Quarterly Report (10-q)

Date : 07/25/2019 @ 8:47PM
Source : Edgar (US Regulatory)
Stock : Dow Inc (DOW)
Quote : 54.645  0.695 (1.29%) @ 8:19PM

Quarterly Report (10-q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2019
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission
File Number
Exact Name of Registrant as Specified in its Charter,
Principal Office Address and Telephone Number
State of Incorporation or
Organization
I.R.S. Employer
Identification No.
001-38646
Dow Inc.
Delaware
30-1128146
 
2211 H.H. Dow Way, Midland, MI 48674
 
 
 
(989) 636-1000
 
 
001-03433
The Dow Chemical Company
Delaware
38-1285128
 
2211 H.H. Dow Way, Midland, MI 48674
 
 
 
(989) 636-1000
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Dow Inc. þ    Yes     ¨   No
The Dow Chemical Company þ    Yes     ¨   No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Dow Inc. þ    Yes     ¨   No
The Dow Chemical Company þ    Yes     ¨   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Dow Inc.
Large accelerated filer ¨
Accelerated
filer ¨
Non-accelerated filer þ
Smaller reporting company ¨
Emerging growth company ¨
The Dow Chemical Company
Large accelerated filer ¨
Accelerated
filer ¨
Non-accelerated filer þ
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Dow Inc. ¨  
The Dow Chemical Company ¨   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Dow Inc. ¨    Yes     þ   No
The Dow Chemical Company ¨    Yes     þ   No
Securities registered pursuant to Section 12(b) of the Act:
Registrant
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Dow Inc.
Common Stock, par value $0.01 per share
DOW
New York Stock Exchange
The Dow Chemical Company
4.625% Notes due October 1, 2044
DOW/44
New York Stock Exchange
Dow Inc. had 743,212,006 shares of common stock, $0.01 par value, outstanding at June 30, 2019. The Dow Chemical Company had 100 shares of common stock, $0.01 par value, outstanding at June 30, 2019, all of which were held by the registrant’s parent, Dow Inc.




Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 2019
TABLE OF CONTENTS

 
 
PAGE
 
 
 
 
 
 
 
Item 1.
 
Dow Inc. and Subsidiaries:
 
 
 
 
 
 
 
 
 
 
The Dow Chemical Company and Subsidiaries:
 
 
 
 
 
 
 
 
 
 
Dow Inc. and Subsidiaries and The Dow Chemical Company and Subsidiaries:
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 

2


Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries

This Quarterly Report on Form 10-Q is a combined report being filed by Dow Inc. and The Dow Chemical Company and its consolidated subsidiaries (“TDCC” and together with Dow Inc., “Dow” or the "Company"). This Quarterly Report on Form 10‑Q reflects the results of Dow and its consolidated subsidiaries, after giving effect to the distribution to DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc. or "DuPont") of TDCC’s agricultural sciences business (“AgCo”) and specialty products business (“SpecCo”) and the receipt of E. I. du Pont de Nemours and Company and its consolidated subsidiaries' (“Historical DuPont”) ethylene and ethylene copolymers business (other than its ethylene acrylic elastomers business) ("ECP"). The U.S. GAAP consolidated financial results of Dow Inc. and TDCC reflect the distribution of AgCo and SpecCo as discontinued operations for the applicable periods presented as well as the receipt of ECP as a common control transaction from the closing of the merger with Historical DuPont on August 31, 2017. In addition, following the separation from DowDuPont, the Company changed the manner in which its business activities were managed. The Company's portfolio now includes six global businesses which are organized into the following operating segments: Performance Materials & Coatings, Industrial Intermediates & Infrastructure and Packaging & Specialty Plastics. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. As a result of the parent/subsidiary relationship between Dow Inc. and TDCC, and the expectation that the financial statements and disclosures of each company will be substantially similar, the companies are filing a combined report for this Quarterly Report on Form 10-Q. The information reflected in this report is equally applicable to both Dow Inc. and TDCC, except where otherwise noted. Each of Dow Inc. and TDCC is filing information in this report on its own behalf and neither company makes any representation to the information relating to the other company.

Background
On April 1, 2019, DowDuPont completed the separation of its materials science business and Dow Inc. became the direct parent company of TDCC, owning all of the outstanding common shares of TDCC. For filings related to the period commencing April 1, 2019 and thereafter, TDCC was deemed the predecessor to Dow Inc., and the historical results of TDCC are deemed the historical results of Dow Inc. for periods prior to and including March 31, 2019.

The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017. TDCC and Historical DuPont each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business.

FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In this context, forward-looking statements often address expected future business and financial performance, financial condition, and other matters, and often contain words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “opportunity,” “outlook,” “plan,” “project,” “seek,” “should,” “strategy,” "target," “will,” “will be,” “will continue,” “will likely result,” “would” and similar expressions, and variations or negatives of these words. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.

Forward-looking statements include, but are not limited to, expectations as to future sales of Dow’s products; the ability to protect Dow’s intellectual property in the United States and abroad; estimates regarding Dow’s capital requirements and need for and availability of financing; estimates of Dow’s expenses, future revenues and profitability; estimates of the size of the markets for Dow’s products and services and Dow’s ability to compete in such markets; expectations related to the rate and degree of market acceptance of Dow’s products; the outcome of certain Dow contingencies, such as litigation and environmental matters; estimates of the success of competing technologies that may become available and expectations regarding the benefits and costs associated with each of the foregoing.


3


Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Forward-looking statements are based on certain assumptions and expectations of future events which may not be realized and speak only as of the date the statements were made. In addition, forward-looking statements also involve risks, uncertainties and other factors that are beyond Dow’s control that could cause Dow’s actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. These factors include, but are not limited to: fluctuations in energy and raw material prices; failure to develop and market new products and optimally manage product life cycles; significant litigation and environmental matters; failure to appropriately manage process safety and product stewardship issues; changes in laws and regulations or political conditions; global economic and capital markets conditions, such as inflation, market uncertainty, interest and currency exchange rates, and equity and commodity prices; business or supply disruptions; security threats, such as acts of sabotage, terrorism or war; weather events and natural disasters; ability to protect, defend and enforce Dow’s intellectual property rights; increased competition; changes in relationships with Dow’s significant customers and suppliers; unanticipated expenses such as litigation or legal settlement expenses; unanticipated business disruptions; Dow’s ability to predict, identify and interpret changes in consumer preferences and demand; Dow’s ability to complete proposed divestitures or acquisitions; Dow’s ability to realize the expected benefits of acquisitions if they are completed; the availability of financing to Dow in the future and the terms and conditions of such financing; and disruptions in Dow’s information technology networks and systems. Additionally, there may be other risks and uncertainties that Dow is unable to identify at this time or that Dow does not currently expect to have a material impact on its business.

