchase and Reverse Repurchase Agreement Transactions
Historical Dow enters into repurchase and reverse repurchase agreements. These transactions are accounted for as collateralized borrowings and lending transactions bearing a specified rate of interest and are short-term in nature with original maturities of 30 days or less. The underlying collateral is typically treasury bills with longer maturities than the repurchase agreement. The impact of these transactions is not material to Historical Dow’s results. There were no repurchase or reverse repurchase agreements outstanding at December 31, 2018 and 2017.
Risk Management
The Company’s business operations give rise to market risk exposure due to changes in interest rates, foreign currency exchange rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, Historical Dow and Historical DuPont enter into a variety of contractual arrangements, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as cash flow, fair value or net foreign investment hedges where appropriate. Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value.
The Company’s risk management program for interest rate, foreign currency and commodity risks is based on fundamental, mathematical and technical models that take into account the implicit cost of hedging. Risks created by derivative instruments and the mark-to-market valuations of positions are strictly monitored. Counterparty credit risk arising from these contracts is not significant because the Company minimizes counterparty concentration, deals primarily with major financial institutions of solid credit quality and the majority of its hedging transactions mature in less than three months. In addition, the Company minimizes concentrations of credit risk through its global orientation by transacting with large, internationally diversified financial counterparties.
The Company revises its strategies as market conditions dictate and management reviews its overall financial strategies and the impacts from using derivatives in its risk management program with the Company’s senior leadership who also reviews those strategies with the DowDuPont Board and/or relevant committees thereof.
The notional amounts of the Company's derivative instruments presented on a net basis at December 31, 2018 and 2017, were as follows:
| Notional Amounts - Net | Dec 31, 2018 | Dec 31, 2017 1 | ||||
| In millions | ||||||
| Derivatives designated as hedging instruments: | ||||||
| Interest rate swaps | $ | 2,049 | $ | 185 | ||
| Foreign currency contracts | $ | 4,457 | $ | 4,343 | ||
| Derivatives not designated as hedging instruments: | ||||||
| Interest rate swaps | $ | 5 | $ | — | ||
| Foreign currency contracts | $ | 21,342 | $ | 15,963 |
| 1. | Prior period amounts were previously presented on a gross basis and have been updated to conform with the current year net presentation. |
The notional amounts of the Company's commodity derivatives at December 31, 2018 and 2017, were as follows:
| Commodity Notionals - Net | Dec 31, 2018 | Dec 31, 2017 1 | Notional Volume Unit | ||
| Derivatives designated as hedging instruments: | |||||
| Hydrocarbon derivatives | 39.9 | 71.3 | million barrels of oil equivalent | ||
| Seed derivatives | 82.4 | 100.9 | million bushels | ||
| Derivatives not designated as hedging instruments: | |||||
| Hydrocarbon derivatives | 1.2 | 4.1 | million barrels of oil equivalent | ||
| Seed derivatives | 0.7 | 2.8 | million bushels | ||
| Seed derivatives | 9.0 | 8.2 | kilotons | ||
| Power derivatives | 73.9 | — | thousands of megawatt hours |
| 1. | Prior period amounts were previously presented on a gross basis and have been updated to conform with the current year net presentation. |
Interest Rate Risk Management
The main objective of interest rate risk management is to reduce the total funding cost to Historical Dow and Historical DuPont and to alter the interest rate exposure to the desired risk profile. To achieve this objective, Historical Dow and Historical DuPont hedge using interest rate swaps, “swaptions” and exchange-traded instruments. At December 31, 2018, the Company had open interest rate swaps with maturity dates that extend through 2022.
Foreign Currency Risk Management
Historical Dow
The global nature of Historical Dow's business requires active participation in the foreign exchange markets. Historical Dow has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of Historical Dow's foreign currency risk management is to optimize the U.S. dollar value of net assets and cash flows. To achieve this objective, Historical Dow hedges on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps and nonderivative instruments in foreign currencies. Exposures primarily relate to assets, liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to operating activities. At December 31, 2018, Historical Dow had foreign currency contracts with various expiration dates, through 2019.
Historical DuPont
Historical DuPont's objective in managing exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign currency rate changes. Accordingly, Historical DuPont enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency-denominated assets, liabilities, commitments and cash flows.
Historical DuPont routinely uses foreign currency contracts to offset its net exposures, by currency, related to the foreign currency‑denominated monetary assets and liabilities of its operations. The primary business objective of this hedging program is to maintain an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes, net of related tax effects, are minimized. Historical DuPont also uses foreign currency exchange contracts to offset a portion of Historical DuPont's exposure to certain foreign currency-denominated revenues so that gains and losses on these contracts offset changes in the USD value of the related foreign currency-denominated revenues. The objective of the hedge program is to reduce earnings and cash flow volatility related to changes in foreign currency exchange rates. At December 31, 2018, Historical DuPont had foreign currency contracts with various expiration dates, through the third quarter of 2019.
Commodity Risk Management
Historical Dow and Historical DuPont have exposure to the prices of commodities in its procurement of certain raw materials. The primary purpose of commodity hedging activities is to manage the price volatility associated with these forecasted inventory purchases. Historical Dow and Historical DuPont enter into over-the-counter and exchange-traded derivative commodity instruments to hedge the commodity price risk. At December 31, 2018, Historical Dow and Historical DuPont had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements have various expiration dates through 2022.
Derivatives Not Designated in Hedging Relationships
Foreign Currency Contracts
Historical Dow
Historical Dow also uses foreign exchange forward contracts, options and cross-currency swaps that are not designated as hedging instruments primarily to manage foreign currency exposure.
Historical DuPont
Historical DuPont routinely uses foreign currency contracts to reduce its net exposure, by currency, related to foreign currency-denominated monetary assets and liabilities of its operations so that exchange gains and losses resulting from exchange rate changes are minimized. The netting of such exposures precludes the use of hedge accounting; however, the required revaluation of the forward contracts and the associated foreign currency-denominated monetary assets and liabilities intends to achieve a minimal earnings impact, after taxes. Historical DuPont also uses foreign currency exchange contracts to offset a portion of the exposure to certain foreign currency-denominated revenues so gains and losses on the contracts offset changes in the USD value of the related foreign currency-denominated revenues.
Commodity Contracts
Historical Dow and Historical DuPont utilize futures, options and swap instruments that are effective as economic hedges of commodity price exposures, but do not meet hedge accounting criteria for derivatives and hedging, to reduce exposure to commodity price fluctuations on purchases of raw materials and inventory.
Interest Rate Contracts
Historical Dow
Historical Dow uses swap instruments that are not designated as hedging instruments to manage the interest rate exposures, and uses interest rate swaps, "swaptions," and exchange-traded instruments to accomplish this objective.
Accounting for Derivative Instruments and Hedging Activities
Cash Flow Hedges
Historical Dow
For derivatives that are designated and qualify as cash flow hedging instruments, the gain or loss on the derivative is recorded in AOCL; it is reclassified to income in the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCL fluctuate based on changes in the fair value of open contracts at the end of each reporting period. Historical Dow anticipates volatility in AOCL and net income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market conditions during any period.
The net gain from interest rate hedges included in AOCL at December 31, 2018 was $23 million after tax (net loss of $3 million after tax at December 31, 2017). These contracts have maturity dates that extend through 2022.
Historical Dow had open foreign currency contracts designated as cash flow hedges of the currency risk associated with forecasted transactions not extending beyond 2019. The portion of the mark-to-market effects of the foreign currency contracts is recorded in AOCL; it is reclassified to income in the same period or periods that the underlying item affects income. The net gain from the foreign currency hedges included in AOCL at December 31, 2018, was $15 million after tax (net loss of $19 million after tax at December 31, 2017).
Commodity swaps, futures and option contracts with maturities of not more than 60 months are utilized and designated as cash flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until December 2022. The designated portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCL; it is reclassified to income in the same period or periods that the underlying commodity purchase affects income. The net loss from commodity hedges included in AOCL at December 31, 2018 was $87 million after tax (net loss of $73 million after tax at December 31, 2017).
Fair Value Hedges
Historical Dow
For interest rate swap instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current period income and reflected as “Interest expense and amortization of debt discount” in the consolidated statements of income. The short-cut method is used when the criteria are met. At December 31, 2018 and 2017, Historical Dow had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations.
Net Foreign Investment Hedges
Historical Dow
For derivative instruments that are designated and qualify as net foreign investment hedges, the designated portion of the gain or loss on the derivative is included in “Cumulative translation adjustments” in AOCL. Historical Dow had outstanding foreign currency denominated debt designated as a hedge of net foreign investment of $182 million at December 31, 2018 ($177 million at December 31, 2017). The results of hedges of Dow’s net investment in foreign operations included in “Cumulative translation adjustments” in AOCL was a net gain of $113 million after tax for the year ended December 31, 2018 (net loss of $76 million after tax for the year ended December 31, 2017).
Amounts to be Reclassified within the Next Twelve Months
The net after-tax amounts to be reclassified from AOCL to income within the next 12 months are a $54 million loss for commodity contracts, a $13 million gain for foreign currency contracts and a $1 million gain for interest rate contracts.
