DOW INC. 
OnApril 1, 2019 , DowDuPont Inc. ("DowDuPont" and effectiveJune 3, 2019 , n/k/a DuPont de Nemours, Inc. or "DuPont") completed the separation of its materials science business andDow Inc. became the direct parent company ofThe Dow Chemical Company and its consolidated subsidiaries ("TDCC" and together withDow Inc. , "Dow" or the "Company"), owning all of the outstanding common shares of TDCC. For filings related to the period commencingApril 1, 2019 and thereafter, TDCC was deemed the predecessor toDow Inc. , and the historical results of TDCC are deemed the historical results ofDow Inc. for periods prior to and includingMarch 31, 2019 . As a result of the parent/subsidiary relationship betweenDow Inc. and TDCC, and considering that the financial statements and disclosures of each company are substantially similar, the companies are filing a combined report for this Quarterly Report on Form 10-Q. The information reflected in the report is equally applicable to bothDow Inc. and TDCC, except where otherwise noted. The separation was contemplated by the merger of equals transaction effectiveAugust 31, 2017 , under the Agreement and Plan of Merger, dated as ofDecember 11, 2015 , as amended onMarch 31, 2017 . TDCC andE. I. du Pont de Nemours and Company and its consolidated subsidiaries ("Historical DuPont") each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the "Merger"). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products.Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business. As of the effective date and time of the distribution, DowDuPont 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 reflect the receipt of Historical DuPont's ethylene and ethylene copolymers businesses (other than its ethylene acrylic elastomers business) ("ECP") as a common control transaction from the closing of the Merger onAugust 31, 2017 . See Note 3 to the Consolidated Financial Statements for additional information.
Throughout this Quarterly Report on Form 10-Q, unless otherwise indicated, amounts and activity are presented on a continuing operations basis.
Except as otherwise indicated by the context, the terms "Union Carbide" meansUnion Carbide Corporation , and "Dow Silicones" meansDow Silicones Corporation , both wholly owned subsidiaries of the Company. Items Affecting Comparability of Financial Results As a result of the separation from DowDuPont, pro forma net sales and pro forma Operating EBIT are provided in this section which were based on the consolidated financial statements of TDCC, adjusted to give effect to the separation from DowDuPont as if it had been consummated onJanuary 1, 2017 . For the three months endedMarch 31, 2019 , pro forma adjustments have been made for (1) the margin impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva, Inc. ("Corteva") in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont and (2) the elimination of the impact of events directly attributable to the Merger, internal reorganization and business realignment, separation, distribution and other related transactions (e.g., one-time transaction costs). These adjustments impacted the consolidated results as well as the reportable segments. See Note 22 to the Consolidated Financial Statements for a summary of the pro forma adjustments impacting segment measures for the three months endedMarch 31, 2019 . For further information on the unaudited pro forma financial information, please refer to the Company's Current Report on Form 8-K datedJune 3, 2019 . Statement on COVID-19, Oil Supply and Second Quarter Outlook The pandemic caused by coronavirus disease 2019 ("COVID-19") was first reported inWuhan, China inDecember 2019 and has since spread to all geographic regions where Dow produces and sells its products. Financial markets have been volatile in 2020, primarily due to uncertainty with respect to the severity and duration of the pandemic, coupled with a significant drop in oil prices that began in earlyMarch 2020 , driven by a collapse in demand due to the global spread of COVID-19 combined with increased supply from oil producers. The global, regional and local spread of COVID-19 has resulted in significant global mitigation measures, including government-directed quarantines, social distancing and shelter-in-place mandates, travel restrictions and/or bans, and restricted access to certain corporate facilities and manufacturing sites. The Company has manufacturing operations and sales offices in all impacted geographic regions. Most of the Company's manufacturing facilities have been designated essential operations by local governments. As a result, nearly all of the Company's manufacturing sites and facilities continue to operate and are doing so safely, having implemented social distancing and enhanced health, safety and sanitization measures as directed by Dow's 46 -------------------------------------------------------------------------------- Table of Contents Crisis Management Teams ("CMTs"). The CMTs continue to work closely with site leadership to address the rapidly evolving situation and are adjusting alert levels as warranted on a site by site basis. The Company has also implemented necessary procedures to enable a significant portion of its employee base to work remotely. For much of March and continuing throughout April, nearly two-thirds of the Company's workforce was working remotely. As the COVID-19 outbreak was identified and spread inChina , the Company mobilized its Corporate CMT and Asia Pacific CMT to provide information and guidance to Company leadership and directed its workforce inChina to institute crisis management protocols, including travel restrictions and other safety measures and adherence to government-directed guidelines. As the virus began to spread to other countries and geographic regions, and the effects of disrupted operations and supply chains began to be realized, each regional CMT established crisis management protocols and safety guidelines by region, country and/or manufacturing site. These teams have directed actions including imposing additional travel restrictions, transitioning large meetings from in-person to virtual formats, continuously assessing the Company's information technology infrastructure to ensure readiness for a larger than ever remote workforce, staying well connected to customers, suppliers and business partners, planning for return to the workplace and continuously making operational adjustments as needed to ensure continued safety of the Company's workforce and assets, while also ensuring the ability to continue to supply products to meet the world's essential needs and evolving market demands. During this public health crisis, the Company is focused on the health and safety of its employees, customers and suppliers around the world and maintaining safe and reliable operations of its manufacturing sites. As many of Dow's businesses and products are deemed essential to critical global infrastructure, it is imperative that the Company continues to supply materials science solutions used in vital applications, including medical equipment and infrastructure, such as hospital beds and IV components; medical supplies and hand sanitizer; disposable non-woven plastics, surgical masks, tubing and vials and medical supply packaging; as well as personal and home hygiene and sanitization such as hard surface disinfectants, laundry detergent and hand soaps; and food supply and packaging. While the Company's manufacturing sites have largely continued to operate during the COVID-19 pandemic, with no significant impact to manufacturing whether through shutdowns or shortages in labor, raw materials or personal protective equipment, supply chain disruptions and related logistical issues have posed challenges across all modes of transportation. Supply chain and logistical challenges are expected to continue in the second quarter of 2020. In response to global needs related to the COVID-19 pandemic, inMarch 2020 the Company announced plans to produce hand sanitizer at five of its manufacturing sites around the world:Auburn, Michigan ;South Charleston, West Virginia ; Seneffe,Belgium ; Hortolandia,Brazil and Stade,Germany . The Company does not regularly produce hand sanitizer, but already produces a large portion of the required ingredients at certain sites. A majority of the hand sanitizer produced is being donated to health systems and government agencies for distribution. Also, inApril 2020 , to help address the need for personal protective equipment ("PPE") among healthcare professionals, Dow developed a simplified face shield design and shared the design through an open-source file to help accelerate production rates of the critically-needed PPE. The Company is collaborating to produce 100,000 face shields for donation to the state ofMichigan for distribution to hospitals and seeks to partner with other companies to continue to develop this critical PPE. InMarch 2020 , Dow announced a commitment of$3 million to aid COVID-19 relief efforts worldwide. This included$2 million for immediate support of impacts caused by COVID-19, including donations to theCOVID-19 Solidarity Fund , Direct Relief, and local and regional nonprofit organizations in Dow communities around the globe and$1 million to build community resilience in the recovery phase. The Company is also providing ways for employees to stay engaged and contribute through virtual volunteering and financial donations to front-line organizations. Global markets have also been impacted by reduced demand for oil caused by the economic impact of the COVID-19 pandemic and a lack of support by oil producing nations to cut supply. These factors resulted in significant declines in crude oil prices inMarch 2020 that have extended throughApril 2020 . Prices are expected to remain volatile until supply/demand conditions become more balanced. Declines in crude oil prices impact the pace of oil drilling in theU.S. &Canada , which makes natural gas, a significant by-product of oil drilling and the primary feedstock used in theU.S. by Dow and other ethylene producers, less cost advantaged. However, the Company has unmatched feedstock flexibility, driven by manufacturing assets that have the ability to produce ethylene from natural gas liquids or crude oil-based feedstocks, significant naphtha-based production capabilities, as well as comprehensive financial and physical hedging programs. Therefore, although a continuation of suppressed crude oil prices could result in additional margin compression, the Company's feedstock flexibility, fully integrated feedstock position and differentiated product portfolio positions the Company well to respond to the current challenges.