Risks related to achieving the anticipated benefits of Dow's separation from DowDuPont include, but are not limited to, a number of conditions outside the control of Dow, including risks related to Dow's inability to achieve some or all of the benefits that it expects to receive from the separation from DuPont; certain tax risks associated with the separation; Dow's inability to make necessary changes to operate as a stand-alone company; the failure of Dow's pro forma financial information to be a reliable indicator of Dow's future results; Dow's inability to enjoy the same benefits of diversity, leverage and market reputation that it enjoyed as a combined company; Dow's inability to receive third-party consents required under the separation agreement; Dow's customers, suppliers and others' perception of Dow's financial stability on a stand-alone basis; non-compete restrictions under the separation agreement; receipt of less favorable terms in the commercial agreements Dow entered into with DuPont and Corteva, Inc. ("Corteva"), including restrictions under intellectual property cross-license agreements, than Dow would have received from an unaffiliated third party; and Dow's obligation to indemnify DuPont and/or Corteva for certain liabilities.

Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. For a more detailed discussion of Dow’s risks and uncertainties, see the section titled “Risk Factors” in: Dow's Quarterly Report on Form 10-Q for the period ended June 30, 2019, in the Information Statement filed as Exhibit 99.1 to Amendment No. 4 to the Registration Statement of Dow Inc. on Form 10, filed with the SEC on March 8, 2019, and in Part I, Item 1A of TDCC's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 11, 2019. Dow undertakes no obligation to update or revise publicly any forward-looking statements whether because of new information, future events, or otherwise, except as required by securities and other applicable laws.



4


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


Dow Inc. and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
Six Months Ended
In millions, except per share amounts (Unaudited)
Jun 30,
2019
Jun 30,
2018
Jun 30,
2019
Jun 30,
2018
Net sales
$
11,014

$
12,789

$
21,983

$
25,026

Cost of sales
9,420

10,540

18,562

20,520

Research and development expenses
208

221

398

429

Selling, general and administrative expenses
422

485

870

967

Amortization of intangibles
104

118

220

236

Restructuring and asset related charges - net
65

40

221

127

Integration and separation costs
348

262

800

486

Equity in earnings (losses) of nonconsolidated affiliates
(15
)
193

(29
)
394

Sundry income (expense) - net
(1
)
(14
)
68

40

Interest income
21

18

39

38

Interest expense and amortization of debt discount
237

261

478

523

Income from continuing operations before income taxes
215

1,059

512

2,210

Provision for income taxes on continuing operations
125

249

266

475

Income from continuing operations, net of tax
90

810

246

1,735

Income from discontinued operations, net of tax

554

445

1,068

Net income
90

1,364

691

2,803

Net income attributable to noncontrolling interests
15

31

60

66

Net income available for Dow Inc. common stockholders
$
75

$
1,333

$
631

$
2,737

 








Per common share data:








Earnings per common share from continuing operations - basic
$
0.10

$
1.05

$
0.26

$
2.26

Earnings per common share from discontinued operations - basic

0.73

0.58

1.40

Earnings per common share - basic
$
0.10

$
1.78

$
0.84

$
3.66

Earnings per common share from continuing operations - diluted
$
0.10

$
1.05

$
0.26

$
2.26

Earnings per common share from discontinued operations - diluted

0.73

0.58

1.40

Earnings per common share - diluted
$
0.10

$
1.78

$
0.84

$
3.66

 








Weighted-average common shares outstanding - basic
742.8

747.2

745.0

747.2

Weighted-average common shares outstanding - diluted
747.9

747.2

747.6

747.2

 
 
 
 
 
Depreciation
$
538

$
540

$
1,081

$
1,094

Capital expenditures
$
470

$
489

$
912

$
868

See Notes to the Consolidated Financial Statements.


5


Dow Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
Six Months Ended
In millions (Unaudited)
Jun 30,
2019
Jun 30,
2018
Jun 30,
2019
Jun 30,
2018
Net income
$
90

$
1,364

$
691

$
2,803

Other comprehensive income (loss), net of tax




Unrealized gains (losses) on investments
33

(14
)
100

(39
)
Cumulative translation adjustments
67

(470
)
36

(94
)
Pension and other postretirement benefit plans
106

124

247

250

Derivative instruments
(204
)
118

(279
)
124

Total other comprehensive income (loss)
2

(242
)
104

241

Comprehensive income
92

1,122

795

3,044

Comprehensive income (loss) attributable to noncontrolling interests, net of tax
21

(1
)
72

27

Comprehensive income attributable to Dow Inc.
$
71

$
1,123

$
723

$
3,017

See Notes to the Consolidated Financial Statements.


6


Dow Inc. and Subsidiaries
Consolidated Balance Sheets

In millions, except share amounts (Unaudited)
Jun 30,
2019
Dec 31,
2018
Assets
 
 
Current Assets


Cash and cash equivalents (variable interest entities restricted - 2019: $26; 2018: $71)
$
2,446

$
2,724

Marketable securities
20

100

Accounts and notes receivable:


Trade (net of allowance for doubtful receivables - 2019: $40; 2018: $42)
5,661

5,646

Other
2,908

3,389

Inventories
6,841

6,899

Other current assets
761

712

Assets of discontinued operations - current

19,900

Total current assets
18,637

39,370

Investments


Investment in nonconsolidated affiliates
2,968

3,320

Other investments (investments carried at fair value - 2019: $1,688; 2018: $1,699)
2,558

2,646

Noncurrent receivables
785

360

Total investments
6,311

6,326

Property


Property
54,937

53,984

Less accumulated depreciation
33,687

32,566

Net property (variable interest entities restricted - 2019: $657; 2018: $683)
21,250

