Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.48M
2: EX-23 Ankura Consulting Group, LLC's Consent HTML 34K
3: EX-31.1 Certification Pursuant to Section 302 of the HTML 35K
Sarbanes-Oxley Act of 2002
4: EX-31.2 Certification Pursuant to Section 302 of the HTML 35K
Sarbanes-Oxley Act of 2002
5: EX-32.1 Certification Pursuant to Section 906 of the HTML 31K
Sarbanes-Oxley Act of 2002
6: EX-32.2 Certification Pursuant to Section 906 of the HTML 31K
Sarbanes-Oxley Act of 2002
13: R1 Cover Page HTML 110K
14: R2 Dow Consolidated Statements of Income Statement HTML 105K
15: R3 Dow Consolidated Statements of Comprehensive HTML 66K
Income Statement
16: R4 Dow Consolidated Balance Sheets Statement HTML 154K
17: R5 Dow Consolidated Balance Sheets Parentheticals HTML 59K
18: R6 Dow Consolidated Statements of Cash Flows HTML 125K
Statement
19: R7 Dow Consolidated Statements of Equity Statement HTML 78K
20: R8 Consolidated Statements of Income HTML 92K
21: R9 Consolidated Statements of Comprehensive Income HTML 69K
22: R10 TDCC Consolidated Balance Sheets (Statement) HTML 168K
23: R11 TDCC Consolidated Statements of Cash Flows HTML 131K
Statement
24: R12 Consolidated Statements of Equity HTML 73K
25: R13 Dow Consolidated Statements of Income - HTML 34K
Supplemental Info
26: R14 TDCC Consolidated Statements of Income - HTML 34K
Supplemental Info
27: R15 TDCC Consolidated Balance Sheets Parentheticals HTML 56K
28: R16 Consolidated Financial Statements (Notes) HTML 34K
29: R17 Recent Accounting Guidance (Notes) HTML 39K
30: R18 SEPARATION FROM DOWDUPONT Separation from HTML 34K
DowDuPont (Notes)
31: R19 Revenue (Notes) HTML 79K
32: R20 Restructuring and Asset Related Charges - Net HTML 75K
(Notes)
33: R21 Supplementary Information (Notes) HTML 56K
34: R22 Earnings Per Share (Notes) HTML 54K
35: R23 Inventories (Notes) HTML 41K
36: R24 Nonconsolidated Affiliates (Notes) HTML 40K
37: R25 Goodwill and Other Intangible Assets (Notes) HTML 74K
38: R26 Notes Payable, Long-Term Debt and Available Credit HTML 101K
Facilities (Notes)
39: R27 Commitments and Contingent Liabilities (Notes) HTML 52K
40: R28 Leases (Notes) HTML 102K
41: R29 Accumulated Other Comprehensive Loss (Notes) HTML 85K
42: R30 NONCONTROLLING INTERESTS Noncontrolling Interests HTML 44K
43: R31 Pension Plans and Other Postretirement Benefits HTML 56K
44: R32 Stock-Based Compensation HTML 34K
45: R33 Financial Instruments (Notes) HTML 294K
46: R34 Fair Value Measurements (Notes) HTML 102K
47: R35 Variable Interest Entities (Notes) HTML 53K
48: R36 Relatd Party Transactions (Notes) HTML 34K
49: R37 Segments and Geographic Regions (Notes) HTML 104K
50: R38 Revenue (Tables) HTML 73K
51: R39 Restructuring and Related Activities (Tables) HTML 70K
52: R40 Supplementary Information (Tables) HTML 64K
53: R41 Earnings Per Share (Tables) HTML 53K
54: R42 Inventories (Tables) HTML 42K
55: R43 Nonconsolidated Affiliates (Tables) HTML 37K
56: R44 Goodwill and Other Intangible Assets (Tables) HTML 80K
57: R45 Notes Payable, Long-Term Debt and Available Credit HTML 106K
Facilities (Tables)
58: R46 Commitments and Contingent Liabilities (Tables) HTML 40K
59: R47 Leases (Tables) HTML 121K
60: R48 Accumulated Other Comprehensive Loss (Tables) HTML 84K
61: R49 NONCONTROLLING INTERESTS Noncontrolling Interests HTML 43K
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62: R50 Pension Plans and Other Postretirement Benefits HTML 49K
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63: R51 Financial Instruments (Tables) HTML 304K
64: R52 Fair Value Measurements (Tables) HTML 99K
65: R53 Variable Interest Entities (Tables) HTML 56K
66: R54 Segments and Geographic Regions (Tables) HTML 109K
67: R55 SEPARATION FROM DOWDUPONT Separation, Distribution HTML 39K
and Tax Agreements (Details)
68: R56 Revenue (Details) HTML 101K
69: R57 Restructuring and related activities (2020 HTML 105K
Restructuring Program) (Details)
70: R58 Restructuring and Related Activities (DowDupont HTML 36K
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71: R59 Restructuring and Related Activities (Asset HTML 34K
Related Charges) (Details)
72: R60 Summary of Sundry Income (Expense) - Net (Details) HTML 48K
73: R61 Accrued and Other Current Liabilities (Details) HTML 34K
74: R62 Company-Owned Life Insurance (Details) HTML 35K
75: R63 Earnings Per Share (Details) HTML 69K
76: R64 Inventories (Details) HTML 44K
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78: R66 GOODWILL AND OTHER INTANGIBLE ASSETS - Summary of HTML 42K
Goodwill (Details)
79: R67 GOODWILL AND OTHER INTANGIBLE ASSETS - Summary of HTML 52K
Other Intangible Assets (Details)
80: R68 GOODWILL AND OTHER INTANGIBLE ASSETS - Summary of HTML 37K
Amortization Expense (Details)
81: R69 GOODWILL AND OTHER INTANGIBLE ASSETS - Summary of HTML 43K
Future Amortization Expense (Details)
82: R70 NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT HTML 36K
FACILITIES Notes Payable (Details)
83: R71 NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT HTML 136K
FACILITIES Long-Term Debt (Details)
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FACILITIES Committed and Available Credit
Facilities (Details)
85: R73 Commitments and Contingent Liabilities HTML 34K
(Environmental Matters) (Details)
86: R74 Commitments and Contingent Liabilities HTML 36K
(Asbestos-Related Matters of Union Carbide
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87: R75 Commitments and Contingent Liabilites (Dow HTML 42K
Silicones Chapter 11 Related Matters) (Details)
88: R76 COMMITMENTS AND CONTINGENT LIABILITIES HTML 34K
Indemnifications with Corning (Details)
89: R77 Commitments and Contingent Liabilities (Nova HTML 38K
Patent Infringement Matter) (Details)
90: R78 Commitments and Contingent Liabilities Nova HTML 40K
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92: R80 Leases (Details) HTML 140K
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94: R82 NONCONTROLLING INTERESTS Noncontrolling Interests HTML 46K
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95: R83 Pension Plans and Other Postretirement Benefits HTML 75K
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96: R84 Stock-Based Compensation (Stock Incentive Plan) HTML 46K
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100: R88 Schedule of Fair Value of Derivative Instruments HTML 100K
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101: R89 Effect of Derivative Instruments (Details) HTML 79K
102: R90 Expected Reclassification (Details) HTML 45K
103: R91 Fair Value Measurements (Summary of Recurring HTML 133K
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104: R92 Schedule of Consolidated VIEs, Carrying Amounts of HTML 60K
Assets and Liabilities (Details)
105: R93 Schedule of Nonconsolidated VIEs (Details) HTML 36K
106: R94 Relatd Party Transactions (Details) HTML 32K
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Reconciliation (Details)
109: R97 SEGMENTS AND GEOGRAPHIC REGIONS Significant Items HTML 58K
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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.
☑
iYes
☐
No
The Dow Chemical Company
☑
iYes
☐
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.
☑
iYes
☐
No
The Dow Chemical Company
☑
iYes
☐
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.
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
☑
iNo
The
Dow Chemical Company
☐
Yes
☑
iNo
Dow Inc. had i746,989,442
shares of common stock, $i0.01 par value, outstanding at March 31, 2021. The Dow Chemical Company had i100 shares of common stock, $i0.01
par value, outstanding at March 31, 2021, all of which were held by the registrant’s parent, Dow Inc.