The following tables provide the fair value and gross balance sheet classification of derivative instruments at December 31, 2018 and 2017:
| Fair Value of Derivative Instruments | Dec 31, 2018 | |||||||||
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheet | ||||||
| Asset derivatives: | ||||||||||
| Derivatives designated as hedging instruments: | ||||||||||
| Foreign currency contracts | Other current assets | $ | 98 | $ | (42 | ) | $ | 56 | ||
| Commodity contracts | Other current assets | 47 | (13 | ) | 34 | |||||
| Commodity contracts | Deferred charges and other assets | 18 | (3 | ) | 15 | |||||
| Total | $ | 163 | $ | (58 | ) | $ | 105 | |||
| Derivatives not designated as hedging instruments: | ||||||||||
| Foreign currency contracts | Other current assets | $ | 200 | $ | (99 | ) | $ | 101 | ||
| Commodity contracts | Other current assets | 41 | (1 | ) | 40 | |||||
| Commodity contracts | Deferred charges and other assets | 4 | (2 | ) | 2 | |||||
| Total | $ | 245 | $ | (102 | ) | $ | 143 | |||
| Total asset derivatives | $ | 408 | $ | (160 | ) | $ | 248 | |||
| Liability derivatives: | ||||||||||
| Derivatives designated as hedging instruments: | ||||||||||
| Interest rate swaps | Other noncurrent obligations | $ | 64 | $ | — | $ | 64 | |||
| Foreign currency contracts | Accrued and other current liabilities | 46 | (42 | ) | 4 | |||||
| Commodity contracts | Accrued and other current liabilities | 111 | (18 | ) | 93 | |||||
| Commodity contracts | Other noncurrent obligations | 86 | (9 | ) | 77 | |||||
| Total | $ | 307 | $ | (69 | ) | $ | 238 | |||
| Derivatives not designated as hedging instruments: | ||||||||||
| Foreign currency contracts | Accrued and other current liabilities | $ | 124 | $ | (79 | ) | $ | 45 | ||
| Commodity contracts | Accrued and other current liabilities | 7 | (4 | ) | 3 | |||||
| Commodity contracts | Other noncurrent obligations | 8 | (3 | ) | 5 | |||||
| Total | $ | 139 | $ | (86 | ) | $ | 53 | |||
| Total liability derivatives | $ | 446 | $ | (155 | ) | $ | 291 |
| 1. | Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between Historical Dow and Historical DuPont and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
| Fair Value of Derivative Instruments | Dec 31, 2017 | |||||||||
| In millions | Balance Sheet Classification | Gross | Counterparty and Cash Collateral Netting 1 | Net Amounts Included in the Consolidated Balance Sheet | ||||||
| Asset derivatives: | ||||||||||
| Derivatives designated as hedging instruments: | ||||||||||
| Foreign currency contracts | Other current assets | $ | 51 | $ | (46 | ) | $ | 5 | ||
| Commodity contracts | Other current assets | 20 | (4 | ) | 16 | |||||
| Commodity contracts | Deferred charges and other assets | 70 | (5 | ) | 65 | |||||
| Total | $ | 141 | $ | (55 | ) | $ | 86 | |||
| Derivatives not designated as hedging instruments: | ||||||||||
| Foreign currency contracts | Other current assets | $ | 121 | $ | (95 | ) | $ | 26 | ||
| Commodity contracts | Other current assets | 50 | (5 | ) | 45 | |||||
| Commodity contracts | Deferred charges and other assets | 7 | (3 | ) | 4 | |||||
| Total | $ | 178 | $ | (103 | ) | $ | 75 | |||
| Total asset derivatives | $ | 319 | $ | (158 | ) | $ | 161 | |||
| Liability derivatives: | ||||||||||
| Derivatives designated as hedging instruments: | ||||||||||
| Interest rate swaps | Other noncurrent obligations | $ | 4 | $ | — | $ | 4 | |||
| Foreign currency contracts | Accrued and other current liabilities | 109 | (46 | ) | 63 | |||||
| Commodity contracts | Accrued and other current liabilities | 96 | (15 | ) | 81 | |||||
| Commodity contracts | Other noncurrent obligations | 143 | (12 | ) | 131 | |||||
| Total | $ | 352 | $ | (73 | ) | $ | 279 | |||
| Derivatives not designated as hedging instruments: | ||||||||||
| Foreign currency contracts | Accrued and other current liabilities | $ | 186 | $ | (90 | ) | $ | 96 | ||
| Commodity contracts | Accrued and other current liabilities | 45 | (6 | ) | 39 | |||||
| Commodity contracts | Other noncurrent obligations | 8 | (3 | ) | 5 | |||||
| Total | $ | 239 | $ | (99 | ) | $ | 140 | |||
| Total liability derivatives | $ | 591 | $ | (172 | ) | $ | 419 |
| 1. | Counterparty and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between Historical Dow and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty. |
Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are netted with corresponding liabilities. The Company posted cash collateral of $26 million at December 31, 2018 ($26 million of cash collateral at December 31, 2017). Counterparties posted cash collateral of $54 million with the Company at December 31, 2018 (zero at December 31, 2017).
| Effect of Derivative Instruments | Amount of gain (loss) recognized in OCI 1 | Amount of gain (loss) recognized in income 2 | Income Statement Classification | ||||||||||||||||
| In millions | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||
| Fair value hedges: | |||||||||||||||||||
| Interest rate swaps | $ | — | $ | — | $ | — | $ | — | $ | (2 | ) | $ | — | Interest expense and amortization of debt discount 3 | |||||
| Cash flow hedges: | |||||||||||||||||||
| Interest rate swaps | 26 | 2 | 2 | (3 | ) | 4 | 6 | Interest expense and amortization of debt discount | |||||||||||
| Foreign currency contracts | 19 | (30 | ) | 8 | (18 | ) | 7 | (5 | ) | Cost of sales | |||||||||
| Foreign currency contracts | (3 | ) | (5 | ) | 25 | — | (17 | ) | (13 | ) | Sundry income (expense) - net | ||||||||
| Commodity contracts | (69 | ) | 38 | 55 | (63 | ) | 7 | (28 | ) | Cost of sales | |||||||||
| Net investment hedges: | |||||||||||||||||||
| Foreign currency contracts | 116 | (73 | ) | 5 | — | — | — | ||||||||||||
| Total derivatives designated as hedging instruments | $ | 89 | $ | (68 | ) | $ | 95 | $ | (84 | ) | $ | (1 | ) | $ | (40 | ) | |||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||
| Foreign currency contracts | $ | — | $ | — | $ | — | $ | 195 | $ | (198 | ) | $ | (180 | ) | Sundry income (expense) - net | ||||
| Commodity contracts | — | — | — | (7 | ) | (9 | ) | 6 | Cost of sales | ||||||||||
| Total derivatives not designated as hedging instruments | $ | — | $ | — | $ | — | $ | 188 | $ | (207 | ) | $ | (174 | ) | |||||
| Total derivatives | $ | 89 | $ | (68 | ) | $ | 95 | $ | 104 | $ | (208 | ) | $ | (214 | ) |
| 1. | OCI is defined as "Other comprehensive income (loss)." |
| 2. | Pretax amounts. |
| 3. | Gain (loss) recognized in income of derivatives is offset by gain (loss) recognized in income of the hedged item. |
NOTE 22 - FAIR VALUE MEASUREMENTS
Fair Value Measurements on a Recurring Basis
The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis:
| Basis of Fair Value Measurements on a Recurring Basis | Dec 31, 2018 | Dec 31, 2017 | ||||||||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Assets at fair value: | ||||||||||||||||||||||||
| Cash equivalents 1 | $ | — | $ | 9,963 | $ | — | $ | 9,963 | $ | — | $ | 6,927 | $ | — | $ | 6,927 | ||||||||
| Restricted cash equivalents 1, 2 | — | 500 | — | 500 | — | 558 | — | 558 | ||||||||||||||||
| Marketable securities 3 | — | 134 | — | 134 | — | 956 | — | 956 | ||||||||||||||||
| Interests in trade accounts receivable conduits 4 | — | — | — | — | — | — | 677 | 677 | ||||||||||||||||
| Equity securities 5 | 16 | — | — | 16 | 88 | 52 | — | 140 | ||||||||||||||||
| Debt securities: 5 | ||||||||||||||||||||||||
| Government debt 6 | — | 700 | — | 700 | — | 639 | — | 639 | ||||||||||||||||
| Corporate bonds | — | 983 | — | 983 | — | 733 | — | 733 | ||||||||||||||||
| Derivatives relating to: 7 | ||||||||||||||||||||||||
| Foreign currency | — | 298 | — | 298 | — | 172 | — | 172 | ||||||||||||||||
| Commodities | 17 | 93 | — | 110 | 47 | 100 | — | 147 | ||||||||||||||||
| Total assets at fair value | $ | 33 | $ | 12,671 | $ | — | $ | 12,704 | $ | 135 | $ | 10,137 | $ | 677 | $ | 10,949 | ||||||||
| Liabilities at fair value: | ||||||||||||||||||||||||
| Long-term debt including debt due within one year 8 | $ | — | $ | 39,366 | $ | — | $ | 39,366 | $ | — | $ | 34,175 | $ | — | $ | 34,175 | ||||||||
| Derivatives relating to: 7 | ||||||||||||||||||||||||
| Interest rates | — | 64 | — | 64 | — | 4 | — | 4 | ||||||||||||||||
| Foreign currency | — | 170 | — | 170 | — | 295 | — | 295 | ||||||||||||||||
| Commodities | 23 | 189 | — | 212 | 31 | 261 | — | 292 | ||||||||||||||||
| Total liabilities at fair value | $ | 23 | $ | 39,789 | $ | — | $ | 39,812 | $ | 31 | $ | 34,735 | $ | — | $ | 34,766 |
| 1. | Treasury bills, time deposits, and money market funds included in "Cash and cash equivalents" and money market funds included in "Other currents assets" in the consolidated balance sheets are held at amortized cost, which approximates fair value. |
| 2. | Prior period amounts were updated to conform with the current year presentation. |
| 3. | Primarily time deposits with maturities of greater than three months at time of acquisition. |
| 4. | Included in "Accounts and notes receivable - Other" in the consolidated balance sheets. See Note 14 for additional information on transfers of financial assets. |
| 5. | The Company’s investments in debt securities, which are primarily available-for-sale, and equity securities are included in “Other investments” in the consolidated balance sheets. |
| 6. | U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations. |
| 7. | See Note 21 for the classification of derivatives in the consolidated balance sheets. |
| 8. | See Note 21 for information on fair value measurements of long-term debt. |
For assets and liabilities classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For assets and liabilities classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability, or by using observable market data points of similar, more liquid securities to imply the price. For time deposits classified as held-to-maturity investments and reported at amortized cost, fair value is based on an observable interest rate for similar securities. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance and quality checks.