The Company started 2020 with significant committed and available liquidity facilities. As markets became more volatile and uncertain during the first quarter of 2020, the Company took proactive measures to further bolster liquidity by drawing down certain uncommitted credit facilities and partially monetizing investments in Company-owned life insurance policies. At
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March 31, 2020 , the Company had more than $8 billion of committed and available
forms of liquidity and $3.6 billion in cash and cash equivalents. The Company
has no substantive long-term debt maturities until the second half of 2023.
The Company experienced mixed sales results in the first quarter as global
demand has been dynamic as a result of the pandemic and suppressed oil prices.
Sequentially, the quarter started with reduced demand in Asia Pacific , while
increased demand was noted in Europe , Middle East , Africa and India ("EMEAI")
and Latin America . Demand softened slightly in February in U.S. & Canada , EMEAI
and Latin America while Asia Pacific reported modest improvement, primarily in
China . Demand in March showed strong growth in EMEAI and U.S. & Canada and
volume also increased in Asia Pacific . While the Company has noted reduced
demand for products used in durable goods applications, including appliances,
automotive and furniture and bedding, demand has remained strong for products
utilized in consumer applications, such as cleaning and detergent ingredients
and food, health and hygiene packaging. These demand patterns are expected to
continue in the second quarter of 2020. Local prices also declined in the first
quarter of 2020, largely impacted by lower global energy prices. See Results of
Operations in this report for additional discussion on first quarter results.
The Company expects results of operations in the second quarter of 2020 will be
negatively impacted as a result of the COVID-19 pandemic coupled with
challenging oil supply/demand balances. Sales are estimated to decline 10 to 20
percent sequentially, with declines in all geographic regions, except Asia
Pacific , and all operating segments. Local price is expected to decline in all
operating segments due to lower feedstock and raw material costs - as a result
of the declines in global energy prices - as well as demand reductions due to
the COVID-19 pandemic. Global demand softness is expected in all operating
segments which will result in margin compression. This outlook assumes the
COVID-19 virus containment will continue in the coming weeks. It also assumes a
gradual and sustainable return of global economic activity and reopening of
economies in May and June, with an expected recovery beginning to take hold as
the year progresses. Dow expects the largest global economic impact - and
chemical industry impact - due to COVID-19 and lower global energy prices will
be in the second quarter of 2020.
The Company has taken immediate and additional proactive measures to further
strengthen its financial position. These actions include: further reducing the
2020 capital expenditure target to $1.25 billion ; trimming operating expenses by
$350 million ; and unlocking another $500 million from working capital. The
Company is also temporarily suspending share repurchases and will delay planned
maintenance turnaround spending, where appropriate, without compromising safety
and while also ensuring ability to serve customer needs. In addition, on April
30, 2020 , the Company announced it is temporarily idling select manufacturing
facilities to balance production to demand across markets more severely affected
by restrained economic activity. This includes the idling of three polyethylene
production units and two elastomers units for at least one month; running Dow's
polyurethanes assets, including propylene oxide and methylene diphenyl
diisocyanate ("MDI"), at reduced operating rates; reducing siloxanes rates
globally and extending a planned maintenance turnaround at a silicones
production unit in Zhangjiagang, China into May. Operationally, the Company will
continue to take advantage of its global footprint and industry-leading asset
capabilities, remain close to customers and ensure availability of products
essential to consumers and instrumental to containing the global pandemic, such
as hand sanitizer and materials for PPE. Dow is proud of the critical role the
Company and industry continue to play during these extraordinary times and is
confident that the actions being taken will position Dow to emerge even stronger
when the global economy rebounds.
At the time of this filing, the ultimate severity and duration of the COVID-19
pandemic and suppressed oil prices cannot be reasonably estimated. The Company
acknowledges that a prolonged pandemic, suppressed oil prices and corresponding
market volatility could have a materially adverse effect on the Company's
results of operations, financial condition and cash flows. The risks associated
with these conditions are more fully discussed in this report in Part II, Item
1A, Risk Factors. The Company is actively monitoring for potential financial
impacts from the pandemic and suppressed oil prices, including, but not limited
to: gauging the financial health of its customers; assessing liquidity;
evaluating the recoverability of its assets; enhancing cyber security
monitoring; and evaluating ongoing appropriateness of its estimates.
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted
on
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OVERVIEW
The following is a summary of the results from continuing operations for the
three months ended March 31, 2020 :
•The Company reported net sales in the first quarter of 2020 of $9.8 billion ,
down 11 percent from $11.0 billion in the first quarter of 2019, with declines
across all geographic regions and segments. These declines were due to a
decrease in local price of 9 percent, a volume decline of 2 percent and a 1
percent unfavorable currency impact. Portfolio & Other was up 1 percent.
•Local price decreased 9 percent compared with the same period last year, with
decreases in Packaging & Specialty Plastics and Industrial Intermediates &
Infrastructure (both down 9 percent) and Performance Materials & Coatings (down
8 percent). Local price decreased in all geographic regions, including
double-digit declines in Latin America and U.S. & Canada , while Asia Pacific was
down 8 percent and EMEAI was down 7 percent.
•Volume decreased 2 percent compared with the first quarter of 2019. Packaging &
Specialty Plastics was flat. Volume decreased in Industrial Intermediates &
Infrastructure (down 3 percent) and Performance Materials & Coatings (down
4 percent). Volume declined in all geographic regions, except
•Currency had an unfavorable impact of 1 percent on net sales, primarily driven
by EMEAI (down 2 percent) and
•Research and development ("R&D") expenses were $179 million in the first
quarter of 2020, compared with $190 million in the first quarter of 2019.
Selling, general and administrative ("SG&A") expenses were $334 million in the
first quarter of 2020, down from $448 million in the first quarter of 2019. R&D
and SG&A expenses decreased primarily due to the impact of stock market declines
on certain fringe benefits as well as cost reductions. SG&A expenses were also
favorably impacted in the first quarter of 2020 by the reversal of a bad debt
reserve related to an arbitration judgment.
•Restructuring and asset related charges - net were $96 million in the first
quarter of 2020, primarily reflecting final charges related to restructuring
actions under the DowDuPont Cost Synergy Program.
•Integration and separation costs were $65 million in the first quarter of 2020,
down from $452 million in the first quarter of 2019, reflecting the wind-down of
business separation activities.
•Equity in losses of nonconsolidated affiliates was $89 million in the first
quarter of 2020, compared with $14 million in the first quarter of 2019,
primarily due to lower equity earnings from the Kuwait joint ventures and the
Thai joint ventures.
•Sundry income (expense) - net for Dow Inc. and TDCC was expense of $81 million
and expense of $82 million , respectively, in the first quarter of 2020, compared
with income of $69 million in the first quarter of 2019. Sundry income
(expense) - net decreased primarily due to a net loss of $86 million related to
the early extinguishment of debt and foreign currency exchange losses in the
first quarter of 2020 compared with foreign currency exchange gains in the first
quarter of 2019, as well as a decrease in non-operating pension and
postretirement benefit plan credits compared with the first quarter of 2019.
•Net income available for Dow Inc. and TDCC common stockholder(s) was $239
million in the first quarter of 2020, compared with $556 million in the first
quarter of 2019. Earnings per share for Dow Inc. was $0.32 per share in the
first quarter of 2020, compared with earnings per share of $0.74 in the first
quarter of 2019 (earnings per share from continuing operations of $0.16 per
share in the first quarter of 2019).
•On February 13, 2020 , Dow Inc. announced that its Board of Directors ("Board")
declared a dividend of $0.70 per share, paid on March 13, 2020 , to shareholders
of record on February 28, 2020 .