The Dow Chemical Company meets the conditions set forth in General Instruction H(1)(a) and (b) for Form 10-Q and therefore is filing this form with a reduced disclosure format.
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") due to the parent/subsidiary relationship between Dow Inc. and TDCC. The information reflected in the 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.
CAUTIONARY
STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this report are “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. Such statements often address expected future business and financial performance, financial condition, and other matters, and often contain words or phrases 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 or phrases.
Forward-looking
statements are based on current assumptions and expectations of future events that are subject to risks, uncertainties and other factors that are beyond Dow’s control, which may cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements and speak only as of the date the statements were made. These factors include, but are not limited to: sales of Dow’s products; Dow’s expenses, future revenues and profitability; the continuing global and regional economic impacts of the coronavirus disease 2019 (“COVID-19”) pandemic and other public health-related risks and events on Dow’s business; capital requirements and need for and availability of financing; size of the markets for Dow’s products and services and ability to compete in such markets; failure to develop and market new products and optimally manage product life cycles; the rate and degree of market acceptance of Dow’s products; significant litigation
and environmental matters and related contingencies and unexpected expenses; the success of competing technologies that are or may become available; the ability to protect Dow’s intellectual property in the United States and abroad; developments related to contemplated restructuring activities and proposed divestitures or acquisitions such as workforce reduction, manufacturing facility and/or asset closure and related exit and disposal activities, and the benefits and costs associated with each of the foregoing; fluctuations in energy and raw material prices; management of process safety and product stewardship; changes in relationships with Dow’s significant customers and suppliers; changes in consumer preferences and demand; changes in laws and regulations, political conditions or industry development; 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; and disruptions in Dow’s information technology networks and systems.
Risks related to Dow’s separation from DowDuPont Inc. include, but are not limited to: (i) Dow’s inability to achieve some or all of the benefits that it expects to receive from the separation from DowDuPont Inc.; (ii) certain tax risks associated with the separation; (iii) the failure of Dow’s pro forma financial information to be a reliable indicator of Dow’s future results; (iv) non-compete restrictions under the separation agreement; (v) 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 (vi) 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. A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. These are not the only risks and uncertainties that Dow faces. 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. If any of those risks or uncertainties develops into an actual event, it could have a material adverse effect on Dow’s business. Dow assumes 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.
Dow Inc. is the direct parent company of The Dow Chemical Company and its consolidated subsidiaries ("TDCC" and together with Dow Inc., "Dow" or the "Company"). 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 the combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31,
2020 ("2020 10-K").
As a result of the parent/subsidiary relationship between Dow Inc. and TDCC, and considering that the financial statements and disclosures of each company are substantially similar, the companies are filing a combined report for this Quarterly Report on Form 10-Q. The information reflected in the report is equally applicable to both Dow Inc. and TDCC, except where otherwise noted. Transactions between TDCC and Dow Inc. are treated as related party transactions for TDCC. See Note 21 for additional information.
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.
In the first quarter of 2021, the Company adopted Accounting Standards Update 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles
of Topic 740, "Income Taxes" and improve consistent application by clarifying and amending existing guidance. The adoption of this guidance did not have a material impact on the consolidated financial statements.
NOTE 3 – iSEPARATION FROM DOWDUPONT
For additional information on the separation
from DowDuPont Inc. ("DowDuPont"), see Note 3 to the Consolidated Financial Statements included in the 2020 10-K.
Agreements Related to the Separation and Distribution
Dow Inc. entered into certain agreements with DuPont de Nemours, Inc. ("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 Dow Inc.'s separation from DowDuPont, 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. At March 31, 2021, the Company had assets of $i37 million
($i77 million at December 31, 2020) included in "Other current assets" and $i31 million ($i33 million
at December 31, 2020) included in "Noncurrent receivables," and liabilities of $i214 million ($i412 million at December 31,
2020) included in "Accrued and other current liabilities" and $i38 million ($i46 million at December 31, 2020) included in "Other noncurrent obligations"
in the consolidated balance sheets of Dow Inc. related to the Agreements.
In addition, the Company deferred a portion 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. At March 31, 2021, $i78 million ($i103 million
at December 31, 2020) of this liability was recorded in "Accrued and other current liabilities" and $i96 million ($i96 million at December 31,
2020) was recorded in "Other noncurrent obligations" in the consolidated balance sheets.
NOTE 4 – iREVENUE
Revenue Recognition
The majority of Dow's revenue is derived from product sales. Dow's revenue related to product
sales was i98 percent for the three months ended March 31, 2021 (i99
percent for the three months ended March 31, 2020), 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 represent the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. At March 31, 2021, Dow had unfulfilled performance obligations of $i942 million ($i977 million
at December 31, 2020) related to the licensing of technology. Dow expects revenue to be recognized for the remaining performance obligations over the next 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 i20
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 the consolidated balance sheets.
Disaggregation of Revenue
i
Dow disaggregates its revenue from contracts with customers by operating segment and business, as the Company believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash
flows.
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 recognized in revenue
when the performance obligations are met. "Contract liabilities - current" primarily reflects deferred revenue from prepayments from customers for product to be delivered in 12 months or less and royalty payments that are deferred and will be recognized 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.
Revenue recognized in the first three months of 2021 from amounts included in contract liabilities at the beginning of the period was approximately $i40
million (approximately $i35 million in the first three months of 2020). In the first three months of 2021, the amount of contract assets reclassified to receivables as a result of the right to the transaction consideration becoming unconditional was insignificant (approximately $i10 million
in the first three months of 2020).
1.Included
in "Other current assets" in the consolidated balance sheets.
2.Included in "Deferred charges and other assets" in the consolidated balance sheets.
3.Included in "Accrued and other current liabilities" in the consolidated balance sheets.
4.Included in "Other noncurrent obligations" in the consolidated balance sheets.
/
NOTE 5 – iRESTRUCTURING
AND ASSET RELATED CHARGES - NET
Charges for restructuring programs and other asset related charges, which includes asset impairments, are recorded in "Restructuring and asset related charges - net" in the consolidated statements of income and were insignificant for the three months ended March 31, 2021 ($i96 million for the three months ended March 31, 2020). For additional
information on the Company's restructuring programs, see Note 6 to the Consolidated Financial Statements included in the 2020 10-K.
Restructuring Plans
2020 Restructuring Program
On September 29, 2020, the Board of Directors ("Board") of Dow Inc. approved restructuring actions to achieve the Company's structural cost improvement initiatives in response to the continued economic impact from the coronavirus disease 2019 ("COVID-19") pandemic. The restructuring program is designed to reduce structural costs and enable the Company to further enhance competitiveness while the COVID-19 economic recovery gains traction. This program includes a global workforce cost reduction of approximately i6
percent and actions to rationalize the Company's manufacturing assets, which include asset write-down and write-off charges, related contract termination fees and environmental remediation costs ("2020 Restructuring Program"). These actions are expected to be substantially complete by the end of 2021.
The
following table summarizes the activities related to the 2020 Restructuring Program:
2020 Restructuring Program
Severance and Related Benefit Costs
Asset Write-downs and Write-offs
Costs Associated with Exit and Disposal Activities
Total
In
millions
Packaging & Specialty Plastics
$
i—
$
i11
$
i—
$
i11
Industrial
Intermediates & Infrastructure
i—
i22
i—
i22
Performance
Materials & Coatings
i—
i117
i57
i174
Corporate
i297
i47
i24
i368
Total
restructuring charges
$
i297
$
i197
$
i81
$
i575
Charges
against the reserve
i—
(i197)
i—
(i197)
Cash
payments
(i1)
i—
i—
(i1)
Reserve
balance at Sep 30, 2020
$
i296
$
i—
$
i81
$
i377
Performance
Materials & Coatings
i—
(i1)
i4
i3
Corporate
i—
i—
(i5)
(i5)
Total
restructuring charges
$
i—
$
(i1)
$
(i1)
$
(i2)
Charges
against the reserve
i—
i1
(i5)
(i4)
Cash
payments
(i7)
i—
i—
(i7)
Reserve
balance at Dec 31, 2020
$
i289
$
i—
$
i75
$
i364
Cash
payments
(i37)
i—
(i12)
(i49)
Reserve
balance at Mar 31, 2021
$
i252
$
i—
$
i63
$
i315
/
At
March 31, 2021, $i246 million of the reserve balance was included in "Accrued and other current liabilities" ($i227 million at December 31,
2020) and $i69 million was included in "Other noncurrent obligations" ($i137 million at December 31, 2020) in the consolidated balance sheets.