21,418

Other Assets


Goodwill
9,848

9,846

Other intangible assets (net of accumulated amortization - 2019: $3,657; 2018: $3,379)
4,000

4,225

Operating lease right-of-use assets
2,183


Deferred income tax assets
1,857

1,779

Deferred charges and other assets
803

735

Total other assets
18,691

16,585

Total Assets
$
64,889

$
83,699

Liabilities and Equity


Current Liabilities


Notes payable
$
544

$
298

Long-term debt due within one year
297

338

Accounts payable:


Trade
4,188

4,456

Other
2,179

2,479

Operating lease liabilities - current
421


Income taxes payable
370

557

Accrued and other current liabilities
3,606

2,931

Liabilities of discontinued operations - current

4,488

Total current liabilities
11,605

15,547

Long-Term Debt (variable interest entities nonrecourse - 2019: $45; 2018: $75)
17,155

19,253

Other Noncurrent Liabilities


Deferred income tax liabilities
500

501

Pension and other postretirement benefits - noncurrent
8,674

8,926

Asbestos-related liabilities - noncurrent
1,113

1,142

Operating lease liabilities - noncurrent
1,779


Other noncurrent obligations
5,563

4,709

Total other noncurrent liabilities
17,629

15,278

Stockholders’ Equity


Common stock (authorized 5,000,000,000 shares of $0.01 par value each;
issued 2019: 749,025,762 shares; 2018: 100 shares)
7


Additional paid-in capital
7,186

7,042

Retained earnings
20,110

35,460

Accumulated other comprehensive loss
(8,988
)
(9,885
)
Unearned ESOP shares
(99
)
(134
)
Treasury stock at cost (2019: 5,813,756 shares; 2018: zero shares)
(305
)

Dow Inc.’s stockholders’ equity
17,911

32,483

Noncontrolling interests
589

1,138

Total equity
18,500

33,621

Total Liabilities and Equity
$
64,889

$
83,699

See Notes to the Consolidated Financial Statements.

7


Dow Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 
In millions (Unaudited)
Six Months Ended
Jun 30,
2019
Jun 30,
2018
Operating Activities


Net income
$
691

$
2,803

Less: Income from discontinued operations, net of tax
445

1,068

Income from continuing operations, net of tax
246

1,735

Adjustments to reconcile net income to net cash provided by operating activities:


Depreciation and amortization
1,486

1,451

Provision (credit) for deferred income tax
(63
)
7

Earnings of nonconsolidated affiliates less than dividends received
880

196

Net periodic pension benefit cost
57

169

Pension contributions
(152
)
(373
)
Net gain on sales of assets, businesses and investments
(27
)
(26
)
Adjustment to gain on step acquisition of nonconsolidated affiliate

20

Restructuring and asset related charges - net
221

127

Other net loss
115

241

Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
Accounts and notes receivable
239

(1,115
)
Inventories
58

(912
)
Accounts payable
(450
)
1,299

Other assets and liabilities, net
(607
)
(1,315
)
Cash provided by operating activities - continuing operations
2,003

1,504

Cash provided by operating activities - discontinued operations
253

289

Cash provided by operating activities
2,256

1,793

Investing Activities
 
 
Capital expenditures
(912
)
(868
)
Investment in gas field developments
(48
)
(46
)
Purchases of previously leased assets
(9
)

Proceeds from sales of property and businesses, net of cash divested
9

14

Investments in and loans to nonconsolidated affiliates
(228
)
(2
)
Distributions and loan repayments from nonconsolidated affiliates

55

Purchases of investments
(393
)
(900
)
Proceeds from sales and maturities of investments
735

751

Proceeds from interests in trade accounts receivable conduits

656

Cash used for investing activities - continuing operations
(846
)
(340
)
Cash used for investing activities - discontinued operations
(34
)
(112
)
Cash used for investing activities
(880
)
(452
)
Financing Activities
 
 
Changes in short-term notes payable
162

345

Proceeds from issuance of long-term debt
2,010


Payments on long-term debt
(4,221
)
(568
)
Purchases of treasury stock
(305
)

Proceeds from issuance of parent company stock
34

85

Transaction financing, debt issuance and other costs
(56
)

Employee taxes paid for share-based payment arrangements
(50
)
(70
)
Distributions to noncontrolling interests
(7
)
(39
)
Purchases of noncontrolling interests
(127
)

Dividends paid to stockholders
(517
)

Dividends paid to DowDuPont Inc.
(535
)
(2,110
)
Settlements and transfers related to separation from DowDuPont Inc.
1,963

(215
)
Other financing activities, net

3

Cash used for financing activities - continuing operations
(1,649
)
(2,569
)
Cash used for financing activities - discontinued operations
(18
)
(43
)
Cash used for financing activities
(1,667
)
(2,612
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
10

(69
)
Summary
 
 
Decrease in cash, cash equivalents and restricted cash
(281
)
(1,340
)
Cash, cash equivalents and restricted cash at beginning of period
2,764

6,208

Cash, cash equivalents and restricted cash at end of period
$
2,483

$
4,868

Less: Restricted cash and cash equivalents, included in "Other current assets"
37

45

Cash and cash equivalents at end of period
$
2,446

$
4,823

See Notes to the Consolidated Financial Statements.


8


Dow Inc. and Subsidiaries
Consolidated Statements of Equity
 
 
Three Months Ended
Six Months Ended
In millions (Unaudited)
Jun 30,
2019
Jun 30,
2018
Jun 30,
2019
Jun 30,
2018
Common Stock
 
 
 
 
Balance at beginning of period
$

$

$

$

Common stock issued
7


7


Balance at end of period
7


7


Additional Paid-in Capital
 
 
 
 
Balance at beginning of period
7,153

6,758

7,042

6,553

Common stock issued/sold
(1
)

(1
)

Issuance of parent company stock - DowDuPont Inc.

22

28

85

Stock-based compensation and allocation of ESOP shares
64

81

147

223

Other
(30
)

(30
)

Balance at end of period
7,186

6,861

7,186

6,861

Retained Earnings
 
 
 
 
Balance at beginning of period
35,403

33,899

35,460

33,742

Net income available for Dow Inc. common stockholders
75

1,333

631

2,737

Dividends to stockholders
(517
)

(517
)

Dividends to parent - DowDuPont Inc.