For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.
For all other assets and liabilities for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models. See Note 21 for further information on the types of instruments used by the Company for risk management.
There were no transfers between Levels 1 and 2 during the years ended December 31, 2018 and 2017.
For assets classified as Level 3 measurements, the fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity. The fair value of the Company’s interests held in trade accounts receivable conduits is determined by calculating the expected amount of cash to be received using the key input of anticipated credit losses in the portfolio of receivables sold that have not yet been collected. Given the short-term nature of the underlying receivables, discount rate and prepayments are not factors in determining the fair value of the interests. See Note 14 for further information on assets classified as Level 3 measurements.
For equity securities calculated at net asset value per share (or its equivalent), the Company had $120 million in private market securities and $29 million in real estate at December 31, 2018. There are no redemption restrictions and the underfunded commitments on these investments were $89 million at December 31, 2018.
The following table summarizes the changes in fair value measurements using Level 3 inputs for the years ended December 31, 2018 and 2017:
| Fair Value Measurements Using Level 3 Inputs for Interests Held in Trade Accounts Receivable Conduits 1 | ||||||
| In millions | 2018 | 2017 | ||||
| Balance at Jan 1 | $ | 677 | $ | 1,237 | ||
| Gain (loss) included in earnings 2 | 3 | (8 | ) | |||
| Purchases 3 | — | 8,910 | ||||
| Settlements 3, 4 | (680 | ) | (9,462 | ) | ||
| Balance at Dec 31 | $ | — | $ | 677 |
| 1. | Included in "Accounts and notes receivable - Other" in the consolidated balance sheets. |
| 2. | Included in "Selling, general and administrative expenses" in the consolidated statements of income. |
| 3. | Presented in accordance with ASU 2016-15. See Notes 1 and 2 for additional information. In connection with the review and implementation of ASU 2016-15, the Company also changed the prior year value of “Purchases” and "Settlements" due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits, including additional guidance from the SEC's Office of the Chief Accountant issued in the third quarter of 2018 that indicated an entity must evaluate daily transaction activity to calculate the value of cash received from beneficial interests in conduits. |
| 4. | Includes noncash transactions of $23 million for the year ended December 31, 2018. |
Fair Value Measurements on a Nonrecurring Basis
The following table summarizes the bases used to measure certain assets at fair value on a nonrecurring basis in the consolidated balance sheets in 2018, 2017 and 2016:
| Basis of Fair Value Measurements on a Nonrecurring Basis at Dec 31 | (Level 1) | (Level 3) | Total Losses | ||||||
| In millions | |||||||||
| 2018 | |||||||||
| Assets at fair value: | |||||||||
| Long-lived assets, intangible assets and equity method investments | $ | — | $ | 518 | $ | (387 | ) | ||
| 2017 | |||||||||
| Assets at fair value: | |||||||||
| Long-lived assets, intangible assets, other assets and equity method investments | $ | — | $ | 61 | $ | (1,226 | ) | ||
| Goodwill | $ | — | $ | — | $ | (1,491 | ) | ||
| 2016 | |||||||||
| Assets at fair value: | |||||||||
| Long-lived assets, other assets and equity method investments | $ | 46 | $ | — | $ | (296 | ) |
2018 Fair Value Measurements on a Nonrecurring Basis
As part of the Synergy Program, the Company has or will shut down a number of manufacturing, R&D and corporate facilities around the world. In 2018, the write-down of inventory, corporate facilities and all but one manufacturing facility and related assets, were written down to zero. The remaining manufacturing facility, which was classified as a Level 3 measurement, was written down to a fair value of $17 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets, which included a third party appraisal. The impairment charges related to the Synergy Program, totaling $227 million, were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note 6 for additional information on the Company's restructuring activities.
In 2018, the Company recognized an additional pretax impairment charge of $34 million related primarily to capital additions made to the biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, that was impaired in 2017. The assets were written down to zero in 2018. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income. See Note 6 for additional information on the Company's restructuring activities.
As discussed in Notes 6 and 13, the Company recorded impairments, classified as Level 3 measurements, on certain indefinite-lived intangible assets and equity method investments in joint ventures for the year ended December 31, 2018. The fair value of the indefinite-lived intangible assets that were tested for impairment was $450 million, after an impairment loss of $85 million. The fair value of the equity method investment in joint ventures was $51 million, after an impairment loss of $41 million. These impairment charges were recorded in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income.
2017 Fair Value Measurements on a Nonrecurring Basis
As part of the Synergy Program, the Company has or will shut down a number of manufacturing, R&D and corporate facilities around the world. The manufacturing facilities and related assets (including intangible assets), corporate facilities and data centers associated with this plan were written down to zero in the fourth quarter of 2017. The impairment charges related to the Synergy Program, totaling $287 million, were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note 6 for additional information on the Company's restructuring activities.
In the fourth quarter of 2017, the Company recognized a $622 million pretax impairment charge related to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil. The Company determined it would not pursue an expansion of the facility’s ethanol mill into downstream derivative products, primarily as a result of cheaper ethane-based production as well as the Company’s new assets coming online on the U.S. Gulf Coast which can be used to meet growing market demands in Brazil. As a result of this decision, cash flow analysis indicated the carrying amount of the impacted assets was not recoverable and the assets were written down to zero in the fourth quarter of 2017. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income. See Notes 6 and 23 for additional information.
The Company also recognized other pretax impairment charges of $317 million in the fourth quarter of 2017, including charges related to manufacturing assets of $230 million, an equity method investment of $81 million and other assets of $6 million. The assets, classified as Level 3 measurements, were valued at $61 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets, which included projected cash flows. The impairment charges were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Notes 6 and 23 for additional information.
In the fourth quarter of 2017, the Company performed its annual goodwill impairment testing utilizing a discounted cash flow methodology as its valuation technique. As a result, the Company determined the fair value of the Coatings & Performance Monomers reporting unit was lower than its carrying amount and recorded an impairment charge of $1,491 million, included in “Restructuring, goodwill impairment and asset related charges - net” in the consolidated statements of income and related to Performance Materials & Coatings. See Note 13 for additional information on the impairment charge.
2016 Fair Value Measurements on a Nonrecurring Basis
As part of the 2016 restructuring plan, Historical Dow has or will shut down a number of manufacturing and corporate facilities. The manufacturing facilities and related assets, corporate facilities and data centers associated with this plan were written down to zero in the second quarter of 2016. Historical Dow also rationalized its aircraft fleet in the second quarter of 2016. Certain aircraft, classified as a Level 3 measurement, were considered held for sale and written down to fair value, using unobservable inputs, including assumptions a market participant would use to measure the fair value of the aircraft. The aircraft were subsequently sold during the second half of 2016. The impairment charges related to the 2016 restructuring plan, totaling $153 million, were included in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Note 6 for additional information on Dow's 2016 restructuring program.
Historical Dow recognized an impairment charge of $143 million in the fourth quarter of 2016, related to its equity interest in AFSI. This investment, classified as a Level 1 measurement, was written down to $46 million using quoted prices in an active market. The impairment charge was included in “Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income. See Notes 6 and 12 for additional information.
NOTE 23 - VARIABLE INTEREST ENTITIES
Historical DuPont did not hold a variable interest in any joint ventures at December 31, 2018 and 2017 for which it was the primary beneficiary. In addition, the maximum exposure to loss related to the nonconsolidated variable interest entities ("VIEs") for which Historical DuPont did hold a variable interest at December 31, 2018 and 2017 was not considered material to the consolidated financial statements. The following discussion addresses variable interests held by Historical Dow.
Historical Dow Consolidated VIEs
Historical Dow holds a variable interest in the following joint ventures or entities for which it is the primary beneficiary.
Asia Pacific joint ventures
Historical Dow has variable interests in three joint ventures that own and operate manufacturing and logistics facilities, which produce chemicals and provide services in Asia Pacific. Historical Dow's variable interests in these joint ventures relate to arrangements between the joint ventures and Historical Dow, involving the majority of the output on take-or-pay terms with pricing ensuring a guaranteed return to the joint ventures.