The
Company recorded pretax restructuring charges of $i573 million inception-to-date under the 2020 Restructuring Program, consisting of severance and related benefit costs of $i297 million,
asset write-downs and write-offs of $i196 million and costs associated with exit and disposal activities of $i80 million.
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. For the three months ended March 31, 2020, the Company recorded pretax restructuring charges of $i90 million
for severance and related benefit costs, related to Corporate. Cash expenditures related to the Synergy Program were substantially complete at December 31, 2020.
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 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.
Asset Related Charges
For the three months ended March 31,
2020, the Company recognized a pretax impairment charge of $i6 million, related to capital additions made to a bio-ethanol manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017 and divested in 2020. The impairment charge was included in “Restructuring and asset related charges - net” in the consolidated statements of income and related to Packaging & Specialty Plastics.
The Company uses "Sundry income (expense) – net" to record 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.
Dow Inc. Sundry Income (Expense) – Net
Three Months Ended
In millions
Mar 31, 2021
Mar
31, 2020
Non-operating pension and other postretirement benefit plan net credits 1
$
i75
$
i27
Foreign
exchange losses
(i8)
(i16)
Loss
on early extinguishment of debt 2
i—
(i86)
Gains
on sales of other assets and investments
i48
i9
Other
- net
i13
(i15)
Total
sundry income (expense) – net
$
i128
$
(i81)
1.See
Note 16 for additional information.
2.See Note 11 for additional information.
TDCC Sundry Income (Expense) – Net
Three Months Ended
In millions
Mar 31, 2021
Mar 31, 2020
Non-operating
pension and other postretirement benefit plan net credits 1
$
i75
$
i27
Foreign
exchange losses
(i12)
(i17)
Loss
on early extinguishment of debt 2
i—
(i86)
Gains
on sales of other assets and investments
i48
i9
Other
- net
i8
(i15)
Total
sundry income (expense) – net
$
i119
$
(i82)
1.See
Note 16 for additional information.
2.See Note 11 for additional information.
/
Accrued and Other Current Liabilities
“Accrued and other current liabilities” were $i3,431 million and $i3,120
million at March 31, 2021 and $i3,790 million and $i3,256 million at December 31, 2020,
for Dow Inc. and TDCC, respectively. Accrued payroll, which is a component of "Accrued and other current liabilities" and includes liabilities related to payroll, performance-based compensation and severance, was $i608 million at March 31, 2021 and $i866
million at December 31, 2020. No other components of "Accrued and other current liabilities" were more than 5 percent of total current liabilities.
Other Investments
i
The Company has investments in company-owned life insurance policies, which are recorded at their cash surrender value as of each balance sheet date, as provided below:
Investments
in Company-Owned Life Insurance
Mar 31, 2021
Dec 31, 2020
In millions
Gross cash value
$
i810
$
i807
Less:
Existing drawdowns 1
i200
i—
Investments
in company-owned life insurance 2
$
i610
$
i807
1.Classified
as "Proceeds from sales and maturities of investments" in the consolidated statements of cash flows.
2.Classified as "Other investments" in the consolidated balance sheets.
The following tables provide earnings per share calculations for Dow Inc. for the three months ended March 31, 2021 and 2020. Earnings per share of TDCC is not presented as this information is not required in financial statements of wholly owned subsidiaries.
Net
Income for Earnings Per Share Calculations
Three Months Ended
In millions
Mar 31, 2021
Mar 31, 2020
Net income
$
i1,006
$
i258
Net
income attributable to noncontrolling interests
i15
i19
Net
income attributable to participating securities 1
i5
i2
Net
income attributable to common stockholders
$
i986
$
i237
Earnings
Per Share - Basic and Diluted
Three Months Ended
Dollars per share
Mar 31, 2021
Mar 31, 2020
Earnings per common share - basic
$
i1.32
$
i0.32
Earnings
per common share - diluted
$
i1.32
$
i0.32
Share
Count Information
Three Months Ended
Shares in millions
Mar 31, 2021
Mar 31, 2020
Weighted-average common shares outstanding - basic
i744.8
i740.2
Plus
dilutive effect of equity compensation plans
i5.0
i1.8
Weighted-average
common shares outstanding - diluted
i749.8
i742.0
Stock
options and restricted stock units excluded from EPS calculations 2
i5.9
i15.5
1.Restricted
stock units are considered participating securities due to the Company's practice of paying dividend equivalents on unvested shares.
2.These outstanding options to purchase shares of common stock and restricted stock units were excluded from the calculation of diluted earnings per share because the effect of including them would have been antidilutive.
The following table provides a breakdown of inventories:
Inventories
Mar
31, 2021
Dec 31, 2020
In millions
Finished goods
$
i3,590
$
i3,140
Work
in process
i1,217
i996
Raw
materials
i670
i598
Supplies
i907
i933
Total
$
i6,384
$
i5,667
Adjustment
of inventories to a LIFO basis
(i227)
i34
Total inventories
$
i6,157
$
i5,701
/
NOTE
9 – iNONCONSOLIDATED AFFILIATES
For additional information on the Company’s nonconsolidated affiliates, see Note 12 to the Consolidated Financial Statements included in the 2020 10-K.
i
The
Company's investments in companies accounted for using the equity method ("nonconsolidated affiliates"), by classification in the consolidated balance sheets, are shown in the following table:
Investments in Nonconsolidated Affiliates
Mar 31, 2021
Dec 31, 2020
In millions
Investment in nonconsolidated affiliates
$
i1,620
$
i1,327
Other
noncurrent obligations
(i153)
(i169)
Net
investment in nonconsolidated affiliates
$
i1,467
$
i1,158
/
In
the first quarter of 2021, The Kuwait Styrene Company K.S.C.C. paid a dividend of $i25 million ($i42
million in the first quarter of 2020), reflected in "Earnings of nonconsolidated affiliates less than (in excess of) dividends received" in the consolidated statements of cash flows. In the first quarter of 2021, EQUATE Petrochemical Company K.S.C.C. (“EQUATE”) and The Kuwait Olefins Company K.S.C.C. paid dividends of $i79 million and $i74
million, respectively. At March 31, 2021, the Company had a negative investment balance in EQUATE of $i153 million (negative $i147 million
at December 31, 2020), classified as "Other noncurrent obligations" in the consolidated balance sheets.
At March 31, 2021, the Company had an investment balance in Sadara Chemical Company (“Sadara”) of $i306 million classified as “Investment in nonconsolidated affiliates” (negative $i22
million at December 31, 2020 classified as “Other noncurrent obligations”) in the consolidated balance sheets. In the first quarter of 2021, the Company entered into a new guarantee in conjunction with Sadara’s debt re-profiling activities. See Notes 12 and 19 for additional information on the guarantee.
Transactions with Nonconsolidated Affiliates
The Company is currently responsible for marketing the majority of Sadara products outside of the Middle East zone through the Company’s established sales channels. Under this arrangement, the Company purchases and sells Sadara products for a marketing fee. In March 2021, Dow and the Saudi Arabian Oil Company agreed to transition the marketing rights and responsibilities for Sadara’s finished products to levels more consistent with each partner’s
equity ownership. This transition will begin in mid-2021 and will be effectuated over the next five years.
NOTE 11 – iNOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
i
Notes
Payable
Mar 31, 2021
Dec 31, 2020
In millions
Notes payable to banks and other lenders
$
i152
$
i156
Period-end
average interest rates
i3.81%
i3.89%
/
i
Long-Term
Debt
2021 Average Rate
Mar 31, 2021
2020 Average Rate
Dec 31, 2020
In millions
Promissory notes and debentures:
Final maturity 2021
i8.95%
$
i173
i8.95%
$
i173
Final
maturity 2022
i8.64%
i121
i8.64%
i121
Final
maturity 2023
i7.63%
i250
i7.63%
i250
Final
maturity 2024 1
i3.43%
i1,017
i3.43%
i1,017
Final
maturity 2025
i5.13%
i625
i5.13%
i625
Final
maturity 2026
i3.63%
i750
i3.63%
i750
Final
maturity 2027 and thereafter 1
i5.34%
i10,112
i5.34%
i10,138
Other
facilities:
Foreign currency notes and loans, various rates and maturities
i1.21%
i3,018
i1.41%
i3,189
InterNotes®,
varying maturities through 2051
i3.49%
i432
i3.56%
i535
Finance
lease obligations 2
i554
i518
Unamortized
debt discount and issuance costs
(i360)
(i365)
Long-term
debt due within one year 3
(i492)
(i460)
Long-term
debt
$
i16,200
$
i16,491
1.Cost
includes net fair value hedge adjustment gains of $i43 million at March 31, 2021 ($i69 million
at December 31, 2020). See Note 18 for additional information.