(1,053
)
(535
)
(2,110
)
Common control transaction
(14,846
)
(37
)
(14,811
)
(152
)
Adoption of accounting standards

1,057

(111
)
989

Other
(5
)
(7
)
(7
)
(14
)
Balance at end of period
20,110

35,192

20,110

35,192

Accumulated Other Comprehensive Loss
 
 
 
 
Balance at beginning of period
(9,783
)
(8,088
)
(9,885
)
(8,591
)
Other comprehensive income (loss)
2

(242
)
104

241

Common control transaction
793


793


Adoption of accounting standards

(1,057
)

(1,037
)
Balance at end of period
(8,988
)
(9,387
)
(8,988
)
(9,387
)
Unearned ESOP Shares
 
 
 
 
Balance at beginning of period
(105
)
(150
)
(134
)
(189
)
Allocation of ESOP shares
6

5

35

44

Balance at end of period
(99
)
(145
)
(99
)
(145
)
Treasury Stock
 
 
 
 
Balance at beginning of period




Treasury stock purchases
(305
)

(305
)

Balance at end of period
(305
)

(305
)

Dow Inc.'s stockholders' equity
17,911

32,521

17,911

32,521

Noncontrolling Interests
589

1,152

589

1,152

Total Equity
$
18,500

$
33,673

$
18,500

$
33,673

 
 
 
 
 
Dividends declared per share of common stock
$
0.70

$

$
0.70

$

See Notes to the Consolidated Financial Statements.


9


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
Six Months Ended
In millions (Unaudited)
Jun 30,
2019
Jun 30,
2018
Jun 30,
2019
Jun 30,
2018
Net sales
$
11,014

$
12,789

$
21,983

$
25,026

Cost of sales
9,419

10,540

18,561

20,520

Research and development expenses
208

221

398

429

Selling, general and administrative expenses
418

485

866

967

Amortization of intangibles
104

118

220

236

Restructuring and asset related charges - net
65

40

221

127

Integration and separation costs
324

262

776

486

Equity in earnings (losses) of nonconsolidated affiliates
(15
)
193

(29
)
394

Sundry income (expense) - net
109

(14
)
178

40

Interest income
21

18

39

38

Interest expense and amortization of debt discount
249

261

490

523

Income from continuing operations before income taxes
342

1,059

639

2,210

Provision for income taxes on continuing operations
125

249

266

475

Income from continuing operations, net of tax
217

810

373

1,735

Income from discontinued operations, net of tax

554

445

1,068

Net income
217

1,364

818

2,803

Net income attributable to noncontrolling interests
15

31

60

66

Net income available for The Dow Chemical Company common stockholder
$
202

$
1,333

$
758

$
2,737

 
 
 
 
 
Depreciation
$
538

$
540

$
1,081

$
1,094

Capital expenditures
$
470

$
489

$
912

$
868

See Notes to the Consolidated Financial Statements.


10


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
Six Months Ended
In millions (Unaudited)
Jun 30,
2019
Jun 30,
2018
Jun 30,
2019
Jun 30,
2018
Net income
$
217

$
1,364

$
818

$
2,803

Other comprehensive income (loss), net of tax
 
 
 
 
Unrealized gains (losses) on investments
33

(14
)
100

(39
)
Cumulative translation adjustments
67

(470
)
36

(94
)
Pension and other postretirement benefit plans
106

124

247

250

Derivative instruments
(204
)
118

(279
)
124

Total other comprehensive income (loss)
2

(242
)
104

241

Comprehensive income
219

1,122

922

3,044

Comprehensive income (loss) attributable to noncontrolling interests, net of tax
21

(1
)
72

27

Comprehensive income attributable to The Dow Chemical Company
$
198

$
1,123

$
850

$
3,017

See Notes to the Consolidated Financial Statements.

11


The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions, except share amounts (Unaudited)
Jun 30,
2019
Dec 31,
2018
Assets
 
 
Current Assets
 
 
Cash and cash equivalents (variable interest entities restricted - 2019: $26; 2018: $71)
$
2,446

$
2,724

Marketable securities
20

100

Accounts and notes receivable:
 
 
Trade (net of allowance for doubtful receivables - 2019: $40; 2018: $42)
5,661

5,646

Other
2,912

3,389

Inventories
6,841

6,899

Other current assets
588

712

Assets of discontinued operations - current

19,900

Total current assets
18,468

39,370

Investments
 
 
Investment in nonconsolidated affiliates
2,968

3,320

Other investments (investments carried at fair value - 2019: $1,688; 2018: $1,699)
2,558

2,646

Noncurrent receivables
771

360

Total investments
6,297

6,326

Property
 
 
Property
54,937

53,984

Less accumulated depreciation
33,687

32,566

Net property (variable interest entities restricted - 2019: $657; 2018: $683)
21,250

21,418

Other Assets
 
 
Goodwill
9,848

9,846

Other intangible assets (net of accumulated amortization - 2019: $3,657; 2018: $3,379)
4,000

4,225

Operating lease right-of-use assets
2,183


Deferred income tax assets
1,857

1,779

Deferred charges and other assets
801

735

Total other assets
18,689

16,585

Total Assets
$
64,704

$
83,699

Liabilities and Equity
 
 
Current Liabilities
 
 
Notes payable
$
1,691

$
298

Long-term debt due within one year
297

338

Accounts payable:
 
 
Trade
4,187

4,456

Other
2,179

2,479

Operating lease liabilities - current
421


Income taxes payable
370

557

Accrued and other current liabilities
3,072

2,931

Liabilities of discontinued operations - current

4,488

Total current liabilities
12,217

15,547

Long-Term Debt (variable interest entities nonrecourse - 2019: $45; 2018: $75)
17,155

19,253

Other Noncurrent Liabilities
 
 
Deferred income tax liabilities
500

501

Pension and other postretirement benefits - noncurrent
8,674

8,926

Asbestos-related liabilities - noncurrent
1,113

1,142

Operating lease liabilities - noncurrent
1,779


Other noncurrent obligations
4,997

4,709

Total other noncurrent liabilities
17,063

15,278

Stockholder's Equity
 
 
Common stock (authorized and issued 100 shares of $0.01 par value each)


Additional paid-in capital
7,192

7,042

Retained earnings
19,575

35,460

Accumulated other comprehensive loss
(8,988
)
(9,885
)
Unearned ESOP shares
(99
)
(134
)
The Dow Chemical Company’s stockholder's equity
17,680

32,483

Noncontrolling interests
589

1,138

Total equity
18,269

33,621

Total Liabilities and Equity
$
64,704

$
83,699

See Notes to the Consolidated Financial Statements.