Polishing materials joint venture
Historical Dow has variable interests in a joint venture that manufactures products in Japan for the semiconductor industry. Each joint venture partner holds several equivalent variable interests, with the exception of a royalty agreement held exclusively between the joint venture and Historical Dow. In addition, the entire output of the joint venture is sold to Historical Dow for resale to third-party customers.
Ethylene storage joint venture
Historical Dow has variable interests in a joint venture that provides ethylene storage in Alberta, Canada. Historical Dow's variable interests relate to arrangements involving a majority of the joint venture's storage capacity on take-or-pay terms with pricing ensuring a guaranteed return to the joint venture; and favorably priced leases provided to the joint venture. Historical Dow provides the joint venture with operation and maintenance services and utilities.
Ethanol production and cogeneration in Brazil
Historical Dow held a variable interest in a joint venture located in Brazil that produces ethanol from sugarcane. In August 2015, the partner exercised an equity option which required Historical Dow to purchase their equity interest. On March 31, 2016, the partner's equity investment transferred to Historical Dow. On July 11, 2016, Historical Dow paid $202 million to the former partner, which was classified as "Purchases of noncontrolling interests" in the consolidated statements of cash flows. This former joint venture is now 100 percent owned by Historical Dow. Historical Dow continues to hold variable interests in a related entity that owns a cogeneration facility. Historical Dow's variable interests are the result of a tolling arrangement where it provides fuel to the entity and purchases a majority of the cogeneration facility’s output on terms that ensure a return to the entity’s equity holders.
Assets and Liabilities of Consolidated VIEs
The Company's consolidated financial statements include the assets, liabilities and results of operations of VIEs for which the Company is the primary beneficiary. The other equity holders’ interests are reflected in "Net income attributable to noncontrolling interests" in the consolidated statements of income and "Noncontrolling interests" in the consolidated balance sheets.
The following table summarizes the carrying amounts of these entities’ assets and liabilities included in the Company’s consolidated balance sheets at December 31, 2018 and 2017:
| Assets and Liabilities of Consolidated VIEs at Dec 31 | 2018 | 2017 | ||||
| In millions | ||||||
| Cash and cash equivalents | $ | 82 | $ | 107 | ||
| Other current assets | 114 | 131 | ||||
| Net property | 734 | 907 | ||||
| Other noncurrent assets | 45 | 50 | ||||
| Total assets 1 | $ | 975 | $ | 1,195 | ||
| Current liabilities | $ | 334 | $ | 303 | ||
| Long-term debt | 75 | 249 | ||||
| Other noncurrent obligations | 31 | 41 | ||||
| Total liabilities 2 | $ | 440 | $ | 593 |
| 1. | All assets were restricted at December 31, 2018 and 2017. |
| 2. | All liabilities were nonrecourse at December 31, 2018 and 2017. |
In addition, Historical Dow holds a variable interest in an entity created to monetize accounts receivable of select European entities. Historical Dow is the primary beneficiary of this entity as a result of holding subordinated notes while maintaining servicing responsibilities for the accounts receivable. The carrying amounts of assets and liabilities included in the Company’s consolidated balance sheets pertaining to this entity were current assets of zero (zero restricted) at December 31, 2018 ($671 million, zero restricted, at December 31, 2017) and current liabilities of zero (zero nonrecourse) at December 31, 2018 (less than $1 million, zero nonrecourse, at December 31, 2017).
Amounts presented in the consolidated balance sheets and the table above as restricted assets or nonrecourse obligations relating to consolidated VIEs at December 31, 2018 and 2017 are adjusted for intercompany eliminations and parental guarantees.
Historical Dow Nonconsolidated VIEs
Historical Dow holds a variable interest in the following entities for which Historical Dow is not the primary beneficiary.
Polysilicon joint venture
As a result of the Dow Silicones ownership restructure, Historical Dow holds variable interests in Hemlock Semiconductor L.L.C. The variable interests relate to an equity interest held by Historical Dow and arrangements between Historical Dow and the joint venture to provide services. Historical Dow is not the primary beneficiary, as it does not direct the activities that most significantly impact the economic performance of this entity; therefore, the entity is accounted for under the equity method of accounting. At December 31, 2018, the Company had a negative investment basis of $495 million in this joint venture (negative $752 million at December 31, 2017), classified as "Other noncurrent obligations" in the consolidated balance sheets. The Company's maximum exposure to loss was zero at December 31, 2018 (zero at December 31, 2017). See Note 12 for additional information on this joint venture.
Silicon joint ventures
Also as a result of the Dow Silicones ownership restructure, Historical Dow holds minority voting interests in certain joint ventures that produce silicon inputs for Dow Silicones. These joint ventures operate under supply agreements that sell inventory to the equity owners using pricing mechanisms that guarantee a return, therefore shielding the joint ventures from the obligation to absorb expected losses. As a result of the pricing mechanisms of these agreements, these entities are determined to be VIEs. Historical Dow is not the primary beneficiary, as it does not hold the power to direct the activities that most significantly impact the economic performance of these entities; therefore, the entities are accounted for under the equity method of accounting. The Company's maximum exposure to loss as a result of its involvement with these variable interest entities is determined to be the carrying value of the investment in these entities. At December 31, 2018, the Company's investment in these joint ventures was $100 million ($103 million at December 31, 2017), classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets, representing the Company's maximum exposure to loss.
AFSI
Historical Dow holds a variable interest in AFSI, a company that produces and sells proprietary technologies for the horticultural market. The variable interest in AFSI relates to a tax receivable agreement that entitles Historical Dow to additional consideration in the form of tax savings, which is contingent on the operations and earnings of AFSI. Historical Dow is not the primary beneficiary, as it is a minority shareholder in AFSI and AFSI is governed by a board of directors, the composition of which is mandated by AFSI's corporate governance requirements that a majority of the directors be independent.
On April 4, 2017, Historical Dow entered into a stock purchase agreement to purchase up to 5,070,358 shares of AFSI's common stock, which represented approximately 10 percent of AFSI's common stock outstanding at signing of the agreement, subject to certain terms and conditions. On November 19, 2018, the stock purchase agreement concluded. The Company's investment in AFSI was $48 million at December 31, 2018 ($51 million at December 31, 2017), classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets. In the fourth quarter of 2016, as a result of a decline in the market value of AFSI, Historical Dow recognized a $143 million pretax impairment charge related to its equity interest in AFSI, recorded in "Restructuring, goodwill impairment and asset related charges - net" in the consolidated statements of income (see Notes 12 and 22 for further information).
At December 31, 2018, the Company's receivable with AFSI related to the tax receivable agreement was $8 million ($4 million at December 31, 2017), classified as "Accounts and notes receivable - Other" in the consolidated balance sheets. The Company's maximum exposure to loss was $56 million at December 31, 2018 ($55 million at December 31, 2017).
Crude acrylic acid joint venture
Historical Dow held a variable interest in a joint venture that manufactured crude acrylic acid in the United States and Germany on behalf of Historical Dow and the other joint venture partner. The variable interest related to a cost-plus arrangement between the joint venture and each joint venture partner. Historical Dow was not the primary beneficiary, as a majority of the joint venture’s output was committed to the other joint venture partner; therefore, the entity was accounted for under the equity method of accounting.
In the fourth quarter of 2017, the joint venture was dissolved by mutual agreement with return of the originally contributed assets to the partners. The carrying value of Historical Dow's investment prior to the dissolution was $168 million, which was also determined to be fair value, therefore, no gain or loss was recognized as a result of the transaction. The fair value of assets recognized included $47 million of cash, $67 million of other assets and $48 million of goodwill (net of $6 million settlement of an affiliate’s pre‑existing obligation).
NOTE 24 - SEGMENTS AND GEOGRAPHIC REGIONS
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 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 Europe, Middle East, and Africa ("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 were retrospectively applied to 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 are provided at the end of this footnote. The Company also presents pro forma net sales for 2017 and 2016 in this footnote as it is included in management’s measure of segment performance and is regularly reviewed by the CODM.
Pro forma adjustments used in the calculation of pro forma net sales and pro forma Operating EBITDA were determined in accordance with Article 11 of Regulation S-X. Pro forma financial information is based on the historical consolidated financial statements of Historical Dow and Historical DuPont, adjusted to give effect to the Merger as if it had been consummated on January 1, 2016. Pro forma adjustments have been made for (1) the 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 regulatory approval for the Merger. Events that are not expected to have a continuing impact on the combined results (e.g., inventory step-up costs) are excluded from the pro forma adjustments.
Corporate Profile
The Company conducts its worldwide operations through global businesses which are reflected in the following reportable segments:
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 agriculture industry. Land available for worldwide agricultural production is increasingly limited so production growth will need to be achieved principally through improving crop yields and productivity. The segment’s two global businesses, Seed and Crop Protection, deliver a broad portfolio of products and services that are specifically targeted to achieve gains in crop yields and productivity, including well-established brands of seed products, crop chemicals, seed treatment, agronomy and digital services. R&D focuses on leveraging germplasm and plant science technology to increase farmer productivity and to enhance the value of grains and oilseeds through improved seed traits, superior seed germplasm and effective use of crop protection solutions.
Seed
Seed is a global leader in developing and supplying advanced plant genetic products and technologies. The Seed business is a global leader in developing, producing and marketing hybrid corn seed and soybean seed varieties, primarily under the Pioneer® brand name, which improve the productivity and profitability of its customers. Additionally, the Seed business develops, produces and markets sunflowers, wheat, alfalfa, canola, cotton, rice and sorghum, as well as silage inoculants.