2.See Note 13 for additional information.
3.Presented net of current portion of unamortized debt issuance costs.
/
i
Maturities
of Long-Term Debt for Next Five Years at Mar 31, 2021
In millions
2021
$
i476
2022
$
i187
2023
$
i340
2024
$
i1,058
2025
$
i676
2026
$
i781
/
2021
Activity
In the first three months of 2021, the Company issued an aggregate principal amount of $i29 million of InterNotes®, and redeemed an aggregate principal amount of $i13
million at maturity. In addition, the Company voluntarily repaid an aggregate principal amount of $i118 million of InterNotes® with various maturities.
On March 15, 2021, the Company announced a call for $i46
million of InterNotes® with various maturities, which settled on April 15, 2021.
In February 2020, the Company issued €i2.25
billion aggregate principal amount of notes (“Euro Notes”). The Euro Notes included €i1.0 billion aggregate principal amount of i0.50
percent notes due 2027, €i750 million aggregate principal amount of i1.125 percent notes due 2032 and €i500
million aggregate principal amount of i1.875 percent notes due 2040. The Euro Notes have a weighted average coupon rate of approximately i1.0
percent. With the net proceeds from the issuance of the Euro Notes, Dow Silicones voluntarily repaid $i750 million of principal under a certain third party credit agreement. In addition, the Company redeemed $i1.25 billion
of i3.0 percent notes issued by the Company with maturity in 2022. As a result, the Company recognized a pretax loss of $i85 million
on the early extinguishment of debt, included in “Sundry income (expense) – net” in the consolidated statements of income and related to Corporate.
In the first three months of 2020, the Company also issued an aggregate principal amount of $i37 million of InterNotes®, and redeemed an aggregate principal amount of $i62 million
at maturity. In addition, the Company voluntarily repaid an aggregate principal amount of $i200 million of InterNotes® with various maturities. As a result, the Company recognized a pretax loss on the early extinguishment of debt of $i1
million, included in “Sundry income (expense) – net” in the consolidated statements of income and related to Corporate.
Available Credit Facilities
i
The following table summarizes the Company's credit facilities:
Committed
and Available Credit Facilities at Mar 31, 2021
In millions
Committed Credit
Credit Available
Maturity Date
Interest
Five Year Competitive Advance and Revolving Credit Facility
$
i5,000
$
i5,000
October
2024
Floating rate
Bilateral Revolving Credit Facility
i200
i200
November
2021
Floating rate
Bilateral Revolving Credit Facility
i300
i300
December
2021
Floating rate
Bilateral Revolving Credit Facility
i300
i300
December
2021
Floating rate
Bilateral Revolving Credit Facility
i150
i150
March
2022
Floating rate
Bilateral Revolving Credit Facility
i100
i100
June
2022
Floating rate
Bilateral Revolving Credit Facility
i200
i200
September
2022
Floating rate
Bilateral Revolving Credit Facility
i200
i200
September
2023
Floating rate
Bilateral Revolving Credit Facility
i250
i250
September
2023
Floating rate
Bilateral Revolving Credit Facility
i300
i300
September
2023
Floating rate
Bilateral Revolving Credit Facility
i100
i100
October
2024
Floating rate
Bilateral Revolving Credit Facility
i100
i100
October
2024
Floating rate
Bilateral Revolving Credit Facility
i200
i200
November
2024
Floating rate
Bilateral Revolving Credit Facility
i100
i100
March
2025
Floating rate
Bilateral Revolving Credit Facility
i250
i250
March
2025
Floating rate
Bilateral Revolving Credit Facility
i350
i350
March
2025
Floating rate
Total committed and available credit facilities
$
i8,100
$
i8,100
/
Debt
Covenants and Default Provisions
There were no material changes to the debt covenants and default provisions related to the Company's outstanding long-term debt and primary, private credit agreements in the first three months of 2021. For additional information on the Company's debt covenants and default provisions, see Note 15 to the Consolidated Financial Statements included in the 2020 10-K.
A summary of the Company's commitments and contingent liabilities can be found in Note 16 to the Consolidated Financial Statements included in the 2020 10-K, which is incorporated by reference herein.
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. At March 31, 2021, the Company had accrued obligations of $i1,243 million
for probable environmental remediation and restoration costs, including $i249 million for the remediation of Superfund sites. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters
could range up to approximately one and a half times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Company's results of operations, financial condition and cash flows. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s results of operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. As new or additional information becomes available and/or certain spending trends become known, management will evaluate such information in determination of the current estimate of environmental liability. At
December 31, 2020, the Company had accrued obligations of $i1,244 million for probable environmental remediation and restoration costs, including $i248 million
for the remediation of Superfund sites.
Litigation
Asbestos-Related Matters of Union Carbide Corporation
Each quarter, Union Carbide reviews claims filed, settled and dismissed, as well as average settlement and resolution costs by disease category. Union Carbide also considers additional quantitative and qualitative factors such as the nature of pending claims, trial experience of Union Carbide and other asbestos defendants, current spending for defense and processing costs, significant appellate rulings and legislative developments, trends in the tort system, and their respective effects on expected future resolution costs. Union Carbide's management considers these factors in conjunction with the most recent actuarial study and determines whether a change in the estimate is warranted. Based on
Union Carbide's review of 2021 activity, it was determined that no adjustment to the accrual was required at March 31, 2021.
Union Carbide’s total asbestos-related liability for pending and future claims and defense and processing costs was $i1,080 million at March 31, 2021 ($i1,098 million
at December 31, 2020), and was included in “Accrued and other current liabilities” and “Asbestos-related liabilities - noncurrent” in the consolidated balance sheets. At March 31, 2021, approximately i24 percent of the recorded claim liability related to pending claims and approximately i76 percent
related to future claims.
Dow Silicones Chapter 11 Related Matters
At March 31, 2021, Dow Silicones and its insurers had made life-to-date payments of $i1,762 million to the settlement program administered by an independent claims office (the “Settlement Facility”), created to resolve breast implant and other product liability claims, and the Settlement
Facility reported an unexpended balance of $i55 million. At March 31, 2021, Dow Silicones estimates that it will be obligated to contribute an additional $i160 million
after the Settlement Facility balance is exhausted ($i160 million at December 31, 2020), of which $i79 million
($i46 million at December 31, 2020) was included in “Accrued and other current liabilities” and $i81 million
($i114 million at December 31, 2020) was included in "Other noncurrent obligations" in the consolidated balance sheets.
Indemnifications with Corning
The Company had indemnification assets of $i115 million
at March 31, 2021 ($i115 million at December 31, 2020), which was included in "Noncurrent receivables" in the consolidated balance sheets.
Gain
Contingency - Dow v. Nova Chemicals Corporation Patent Infringement Matter
As a result of a 2017 damages judgment related to the patent infringement matter, Nova Chemicals Corporation ("Nova") was ordered to pay the Company $i645 million Canadian dollars, plus pre- and post-judgment interest, for which the Company received payment of $i501 million
U.S. dollars in July 2017. At March 31, 2021, the Company had $i341 million ($i341 million at December 31,
2020) included in "Accrued and other current liabilities" in the consolidated balance sheets related to the disputed portion of the damages judgment. The Company is confident of its chances to continue to defend the entire judgment if the Supreme Court of Canada agrees to review it, particularly the trial and appellate courts' determinations on important factual issues, which will be accorded deferential review on appeal.