•On February 25, 2020 , TDCC announced the completion of a public offering of
€2.25 billion aggregate principal amount of its notes. TDCC issued €1.0 billion
of its 0.50 percent notes due 2027, €750 million of its 1.125 percent notes due
2032 and €500 million of its 1.875 percent notes due 2040 (collectively, the
"Euro Notes"). The Euro Notes have a weighted average coupon rate of
approximately 1.0 percent. In the first quarter of 2020, net proceeds from the
Euro Notes were used to fund the redemption of existing notes and/or repay
indebtedness, including repayment by Dow Silicones of $750 million of the
outstanding $2.0 billion principal under a certain third party credit agreement
("Term Loan Facility") and full redemption of TDCC's 3.0 percent Notes due
November 15, 2022 , of which approximately $1.25 billion was outstanding.
•Dow Inc. repurchased
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•In March 2020 , Dow announced a commitment of $3 million to aid COVID-19 relief
efforts worldwide. This includes $2 million for immediate support of impacts
caused by COVID-19, including donations to the COVID-19 Solidarity Fund , Direct
Relief, and local and regional nonprofit organizations in Dow communities around
the globe and $1 million to build community resilience in the recovery phase.
•In response to global needs related to COVID-19, in March 2020 the Company
announced plans to produce hand sanitizer at five of its manufacturing sites
around the world: Auburn, Michigan ; South Charleston, West Virginia ; Seneffe,
Belgium ; Hortolandia, Brazil and Stade, Germany . A majority of the hand
sanitizer produced will be donated to health systems and government agencies for
distribution.
In addition to the highlights above, the following events occurred subsequent to the first quarter of 2020:
•EffectiveApril 9, 2020 , following the Company's Annual Meeting of Stockholders ("2020 Meeting")Dow Inc.'s Board electedJim Fitterling , Dow's Chief Executive Officer, as Chairman. In connection with that election, the Board electedJeff M. Fettig to serve as Lead Director until the 2021 Annual Meeting of Stockholders or until a successor is duly elected and qualified. The Company also announced thatJill S. Wyant , executive vice president and president of global regions at Ecolab, Inc., was elected to the Board at the 2020 Meeting andRuth G. Shaw retired from the Board following the 2020 Meeting after 15 years of exemplary leadership, in accordance with director tenure requirements of the Company's Corporate Governance Guidelines. •OnApril 9, 2020 ,Dow Inc. announced that its Board declared a dividend of$0.70 per share, payable onJune 12, 2020 , to shareholders of record as ofMay 29, 2020 . •OnApril 9, 2020 ,Standard & Poor's ("S&P") announced a credit rating change for Dow from BBB and A-2 to BBB- and A-3, maintaining stable outlook. The decision was made as part of S&P's broader review of the chemicals sector, in light of the global impact of COVID-19 and lower oil prices. S&P is one of three credit rating agencies, and the only one to have adjusted Dow's rating. OnApril 13, 2020 , Fitch re-affirmed Dow's BBB+ and F2 rating, and revised its outlook to negative from stable. The decision was made as part of Fitch's annual review process. •InApril 2020 , Dow announced the Company had developed a simplified face shield design and shared the design through an open-source file to help accelerate production rates of the critically-needed personal protective equipment. The Company is collaborating to produce 100,000 face shields for donation to the state ofMichigan for distribution to hospitals and seeks to partner with other companies to continue to develop this critical PPE. •OnApril 30, 2020 , the Company announced the temporary idling or rate reductions of select manufacturing units to balance production with demand across markets more severely affected by restrained economic activity. This includes the idling of three polyethylene production units and two elastomers productions units for at least one month; running Dow's polyurethanes assets, including propylene oxide and methylene diphenyl diisocyanate ("MDI"), at reduced operating rates; reducing siloxane rates globally and extending a planned maintenance turnaround at a silicones production unit in Zhangjiagang,China into May. 50 -------------------------------------------------------------------------------- Table of Contents Selected Financial Data - Dow Inc. and TDCC Three Months Ended Mar 31, Mar 31, In millions 2020 2019 Net sales$ 9,770 $ 10,969 Cost of sales ("COS")$ 8,230 $ 9,142 Percent of net sales 84.2 % 83.3 % R&D$ 179 $ 190 Percent of net sales 1.8 % 1.7 % SG&A$ 334 $ 448 Percent of net sales 3.4 % 4.1 % Effective tax rate 34.8 % 47.5 %
Net income available for common stockholder(s)
RESULTS OF OPERATIONSNet Sales The following tables summarize net sales, pro forma net sales and sales variances by segment and geographic region from the prior year: Summary of Sales Results Three Months Ended In millions Mar 31, 2020 Mar 31, 2019 Net sales$ 9,770 $ 10,969 Pro forma net sales$ 11,016
Sales Variances by Segment and
Three Months Ended Mar 31, 2020
Local Price & Portfolio &
Percentage change from prior year Product Mix Currency Volume Other 1 Total
Packaging & Specialty Plastics (9) % (1) % - % - % (10) %
Industrial Intermediates & Infrastructure (9) (1) (3) - (13)
Performance Materials & Coatings (8) (1) (4) 3 (10)
Total (9) % (1) % (2) % 1 % (11) %
U.S. & Canada (10) % - % (2) % 2 % (10) %
EMEAI (7) (2) (3) - (12)
Asia Pacific (8) (1) (4) 1 (12)
Latin America (13) - 5 - (8)
Total (9) % (1) % (2) % 1 % (11) %
1. Portfolio & Other includes the sales impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont.
Net sales in the first quarter of 2020 were$9.8 billion , down 11 percent from$11.0 billion in the first quarter of last year, primarily due to a decrease in local price, a decrease in volume, an unfavorable impact from currency, and a favorable impact of Portfolio & Other. Sales decreased in all geographic regions and operating segments. Local price decreased 9 percent, primarily in response to lower feedstock and raw material costs, as well as unfavorable supply and demand fundamentals. Local price 51 -------------------------------------------------------------------------------- Table of Contents decreased in Packaging & Specialty Plastics and Industrial Intermediates & Infrastructure (both down 9 percent), in Performance Materials & Coatings (down 8 percent) and all geographic regions. Volume decreased 2 percent with declines in all geographic regions, exceptLatin America (up 5 percent). Volume was flat in Packaging & Specialty Plastics and decreased in Industrial Intermediates & Infrastructure (down 3 percent) and Performance Materials & Coatings (down 4 percent). The onset of the COVID-19 pandemic contributed to the volume decrease, primarily inAsia Pacific and in Industrial Intermediates & Infrastructure and Performance Materials & Coatings. Currency unfavorably impacted net sales 1 percent compared with the same period last year, driven primarily by EMEAI (down 2 percent) andAsia Pacific (down 1 percent). Portfolio & Other favorably impacted net sales 1 percent and was flat in all segments with the exception of Performance Materials & Coatings (up 3 percent).
Sales Variances by Segment and
Three months ended Mar 31, 2020
Local Price &
Percentage change from prior year Product Mix Currency Volume Total
Packaging & Specialty Plastics (9) % (1) % - % (10) %
Industrial Intermediates & Infrastructure (9) (1) (3) (13)
Performance Materials & Coatings (7) (1) (3) (11)
Total (8) % (1) % (2) % (11) %
Total, excluding the Hydrocarbons & Energy
business (9) % (1) % (1) % (11) %
U.S. & Canada (9) % - % (1) % (10) %
EMEAI (7) (2) (3) (12)
Asia Pacific (7) (1) (4) (12)
Latin America (13) - 4 (9)
Total (8) % (1) % (2) % (11) %
Net sales in the first quarter of 2020 were $9.8 billion , down 11 percent from
pro forma net sales of $11.0 billion in the first quarter of last year,
primarily due to a decrease in local price, a decrease in volume, and an
unfavorable impact from currency. Sales decreased in all geographic regions and
operating segments. Local price decreased 8 percent, primarily in response to
lower feedstock and raw material costs, as well as unfavorable supply and demand
fundamentals. Local price decreased in Packaging & Specialty Plastics and
Industrial Intermediates & Infrastructure (both down 9 percent), in Performance
Materials & Coatings (down 7 percent) and in all geographic regions. Volume
decreased 2 percent with declines in all geographic regions, except Latin
America (up 4 percent). Volume decreased 1 percent excluding the Hydrocarbons &
Energy business. Volume was flat in Packaging & Specialty Plastics and decreased
in Industrial Intermediates & Infrastructure and Performance Materials &
Coatings (both down 3 percent). The onset of the COVID-19 pandemic contributed
to the overall volume decrease, primarily in Asia Pacific and in Industrial
Intermediates & Infrastructure and Performance Materials & Coatings. Currency
unfavorably impacted net sales 1 percent compared with the same period last
year, driven primarily by EMEAI (down 2 percent) and Asia Pacific (down 1
percent).