Crop Protection
Crop Protection serves the global agriculture industry with crop protection products for field crops such as wheat, corn, soybean, sunflower, canola/oilseed rape and rice, and specialty crops such as fruit, nut, vine, sugarcane, coffee and vegetables. Principle crop protection products are weed control, disease control and insect control offerings for foliar or soil application or as a seed treatment.
PERFORMANCE MATERIALS & COATINGS
Performance Materials & Coatings includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. These businesses primarily utilize the Company's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of the architectural and industrial coatings, home care and personal care end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to combine chemistry platforms to deliver differentiated offerings to customers.
Coatings & Performance Monomers
Coatings & Performance Monomers consists of two businesses: Coating Materials and Performance Monomers. The Coating Materials business makes critical ingredients and additives that help advance the performance of paints and coatings. The business offers innovative and sustainable products to accelerate paint and coatings performance across diverse market segments, including architectural paints and coatings, as well as industrial coatings applications used in maintenance and protective industries, wood, metal packaging, traffic markings, thermal paper and leather. These products enhance coatings by improving hiding and coverage characteristics, enhancing durability against nature and the elements, reducing volatile organic compounds (“VOC”) content, reducing maintenance and improving ease of application. The Performance Monomers business manufactures critical building blocks based on acrylics needed for the production of coatings, textiles, and home and personal care products.
Consumer Solutions
Consumer Solutions consists of three businesses: Performance Silicones; Silicone Feedstocks & Intermediates; and Home & Personal Care. Performance Silicones uses innovative, versatile silicone-based technology to provide ingredients and solutions to customers in high performance building, consumer goods, elastomeric applications and the pressure sensitive adhesives industry that help them meet modern consumer preferences in attributes such as texture, feel, scent, durability and consistency. The Company’s wide array of silicone-based products and solutions enables customers to: increase the appeal of their products; extend shelf life; improve performance of products under a wider range of conditions; and provide a more sustainable offering. Silicone Feedstocks & Intermediates provides standalone silicone materials that are used as intermediates in a wide range of applications including adhesion promoters, coupling agents, crosslinking agents, dispersing agents and surface modifiers. The Home & Personal Care business collaborates closely with global and regional brand owners to deliver innovative solutions for creating new and unrivaled consumer benefits and experiences in cleaning, laundry and skin and hair care applications, among others.
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.
Industrial Solutions
Industrial Solutions is the world’s largest producer of purified ethylene oxide. It provides a broad portfolio of solutions that address world needs by enabling and improving the manufacture of consumer and industrial goods and services. The business’ solutions minimize friction and heat in mechanical processes, manage the oil and water interface, deliver ingredients for maximum effectiveness, facilitate dissolvability, enable product identification and provide the foundational building blocks for the development of chemical technologies. The business supports manufacturers associated with a large variety of end-markets, notably better crop protection offerings in agriculture, coatings, detergents and cleaners, solvents for electronics processing, inks and textiles.
Polyurethanes & CAV
Polyurethanes & CAV consists of three businesses: Polyurethanes, Chlor-Alkali & Vinyl (“CAV”), and Construction Chemicals (“DCC”). The Polyurethanes business is the world’s largest producer of propylene oxide, propylene glycol and polyether polyols, and a leading producer of aromatic isocyanates and fully formulated polyurethane systems for rigid, semi-rigid and flexible foams, and coatings, adhesives, sealants, elastomers and composites that serve energy efficiency, consumer comfort, industrial and enhanced mobility market sectors. The CAV business provides cost advantaged chlorine and caustic soda supply and markets caustic soda, a valuable co-product of the chlor-alkali manufacturing process, and ethylene dichloride and vinyl chloride monomer. The DCC business provides cellulose ethers, redispersible latex powders, silicones and acrylic emulsions used as key building blocks for differentiated building and construction materials across many market segments and applications ranging from roofing and flooring to gypsum-, cement-, concrete- or dispersion-based building materials.
Joint Ventures
The Industrial Intermediates & Infrastructure segment includes a portion of the Company's share of the results of the following joint ventures:
| • | EQUATE Petrochemical Company K.S.C.C. (“EQUATE”) - a Kuwait-based company that manufactures ethylene, polyethylene and ethylene glycol, and manufactures and markets monoethylene glycol, diethylene glycol and polyethylene terephthalate resins; owned 42.5 percent by the Company. |
| • | The Kuwait Olefins Company K.S.C.C. (“TKOC”) - a Kuwait-based company that manufactures ethylene and ethylene glycol; owned 42.5 percent by the Company. |
| • | Map Ta Phut Olefins Company Limited (“Map Ta Phut”) - a Thailand-based company that manufactures propylene and ethylene; the Company has an effective ownership of 32.77 percent (of which 20.27 percent is owned directly by the Company and aligned with the Industrial Intermediates & Infrastructure segment and 12.5 percent is owned indirectly through the Company’s equity interest in Siam Polyethylene Company Limited, an entity that is part of The SCG-Dow Group and aligned with the Packaging & Specialty Plastics segment). |
| • | Sadara Chemical Company ("Sadara") - a Saudi Arabian company that manufactures chlorine, ethylene, propylene and aromatics for internal consumption and manufactures and sells polyethylene, ethylene oxide and propylene oxide derivative products, and isocyanates; owned 35 percent by the Company. |
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.
The Company’s unique advantages compared with its competitors include: the Company’s extensive low-cost feedstock positions around the world; unparalleled scale, footprint, and market reach, with world-class manufacturing sites in every geography; deep customer and brand owner understanding; and market-driven application development and technical support.
The segment remains agile and adaptive by participating in the entire ethylene-to-polyethylene chain integration, enabling the Company to manage market swings, and therefore optimize returns while reducing long-term earnings volatility. The Company’s unrivaled value chain ownership, combined with its Pack Studio locations in every geography, which help customers and brand owners deliver faster and more efficient packaging product commercialization through a global network of laboratories, technical experts and testing equipment, together differentiate the Company from its competitors.
Hydrocarbons & Energy
Hydrocarbons & Energy is the largest global producer of ethylene, an internal feedstock that is consumed primarily within the Packaging & Specialty Plastics segment. In addition to ethylene, the business is a leading producer of propylene and aromatics products that are used to manufacture materials that consumers use every day. The business also produces and procures the power and feedstocks used by the company’s manufacturing sites.
Packaging and Specialty Plastics
Packaging and Specialty Plastics serves growing, high-value sectors using world-class technology, broad existing product lines, and a rich product pipeline that creates competitive advantages for the entire packaging value chain. The business is also a leader in polyolefin elastomers and ethylene propylene diene monomer ("EPDM") rubber serving automotive, consumer, wire and cable and construction markets. Market growth is expected to be driven by major shifts in population demographics; improving socioeconomic status in emerging geographies; consumer and brand owner demand for increased functionality; global efforts to
reduce food waste; growth in telecommunications networks; global development of electrical transmission and distribution infrastructure; and renewable energy applications.
Joint Ventures
This segment also includes the results of the following joint ventures of the Company, as well as a portion of the results of EQUATE, TKOC, Map Ta Phut and Sadara:
| • | The Kuwait Styrene Company K.S.C.C. (“TKSC”) - a Kuwait-based company that manufactures styrene monomer; owned 42.5 percent by the Company. |
| • | The SCG-Dow Group - a group of Thailand-based companies (consisting of Siam Polyethylene Company Limited; Siam Polystyrene Company Limited; Siam Styrene Monomer Co., Ltd.; and Siam Synthetic Latex Company Limited) that manufacture polyethylene, polystyrene, styrene, latex and specialty elastomers; owned 50 percent by the Company. |
ELECTRONICS & IMAGING
Electronics & Imaging is a leading global supplier of differentiated materials and systems for a broad range of consumer electronics including mobile devices, television monitors, personal computers and electronics used in a variety of industries. The segment is a leading supplier of key materials for the manufacturing of photovoltaics ("PV") and solar cells, and of materials and printing systems to the advanced printing industry, and of materials and solutions for the fabrication of semiconductors and integrated circuits addressing both front-end and back-end of the manufacturing process. By providing chemical mechanical planarization ("CMP") pads and slurries, photoresists and advanced coatings for lithography, removers and cleaners, dielectric and metallization solutions for back-end-of-line advanced chip packaging, along with silicones for light emitting diode ("LED") packaging and semiconductor applications, the segment offers the broadest portfolio of semiconductor and advanced packaging materials in the market. Electronics & Imaging also provides permanent and process chemistries for the fabrication of printed circuit boards to include laminates and substrates, electroless and electrolytic metallization solutions, as well as patterning solutions and materials and innovative metallization processes for metal finishing, decorative, and industrial applications. Electronics & Imaging is a leading global supplier of innovative metallization pastes and back sheet materials for the production of solar cells and solar modules for the PV industry (solar modules, which are made up of solar cells and other materials, are installed to generate power) and in the 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. Electronics & Imaging addresses all of these markets by leveraging a strong science and technology base to provide the critical materials and solutions for creating a more connected and digital world.
Joint Ventures
Electronics & Imaging 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.
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. It consists of two operating segments: Nutrition & Health and Industrial Biosciences.