Gain Contingency - Dow v. Nova Chemicals Corporation Ethylene Asset Matter
As a result of a 2019 damages judgment related to the ethylene asset matter, Nova was ordered to pay the Company $i1.43 billion
Canadian dollars (equivalent to approximately $i1.08 billion U.S. dollars). In October 2019, Nova paid $i1.08 billion
Canadian dollars (equivalent to approximately $i0.8 billion U.S. dollars) directly to the Company, and remitted $i347 million
Canadian dollars to the Canada Revenue Agency ("CRA") for the tax account of one of the Company's subsidiaries. In March 2020, the Company received the full refund from the CRA, equivalent to $i259 million U.S. dollars. At March 31, 2021, $i323 million
($i323 million at December 31, 2020) was included in "Other noncurrent obligations" in the Company's consolidated balance sheets related to the disputed portion of the damages judgment. Dow continues to seek an award of additional damages for the period from 2013-2018. The trial court ordered a damages hearing for November 2021 that would resolve the impact of the appellate ruling and quantify Dow's damages for the 2013-2018 period, although Nova may seek to further delay this hearing.
Guarantees
i
The
following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for guarantees:
Guarantees
Mar 31, 2021
Dec 31, 2020
In millions
Final Expiration
Maximum
Future
Payments 1
Recorded Liability
Final Expiration
Maximum Future Payments
Recorded Liability
Guarantees
2038
$
i1,316
$
i235
2023
$
i251
$
i2
1.In
addition, TDCC has provided guarantees, in proportion to the Company's 35 percent ownership interest, of all future interest payments that will become due on Sadara’s project financing debt during the grace period, which Dow's share is estimated to be $i559 million at March 31, 2021. Based on Sadara's current forecasted cash flows, the Company does not expect to perform under the guarantees.
/
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 (via delivery of cash or other assets) if specified triggering events occur. With guarantees, such as commercial or financial contracts, non-performance by the guaranteed party triggers the obligation of the Company to make payments to the beneficiary of the guarantee. The majority of the Company’s guarantees relate to debt of nonconsolidated affiliates, which have expiration dates ranging from less than 1 year to less than 17 years. The Company’s current expectation is that future payment or performance related to the non-performance of others is considered remote.
TDCC has entered into guarantee agreements related to Sadara, a nonconsolidated affiliate.
In the first quarter of 2021, Sadara reached an agreement with its lenders to re-profile Sadara's outstanding project financing debt. In conjunction with the completion of Sadara’s debt re-profiling, TDCC entered into a new guarantee of up to approximately $i1.3 billion of Sadara’s debt. The debt re-profiling also includes a grace period until June 2026, during which Sadara is obligated to make interest-only payments and TDCC will guarantee in proportion to the Company’s i35
percent ownership interest. The total of an Islamic bond and additional project financing outstanding at Sadara was $i9.9 billion at March 31, 2021 and December 31, 2020. As part of the successful re-profiling, TDCC’s prior $i220
million letter of credit related to the guarantee of one future Sadara debt service schedule payment was cancelled. As a result of these actions, the Company does not expect to provide any shareholder loans or equity contributions to Sadara in 2021.
In the second quarter, the Company expects Sadara to establish a new $i500
million revolving credit facility guaranteed by Dow, which will be used to fund Dow’s pro-rata share of any potential shortfall during the grace period. Based on Sadara's current forecasted cash flows, the Company does not expect Sadara to draw on the facility.
NOTE 13 - iLEASES
For
additional information on the Company's leases, see Note 17 to the Consolidated Financial Statements included in the 2020 10-K.
i
The components of lease cost for operating and finance leases for the three months ended March 31, 2021 and 2020 were as follows:
Lease
Cost
Three Months Ended
In millions
Mar 31, 2021
Mar 31, 2020
Operating lease cost
$
i121
$
i120
Finance
lease cost
Amortization of right-of-use assets - finance
$
i15
$
i13
Interest
on lease liabilities - finance
i7
i6
Total
finance lease cost
$
i22
$
i19
Short-term
lease cost
i49
i54
Variable
lease cost
i71
i64
Sublease
income
(i2)
(i1)
Total
lease cost
$
i261
$
i256
/
i
The
following table provides supplemental cash flow information related to leases:
Other Lease Information
Three Months Ended
In millions
Mar 31, 2021
Mar 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at March 31, 2021 and December 31, 2020:
Lease
Position
Balance Sheet Classification
Mar 31, 2021
Dec 31, 2020
In millions
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
i35
$
i185
Finance
leases
$
i57
$
i178
Assets
Operating
lease assets
Operating lease right-of-use assets
$
i1,810
$
i1,856
Finance
lease assets
Property
i712
i665
Finance
lease amortization
Accumulated depreciation
(i227)
(i216)
Total
lease assets
$
i2,295
$
i2,305
Liabilities
Current
Operating
Operating
lease liabilities - current
$
i405
$
i416
Finance
Long-term
debt due within one year
i64
i54
Noncurrent
Operating
Operating
lease liabilities - noncurrent
i1,477
i1,521
Finance
Long-Term
Debt
i490
i464
Total
lease liabilities
$
i2,436
$
i2,455
/
i
The
weighted-average remaining lease term and discount rate for leases recorded in the consolidated balance sheets at March 31, 2021 and December 31, 2020 are provided below:
The following table provides the maturities of lease liabilities at March 31, 2021:
Maturities of Lease Liabilities
Mar 31, 2021
Operating
Leases
Finance Leases
In millions
2021
$
i353
$
i66
2022
i398
i84
2023
i323
i108
2024
i253
i54
2025
i174
i44
2026
and thereafter
i704
i383
Total
future undiscounted lease payments
$
i2,205
$
i739
Less:
Imputed interest
i323
i185
Total
present value of lease liabilities
$
i1,882
$
i554
/
At
March 31, 2021, Dow had additional leases of approximately $i9 million, primarily for buildings and equipment, which had not yet commenced. These leases are expected to commence in 2021 and 2022, with lease terms of up to i10
years.
Dow provides guarantees related to certain leased assets, specifying the residual value that will be available to the lessor at lease termination through the sale of the assets to the lessee or third parties. The following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for residual value guarantees at March 31, 2021 and December 31, 2020. The Company had a recorded liability of $i19 million
related to these residual value guarantees at March 31, 2021 ($i22 million at December 31, 2020), as payment of such residual value guarantees was determined to be probable. The lease agreements do not contain any material restrictive covenants.
The
changes in each component of accumulated other comprehensive loss ("AOCL") for the three months ended March 31, 2021 and 2020 were as follows:
Accumulated Other Comprehensive Loss
Three Months Ended
In millions
Mar 31, 2021
Mar
31, 2020
Unrealized Gains (Losses) on Investments
Beginning balance
$
i104
$
i64
Unrealized
gains (losses) on investments
(i54)
(i118)
Less:
Tax (expense) benefit
i11
i25
Net
unrealized gains (losses) on investments
(i43)
(i93)
(Gains)
losses reclassified from AOCL to net income 1
(i8)
(i9)
Less:
Tax expense (benefit) 2
i2
i2
Net
(gains) losses reclassified from AOCL to net income
(i6)
(i7)
Other
comprehensive income (loss), net of tax
(i49)
(i100)
Ending
balance
$
i55
$
(i36)
Cumulative
Translation Adjustment
Beginning balance
$
(i930)
$
(i1,135)
Gains
(losses) on foreign currency translation
(i217)
(i161)
Less:
Tax (expense) benefit
(i36)
i12
Net
gains (losses) on foreign currency translation
(i253)
(i149)
(Gains)
losses reclassified from AOCL to net income 3
i—
(i14)
Other
comprehensive income (loss), net of tax
(i253)
(i163)
Ending
balance
$
(i1,183)
$
(i1,298)
Pension
and Other Postretirement Benefits
Beginning balance
$
(i9,559)
$
(i8,781)
Gains
(losses) arising during the period 4
i1,268
i—
Less:
Tax (expense) benefit
(i298)
i—
Net
gains (losses) arising during the period
i970
i—
Amortization
and recognition of net loss and prior service credits 5
i198
i185
Less:
Tax expense (benefit) 2
(i34)
(i43)
Net
loss and prior service credits reclassified from AOCL to net income
i164
i142
Other
comprehensive income (loss), net of tax
i1,134
i142
Ending
balance
$
(i8,425)
$
(i8,639)
Derivative
Instruments
Beginning balance
$
(i470)
$
(i394)
Gains
(losses) on derivative instruments
i122
(i176)
Less:
Tax (expense) benefit
(i9)
i10
Net
gains (losses) on derivative instruments
i113
(i166)
(Gains)
losses reclassified from AOCL to net income 6
(i3)
i7
Less:
Tax expense (benefit) 2
i—
(i3)
Net
(gains) losses reclassified from AOCL to net income
(i3)
i4
Other
comprehensive income (loss), net of tax
i110
(i162)
Ending
balance
$
(i360)
$
(i556)
Total
AOCL ending balance
$
(i9,913)
$
(i10,529)
1.Reclassified
to "Net sales" and "Sundry income (expense) - net."