Cost of Sales
COS was $8.2 billion in the first quarter of 2020, down from $9.1 billion in the
first quarter of 2019, primarily due to lower feedstock and other raw material
costs and decreased sales volume. COS as a percentage of net sales in the first
quarter of 2020 was 84.2 percent (83.3 percent in the first quarter of 2019).
Research and Development Expenses
R&D expenses totaled $179 million in the first quarter of 2020, compared with
$190 million in the first quarter of 2019. R&D expenses decreased primarily due
to the impact of stock market declines on certain fringe benefits as well as
cost reductions.
Selling, General and Administrative Expenses
SG&A expenses were $334 million in the first quarter of 2020, down from $448
million in the first quarter of 2019. SG&A expenses decreased primarily due to
the impact of stock market declines on certain fringe benefits, cost reductions
and stranded cost removal. SG&A expenses were also favorably impacted in the
first quarter of 2020 by the reversal of a bad debt reserve related to an
arbitration judgment.
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Amortization of Intangibles
Amortization of intangibles was $100 million in the first quarter of 2020, down
from $116 million in the first quarter of 2019. See Note 10 to the Consolidated
Financial Statements for additional information on intangible assets.
Restructuring and Asset Related Charges - Net
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
was designed to integrate and optimize the organization following the Merger and
in preparation for the business separations. The restructuring charges below
reflect charges from continuing operations.
For the three months ended March 31, 2020 , the Company recorded pretax
restructuring charges of $90 million for severance and related benefit costs,
related to the Corporate segment. These are the final charges related to the
Synergy Program. For the three months ended March 31, 2019 , the Company recorded
pretax restructuring charges of $144 million , consisting of severance and
related benefit costs of $52 million , asset write-downs and write-offs of $76
million and costs associated with exit and disposal activities of $16 million .
The Company expects cash expenditures related to the Synergy Program to be
substantially complete by the end of 2020.
Asset Related Charges
The Company recognized an additional pretax impairment charge of $6 million for
the three months ended March 31, 2020 , related to capital additions made to a
biopolymers manufacturing facility in Santa Vitoria , Minas Gerais, Brazil , which
was impaired in 2017 (charge of $12 million for the three months ended March 31,
2019 ). The impairment charge was related to the Packaging & Specialty Plastics
segment. See Note 5 to the Consolidated Financial Statements for details on the
Company's restructuring and asset related charges, including charges by segment.
Integration and Separation Costs
Integration and separation costs, which reflect costs related to business
separation activities, were $65 million in the first quarter of 2020, down from
$452 million in the first quarter of 2019. Further decreases in integration and
separation costs are expected as business separation activities wind down.
Integration and separation costs are related to the Corporate segment.
Equity in Losses of Nonconsolidated Affiliates
The Company's share of the equity in losses of nonconsolidated affiliates was a
loss of $89 million in the first quarter of 2020, compared with a loss of
$14 million in the first quarter of 2019, primarily due to lower equity earnings
from the Kuwait joint ventures (due to lower monoethylene glycol prices) and
lower equity earnings from the Thai joint ventures. See Note 9 to the
Consolidated Financial Statements for additional information.
Sundry Income (Expense) - Net
Sundry income (expense) - net includes a variety of income and expense items
such as foreign currency exchange gains and losses, dividends from investments,
gains and losses on sales of investments and assets, non-operating pension and
other postretirement benefit plan credits or costs, and certain litigation
matters.
For the three months ended March 31, 2020 , "Sundry income (expense) - net" was
expense of $81 million for Dow Inc. and expense of $82 million for TDCC compared
with income of $69 million for the three months ended March 31, 2019 . "Sundry
income (expense) - net" decreased primarily due to an $86 million loss on the
early extinguishment of debt (related to the Corporate segment) and foreign
currency exchange losses for the three months ended March 31, 2020 compared with
foreign currency exchange gains for the three months ended March 31, 2019 , as
well as a decrease in non-operating pension and postretirement benefit plan
credits. See Notes 11, 16 and 22 to the Consolidated Financial Statements for
additional information.
Interest Expense and Amortization of Debt Discount
Interest expense and amortization of debt discount was
Provision for Income Taxes The Company's effective tax rate fluctuates based on, among other factors, where income is earned, the level of income relative to tax attributes and the level of equity earnings, since most earnings from the Company's equity method investments are taxed at the joint venture level. The effective tax rate for the first quarter of 2020 for bothDow Inc. and TDCC was 34.8 percent, compared with 47.5 percent for the first quarter of 2019. The tax rate in the first quarter of 2020 was unfavorably impacted by geographic mix of earnings, equity losses and non-deductible restructuring costs. The tax rate in the first quarter of 2019 was unfavorably impacted by non-deductible restructuring costs and tax impacts related to spin preparation activities and favorably 53 -------------------------------------------------------------------------------- Table of Contents impacted by tax benefits related to the issuance of stock-based compensation and deferred tax remeasurement in foreign jurisdictions. Income from Discontinued Operations, Net of Tax Income from discontinued operations, net of tax was$445 million in the first quarter of 2019, related to the distribution of AgCo and SpecCo to DowDuPont as a result of the separation. See Note 3 to the Consolidated Financial Statements for additional information. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests from continuing operations was$19 million in the first quarter of 2020, down from$32 million in the first quarter of 2019. Net income attributable to noncontrolling interests from discontinued operations was zero in the first quarter of 2020, compared with$13 million in the first quarter of 2019. Net Income Available for the Common Stockholder(s)Dow Inc. Net income available forDow Inc. common stockholders was$239 million , or$0.32 per share, in the first quarter of 2020, compared with$556 million , or$0.74 per share, in the first quarter of 2019. See Note 7 to the Consolidated Financial Statements for details onDow Inc.'s earnings per share calculations.