Nutrition & Health
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. Its innovative and broad portfolio of natural-based ingredients marketed under the DuPont DANISCO® brand serves to improve health and nutrition as well as taste and texture in a wide range of dairy, beverage, bakery and dietary supplement applications. Its probiotics portfolio, including the HOWARU® brand, is world famous for its extensively documented strains that deliver consumers benefits in digestive and immune health. In addition to serving the global food and beverage market, the Nutrition & Health business is one of the world's largest producers of cellulosics- and alginates-based pharma excipients, used to improve the functionality and delivery of pharmaceuticals, and enabling the development of more effective pharma solutions.
Industrial Biosciences
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. Industrial Biosciences offers better, cleaner and safer solutions to a wide range of industries including animal nutrition, biofuels, textiles, food and beverages, cleaning, personal care, fertilizers, and oil and gas.
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.
SAFETY & CONSTRUCTION
Safety & Construction is the global leader in providing innovative 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. Safety & Construction addresses the growing global needs of businesses, governments and consumers for solutions that make life safer, healthier and better.
Innovation is the business imperative. By uniting market-driven science with the strength of highly regarded brands including DUPONT™ KEVLAR® high-strength material, NOMEX® thermal-resistant material, CORIAN® solid surfaces, TYVEK® selective barriers, DOW FILMTEC™ reverse osmosis elements, DOW STYROFOAM™ insulation and DOW GREAT STUFF™ do-it-yourself products, the segment strives to bring new products and solutions to solve customers' needs faster, better and more cost effectively. Safety & Construction is investing in future growth initiatives such as the protection of perishable and temperature-sensitive foods and pharmaceutical products, new roofing products, flame resistant cargo containers, protective clothing with much higher levels of arc protection for utilities, more comfortable and higher particulate protection hoods for firefighters and high recovery reverse osmosis elements. Through the sustainable solutions services, 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.
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.
Product transfers to Agriculture from other operating segments are generally valued at market-based prices. Other transfers of products between operating segments are generally valued at cost.
Sales are attributed to geographic regions based on customer location; long-lived assets are attributed to geographic regions based on asset location.
| Geographic Region Information | United States | EMEA | Rest of World | Total | ||||||||
| In millions | ||||||||||||
| 2018 | ||||||||||||
| Sales to external customers | $ | 29,736 | $ | 24,371 | $ | 31,870 | $ | 85,977 | ||||
| Long-lived assets | $ | 23,264 | $ | 6,495 | $ | 6,089 | $ | 35,848 | ||||
| 2017 | ||||||||||||
| Sales to external customers | $ | 21,210 | $ | 18,069 | $ | 23,205 | $ | 62,484 | ||||
| Long-lived assets | $ | 23,274 | $ | 6,252 | $ | 6,721 | $ | 36,247 | ||||
| 2016 | ||||||||||||
| Sales to external customers | $ | 16,681 | $ | 13,633 | $ | 17,844 | $ | 48,158 | ||||
| Long-lived assets | $ | 14,812 | $ | 2,708 | $ | 5,966 | $ | 23,486 |
| Segment Information | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Corp. | Total | ||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||
| 2018 | ||||||||||||||||||||||||||||||
| Net sales | $ | 14,301 | $ | 9,575 | $ | 15,116 | $ | 24,096 | $ | 4,720 | $ | 6,801 | $ | 5,620 | $ | 5,453 | $ | 295 | $ | 85,977 | ||||||||||
| Restructuring, goodwill impairment and asset related charges - net 1 | 479 | 21 | 11 | 46 | 2 | 29 | 2 | 24 | 491 | 1,105 | ||||||||||||||||||||
| Equity in earnings (losses) of nonconsolidated affiliates | — | 4 | 284 | 287 | 412 | 16 | — | 24 | (26 | ) | 1,001 | |||||||||||||||||||
| Operating EBITDA 2 | 2,705 | 2,170 | 2,543 | 4,926 | 1,902 | 1,632 | 1,702 | 1,427 | (714 | ) | 18,293 | |||||||||||||||||||
| Depreciation and amortization | 941 | 855 | 653 | 1,239 | 452 | 681 | 442 | 542 | 113 | 5,918 | ||||||||||||||||||||
| Total assets | 43,880 | 14,208 | 12,932 | 27,192 | 14,947 | 24,359 | 14,837 | 15,247 | 20,428 | 188,030 | ||||||||||||||||||||
| Investment in nonconsolidated affiliates | 138 | 100 | 1,850 | 1,278 | 1,053 | 212 | 76 | 337 | 160 | 5,204 | ||||||||||||||||||||
| Capital expenditures | 649 | 409 | 417 | 1,163 | 279 | 391 | 182 | 347 | — | 3,837 | ||||||||||||||||||||
| 2017 | ||||||||||||||||||||||||||||||
| Net sales | $ | 7,516 | $ | 8,809 | $ | 12,647 | $ | 21,456 | $ | 3,356 | $ | 2,786 | $ | 2,521 | $ | 3,006 | $ | 387 | $ | 62,484 | ||||||||||
| Pro forma net sales | 14,342 | 8,768 | 12,640 | 22,392 | 4,775 | 5,952 | 5,131 | 5,142 | 393 | 79,535 | ||||||||||||||||||||
| Restructuring, goodwill impairment and asset related charges - net 1 | 134 | 1,578 | 17 | 716 | 125 | 1 | 2 | 53 | 654 | 3,280 | ||||||||||||||||||||
| Equity in earnings (losses) of nonconsolidated affiliates | 3 | 41 | 172 | 189 | 356 | 13 | (1 | ) | 2 | (11 | ) | 764 | ||||||||||||||||||
| Pro forma Operating EBITDA 3 | 2,611 | 1,774 | 2,282 | 4,698 | 1,840 | 1,296 | 1,319 | 1,194 | (848 | ) | 16,166 | |||||||||||||||||||
| Depreciation and amortization | 427 | 854 | 604 | 911 | 329 | 248 | 200 | 266 | 130 | 3,969 | ||||||||||||||||||||
| Total assets | 45,569 | 14,907 | 12,108 | 25,809 | 15,066 | 25,315 | 14,712 | 15,452 | 23,226 | 192,164 | ||||||||||||||||||||
| Investment in nonconsolidated affiliates | 333 | 103 | 1,699 | 1,184 | 1,196 | 203 | 76 | 359 | 183 | 5,336 | ||||||||||||||||||||
| Capital expenditures | 310 | 446 | 295 | 1,965 | 138 | 156 | 74 | 186 | — | 3,570 | ||||||||||||||||||||
| 2016 | ||||||||||||||||||||||||||||||
| Net sales | $ | 6,173 | $ | 6,439 | $ | 10,832 | $ | 18,404 | $ | 2,307 | $ | 948 | $ | 897 | $ | 1,877 | $ | 281 | $ | 48,158 | ||||||||||
| Pro forma net sales | 14,060 | 6,389 | 10,820 | 19,848 | 4,266 | 5,736 | 4,497 | 4,984 | 294 | 70,894 | ||||||||||||||||||||
| Restructuring, goodwill impairment and asset related charges - net 1 | 5 | 42 | 83 | 10 | — | 1 | — | (3 | ) | 457 | 595 | |||||||||||||||||||
| Asbestos-related charge 4 | — | — | — | — | — | — | — | — | 1,113 | 1,113 | ||||||||||||||||||||
| Equity in earnings (losses) of nonconsolidated affiliates | 5 | 98 | (18 | ) | 137 | 234 | 10 | 3 | 1 | (28 | ) | 442 | ||||||||||||||||||
| Pro forma Operating EBITDA 3 | 2,322 | 1,015 | 1,675 | 5,129 | 1,388 | 1,227 | 1,043 | 1,133 | (818 | ) | 14,114 | |||||||||||||||||||
| Depreciation and amortization | 186 | 657 | 649 | 770 | 235 | 64 | 59 | 121 | 121 | 2,862 | ||||||||||||||||||||
| Total assets | 6,960 | 16,256 | 11,638 | 17,837 | 7,592 | 1,202 | 1,807 | 2,832 | 13,387 | 79,511 | ||||||||||||||||||||
| Investment in nonconsolidated affiliates | 84 | 280 | 1,588 | 881 | 659 | 30 | — | 7 | 218 | 3,747 | ||||||||||||||||||||
| Capital expenditures | 222 | 404 | 232 | 2,731 | 83 | 28 | 16 | 88 | — | 3,804 |
| 1. | See Note 6 for information regarding the Company's restructuring programs and other asset related charges. |
| 2. | A reconciliation of "Income from continuing operations, net of tax" to Operating EBITDA is provided in the table on the following page. |
| 3. | A reconciliation of "Income from continuing operations, net of tax" to pro forma Operating EBITDA is provided in the table on the following page. |
| 4. | See Note 16 for information regarding the asbestos-related charge. |
| Reconciliation of "Income from continuing operations, net of tax" to Operating EBITDA | 2018 | ||
| In millions | |||
| Income from continuing operations, net of tax | $ | 4,004 | |
| + Provision for income taxes on continuing operations | 1,489 | ||
| Income from continuing operations before income taxes | $ | 5,493 | |
| + Depreciation and amortization | 5,918 | ||
| - Interest income 1 | 210 | ||
| + Interest expense and amortization of debt discount | 1,504 | ||
| - Foreign exchange gains (losses), net 1, 2 | (184 | ) | |
| EBITDA | $ | 12,889 | |
| - Significant items | (5,404 | ) | |
| Operating EBITDA | $ | 18,293 |
| 1. | Included in "Sundry income (expense) - net." |
- Excludes a $50 million pretax foreign exchange loss significant item related to adjustments to Historical DuPont's foreign currency exchange contracts as a result of U.S. tax reform during the twelve months ended December 31, 2018.