2.Reclassified to "Provision for income taxes on continuing operations."
3.Reclassified to "Sundry income (expense) - net."
4.See Note 16 for additional information.
5.These AOCL components are included in the computation of net periodic benefit cost of the Company's defined benefit pension and other postretirement benefit plans. See Note 16 for additional information.
6.Reclassified to "Cost of sales,""Sundry income (expense) - net" and "Interest expense and amortization of debt discount."
Ownership interests in the Company's subsidiaries held by parties other than the Company are presented separately from the Company's equity in the consolidated balance sheets as "Noncontrolling interests." The amount of consolidated net income attributable to the Company and the noncontrolling interests are both presented on the face of the consolidated statements of income.
i
The
following table summarizes the activity for equity attributable to noncontrolling interests for the three months ended March 31, 2021 and 2020:
Noncontrolling Interests
Three Months Ended
In millions
Mar
31, 2021
Mar 31, 2020
Balance at beginning of period
$
i570
$
i553
Net
income attributable to noncontrolling interests
i15
i19
Distributions
to noncontrolling interests
(i8)
(i1)
Cumulative
translation adjustments
(i16)
(i16)
Other
(i1)
i—
Balance
at end of period
$
i560
$
i555
/
NOTE
16 – iPENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
A summary of the Company's pension and other postretirement benefit plans can be found in Note 20 to the Consolidated Financial Statements included in the 2020 10-K.
On March 4, 2021, the Company announced changes to its U.S. tax-qualified and non-qualified pension plans. Effective December
31, 2023 ("Effective Date"), the Company will freeze the pensionable compensation and credited service amounts used to calculate pension benefits for employees who participate in its U.S. tax-qualified and non-qualified retirement programs (collectively, the "U.S. Plans"). As a result, at the Effective Date and subject to any bargaining obligations required by law, active participants of the U.S. Plans will not accrue additional benefits for future service and compensation. Additionally, contributions to U.S. tax-qualified and non-qualified defined contribution plans will be harmonized across the Company's U.S. eligible employee population. The new matching contribution, beginning January 1, 2022, will allow all eligible U.S. employees to receive matching contributions of up to i5
percent of their eligible compensation. In addition, beginning on January 1, 2024, all eligible U.S. employees will receive an automatic non-elective contribution of i4 percent of eligible compensation to their respective defined contribution plans.
The Company's funding policy is to contribute to defined benefit pension plans in the United States and a number
of other countries when pension laws and/or economics either require or encourage funding. On March 4, 2021, the Company elected to contribute $i1 billion to its U.S. tax-qualified pension plans and, as a result, increased its estimated global 2021 pension contributions to approximately $i1,230 million,
of which $i1,061 million has been contributed through March 31, 2021.
In connection with the foregoing plan amendments, the Company remeasured its U.S. Plans effective February 28, 2021, which resulted in a pretax actuarial gain of $i1,268 million,
reflected in other comprehensive income and inclusive of a $i345 million reduction in the projected benefit obligation resulting from the plan amendments, and a pretax curtailment gain of $i19 million,
recognized in the first quarter of 2021.
The following table provides the components of the Company's net periodic benefit cost for all significant plans:
Net
Periodic Benefit Cost for All Significant Plans
Three Months Ended
In millions
Mar 31, 2021
Mar 31, 2020
Defined Benefit Pension Plans
Service cost
$
i102
$
i99
Interest
cost
i143
i192
Expected
return on plan assets
(i422)
(i414)
Amortization
of prior service credit
(i5)
(i5)
Amortization
of net loss
i224
i192
Curtailment
gain
(i19)
i—
Net
periodic benefit cost
$
i23
$
i64
Other
Postretirement Benefit Plans
Service cost
$
i2
$
i2
Interest
cost
i6
i9
Amortization
of net gain
(i2)
(i2)
Net
periodic benefit cost
$
i6
$
i9
/
Net
periodic benefit cost, other than the service cost component, is included in "Sundry income (expense) - net" in the consolidated statements of income.
NOTE 17 – iSTOCK-BASED COMPENSATION
A summary of the Company's
stock-based compensation plans can be found in Note 21 to the Consolidated Financial Statements included in the 2020 10-K.
Stock Incentive Plan
The Company grants stock-based compensation to employees and non-employee directors under the 2019 Stock Incentive Plan. Most of the Company's stock-based compensation awards are granted in the first quarter of each year.
In the first quarter of 2021, Dow Inc. granted the following stock-based compensation awards to employees:
•i1.3
million stock options with a weighted-average exercise price of $i57.67 per share and a weighted-average fair value of $i10.37 per
share;
•i1.6 million restricted stock units with a weighted-average fair value of $i57.70
per share; and
•i1.2 million performance stock units with a weighted-average fair value of $i61.48
per share.
The Company's Board unanimously approved the Dow Inc. 2021 Employee Stock Purchase Plan, which was approved by the Company's stockholders at the 2021 Annual Meeting of Stockholders held on April 15, 2021.
A summary of the Company's financial instruments, risk management policies, derivative instruments and hedging activities can be found in Note 22 to the Consolidated Financial Statements included in the 2020 10-K.
6.Presented net of cash collateral where master netting arrangements allow.
/
Cost approximates fair value for all other financial instruments.
Debt Securities
The Company's investments in debt securities are primarily classified as available-for-sale. iThe
following table provides the investing results from available-for-sale securities for the three months ended March 31, 2021 and 2020:
Investing Results
Three Months Ended
In millions
Mar 31, 2021
Mar 31, 2020
Proceeds from sales of available-for-sale securities
The following table summarizes the contractual maturities of the Company's investments in debt securities:
Contractual Maturities of Debt Securities at Mar 31, 2021 1
Cost
Fair
Value
In millions
Within one year
$
i31
$
i31
One
to five years
i372
i413
Six
to ten years
i597
i609
After
ten years
i422
i442
Total
$
i1,422
$
i1,495
1.Includes
marketable securities with maturities of less than one year.
/
Equity Securities
There were no material adjustments to the carrying value of the not readily determinable investments for impairment or observable price changes for the three months ended March 31, 2021. There was ino
net unrealized gain or loss recognized in earnings on equity securities for the three months ended March 31, 2021 ($i1 million net unrealized loss for the three months ended March 31, 2020).