12


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
In millions (Unaudited)
Six Months Ended
Jun 30,
2019
Jun 30,
2018
Operating Activities
 
 
Net income
$
818

$
2,803

Less: Income from discontinued operations, net of tax
445

1,068

Income from continuing operations, net of tax
373

1,735

Adjustments to reconcile net income to net cash provided by operating activities:


Depreciation and amortization
1,486

1,451

Provision (credit) for deferred income tax
(63
)
7

Earnings of nonconsolidated affiliates less than dividends received
880

196

Net periodic pension benefit cost
57

169

Pension contributions
(152
)
(373
)
Net gain on sales of assets, businesses and investments
(27
)
(26
)
Adjustment to gain on step acquisition of nonconsolidated affiliate

20

Restructuring and asset related charges - net
221

127

Other net loss
115

241

Changes in assets and liabilities, net of effects of acquired and divested companies:




Accounts and notes receivable
240

(1,115
)
Inventories
58

(912
)
Accounts payable
(451
)
1,299

Other assets and liabilities, net
(760
)
(1,315
)
Cash provided by operating activities - continuing operations
1,977

1,504

Cash provided by operating activities - discontinued operations
346

289

Cash provided by operating activities
2,323

1,793

Investing Activities
 
 
Capital expenditures
(912
)
(868
)
Investment in gas field developments
(48
)
(46
)
Purchases of previously leased assets
(9
)

Proceeds from sales of property and businesses, net of cash divested
9

14

Investments in and loans to nonconsolidated affiliates
(228
)
(2
)
Distributions and loan repayments from nonconsolidated affiliates

55

Purchases of investments
(393
)
(900
)
Proceeds from sales and maturities of investments
735

751

Proceeds from interests in trade accounts receivable conduits

656

Cash used for investing activities - continuing operations
(846
)
(340
)
Cash used for investing activities - discontinued operations
(34
)
(112
)
Cash used for investing activities
(880
)
(452
)
Financing Activities
 
 
Changes in short-term notes payable
162

345

Changes in notes payable with Dow Inc.
1,135


Proceeds from issuance of long-term debt
2,010


Payments on long-term debt
(4,221
)
(568
)
Proceeds from issuance of parent company stock
34

85

Transaction financing, debt issuance and other costs
(56
)

Employee taxes paid for share-based payment arrangements
(50
)
(70
)
Distributions to noncontrolling interests
(7
)
(39
)
Purchases of noncontrolling interests
(127
)

Dividends paid to DowDuPont Inc.
(535
)
(2,110
)
Settlements and transfers related to separation from DowDuPont Inc.
(61
)
(215
)
Other financing activities, net

3

Cash used for financing activities - continuing operations
(1,716
)
(2,569
)
Cash used for financing activities - discontinued operations
(18
)
(43
)
Cash used for financing activities
(1,734
)
(2,612
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
10

(69
)
Summary
 
 
Decrease in cash, cash equivalents and restricted cash
(281
)
(1,340
)
Cash, cash equivalents and restricted cash at beginning of period
2,764

6,208

Cash, cash equivalents and restricted cash at end of period
$
2,483

$
4,868

Less: Restricted cash and cash equivalents, included in "Other current assets"
37

45

Cash and cash equivalents at end of period
$
2,446

$
4,823

See Notes to the Consolidated Financial Statements.

13


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Three Months Ended
Six Months Ended
In millions (Unaudited)
Jun 30,
2019
Jun 30,
2018
Jun 30,
2019
Jun 30,
2018
Common Stock
 
 
 
 
Balance at beginning and end of period
$

$

$

$

Additional Paid-in Capital
 
 
 
 
Balance at beginning of period
7,153

6,758

7,042

6,553

Issuance of parent company stock - Dow Inc.
6


6


Issuance of parent company stock - DowDuPont Inc.

22

28

85

Stock-based compensation and allocation of ESOP shares
64

81

147

223

Other
(31
)

(31
)

Balance at end of period
7,192

6,861

7,192

6,861

Retained Earnings
 
 
 
 
Balance at beginning of period
35,403

33,899

35,460

33,742

Net income available for The Dow Chemical Company common stockholder
202

1,333

758

2,737

Dividends to parent - DowDuPont Inc.

(1,053
)
(535
)
(2,110
)
Common control transaction
(16,025
)
(37
)
(15,990
)
(152
)
Adoption of accounting standards

1,057

(111
)
989

Other
(5
)
(7
)
(7
)
(14
)
Balance at end of period
19,575

35,192

19,575

35,192

Accumulated Other Comprehensive Loss
 
 
 
 
Balance at beginning of period
(9,783
)
(8,088
)
(9,885
)
(8,591
)
Other comprehensive income (loss)
2

(242
)
104

241

Common control transaction
793


793


Adoption of accounting standards

(1,057
)

(1,037
)
Balance at end of period
(8,988
)
(9,387
)
(8,988
)
(9,387
)
Unearned ESOP Shares
 
 
 
 
Balance at beginning of period
(105
)
(150
)
(134
)
(189
)
Allocation of ESOP shares
6

5

35

44

Balance at end of period
(99
)
(145
)
(99
)
(145
)
The Dow Chemical Company's stockholder's equity
17,680

32,521

17,680

32,521

Noncontrolling Interests
589

1,152

589

1,152

Total Equity
$
18,269

$
33,673

$
18,269

$
33,673

See Notes to the Consolidated Financial Statements.











14


Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Note
 
Page
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23


NOTE 1 – CONSOLIDATED FINANCIAL STATEMENTS
Merger and Separation
On April 1, 2019, DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc. or "DuPont") completed the separation of its materials science business and Dow Inc. became the direct parent company of The Dow Chemical Company and its consolidated subsidiaries (“TDCC” and together with Dow Inc., “Dow” or the “Company”). The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017. TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries (“Historical DuPont”) each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business. See Note 3 for additional information.