TDCC
Net income available for the TDCC common stockholder was$239 million in the first quarter of 2020, compared with$556 million in the first quarter of 2019. Following the separation from DowDuPont, TDCC's common shares are owned solely byDow Inc. SEGMENT RESULTS Dow's measure of profit/loss for segment reporting purposes is Operating EBIT for the three months endedMarch 31, 2020 and pro forma Operating EBIT for the three months endedMarch 31, 2019 , as this is the manner in which the Company's chief operating decision maker ("CODM") assesses performance and allocates resources. The Company defines Operating EBIT as earnings (i.e., "Income from continuing operations before income taxes") before interest, excluding the impact of significant items. The Company defines pro forma Operating EBIT as earnings (i.e., "Income from continuing operations before income taxes") before interest, plus pro forma adjustments, excluding the impact of significant items. Operating EBIT and pro forma Operating EBIT by segment include all operating items relating to the businesses; items that principally apply to Dow as a whole are assigned to Corporate. The Company also presents pro forma net sales for the three months endedMarch 31, 2019 , as it is included in management's measure of segment performance and is regularly reviewed by the CODM. Pro forma net sales includes the impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation from DowDuPont which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont. See Note 22 to the Consolidated Financial Statements for reconciliations of these measures and a summary of the pro forma adjustments impacting segment measures for the three months endedMarch 31, 2019 . PACKAGING & SPECIALTY PLASTICS Packaging & Specialty Plastics consists of two highly integrated global businesses: Hydrocarbons &Energy and Packaging and Specialty Plastics. The segment employs the industry's broadest polyolefin product portfolio, supported by the Company's proprietary catalyst and manufacturing process technologies, to work at the customer's design table throughout the value chain to deliver more reliable and durable, higher performing, and more sustainable plastics to customers in food and specialty packaging; industrial and consumer packaging; health and hygiene; caps, closures and pipe applications; consumer durables; automotive; and infrastructure. Ethylene is transferred to downstream derivative businesses at market-based prices, which are generally equivalent to prevailing market prices for large volume purchases. This segment also includes the results ofThe Kuwait Styrene Company K.S.C.C. and The SCG-Dow Group , as well as a portion of the results ofEQUATE Petrochemical Company K.S.C.C . ("EQUATE"),The Kuwait Olefins Company K.S.C.C . ("TKOC"),Map Ta Phut Olefins Company Limited and Sadara, all joint ventures of the Company. 54 -------------------------------------------------------------------------------- Table of Contents The Company is responsible for marketing a majority of Sadara products outside of theMiddle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee. Packaging & Specialty Plastics Three Months Ended In millions Mar 31, 2020 Mar 31, 2019 Net sales$ 4,609 $ 5,138 Pro forma net sales$ 5,138 Operating EBIT$ 580 Pro forma Operating EBIT$ 690 Equity earnings $ 5$ 38 Packaging & Specialty Plastics Three Months Ended Percentage change from prior year Mar 31,
2020
Change inNet Sales from Prior Period due to: Local price & product mix (9) % Currency (1) Volume - Portfolio & other - Total (10) % Change in ProForma Net Sales from Prior Period due to: 1 Local price & product mix (9) % Currency (1) Volume - Total (10) %
1. As reported net sales for the three months ended
Packaging & Specialty Plastics net sales were$4,609 million in the first quarter of 2020, down 10 percent from net sales and pro forma net sales of$5,138 million in the first quarter of 2019, with local price down 9 percent, an unfavorable currency impact of 1 percent, primarily in EMEAI, and volume flat. Local price decreased in both businesses and across all geographic regions driven by reduced polyethylene product prices and lower global energy prices. Price declines were reported in Hydrocarbons & Energy as prices for co-products are generally correlated to Brent crude oil prices, which, on average, declined by approximately 20 percent compared with the first quarter of 2019. Volume decreased in Hydrocarbons & Energy, primarily inLatin America and EMEAI, due to lower ethylene sales from increased internal derivative consumption. Volume increased in Packaging and Specialty Plastics inAsia Pacific , in spite of lower activity and demand inChina due to the onset of the COVID-19 pandemic, andLatin America , more than offsetting declines inU.S. &Canada and EMEAI. Packaging and Specialty Plastics volume growth was driven by strong end-market growth in health and hygiene, rigid packaging and flexible food and specialty packaging applications. Operating EBIT was$580 million in the first quarter of 2020, down 16 percent from pro forma Operating EBIT of$690 million in the first quarter of 2019. Operating EBIT decreased primarily due to lower polyethylene margins and reduced equity earnings, which more than offset volume gains in packaging applications. 55 -------------------------------------------------------------------------------- Table of Contents INDUSTRIAL INTERMEDIATES & INFRASTRUCTURE Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & Construction Chemicals - that develop important intermediate chemicals that are essential to manufacturing processes, as well as downstream, customized materials and formulations that use advanced development technologies. These businesses primarily produce and market ethylene oxide and propylene oxide derivatives that are aligned to market segments as diverse as appliances, coatings, infrastructure and oil and gas. The global scale and reach of these businesses, world-class technology and R&D capabilities and materials science expertise enable the Company to be a premier solutions provider, offering customers value-add sustainable solutions to enhance comfort, energy efficiency, product effectiveness and durability across a wide range of home comfort and appliances, building and construction, adhesives and lubricant applications, among others. This segment also includes a portion of the results of EQUATE, TKOC,Map Ta Phut Olefins Company Limited and Sadara, all joint ventures of the Company. The Company is responsible for marketing a majority of Sadara products outside of theMiddle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee. Industrial Intermediates & Infrastructure Three Months Ended In millions Mar 31, 2020 Mar 31, 2019 Net sales$ 3,045 $ 3,480 Pro forma net sales$ 3,489 Operating EBIT$ 175 Pro forma Operating EBIT$ 277 Equity losses$ (76) $ (48) Industrial Intermediates & Infrastructure Three Months Ended Percentage change from prior year Mar 31,
2020
Change inNet Sales from Prior Period due to: Local price & product mix (9) % Currency (1) Volume (3) Portfolio & other - Total (13) % Change in ProForma Net Sales from Prior Period due to: 1 Local price & product mix (9) % Currency (1) Volume (3) Total (13) %
1. As reported net sales for the three months ended
Industrial Intermediates & Infrastructure net sales were$3,045 million in the first quarter of 2020, down 13 percent from$3,480 million in the first quarter of 2019. Net sales decreased 13 percent compared with pro forma net sales of$3,489 million in the same quarter last year, driven by local price declines of 9 percent, volume down 3 percent and an unfavorable currency impact of 1 percent. Local price decreased in both businesses and all geographic regions. The decrease in local price was primarily driven by lower feedstock and other raw material costs. Volume decreased in Polyurethanes & Construction Chemicals in all geographic regions except EMEAI, which increased slightly, and was attributable to weaker demand in furniture and bedding as well as automotive and aircraft deicing applications. The most significant volume decline was inAsia Pacific , particularly inChina , primarily due to the impact of the onset of the COVID-19 pandemic. Volume increased in Industrial Solutions in all geographic regions except EMEAI, which decreased slightly. The overall increase in volume was attributable to stronger demand in surfactants and solvents used in cleaning applications, partially offset by weaker demand in oil and gas applications. 56 -------------------------------------------------------------------------------- Table of Contents Operating EBIT was$175 million in the first quarter of 2020, down 37 percent from pro forma Operating EBIT of$277 million in the first quarter of 2019. Operating EBIT decreased as a result of margin compression in polyurethanes applications, lower equity earnings from theKuwait joint ventures and softer demand, which was partially offset by lower planned maintenance turnaround costs. PERFORMANCE MATERIALS & COATINGS Performance Materials & Coatings includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. These businesses primarily utilize the Company's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of the architectural and industrial coatings, home care and personal care end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to combine chemistry platforms to deliver differentiated offerings to customers. Performance Materials & Coatings Three Months Ended In millions Mar 31, 2020 Mar 31, 2019 Net sales$ 2,065 $ 2,282 Pro forma net sales$ 2,320 Operating EBIT$ 162 Pro forma Operating EBIT$ 271 Equity earnings $ 1 $ - Performance Materials & Coatings Three Months Ended Percentage change from prior year Mar 31,
2020
Change inNet Sales from Prior Period due to: Local price & product mix (8) % Currency (1) Volume (4) Portfolio & other 3 Total (10) % Change in ProForma Net Sales from Prior Period due to: 1 Local price & product mix (7) % Currency (1) Volume (3) Total (11) %
1. As reported net sales for the three months ended
Performance Materials & Coatings net sales were$2,065 million in the first quarter of 2020, down 10 percent from net sales of$2,282 million in the first quarter of 2019. Net sales decreased 11 percent compared with pro forma net sales of$2,320 million in the same quarter last year, with local price down 7 percent, volume down 3 percent and an unfavorable currency impact of 1 percent. Local price decreased in both businesses and all geographic regions. Consumer Solutions local price declined primarily due to lower pricing in upstream siloxanes across all geographic regions due to additional industry supply. Local price decreased in Coatings & Performance Monomers in response to lower feedstock and other raw material costs. Volume declines in EMEAI andAsia Pacific , which reflected the impact from the onset of the COVID-19 pandemic, were partially offset by growth inU.S. &Canada andLatin America . Consumer Solutions volume decreased due to lower demand inAsia Pacific and EMEAI, partially offset by demand growth in upstream siloxanes and home and personal care end-markets inU.S &Canada andLatin America . Coatings & Performance Monomers volume increased driven by higher merchant sales of acrylates and methacrylates as well as strong demand for industrial coatings applications, primarily inU.S. &Canada .