i
Investments
in Equity Securities
Mar 31, 2021
Dec 31, 2020
In millions
Readily determinable fair value
$
i34
$
i40
Not
readily determinable fair value
$
i214
$
i215
/
Derivative
Instruments
i
The notional amounts of the Company's derivative instruments presented on a net basis at March 31, 2021 and December 31, 2020 were as follows:
Notional
Amounts - Net
Mar 31, 2021
Dec 31, 2020
In millions
Derivatives designated as hedging instruments:
Interest rate contracts
$
i261
$
i612
Foreign
currency contracts
$
i2,222
$
i3,784
Derivatives
not designated as hedging instruments:
Interest rate contracts
$
i89
$
i94
Foreign
currency contracts
$
i11,784
$
i9,187
The
notional amounts of the Company's commodity derivatives presented on a net basis at March 31, 2021 and December 31, 2020 were as follows:
Commodity Notionals - Net
Mar 31, 2021
Dec 31, 2020
Notional Volume Unit
Derivatives designated as hedging instruments:
Hydrocarbon
derivatives
i4.9
i10.9
million
barrels of oil equivalent
Derivatives not designated as hedging instruments:
Hydrocarbon derivatives
i7.9
i—
million
barrels of oil equivalent
/
Maturity Dates of Derivatives Designated as Hedging Instruments
The
following tables provide the fair value and balance sheet classification of derivative instruments at March 31, 2021 and December 31, 2020:
Fair Value of Derivative Instruments
Mar 31, 2021
In millions
Balance Sheet Classification
Gross
Counterparty
and Cash Collateral Netting 1
Net Amounts Included in the Consolidated Balance Sheets
Asset derivatives
Derivatives designated as hedging instruments:
Interest rate contracts
Deferred charges and other assets
$
i22
$
(i22)
$
i—
Foreign
currency contracts
Other current assets
i54
(i36)
i18
Commodity
contracts
Other current assets
i218
(i172)
i46
Commodity
contracts
Deferred charges and other assets
i68
(i43)
i25
Total
$
i362
$
(i273)
$
i89
Derivatives
not designated as hedging instruments:
Foreign currency contracts
Other current assets
$
i17
$
(i12)
$
i5
Commodity
contracts
Other current assets
i7
(i3)
i4
Total
$
i24
$
(i15)
$
i9
Total
asset derivatives
$
i386
$
(i288)
$
i98
Liability
derivatives
Derivatives designated as hedging instruments:
Interest rate contracts
Other noncurrent obligations
$
i22
$
(i22)
$
i—
Foreign
currency contracts
Accrued and other current liabilities
i44
(i36)
i8
Commodity
contracts
Accrued and other current liabilities
i214
(i178)
i36
Commodity
contracts
Other noncurrent obligations
i61
(i45)
i16
Total
$
i341
$
(i281)
$
i60
Derivatives
not designated as hedging instruments:
Interest rate contracts
Other noncurrent obligations
$
i141
$
i—
$
i141
Foreign
currency contracts
Accrued and other current liabilities
i98
(i12)
i86
Commodity
contracts
Accrued and other current liabilities
i22
(i7)
i15
Total
$
i261
$
(i19)
$
i242
Total
liability derivatives
$
i602
$
(i300)
$
i302
1.Counterparty
and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.
Net Amounts Included in the Consolidated Balance Sheets
Asset derivatives
Derivatives designated as hedging instruments:
Interest
rate contracts
Other current assets
$
i3
$
(i3)
$
i—
Foreign
currency contracts
Other current assets
i39
(i19)
i20
Commodity
contracts
Other current assets
i146
(i109)
i37
Commodity
contracts
Deferred charges and other assets
i31
(i8)
i23
Total
$
i219
$
(i139)
$
i80
Derivatives
not designated as hedging instruments:
Interest rate contracts
Deferred charges and other assets
$
41
$
—
$
41
Foreign currency contracts
Other current assets
i74
(i25)
i49
Commodity
contracts
Other current assets
i4
(i1)
i3
Total
$
i119
$
(i26)
$
i93
Total
asset derivatives
$
i338
$
(i165)
$
i173
Liability
derivatives
Derivatives designated as hedging instruments:
Interest rate contracts
Accrued and other current liabilities
$
i7
$
(i3)
$
i4
Foreign
currency contracts
Accrued and other current liabilities
i93
(i19)
i74
Commodity
contracts
Accrued and other current liabilities
i151
(i112)
i39
Commodity
contracts
Other noncurrent obligations
i48
(i9)
i39
Total
$
i299
$
(i143)
$
i156
Derivatives
not designated as hedging instruments:
Interest rate contracts
Other noncurrent obligations
$
i178
$
i—
$
i178
Foreign
currency contracts
Accrued and other current liabilities
i35
(i25)
i10
Commodity
contracts
Accrued and other current liabilities
i9
(i3)
i6
Total
$
i222
$
(i28)
$
i194
Total
liability derivatives
$
i521
$
(i171)
$
i350
1.Counterparty
and cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.
Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are netted with corresponding assets or liabilities, when applicable. The Company posted cash collateral of $i24
million at March 31, 2021 ($i7 million at December 31, 2020). iNo
cash collateral was posted by counterparties with the Company at March 31, 2021 and December 31, 2020.
The
following table summarizes the gain (loss) of derivative instruments in the consolidated statements of income and comprehensive income for the three months ended March 31, 2021 and 2020:
Effect of Derivative Instruments
Amount of gain (loss) recognized in OCI 1
Amount
of gain (loss) recognized in income 2
Income Statement Classification
Three months ended
Three months ended
In millions
Mar 31, 2021
Mar 31, 2020
Mar 31, 2021
Mar 31, 2020
Derivatives designated as hedging instruments:
Fair
value hedges:
Interest rate contracts
$
i—
$
i—
$
(i25)
$
i24
Interest
expense and amortization of debt discount 3
Excluded components 4
i2
i3
i—
i—
Interest
expense and amortization of debt discount
Cash flow hedges:
Interest rate contracts
i—
i—
(i3)
i—
Interest
expense and amortization of debt discount
Foreign currency contracts
i5
i8
(i8)
i4
Cost
of sales
Commodity contracts
i65
(i87)
i13
(i11)
Cost
of sales
Net foreign investment hedges:
Foreign currency contracts
i10
i22
i—
i—
Excluded
components 4
i5
i22
i1
i14
Sundry
income (expense) - net
Total derivatives designated as hedging instruments
$
i87
$
(i32)
$
(i22)
$
i31
Derivatives
not designated as hedging instruments:
Interest rate contracts
$
i—
$
i—
$
(i2)
$
(i6)
Interest
expense and amortization of debt discount
Foreign currency contracts
i—
i—
(i113)
(i19)
Sundry
income (expense) - net
Commodity contracts
i—
i—
(i30)
i11
Cost
of sales
Total derivatives not designated as hedging instruments
$
i—
$
i—
$
(i145)
$
(i14)
Total
derivatives
$
i87
$
(i32)
$
(i167)
$
i17
1.OCI
is defined as other comprehensive income (loss).
2.Pretax amounts.
3.Gain (loss) recognized in income of derivatives is offset by gain (loss) recognized in income of hedged item.
4.The excluded components are related to the time value of the derivatives designated as hedges.
/
i
The
following table provides the net after-tax amounts expected to be reclassified from AOCL to income within the next 12 months:
Expected Reclassifications from AOCL within the next 12 months
A summary of the Company's recurring and nonrecurring fair value measurements can be found in Note 23 to the Consolidated Financial Statements included in the 2020 10-K.
Fair Value Measurements on a Recurring Basis
i
The
following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis:
Basis of Fair Value Measurements on a Recurring Basis
Mar 31, 2021
Dec 31, 2020
Quoted
Prices in Active Markets for Identical Items (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total
Quoted Prices in Active Markets for Identical Items (Level 1)
Significant Other Observable Inputs (Level 2)
Total
In millions
Assets at fair value:
Cash
equivalents:
Held-to-maturity securities 1
$
i—
$
i405
$
i—
$
i405
$
i—
$
i980
$
i980
Money
market funds
i—
i648
i—
i648
i—
i484
i484
Marketable
securities 2
i—
i72
i—
i72
i—
i45
i45
Equity
securities 3
i34
i—
i—
i34
i40
i—
i40
Debt
securities: 3
Government debt 4
i—
i558
i—
i558
i—
i698
i698
Corporate
bonds
i29
i908
i—
i937
i28
i908
i936
Derivatives
relating to: 5
Interest rates
i—
i22
i—
i22
i—
i44
i44
Foreign
currency
i—
i71
i—
i71
i—
i113
i113
Commodities
i3
i290
i—
i293
i8
i173
i181
Total
assets at fair value
$
i66
$
i2,974
$
i—
$
i3,040
$
i76
$
i3,445
$
i3,521
Liabilities
at fair value:
Long-term debt including debt due within one year 6
$
i—
$
i19,319
$
i—
$
i19,319
$
i—
$
i20,604
$
i20,604
Guarantee
liability 7
i—
i—
i235
i235
i—
i—
i—
Derivatives
relating to: 5
Interest rates
i—
i163
i—
i163
i—
i185
i185
Foreign
currency
i—
i142
i—
i142
i—
i128
i128
Commodities
i12
i285
i—
i297
i7
i201
i208
Total
liabilities at fair value
$
i12
$
i19,909
$
i235
$
i20,156
$
i7
$
i21,118
$
i21,125
1.The
Company's held-to-maturity securities primarily included treasury bills and time deposits.
2.The Company’s investments in marketable securities are included in “Other current assets” in the consolidated balance sheets.
3.The Company’s investments in debt securities, which are primarily available-for-sale, and equity securities are included in “Other investments” in the consolidated balance sheets.
4.U.S. Treasury obligations, U.S. agency obligations, U.S. agency mortgage-backed securities and other municipalities’ obligations.