Basis of Presentation
The unaudited interim consolidated financial statements of Dow Inc. and TDCC were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in TDCC's Annual Report on Form 10-K for the year ended December 31, 2018 .


15


Effective April 1, 2019, Dow Inc. owns all of the outstanding common shares of TDCC. TDCC is deemed the predecessor to Dow Inc. and the historical results of TDCC are deemed the historical results of Dow Inc. for periods prior to and including March 31, 2019. As a result of the parent/subsidiary relationship between Dow Inc. and TDCC, and the expectation that the financial statements and disclosures of each company will be substantially similar, the companies are filing a combined report for this Quarterly Report on Form 10-Q. The information reflected in the report is equally applicable to both Dow Inc. and TDCC, except where otherwise noted.
 
As of the effective date and time of the distribution, DowDuPont does not beneficially own any equity interest in Dow and no longer consolidates Dow and its consolidated subsidiaries into its financial results. The consolidated financial results of Dow for all periods presented reflect the distribution of TDCC’s agricultural sciences business (“AgCo”) and specialty products business (“SpecCo”) as discontinued operations, as well as the receipt of Historical DuPont’s ethylene and ethylene copolymers businesses (other than its ethylene acrylic elastomers business) (“ECP”) as a common control transaction from the closing of the Merger on August 31, 2017. See Note 3 and Dow Inc.'s Amendment No. 4 to the Registration Statement on Form 10 filed with the U.S. Securities and Exchange Commission ("SEC") on March 8, 2019 for additional information.

Effective with the Merger, the Company's business activities were components of DowDuPont's business operations and therefore, were reported as a single operating segment. Following the separation from DowDuPont, the Company changed the manner in which its business activities were managed. The Company's portfolio now includes six global businesses which are organized into the following operating segments: Performance Materials & Coatings, Industrial Intermediates & Infrastructure and Packaging & Specialty Plastics. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. See Note 23 for additional information.
 
From the Merger date through the separation, transactions between DowDuPont, TDCC and Historical DuPont and their affiliates were treated as related party transactions. Transactions between TDCC and Historical DuPont primarily consisted of the sale and procurement of certain raw materials that were consumed in each company's manufacturing process. Transactions between TDCC and Dow Inc. are treated as related party transactions for TDCC. See Note 22 for additional information.

Throughout this Quarterly Report on Form 10-Q, unless otherwise indicated, amounts and activity are presented on a continuing operations basis.
 
Except as otherwise indicated by the context, the term "Union Carbide" means Union Carbide Corporation and "Dow Silicones" means Dow Silicones Corporation, both wholly owned subsidiaries of the Company.

Adoption of Accounting Standards
2019
In the first quarter of 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)," and associated ASUs (collectively, "Topic 842"). See Notes 2 and 14 for additional information. The Company added a significant accounting policy for leases as a result of the adoption of Topic 842:

Leases
The Company determines whether a contract contains a lease at contract inception. A contract contains a lease if there is an identified asset and the Company has the right to control the asset.

Operating lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses the incremental borrowing rate (“IBR”) in determining the present value of lease payments, unless the implicit rate is readily determinable. If lease terms include options to extend or terminate the lease, the ROU asset and lease liability are measured based on the reasonably certain decision. Leases with a term of 12 months or less at the commencement date are not recognized on the balance sheet and are expensed as incurred.

The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component for all classes of leased assets for which the Company is the lessee. Additionally, for certain equipment leases, the portfolio approach is applied to account for the operating lease ROU assets and lease liabilities. In the consolidated statements of income, lease expense for operating lease payments is recognized on a straight-line basis over the lease term. For finance leases, interest expense is recognized on the lease liability and the ROU asset is amortized over the lease term.


16


Some leasing arrangements require variable payments that are dependent upon usage or output, or may vary for other reasons, such as insurance or tax payments. Variable lease payments are recognized as incurred and are not presented as part of the ROU asset or lease liability.

Additionally, the Company's consolidated balance sheet reflects the impact of the adoption of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" and the associated ASUs (collectively, "Topic 606") at January 1, 2019, by certain nonconsolidated affiliates of the Company, which were subsequently distributed as part of the separation. The impact to the Company's investment was a reduction to "Investment in nonconsolidated affiliates" of $71 million and an increase to "Other noncurrent obligations" of $168 million , as well as an increase to "Deferred income tax assets" of $56 million and a reduction to "Retained earnings" of $183 million in the consolidated balance sheets at January 1, 2019.

2018
In the first quarter of 2018, the Company adopted Topic 606, ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" and ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." The adoption of these ASUs resulted in a net decrease of $68 million to retained earnings and a decrease of $20 million to accumulated other comprehensive loss ("AOCL") in the consolidated statements of equity at January 1, 2018. 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 ("ASU 2018-02")." The adoption of this standard resulted in a $1,057 million increase to retained earnings due to the reclassification from AOCL in the consolidated statements of equity at April 1, 2018.

Dividends
Effective with the Merger, TDCC no longer had publicly traded common stock. TDCC's common shares were owned solely by its parent company, DowDuPont, prior to separation and TDCC’s Board of Directors determined whether or not there would be a dividend distribution to DowDuPont. See Note 22 for additional information.


NOTE 2 – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In the first quarter of 2019, the Company adopted 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 requires 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 legacy U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance in Topic 606, issued in 2014. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption was permitted.

The Company adopted Topic 842 using the modified retrospective transition approach, applying the new standard to leases existing at the date of initial adoption. The Company elected to apply the transition requirements at the effective date rather than at the beginning of the earliest comparative period presented with a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, and prior periods were not restated. In addition, the Company elected to apply the package of practical expedients permitted under the transition guidance which does not require reassessment of prior conclusions, lease classification and initial direct lease costs. The Company did not elect to use the hindsight practical expedient in determining the lease term or assessing impairment of ROU assets. Adoption of the new standard resulted in the recording of operating lease ROU assets and lease liabilities of $2.3 billion at January 1, 2019. The net impact to retained earnings was an increase of $72 million and was primarily a result of the recognition of a deferred gain associated with a prior sale-leaseback transaction. The adoption of the new guidance did not have a material impact on Dow's consolidated statements of income and had no impact on cash flows. See Note 14 for additional information.