| Reconciliation of "Income from continuing operations, net of tax" to Pro Forma Operating EBITDA | 2017 | 2016 | ||||
| In millions | ||||||
| Income from continuing operations, net of tax | $ | 1,669 | $ | 4,404 | ||
| + Provision (Credit) for income taxes on continuing operations | (476 | ) | 9 | |||
| Income from continuing operations before income taxes | $ | 1,193 | $ | 4,413 | ||
| + Depreciation and amortization | 3,969 | 2,862 | ||||
| - Interest income 1 | 147 | 107 | ||||
| + Interest expense and amortization of debt discount | 1,082 | 858 | ||||
| - Foreign exchange gains (losses), net 1 | (63 | ) | (126 | ) | ||
| + Pro forma adjustments | 3,179 | 4,298 | ||||
| Pro forma EBITDA | $ | 9,339 | $ | 12,450 | ||
| - Adjusted significant items 2 | (6,827 | ) | (1,664 | ) | ||
| Pro forma Operating EBITDA | $ | 16,166 | $ | 14,114 |
| 1. | Included in "Sundry income (expense) - net." |
| 2. | Significant items, excluding the impact of one-time transaction costs directly attributable to the Merger and reflected in the pro forma adjustments. |
The significant items for 2018 are presented on an as reported basis. The adjusted significant items for 2017 and 2016 are presented on a pro forma basis. The following tables summarize the pretax impact of significant items and adjusted significant items by segment that are excluded from Operating EBITDA and pro forma Operating EBITDA:
| Significant Items by Segment for 2018 | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Corp. | Total | ||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||
| Net loss on divestitures and change in joint venture ownership 1 | $ | 22 | $ | (20 | ) | $ | 20 | $ | — | $ | (27 | ) | $ | — | $ | — | $ | (14 | ) | $ | — | $ | (19 | ) | ||||||
| Integration and separation costs 2 | — | — | — | — | — | — | — | — | (2,463 | ) | (2,463 | ) | ||||||||||||||||||
| Inventory step-up amortization 3 | (1,554 | ) | — | — | (2 | ) | — | (67 | ) | — | (5 | ) | — | (1,628 | ) | |||||||||||||||
| Restructuring, goodwill impairment and asset related charges - net 4, 5 | (479 | ) | (21 | ) | (11 | ) | (46 | ) | (2 | ) | (29 | ) | (6 | ) | (24 | ) | (491 | ) | (1,109 | ) | ||||||||||
| Loss on early extinguishment of debt 6 | — | — | — | — | — | — | — | — | (135 | ) | (135 | ) | ||||||||||||||||||
| Income tax related item 7 | — | — | — | — | — | — | — | — | (50 | ) | (50 | ) | ||||||||||||||||||
| Total | $ | (2,011 | ) | $ | (41 | ) | $ | 9 | $ | (48 | ) | $ | (29 | ) | $ | (96 | ) | $ | (6 | ) | $ | (43 | ) | $ | (3,139 | ) | $ | (5,404 | ) |
| 1. | Includes a gain related to Historical Dow's sale of its equity interest in MEGlobal, a gain related to Agriculture asset sales and a loss related to post-closing adjustments on the Dow Silicones ownership restructure. |
| 2. | Integration and separation costs related to post-Merger integration and Intended Business Separation activities, and costs related to the ownership restructure of Dow Silicones. |
| 3. | Includes the fair value step-up of Historical DuPont's inventories as a result of the Merger and the acquisition of the H&N Business. See Note 3 for additional information. |
| 4. | Includes Board approved restructuring plans and asset related charges, which include other asset impairments. See Note 6 for additional information. Also includes net favorable adjustments of $14 million related to prior Historical Dow and Historical DuPont restructuring programs and other asset-related charges. |
| 5. | Includes a $4 million dollar restructuring charge related to an equity affiliate of Transportation & Advanced Polymers that is reflected in "Equity in earnings of nonconsolidated affiliates" in the consolidated financial statements. |
| 6. | Historical Dow and Historical DuPont retired outstanding notes payable resulting in a loss on early extinguishment. See Note 15 for additional information. |
| 7. | Includes a foreign exchange loss related to adjustments to Historical DuPont's foreign currency exchange contracts as a result of U.S. tax reform. |
| Adjusted Significant Items by Segment for 2017 (Pro Forma) | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Corp. | Total | ||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||
| Gains on sales of businesses/entities 1 | $ | 635 | $ | — | $ | — | $ | 227 | $ | — | $ | 162 | $ | — | $ | — | $ | 7 | $ | 1,031 | ||||||||||
| Integration and separation costs 2 | — | — | — | — | — | — | — | — | (1,499 | ) | (1,499 | ) | ||||||||||||||||||
| Inventory step-up amortization 3 | (425 | ) | — | — | (120 | ) | (144 | ) | (404 | ) | (212 | ) | (178 | ) | — | (1,483 | ) | |||||||||||||
| Litigation related charges, awards and adjustments 4 | (469 | ) | — | — | 137 | — | — | — | — | — | (332 | ) | ||||||||||||||||||
| Restructuring, goodwill impairment and asset related charges - net 5 | (134 | ) | (1,578 | ) | (17 | ) | (716 | ) | (128 | ) | (7 | ) | (6 | ) | (318 | ) | (690 | ) | (3,594 | ) | ||||||||||
| Settlement and curtailment items 6 | — | — | — | — | — | — | — | — | (892 | ) | (892 | ) | ||||||||||||||||||
| Transaction costs and productivity actions 7 | — | — | — | — | — | — | — | — | (58 | ) | (58 | ) | ||||||||||||||||||
| Total | $ | (393 | ) | $ | (1,578 | ) | $ | (17 | ) | $ | (472 | ) | $ | (272 | ) | $ | (249 | ) | $ | (218 | ) | $ | (496 | ) | $ | (3,132 | ) | $ | (6,827 | ) |
| 1. | Includes the sale of the DAS Divested Ag Business ($635 million), the sale of Historical Dow's EAA Business ($227 million), the sale of Historical DuPont's global food safety diagnostic business ($162 million) and post-closing adjustments on the split-off of Historical Dow's chlorine value chain ($7 million). See Note 5 for additional information. |
| 2. | Integration and separation costs related to the Merger, post-Merger integration and Intended Business Separation activities, and costs related to the ownership restructure of Dow Silicones. |
| 3. | Includes the fair value step-up of Historical DuPont's inventories as a result of the Merger and the acquisition of the H&N Business of $1,469 million and the amortization of a basis difference related to the fair value step-up of inventories of $14 million. See Note 3 for additional information. |
| 4. | Includes an arbitration matter with Bayer CropScience ($469 million charge) and a patent infringement matter with Nova Chemicals Corporation ($137 million gain). See Note 16 for additional information. |
| 5. | Includes Board approved restructuring plans, goodwill impairment and asset related charges, which includes other asset impairments. See Note 6 for additional information. |
| 6. | Includes a settlement charge related to the payment of plan obligations to certain participants of a Historical Dow U.S. non-qualified pension plan as a result of the Merger. See Note 19 for additional information. |
| 7. | Includes implementation costs associated with Historical Dow's restructuring programs and other productivity actions. |
| Adjusted Significant Items by Segment for 2016 (Pro Forma) | Agri-culture | Perf. Materials & Coatings | Ind. Interm. & Infrast. | Pack. & Spec. Plastics | Elect. & Imaging | Nutrition & Biosciences | Transp. & Adv. Polymers | Safety & Const. | Corp. | Total | ||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||
| Asbestos-related charge 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1,113 | ) | $ | (1,113 | ) | ||||||||
| Charge for the termination of a terminal use agreement 2 | — | — | — | (117 | ) | — | — | — | — | — | (117 | ) | ||||||||||||||||||
| Settlement and curtailment items 3 | — | — | — | — | — | — | — | — | 382 | 382 | ||||||||||||||||||||
| Customer claims adjustment/ recovery 4 | 53 | — | — | — | — | — | — | — | — | 53 | ||||||||||||||||||||
| Environmental charges 5 | (2 | ) | — | (1 | ) | (2 | ) | — | — | — | — | (290 | ) | (295 | ) | |||||||||||||||
| Gains on sales of businesses/entities 6 | — | — | — | — | — | — | — | — | 375 | 375 | ||||||||||||||||||||
| Impact of Dow Silicones ownership restructure 7 | — | 1,389 | — | — | 438 | — | 279 | — | — | 2,106 | ||||||||||||||||||||
| Integration and separation costs 8 | — | — | — | — | — | — | — | — | (476 | ) | (476 | ) | ||||||||||||||||||
| Litigation related charges, awards and adjustments 9 | — | 16 | (1,235 | ) | — | 4 | — | 7 | — | — | (1,208 | ) | ||||||||||||||||||
| Restructuring, goodwill impairment and asset related charges - net 10 | (96 | ) | (42 | ) | (83 | ) | (10 | ) | (2 | ) | (162 | ) | (7 | ) | — | (774 | ) | (1,176 | ) | |||||||||||
| Transaction costs and productivity actions 11 | — | — | — | — | — | — | — | — | (195 | ) | (195 | ) | ||||||||||||||||||
| Total | $ | (45 | ) | $ | 1,363 | $ | (1,319 | ) | $ | (129 | ) | $ | 440 | $ | (162 | ) | $ | 279 | $ | — | $ | (2,091 | ) | $ | (1,664 | ) |