Operating EBIT was
57
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Table of Contents
CORPORATE
Corporate includes certain enterprise and governance activities (including
insurance operations, environmental operations, etc.); non-business aligned
joint ventures; non-business aligned litigation expenses; and discontinued or
non-aligned businesses.
Corporate Three Months Ended
In millions Mar 31, 2020 Mar 31, 2019
Net sales $ 51 $ 69
Pro forma net sales $ 69
Operating EBIT $ (74)
Pro forma Operating EBIT $ (95)
Equity losses $ (19) $ (4) Net sales for Corporate, which primarily relate to the Company's insurance
operations, were
Operating EBIT was a loss of$74 million in the first quarter of 2020, compared with a pro forma Operating EBIT loss of$95 million in the first quarter of 2019. Operating EBIT improved primarily due to cost reductions and stranded cost removal throughout 2019. CHANGES IN FINANCIAL CONDITION The Company had cash and cash equivalents of$3,633 million atMarch 31, 2020 and$2,367 million atDecember 31, 2019 , of which$1,603 million atMarch 31, 2020 and$986 million atDecember 31, 2019 was held by subsidiaries in foreign countries, includingUnited States territories. For each of its foreign subsidiaries, Dow makes an assertion regarding the amount of earnings intended for permanent reinvestment, with the balance available to be repatriated tothe United States . The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries' operational activities and future foreign investments. Dow has the ability to repatriate additional funds to theU.S. , which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/orU.S. state income taxes and the impact of foreign currency movements. During 2020, Dow has repatriated and expects to continue repatriating certain funds from its non-U.S. subsidiaries that are not needed to finance local operations or separation activities; however, these particular repatriation activities have not and are not expected to result in a significant incremental tax liability to the Company. 58 -------------------------------------------------------------------------------- Table of Contents The Company's cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized in the following table: Cash Flow Summary Dow Inc. TDCC Three Months Three Months Ended Ended In millions Mar 31, 2020 Mar 31, 2019 Mar 31, 2020 Mar 31, 2019 Cash provided by (used for): Operating activities - continuing operations$ 1,236 $ 1,043 $ 1,239 $ 1,043 Operating activities - discontinued operations 3 338 - 338 Operating activities 1,239 1,381 1,239 1,381 Investing activities - continuing operations (153) (464) (153) (464) Investing activities - discontinued operations - (34) - (34) Investing activities (153) (498) (153) (498) Financing activities - continuing operations 265 (615) 265 (615) Financing activities - discontinued operations - (18) - (18) Financing activities 265 (633) 265 (633) Effect of exchange rate changes on cash, cash equivalents and restricted cash (86) 30 (86) 30 Cash reclassified as held for sale - (97) - (97)
Summary
Increase in cash, cash equivalents and restricted cash 1,265
183 1,265 183 Cash, cash equivalents and restricted cash at beginning of period
2,380 2,764 2,380 2,764 Cash, cash equivalents and restricted cash at end of period
$ 3,645 $
2,947
12 43 12 43
Cash and cash equivalents at end of period $ 3,633 $
2,904
Cash Flows from Operating Activities Cash provided by operating activities from continuing operations increased in the first three months of 2020 compared with the first three months of 2019. The improvement was primarily due to an increase in cash earnings, a decrease in performance-based compensation payments and severance payments, a cash receipt for the refund of withholding tax related to the Nova ethylene asset matter and improvements in working capital, which were partially offset by a decrease in dividends received from nonconsolidated affiliates and the absence of advance payments from customers received in the first three months of 2019. Net Working Capital Dow Inc. TDCC In millions Mar 31, 2020 Mar 31, 2019 Mar 31, 2020 Mar 31, 2019 Current assets$ 18,138 $ 19,651 $ 18,059 $ 19,651 Current liabilities 11,121 12,737 10,624 12,737 Net working capital$ 7,017 $ 6,914 $ 7,435 $ 6,914 Current ratio 1.63:1 1.54:1 1.70:1 1.54:1 Working Capital Metrics Three Months Ended Mar 31, 2020 Mar 31, 2019 Days sales outstanding in receivables 1 45 47 Days sales in inventory 69 68 Days payables outstanding 2 63 66 1. The decrease in days sales outstanding in receivables was primarily due to a decrease in average accounts receivable, which more than offset a decrease in net sales. 2. The decrease in days payables outstanding was primarily due to a decrease in average accounts payable, which more than offset a decrease in COS. 59 -------------------------------------------------------------------------------- Table of Contents Cash provided by operating activities from discontinued operations decreased in the first three months of 2020 compared with the first three months of 2019 due to the separation of AgCo and SpecCo onApril 1, 2019 . See Note 3 to the Consolidated Financial Statements for additional information. Cash Flows from Investing Activities Cash used for investing activities from continuing operations in the first three months of 2020 was primarily for capital expenditures, purchases of investments and investments in and loans to nonconsolidated affiliates (related to Sadara), which were partially offset by proceeds from sales and maturities of investments, and included partial monetization of the Company's investment in company-owned life insurance policies. Cash used for investing activities from continuing operations in the first three months of 2019 was primarily for capital expenditures and purchases of investments, which were partially offset by proceeds from sales and maturities of investments. The Company's capital expenditures, including capital expenditures of consolidated variable interest entities, were$395 million in the first three months of 2020, compared with$442 million in the first three months of 2019. The Company expects full year capital spending in 2020 to be approximately$1.25 billion . The Company will adjust its spending through the year as economic conditions develop. In the first three months of 2020, the Company loaned$114 million to Sadara. The Company expects to loan Sadara up to$500 million in 2020. Due to the potential for Dow to continue providing financial support to Sadara, the Company will continue to recognize its share of equity losses reported by Sadara. Cash used in investing activities from discontinued operations in the first three months of 2019 was primarily for capital expenditures, partially offset by proceeds from the sale of property and businesses and proceeds from sales of ownership interests in nonconsolidated affiliates. Cash Flows from Financing Activities Cash provided by financing activities from continuing operations in the first three months of 2020 included proceeds from issuance of long-term debt and an increase in short-term notes payable, which were partially offset by payments on long-term debt and transaction financing, debt issuance and other costs. In addition,Dow Inc. included cash outflows for dividends paid to stockholders and purchases of treasury stock and TDCC included cash outflows for dividends paid toDow Inc. Cash used for financing activities from continuing operations in the first three months of 2019 included dividends paid to DowDuPont and payments on long-term debt. See Note 11 to the Consolidated Financial Statements for additional information related to the issuance and retirement of debt.
Cash used for financing activities from discontinued operations in the first three months of 2019 primarily related to distributions to noncontrolling interests and employee taxes paid for share-based payment arrangements.