Accounting Guidance Issued But Not Adopted at June 30, 2019
In August 2018, the Financial Accounting Standards Board ("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

17


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 – SEPARATION FROM DOWDUPONT
On April 1, 2019, DowDuPont completed the previously announced separation of its materials science business. The separation was effected by way of a pro rata distribution of all of the then-issued and outstanding shares of Dow Inc. common stock to DowDuPont stockholders of record as of the close of business, Eastern Time, on March 21, 2019 (the “Record Date”). The shareholders of record of DowDuPont received one share of Dow Inc. common stock, par value $0.01 per share, for every three shares of DowDuPont common stock, par value $0.01 per share, held as of the Record Date ("Distribution Ratio"). No fractional shares of Dow Inc. common stock were issued. Instead, cash in lieu of any fractional shares was paid to DowDuPont registered shareholders. The number of shares of Dow Inc. common stock issued on April 1, 2019 was 748.8 million shares. Dow Inc. is now an independent, publicly traded company and Dow Inc. common stock is listed on the NYSE under the symbol “DOW.” Dow Inc. common stock began regular-way trading on April 2, 2019, the first day following the distribution.

On April 1, 2019, Dow Inc. received a cash contribution of $2,024 million from DowDuPont as part of the internal reorganization and business realignment steps between Dow Inc., TDCC and DowDuPont. Dow Inc. recognized a reduction to "Retained earnings" of $14,846 million in the second quarter of 2019 as a result of the cash contribution, the distribution of AgCo and SpecCo, and other separation related adjustments. TDCC recognized a reduction to "Retained earnings" of $16,025 million in the second quarter of 2019 as a result of the distribution of AgCo and SpecCo.

Receipt of ECP
As the receipt of ECP was accounted for as a transfer between entities under common control, the consolidated financial statements have been retrospectively adjusted to reflect the receipt of ECP from the closing of the Merger on August 31, 2017. All intercompany transactions have been eliminated in consolidation. The ECP assets received and liabilities assumed were recorded at DowDuPont's historical cost basis as reflected in the following table:

ECP Assets Received and Liabilities Assumed on Aug 31, 2017
Carrying value
In millions
Cash and cash equivalents
$
1

Accounts and notes receivable - Trade
169

Accounts and notes receivable - Other
32

Inventories
529

Other current assets
6

Investment in nonconsolidated affiliates
116

Net property
817

Goodwill
3,617

Other intangible assets
1,484

Deferred income tax assets
9

Total Assets
$
6,780

Accounts payable - Trade
102

Accounts payable - Other
29

Accrued and other current liabilities
31

Deferred income tax liabilities
683

Pension and other postretirement benefits - noncurrent
6

Other noncurrent obligations
3

Total Liabilities
$
854

Net Assets (impact to "Retained earnings")
$
5,926



18


Distribution of AgCo and SpecCo
Upon distribution, the Company retrospectively adjusted the previously issued consolidated financial statements and presented AgCo and SpecCo as discontinued operations based on the guidance in Accounting Standards Codification (“ASC”) 205-20 “Discontinued Operations.” The results of operations of AgCo and SpecCo are presented as discontinued operations in the consolidated statements of income and are summarized in the table that follows:

Results of Operations of AgCo and SpecCo
Three Months Ended
Six Months Ended
 
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
In millions
Net sales
$
3,397

$
2,953

$
6,456

Cost of sales
2,123

1,804

3,948

Research and development expenses
193

175

376

Selling, general and administrative expenses
272

262

555

Amortization of intangibles
63

61

127

Restructuring and asset related charges - net
56

78

138

Equity in earnings of nonconsolidated affiliates
41

28

83

Sundry income (expense) - net
1

(18
)
5

Interest income
3

3

11

Interest expense and amortization of debt discount
12

7

21

Income from discontinued operations before income taxes
$
723

$
579

$
1,390

Provision for income taxes
169

134

322

Income from discontinued operations, net of tax
$
554

$
445

$
1,068


The carrying amount of major classes of assets and liabilities related to the distribution of AgCo and SpecCo consisted of the following:

Carrying Values of AgCo and SpecCo 1
Dec 31, 2018
In millions
Accounts and notes receivable - Trade
$
2,768

Accounts and notes receivable - Other
773

Inventories
2,826

Other current assets
151

Investment in nonconsolidated affiliates
612

Other investments
2

Noncurrent receivables
35

Net property
3,014

Goodwill
7,590

Other intangible assets
1,830

Deferred income tax assets
239

Deferred charges and other assets
60

Total assets of discontinued operations
$
19,900

Notes payable
7

Long-term debt due within one year
4

Accounts payable - Trade
1,118

Accounts payable - Other
868

Income taxes payable
234

Accrued and other current liabilities
716

Long-Term Debt
5

Deferred income tax liabilities
568

Pension and other postretirement benefits - noncurrent
306

Other noncurrent obligations
662

Total liabilities of discontinued operations
$
4,488

1.
Includes assets and liabilities of consolidated variable interest entities related to discontinued operations.

19


Separation and Distribution, Tax Matters and Other Agreements  
In connection with the separation, Dow Inc. entered into certain agreements with DuPont and/or Corteva, Inc. ("Corteva"), including the following: Separation and Distribution Agreement, Tax Matters Agreement and Employee Matters Agreement (collectively, the "Agreements"). In addition to establishing the terms of the separation, the Agreements provide a framework for Dow’s interaction with DuPont and Corteva after the separation and also provide for the allocation among Dow, DuPont and Corteva of assets, liabilities and obligations attributable to periods prior to, at and after the completion of the separation. The Agreements also contain certain indemnity and/or cross-indemnity provisions that are intended to set forth each party’s respective rights, responsibilities and obligations for matters subject to indemnification. Except in certain instances, the parties’ indemnification obligations are uncapped. Certain indemnification obligations will be subject to reduction by insurance proceeds or other third-party proceeds of the indemnified party that reduces the amount of the loss. In addition, indemnifiable losses will be subject to, in certain cases, “de minimis” threshold amounts and, in certain cases, deductible amounts.