| 1. | Pretax charge related to Historical Dow's election to change its method of accounting for asbestos-related defense costs from expensing as incurred to estimating and accruing a liability. As a result of this accounting policy change, Historical Dow recorded a pretax charge of $1,009 million for asbestos-related defense costs through the terminal date of 2049. Historical Dow also recorded a pretax charge of $104 million to increase the asbestos-related liability for pending and future claims through the terminal date of 2049. See Note 16 for additional information. |
| 2. | Pretax charge related to Historical Dow's termination of a terminal use agreement. |
| 3. | Pretax curtailment gain related to changes to Historical DuPont's U.S. pension plan and U.S. other postretirement benefits plan. |
| 4. | Includes a reduction in customer claims accrual ($23 million) and insurance recoveries for recovery of costs for customer claims ($30 million) related to the use of Historical DuPont's IMPRELIS® herbicide. |
| 5. | Pretax charge for environmental remediation activities at a number of Historical Dow locations, primarily resulting from the culmination of negotiations with regulators and/or final agency approval. See Note 16 for additional information. |
| 6. | Includes a gain for post-closing adjustments on the split-off of the chlorine value chain ($6 million) and the sale of the Historical DuPont (Shenzhen) Manufacturing Limited entity ($369 million). |
| 7. | Includes a non-taxable gain of $2,445 million related to the Dow Silicones ownership restructure; a $317 million charge for the fair value step-up of inventories; and, a pretax loss of $22 million related to the early redemption of debt incurred by Dow Silicones. See Note 3 for additional information. |
| 8. | Integration and separation costs related to the Merger and the ownership restructure of Dow Silicones. |
| 9. | Includes a loss of $1,235 million related to Historical Dow's settlement of the urethane matters class action lawsuit and the opt-out cases litigation and a gain of $27 million related to a decrease in Dow Silicones' implant liability. See Note 16 for additional information. |
| 10. | Includes Historical Dow and Historical DuPont restructuring activities. See Note 6 for additional information. Also includes a pretax charge related to AgroFresh, including a partial impairment of Historical Dow’s investment in AFSI ($143 million) and post-closing adjustments related to non-cash consideration ($20 million); a pretax charge for the write-down of Historical DuPont's indefinite lived intangible assets ($158 million) related to the realignment of brand marketing strategies and a determination to phase out the use of certain acquired trade names; and, a pretax charge related to the write-down of Historical DuPont's uncompleted enterprise resource planning system ($435 million). |
| 11. | Includes implementation costs associated with Historical Dow's restructuring programs and other productivity actions of $162 million and a charge of $33 million for a retained litigation matter related to the chlorine value chain. |
NOTE 25 - SELECTED QUARTERLY FINANCIAL DATA
| Selected Quarterly Financial Data | 2018 | ||||||||||||||
| In millions, except per share amounts (Unaudited) | First | Second | Third | Fourth | Year | ||||||||||
| Net sales | $ | 21,510 | $ | 24,245 | $ | 20,123 | $ | 20,099 | $ | 85,977 | |||||
| Gross margin | $ | 5,195 | $ | 6,271 | $ | 4,646 | $ | 4,532 | $ | 20,644 | |||||
| Restructuring, goodwill impairment and asset related charges - net 1 | $ | 262 | $ | 189 | $ | 290 | $ | 364 | $ | 1,105 | |||||
| Integration and separation costs | $ | 457 | $ | 558 | $ | 666 | $ | 782 | $ | 2,463 | |||||
| Income from continuing operations, net of tax 2 | $ | 1,153 | $ | 1,803 | $ | 535 | $ | 513 | $ | 4,004 | |||||
| Net income | $ | 1,148 | $ | 1,803 | $ | 535 | $ | 513 | $ | 3,999 | |||||
| Net income attributable to DowDuPont Inc. | $ | 1,104 | $ | 1,768 | $ | 497 | $ | 475 | $ | 3,844 | |||||
| Earnings per common share from continuing operations - basic 3 | $ | 0.47 | $ | 0.76 | $ | 0.22 | $ | 0.21 | $ | 1.66 | |||||
| Earnings per common share from continuing operations - diluted 3 | $ | 0.47 | $ | 0.76 | $ | 0.21 | $ | 0.21 | $ | 1.65 | |||||
| Dividends declared per share of common stock | $ | 0.38 | $ | 0.76 | $ | — | $ | 0.38 | $ | 1.52 | |||||
| Market price range of common stock: | |||||||||||||||
| High | $ | 77.02 | $ | 70.04 | $ | 71.44 | $ | 64.82 | $ | 77.02 | |||||
| Low | $ | 62.41 | $ | 62.04 | $ | 64.31 | $ | 49.09 | $ | 49.09 | |||||
| 2017 4 | |||||||||||||||
| In millions, except per share amounts (Unaudited) | First | Second | Third | Fourth | Year | ||||||||||
| Net sales | $ | 13,230 | $ | 13,834 | $ | 15,354 | $ | 20,066 | $ | 62,484 | |||||
| Gross margin 5 | $ | 3,036 | $ | 3,073 | $ | 3,168 | $ | 3,416 | $ | 12,693 | |||||
| Restructuring, goodwill impairment and asset related charges - net 1 | $ | (1 | ) | $ | (12 | ) | $ | 179 | $ | 3,114 | $ | 3,280 | |||
| Integration and separation costs | $ | 109 | $ | 136 | $ | 354 | $ | 502 | $ | 1,101 | |||||
| Income (loss) from continuing operations, net of tax 6 | $ | 915 | $ | 1,359 | $ | 554 | $ | (1,159 | ) | $ | 1,669 | ||||
| Net income (loss) | $ | 915 | $ | 1,359 | $ | 534 | $ | (1,216 | ) | $ | 1,592 | ||||
| Net income (loss) attributable to DowDuPont Inc. | $ | 888 | $ | 1,321 | $ | 514 | $ | (1,263 | ) | $ | 1,460 | ||||
| Earnings (loss) per common share from continuing operations - basic 3 | $ | 0.74 | $ | 1.08 | $ | 0.33 | $ | (0.52 | ) | $ | 0.97 | ||||
| Earnings (loss) per common share from continuing operations - diluted 3, 7 | $ | 0.72 | $ | 1.07 | $ | 0.33 | $ | (0.52 | ) | $ | 0.95 | ||||
| Dividends declared per share of common stock | $ | 0.46 | $ | 0.46 | $ | 0.46 | $ | 0.38 | $ | 1.76 | |||||
| Market price range of common stock: | |||||||||||||||
| High | $ | 65.00 | $ | 65.26 | $ | 70.41 | $ | 73.32 | $ | 73.32 | |||||
| Low | $ | 57.09 | $ | 60.20 | $ | 63.11 | $ | 68.57 | $ | 57.09 |
| 1. | See Note 6 for additional information. |
| 2. | See Notes 3, 8 and 15 for information on additional items materially impacting "Income from continuing operations, net of tax." The fourth quarter of 2018 included Merger-related amortization of the fair value step-up of inventories; a loss on the early redemption of debt; and tax adjustments related to The Act. The second and third quarters of 2018 included Merger-related amortization of the fair value step-up of inventories. The first quarter of 2018 included Merger-related amortization of the fair value step-up of inventories and tax adjustments related to The Act. |
| 3. | Due to quarterly changes in the share count and the allocation of income to participating securities, the sum of the four quarters does not equal the earnings per share amount calculated for the year. |
| 4. | The Merger closed on August 31, 2017. Financial information for 2017 reflects the results of Historical Dow for all periods presented and the results of Historical DuPont beginning on and after September 1, 2017. |
| 5. | Previously reported amounts have been updated to reflect the impact of adoption of ASU 2017-07. |
| 6. | See Notes 3, 7, 8, 16 and 19 for information on additional items materially impacting "Income (loss) from continuing operations, net of tax." The fourth quarter of 2017 included: the effects of The Act, enacted on December 22, 2017; Merger-related amortization of the fair value step-up of inventories; a gain related to the DAS Divested Ag Business; and a charge related to payment of plan obligations to certain participants of a Historical Dow U.S. non-qualified pension plan. The third quarter of 2017 included a gain related to the sale of Historical Dow's EAA Business and Merger-related amortization of the fair value step-up of inventories. The second quarter of 2017 included a gain related to the Nova patent infringement award. The first quarter of 2017 included a loss related to the Bayer CropScience arbitration matter. |
| 7. | "Earnings (loss) per common share from continuing operations - diluted" for the three-month period ended December 31, 2017 was calculated using "Weighted average common shares outstanding - basic" due to a net loss reported in the period. |
NOTE 26 - SUBSEQUENT EVENTS
Historical DuPont Repurchase Facility
In February 2019, Historical DuPont entered into a new committed receivable repurchase facility of up to $1,300 million (the "2019 Repurchase Facility") which expires in December 2019. Under the 2019 Repurchase Facility, Historical DuPont may sell a portfolio of available and eligible outstanding customer notes receivables within the Agriculture segment to participating institutions and simultaneously agree to repurchase at a future date. The 2019 Repurchase Facility is considered a secured borrowing with the customer notes receivables, inclusive of those that are sold and repurchased, equal to 105 percent of the outstanding amounts borrowed utilized as collateral. Borrowings under the 2019 Repurchase Facility will have an interest rate of LIBOR plus 75 percent.
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