Dow Inc. Non-GAAP Cash Flow Measures Free Cash Flow Dow defines free cash flow as cash flows from operating activities - continuing operations, less capital expenditures. Under this definition, free cash flow represents the cash generated by the Company from operations after investing in its asset base. Free cash flow, combined with cash balances and other sources of liquidity, represents the cash available to fund obligations and provide returns to shareholders. Free cash flow is an integral financial measure used in the Company's financial planning process. Operating EBITDA and Pro Forma Operating EBITDA Dow defines Operating EBITDA (for the three months endedMarch 31, 2020 ) as earnings (i.e., "Income from continuing operations before income taxes") before interest, depreciation and amortization, excluding the impact of significant items. Pro forma Operating EBITDA (for the three months endedMarch 31, 2019 ) is defined as earnings (i.e., "Income from continuing operations before income taxes") before interest, depreciation and amortization, plus pro forma adjustments, excluding the impact of significant items. Cash Flow Conversion (Operating EBITDA or Pro Forma Operating EBITDA to Cash Flow From Operations) Dow defines cash flow conversion (Operating EBITDA or pro forma Operating EBITDA to cash flow from operations) as cash flows from operating activities - continuing operations, divided by Operating EBITDA or pro forma Operating EBITDA. Management believes cash flow conversion is an important financial metric as it helps the Company determine how efficiently it is converting its earnings to cash flow. 60 -------------------------------------------------------------------------------- Table of Contents These financial measures are not recognized in accordance withU.S. GAAP and should not be viewed as alternatives toU.S. GAAP financial measures of performance. All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, Dow's definitions may not be consistent with the methodologies used by other companies. Reconciliation of Free Cash Flow
Three Months Ended
In millions Mar 31, 2020 Mar 31, 2019 Cash provided by operating activities - continuing operations (GAAP)$ 1,236 $ 1,043 Capital expenditures (395) (442) Free cash flow (Non-GAAP)$ 841 $ 601
Reconciliation of Cash Flow Conversion (Operating EBITDA or Pro Forma Operating
Three Months Ended
EBITDA to Cash Flow From Operations)
In millions Mar 31, 2020 Mar 31, 2019 1
Income from continuing operations, net of tax (GAAP) $ 258 $ 156
+ Provision for income taxes on continuing operations 138 141
Income from continuing operations before income taxes $ 396 $ 297
- Interest income 15 18
+ Interest expense and amortization of debt discount 215 241
+ Pro forma adjustments ² - 65
- Significant items ³ (247) (558)
Operating EBIT (Non-GAAP) $ 843 $ 1,143
+ Depreciation and amortization 724 743
Operating EBITDA (Non-GAAP) $ 1,567 $ 1,886
Cash flows from operating activities - continuing operations (GAAP) $ 1,236 $ 1,043
Cash flow conversion (Operating EBITDA or pro forma Operating EBITDA to
cash flow from operations) (Non-GAAP) 78.9 % 55.3 %
1. Operating EBIT, depreciation and amortization and Operating EBITDA for the three months endedMarch 31, 2019 are presented on a pro forma basis. 2. Pro forma adjustments for the three months endedMarch 31, 2019 include: (1) the margin impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont and (2) the elimination of the impact of events directly attributable to the Merger, internal reorganization and business realignment, separation, distribution and other related transactions (e.g., one-time transaction costs). 3. Includes integration and separation costs, restructuring and asset related charges - net and loss on early extinguishment of debt. See Note 22 to the Consolidated Financial Statements for additional information. Liquidity & Financial Flexibility The Company's primary source of incremental liquidity is cash flows from operating activities. The generation of cash from operations and the Company's ability to access capital markets is expected to meet the Company's cash requirements for working capital, capital expenditures, debt maturities, contributions to pension plans, dividend distributions to stockholders, share repurchases and other needs. In addition to cash from operating activities, the Company's current liquidity sources also include TDCC'sU.S. and Euromarket commercial paper programs, committed and uncommitted credit facilities, a committed accounts receivable facility, aU.S. retail note program ("InterNotes®") and other debt markets. The Company started 2020 with significant committed and available liquidity facilities. As markets became more volatile and uncertain during the first quarter of 2020, the Company took proactive measures to further bolster liquidity by drawing down certain uncommitted credit facilities and partially monetizing investments in Company-owned life insurance policies. AtMarch 31, 2020 , the Company had more than$8 billion of committed and available forms of liquidity and$3.6 billion in cash and cash equivalents. The Company has no substantive long-term debt maturities until the second half of 2023. Additional details on sources of liquidity are as follows: Commercial Paper TDCC issues promissory notes under itsU.S. and Euromarket commercial paper programs. TDCC had$250 million of commercial paper outstanding atMarch 31, 2020 ($151 million atDecember 31, 2019 ). TDCC maintains access to the commercial paper market at competitive rates. Amounts outstanding under TDCC's commercial paper programs during the period may be greater, or less than, the amount reported at the end of the period. Subsequent toMarch 31, 2020 , TDCC issued approximately$430 million of commercial paper. 61 -------------------------------------------------------------------------------- Table of Contents Committed Credit Facilities The Company also has the ability to access liquidity through TDCC's committed and available credit facilities. AtMarch 31, 2020 , TDCC had total committed credit facilities of$8.8 billion and available credit facilities of$7.5 billion . In the first quarter of 2020, Dow Silicones voluntarily repaid$750 million of principal under a certain third party credit agreement. See Note 11 to the Consolidated Financial Statements for additional information on committed and available credit facilities. Committed Accounts Receivable Facility In addition to the above committed credit facilities, the Company maintains a committed accounts receivable facility inNorth America where eligible trade accounts receivable, up to$900 million , may be sold at any point in time. For additional information, see Note 15 to the Consolidated Financial Statements included in the combinedDow Inc. and TDCC Annual Report on Form 10-K for the year endedDecember 31, 2019 .Company-Owned Life Insurance The Company has investments in company-owned life insurance ("COLI") policies, which are recorded at their cash surrender value as of each balance sheet date. The Company has the ability to monetize its investment in its COLI policies as an additional source of liquidity. AtMarch 31, 2020 , the Company had monetized$287 million of its existing COLI policies' value ($85 million atDecember 31, 2019 ). See Note 6 to the Consolidated Financial Statements for additional information. Uncommitted Credit Facilities Dow has entered into various uncommitted bilateral credit arrangements as a potential source of excess liquidity. The Company has proactively drawn$800 million against these facilities atMarch 31, 2020 . These lines can be used to support short-term liquidity needs and for general purposes, including letters of credit. See Note 11 to the Consolidated Financial Statements for additional information.
Debt
As the Company continues to maintain its strong balance sheet and financial flexibility, management is focused on net debt (a non-GAAP financial measure), as the Company believes this is the best representation of its financial leverage at this point in time. As shown in the following table, net debt is equal to total gross debt minus "Cash and cash equivalents" and "Marketable securities." AtMarch 31, 2020 , net debt as a percent of total capitalization increased to 51.9 percent and 50.6 percent forDow Inc. and TDCC, respectively, compared with 50.9 percent and 49.6 percent forDow Inc. and TDCC, respectively, atDecember 31, 2019 . Total Debt Dow Inc. TDCC In millions Mar 31, 2020 Dec 31, 2019 Mar 31, 2020 Dec 31, 2019 Notes payable$ 1,490 $ 586 $ 1,490 $ 586 Long-term debt due within one year 384 435 384 435 Long-term debt 16,313 15,975 16,313 15,975 Gross debt$ 18,187 $ 16,996 $ 18,187 $ 16,996 - Cash and cash equivalents 3,633 2,367 3,633 2,367 - Marketable securities 1 21 1 21 Net debt$ 14,553 $ 14,608 $ 14,553 $ 14,608 Total equity$ 13,461 $ 14,094 $ 14,228 $ 14,862 Gross debt as a percent of total capitalization 57.5 % 54.7 % 56.1 % 53.3 % Net debt as a percent of total capitalization 51.9 %
50.9 % 50.6 % 49.6 %
InFebruary 2020 , the Company issued €2.25 billion aggregate principal amount of notes ("Euro Notes"). The Euro Notes include €1 billion aggregate principal amount of 0.50 percent notes due 2027, €750 million aggregate principal amount of 1.125 percent notes due 2032 and €500 million aggregate principal amount of 1.875 percent notes due 2040. The Euro Notes have a weighted average coupon rate of approximately 1.0 percent. In addition, the Company redeemed$1.25 billion of 3.0 percent notes issued by the Company with maturity in 2022. The Company may at any time repurchase certain debt securities in the open market or in privately negotiated transactions subject to: the applicable terms under which any such debt securities were issued, certain internal approvals of the Company, and applicable laws and regulations of the relevant jurisdiction in which any such potential transactions might take place. This in no way obligates the Company to make any such repurchases nor should it be considered an offer to do so. 62 -------------------------------------------------------------------------------- Table of Contents TDCC's public debt instruments and primary, private credit agreements contain, among other provisions, certain customary restrictive covenant and default provisions. TDCC's most significant debt covenant with regard to its financial position is the obligation to maintain the ratio of its consolidated indebtedness to consolidated capitalization at no greater than 0.65 to 1.00 at any time the aggregate outstanding amount of loans under the Five Year Competitive Advance and Revolving Credit Facility Agreement ("Revolving Credit Agreement") equals or exceeds$500 million . The ratio of TDCC's consolidated indebtedness to consolidated capitalization as defined in the Revolving Credit Agreement was 0.54 to 1.00 atMarch 31, 2020 . Management believes TDCC was in compliance with all of its covenants and default provisions atMarch 31, 2020 . For information on TDCC's debt covenants and default provisions, see Note 16 to the Consolidated Financial Statements included in the combinedDow Inc. and TDCC Annual Report on Form 10-K for the year endedDecember 31, 2019 . There were no material changes to the debt covenants and default provisions related to TDCC's outstanding long-term debt and primary, private credit agreements in the first three months of 2020.