The impacts of indemnifications and other post-separation matters relating to the Agreements were primarily reflected in the consolidated financial statements of Dow Inc. In the second quarter of 2019, the Company recorded pretax charges related to the Agreements of $24 million in "Integration and separation costs" and $52 million in "Sundry income (expense) - net" in the consolidated statements of income of Dow Inc. and related to the Corporate segment. At June 30, 2019, the Company had assets of $167 million included in "Other current assets" and liabilities of $471 million included in "Accrued and other current liabilities" and $158 million included in"Other noncurrent obligations" in the consolidated balance sheets of Dow Inc. related to the Agreements. Any adjustments to these assets and liabilities in subsequent periods will be recorded in Dow Inc.'s results of operations. In addition, the Company deferred approximately $400 million of the cash distribution received from DowDuPont at separation and recorded an associated liability in "Other noncurrent obligations," with an offset to "Retained earnings" in the consolidated balance sheets of Dow Inc. The final resolution of this liability is uncertain and any subsequent adjustments to the carrying value of this liability will be reflected in equity of Dow Inc. In the second quarter of 2019, Dow Inc. made cash payments of $93 million related to the Agreements, recorded in "Cash flows from operating activities - discontinued operations" in the Dow Inc. consolidated statements of cash flows. The Company also received $25 million related to the Agreements, recorded in "Other assets and liabilities, net" within "Cash flows from operating activities - continuing operations" in the Dow Inc. consolidated statements of cash flows.

Continuing Involvement
In addition, the Company has certain product and service agreements with DuPont and Corteva that were considered intercompany transactions prior to the separation, but are trade transactions subsequent to the separation. These transactions have been retrospectively reclassified as trade transactions in the consolidated financial statements. Based on the Company’s assessment of the specific factors identified in ASC Topic 205, “Presentation of Financial Statements,” the Company concluded that these agreements do not constitute significant continuing involvement in AgCo or SpecCo.

Integration and Separation Costs
Integration and separation costs, which reflect costs related to post-Merger integration and business separation activities, as well as the ownership restructure of Dow Silicones (through May 31, 2018), were $348 million and $324 million for Dow Inc. and TDCC, respectively, in the second quarter of 2019 , compared with $262 million in the second quarter of 2018 . Integration and separation costs were $800 million and $776 million for Dow Inc. and TDCC, respectively, in the first six months of 2019 compared with $486 million in the first six months of 2018 . Integration and separation costs related to post-Merger integration and business separation activities are expected to decline through the remainder of 2019.



20


NOTE 4 – REVENUE
Revenue Recognition
The majority of Dow's revenue is derived from product sales. In the three and six months ended June 30, 2019 , 98  percent of Dow's revenue related to product sales ( 99 percent for the three and six months ended June 30, 2018 ), with the remaining balance primarily related to the Company's insurance operations and licensing of patents and technologies. Product sales consist of sales of Dow's products to manufacturers and distributors and considers order confirmations or purchase orders, which in some cases are governed by master supply agreements, to be contracts with a customer. Dow enters into licensing arrangements in which it licenses certain rights of its patents and technology to customers. Revenue from Dow’s licenses for patents and technology is derived from sales-based royalties and licensing arrangements based on billing schedules established in each contract.

Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. At June 30, 2019 , Dow had unfulfilled performance obligations of $652 million ( $407 million at December 31, 2018) related to the licensing of technology. Dow 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 Dow has elected the right to invoice practical expedient, or variable consideration attributable to royalties for licenses of patents and technology. Dow has received advance payments from customers related to long-term supply agreements that are deferred and recognized over the life of the contract, with remaining contract terms that range up to 22 years. Dow 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 Dow's consolidated balance sheets.

Disaggregation of Revenue
Dow disaggregates its revenue from contracts with customers by segment and business, as the Company believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash flows.

Net Trade Sales by Segment and Business
Three Months Ended
Six Months Ended
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Coatings & Performance Monomers
$
947

$
1,098

$
1,849

$
2,053

Consumer Solutions
1,409

1,526

2,789

2,898

Performance Materials & Coatings
$
2,356

$
2,624

$
4,638

$
4,951

Industrial Solutions
$
1,070

$
1,214

$
2,197

$
2,389

Polyurethanes & Construction Chemicals
2,269

2,752

4,619

5,371

Other
3

3

6

7

Industrial Intermediates & Infrastructure
$
3,342

$
3,969

$
6,822

$
7,767

Hydrocarbons & Energy
$
1,349

$
1,879

$
2,753

$
3,707

Packaging and Specialty Plastics
3,856

4,245

7,590

8,455

Packaging & Specialty Plastics
$
5,205

$
6,124

$
10,343

$
12,162

Corporate
$
111

$
72

$
180

$
146

Total
$
11,014

$
12,789

$
21,983

$
25,026


Net Trade Sales by Geographic Region
Three Months Ended
Six Months Ended
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
U.S. & Canada
$
4,072

$
4,551

$
8,005

$
8,993

EMEAI 1
3,725

4,473

7,607

8,871

Asia Pacific
2,170

2,480

4,271

4,668

Latin America
1,047

1,285

2,100

2,494

Total
$
11,014

$
12,789

$
21,983

$
25,026

1. Europe, Middle East, Africa and India.

21


Contract Assets and Liabilities
Dow 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 Dow'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 from customers for product to be delivered in 12 months or less. "Contract liabilities - noncurrent" includes advance payments that Dow 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 increase in contract liabilities from December 31, 2018 to June 30, 2019 was due to advanced payments from a customer related to long-term product supply agreements. Revenue recognized in the first six months of 2019 from amounts included in contract liabilities at the beginning of the period was approximately $110 million (approximately $105 million in the first six months of 2018). In the first six months of 2019, the amount of contract assets reclassified to receivables as a result of the right to the transaction consideration becoming unconditional was $15 million (insignificant in the first six months of 2018).

The following table summarizes the contract balances at June 30, 2019 and December 31, 2018:

Contract Assets and Liabilities
Jun 30, 2019
Dec 31, 2018
In millions
Accounts and notes receivable - Trade
$
5,661

$
5,646

Contract assets - current 1
$
34

$
19

Contract assets - noncurrent