While taking into consideration the current economic environment, management expects that the Company will continue to have sufficient liquidity and financial flexibility to meet all of its business obligations.
Credit Ratings AtApril 30, 2020 , TDCC's credit ratings were as follows: Credit Ratings Long-Term Rating Short-Term Rating Outlook Standard & Poor's BBB- A-3 Stable Moody's Investors Service Baa2 P-2 Stable Fitch Ratings BBB+ F2 Negative OnApril 9, 2020 , S&P announced a credit rating change for Dow from BBB and A-2 to BBB- and A-3, maintaining stable outlook. The decision was made as part of S&P's broader review of the chemicals sector, in light of the global impact of COVID-19 and lower oil prices. OnApril 13, 2020 , Fitch re-affirmed Dow's BBB+ and F2 rating, and revised its outlook to negative from stable. The decision was made as part of Fitch's annual review process.
Downgrades in TDCC's credit ratings will increase borrowing costs on certain indentures and could impact its ability to access debt capital markets.
Dividends
Dow Inc. OnFebruary 13, 2020 ,Dow Inc. announced that its Board declared a dividend of$0.70 per share, paid onMarch 13, 2020 , to shareholders of record onFebruary 28, 2020 . OnApril 9, 2020 ,Dow Inc. announced that its Board declared a dividend of$0.70 per share, payable onJune 12, 2020 , to shareholders of record as ofMay 29, 2020 .
TDCC
Effective with the separation from DowDuPont onApril 1, 2019 , TDCC became a wholly owned subsidiary ofDow Inc. TDCC has committed to fundDow Inc.'s dividends paid to common stockholders and share repurchases, as approved byDow Inc.'s Board from time to time, as well as certain governance expenses. Funding is accomplished through intercompany loans. TDCC's Board of Directors reviews and determines a dividend distribution toDow Inc. to settle the intercompany loans. For the three months endedMarch 31, 2020 , TDCC declared and paid a dividend toDow Inc. of$643 million . AtMarch 31, 2020 , TDCC's intercompany loan balance withDow Inc. was insignificant. See Note 21 to the Consolidated Financial Statements for additional information. Share Repurchase Program OnApril 1, 2019 ,Dow Inc.'s Board of Directors ratified the share repurchase program originally approved onMarch 15, 2019 , authorizing up to$3.0 billion to be spent on the repurchase of the Company's common stock, with no expiration date. In the first quarter of 2020,Dow Inc. repurchased$125 million of the Company's common stock. AtMarch 31, 2020 , approximately$2.4 billion of the share repurchase program authorization remained available for repurchases. At this time,Dow Inc. does not expect to repurchase additional shares in 2020, but will continue to evaluate economic conditions. Pension Plans The Company has both funded and unfunded defined benefit pension plans that cover employees inthe United States and a number of other countries. The Company's funding policy is to contribute to funded plans when pension laws and/or economics either require or encourage funding. The Company expects to contribute approximately$290 million to its pension plans in 2020, of which$63 million has been contributed throughMarch 31, 2020 . See Note 16 to the Consolidated Financial 63 -------------------------------------------------------------------------------- Table of Contents Statements and Note 21 to the Consolidated Financial Statements included in the combinedDow Inc. and TDCC Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional information concerning the Company's pension plans.
Restructuring
The activities related to the Synergy Program are expected to result in additional cash expenditures of approximately$120 million , primarily through the end of 2020, consisting of severance and related benefit costs and costs associated with exit and disposal activities, including environmental remediation (see Note 5 to the Consolidated Financial Statements). 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. Integration and Separation Costs Integration and separation costs related to business separation activities are expected to result in additional cash expenditures of approximately$130 million to$190 million through the end of 2020. Contractual Obligations Information related to the Company's contractual obligations, commercial commitments and expected cash requirements for interest can be found in Notes 16, 17, 18 and 21 to the Consolidated Financial Statements included in the combinedDow Inc. and TDCC Annual Report on Form 10-K for the year endedDecember 31, 2019 . With the exception of the items noted below, there have been no material changes in the Company's contractual obligations sinceDecember 31, 2019 . Contractual Obligations at Mar 31, 2020 Payments Due In In millions 2020 2021-2022
2023-2024 2025 and beyond Total
Long-term debt obligations 1$ 359 $ 716 $
3,197
Expected cash requirements for interest 2$ 571 $ 1,442 $ 1,326 $ 7,736 $ 11,075 Operating leases 3$ 338 $ 758 $ 499 $ 806$ 2,401 1.Excludes unamortized debt discount and issuance costs of$355 million . Includes finance lease obligations of$418 million . Assumes the option to extend will be exercised for the$1.25 billion Dow Silicones Term Loan Facility. 2.Cash requirements for interest on long-term debt was calculated using current interest rates and exchange rates atMarch 31, 2020 , and includes$1,579 million of various floating rate notes. 3.Includes imputed interest of$395 million . Off-Balance Sheet Arrangements Off-balance sheet arrangements are obligations the Company has with nonconsolidated entities related to transactions, agreements or other contractual arrangements. The Company holds variable interests in joint ventures accounted for under the equity method of accounting. The Company is not the primary beneficiary of these joint ventures and therefore is not required to consolidate these entities (see Note 20 to the Consolidated Financial Statements).
Guarantees arise during the ordinary course of business from relationships with
customers, committed accounts receivable facilities and nonconsolidated
affiliates when the Company undertakes an obligation to guarantee the
performance of others if specific triggering events occur. The Company had
outstanding guarantees at
Fair Value Measurements See Note 19 to the Consolidated Financial Statements for additional information concerning fair value measurements. OTHER MATTERS Recent Accounting Guidance See Note 2 to the Consolidated Financial Statements for a summary of recent accounting guidance. Critical Accounting Estimates The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP") requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements included in the combinedDow Inc. and TDCC Annual Report on Form 10-K for the year endedDecember 31, 2019 64 -------------------------------------------------------------------------------- Table of Contents ("2019 10-K") describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The Company's accounting policies that are impacted by judgments, assumptions and estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2019 10-K. Since December 31, 2019, there have been no material changes in the Company's accounting policies that are impacted by judgments, assumptions and estimates. Asbestos-Related Matters ofUnion Carbide Corporation Union Carbide Corporation ("Union Carbide") is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide's premises, and Union Carbide's responsibility for asbestos suits filed against a former Union Carbide subsidiary,Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide's products. The table below provides information regarding asbestos-related claims pending against Union Carbide and Amchem based on criteria developed by Union Carbide and its external consultants: Asbestos-Related Claim Activity 2020 2019 Claims unresolved at Jan 1 11,117 12,780 Claims filed 1,296 1,383 Claims settled, dismissed or otherwise resolved (1,269)
(1,569)
Claims unresolved atMar 31 11,144
12,594
Claimants with claims against both Union Carbide and Amchem (3,809) (4,509)
Individual claimants at
7,335 8,085
Plaintiffs' lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous claimants. As a result, the damages alleged are not expressly identified as to Union Carbide, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only Union Carbide and/or Amchem are the sole named defendants. For these reasons and based upon Union Carbide's litigation and settlement experience, Union Carbide does not consider the damages alleged against Union Carbide and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.
For additional information, see Asbestos-Related Matters of
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