5.See Note 18 for the classification of derivatives in the consolidated balance sheets.
6.See
Note 18 for information on fair value measurements of long-term debt.
7.Estimated liability for TDCC's guarantee of Sadara's debt which is included in "Other noncurrent obligations" in the consolidated balance sheets. See Note 12 for additional information.
/
For equity securities calculated at net asset value per share (or its equivalent), the Company had $i110 million
in private market securities and $i19 million in real estate at March 31, 2021 ($i111 million in private market securities and
$i19 million in real estate at December 31, 2020). There are no redemption restrictions and the unfunded commitments on these investments were $i63 million
at March 31, 2021 ($i63 million at December 31, 2020).
For liabilities classified as Level 3 measurements, the fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity. The fair value of the Company’s
accrued liability related to the guarantee of Sadara’s debt is in proportion to the Company’s 35 percent ownership interest in Sadara. The estimated fair value of the guarantee was calculated using a "with" and "without" method. The fair value of the debt was calculated "with" the guarantee less the fair value of the debt "without" the guarantee. The "with" and "without" values were calculated using a discounted cash flow method based on contractual cash flows as well as projected prepayments made on the debt by Sadara. See Note 12 for further information on guarantees classified as Level 3 measurements.
A summary of the Company's variable interest entities ("VIEs") can be found in Note 24 to the Consolidated Financial Statements included in the 2020 10-K.
Assets and Liabilities of Consolidated VIEs
The Company's consolidated financial statements include the assets, liabilities
and results of operations of VIEs for which the Company is the primary beneficiary. The other equity holders’ interests are reflected in “Net income attributable to noncontrolling interests” in the consolidated statements of income and "Noncontrolling interests" in the consolidated balance sheets.
i
The following table summarizes the carrying amounts of these entities' assets and liabilities included in the Company’s consolidated balance sheets at March 31, 2021 and
December 31, 2020:
Amounts presented in the consolidated balance sheets and the table above as restricted assets or nonrecourse obligations relating to consolidated VIEs at March 31, 2021 and December 31, 2020 are adjusted for intercompany eliminations.
Nonconsolidated
VIEs
i
The following table summarizes the carrying amounts of assets included in the consolidated balance sheets at March 31, 2021 and December 31, 2020, related to variable interests in joint ventures or entities for which the Company is not the primary beneficiary. The Company's maximum exposure to loss is the same as the carrying amounts.
Carrying
Amounts of Assets Related to Nonconsolidated VIEs
Mar 31, 2021
Dec 31, 2020
In millions
Description of asset
Silicon joint ventures
Equity method investments 1
$
i112
$
i107
1.Classified
as "Investment in nonconsolidated affiliates" in the consolidated balance sheets.
/
NOTE 21 – iRELATED PARTY TRANSACTIONS
TDCC
has committed to fund Dow Inc.'s dividends paid to common stockholders and share repurchases, as approved by Dow Inc.'s Board from time to time, as well as certain governance expenses. Funding is accomplished through intercompany loans. TDCC's Board reviews and determines a dividend distribution to Dow Inc. to settle the intercompany loans. For the three months ended March 31, 2021, TDCC declared and paid dividends to Dow Inc. of $i703 million
($i643 million for the three months ended March 31, 2020). At March 31, 2021 and December 31, 2020, TDCC's outstanding intercompany loan balance with Dow Inc. was insignificant.
Dow’s measure of profit/loss for segment reporting purposes is Operating EBIT 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 before income taxes") before interest, excluding the impact of significant items. Operating EBIT by segment includes all operating items
relating to the businesses; items that principally apply to Dow as a whole are assigned to Corporate.
i
Segment
Information
Pack. & Spec. Plastics
Ind. Interm. & Infrast.
Perf. Materials & Coatings
Corp.
Total
In millions
Three
months ended Mar 31, 2021
Net sales
$
i6,082
$
i3,607
$
i2,123
$
i70
$
i11,882
Equity
in earnings of nonconsolidated affiliates
$
i106
$
i115
$
i2
$
i1
$
i224
Dow
Inc. Operating EBIT 1
$
i1,228
$
i326
$
i62
$
(i62)
$
i1,554
Three
months ended Mar 31, 2020
Net sales
$
i4,609
$
i3,045
$
i2,065
$
i51
$
i9,770
Equity
in earnings (losses) of nonconsolidated affiliates
$
i5
$
(i76)
$
i1
$
(i19)
$
(i89)
Dow
Inc. Operating EBIT 1
$
i580
$
i175
$
i162
$
(i74)
$
i843
1.Operating
EBIT for TDCC for the three months ended March 31, 2021 and 2020 is substantially the same as that of Dow Inc. and therefore has not been disclosed separately in the table above. A reconciliation of "Net income" to Operating EBIT is provided below.
/
i
Reconciliation
of "Net income" to Operating EBIT
Three Months Ended
In millions
Mar 31, 2021
Mar 31, 2020
Net income
$
i1,006
$
i258
+
Provision for income taxes
i317
i138
Income
before income taxes
$
i1,323
$
i396
- Interest
income
i8
i15
+ Interest
expense and amortization of debt discount
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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") due to the parent/subsidiary relationship between Dow Inc. and TDCC. The information reflected in the 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.
Pursuant
to General Instruction H(1)(a) and (b) for Form 10-Q "Omission of Information by Certain Wholly-Owned Subsidiaries," TDCC is filing this Form 10-Q with a reduced disclosure format.
Except as otherwise indicated by the context, the terms "Union Carbide" means Union Carbide Corporation, and "Dow Silicones" means Dow Silicones Corporation, both wholly owned subsidiaries of the Company.
STATEMENTS ON COVID-19 and U.S. GULF COAST FREEZE
COVID-19
Additional information regarding all actions taken by Dow since the onset of the pandemic can be found in the combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2020 ("2020 10-K").
The
pandemic caused by coronavirus disease 2019 ("COVID-19") has impacted all geographic regions where Dow products are produced and sold. During this public health crisis, the Company is focused on the health and safety of its employees, contractors, customers and suppliers around the world and maintaining safe and reliable operations of its manufacturing sites. Although supply disruptions and related logistical issues have posed challenges across all modes of transportation, the Company’s manufacturing sites have continued to operate during the COVID-19 pandemic, with no significant impact to manufacturing, whether through shutdowns or shortages in labor, raw materials or personal protective equipment. Supply chain and logistical challenges are expected to stabilize throughout 2021. Contingency plans remain in place in the event of significant impacts from COVID-19 infection resurgences.
At
the time of this filing, approximately half of Dow’s global workforce is working remotely. The Company continues to encourage its workforce to practice safe behaviors in the workplace and while away from work to help prevent community spread of COVID-19. The Company continues to monitor the ongoing mitigation efforts of each region to appropriately implement its comprehensive Return to Workplace plan. All regions continue to follow on-site workforce restrictions in accordance with government regulations.
The Company entered 2021 with sequential momentum and is well-positioned for continued profitable growth in the ongoing economic recovery and improving industry cycle. The Company will maintain its disciplined focus on capital allocation priorities as it benefits from an improving cost structure, financial flexibility and a low-cost operating model. As the market recovery continues,
Dow has experienced increasing margins as differentiated parts of the portfolio see improved demand and underlying market fundamentals, which has enabled a return to pre-COVID-19 sales levels and end-market growth across most businesses.
The Company continues to maintain a strong financial position and liquidity in the midst of the economic recession triggered by the COVID-19 pandemic. At March 31, 2021, the Company had cash and committed and available forms of liquidity of $13.6 billion. The Company also has no substantive long-term debt maturities until the second half of 2024.
U.S. Gulf Coast Freeze
Winter Storm Uri had a broad impact on the U.S. Gulf Coast and in particular across the entire state of Texas,
which resulted in widespread utility and raw material supply disruptions and industry-wide production outages. All Dow ethylene production facilities located on the U.S. Gulf Coast were operational at March 31, 2021, along with all sites. As a result of the winter storm, the product and supply chain impacts across the industry created very tight supply fundamentals and generated pricing momentum for both raw materials and finished goods. The Company remains close to its customers and will work diligently to meet demand needs as supply constraints are addressed.
The following is a summary of the results for the three months ended March 31, 2021:
•The Company reported net sales in the first quarter of 2021 of $11.9 billion, up 22 percent from $9.8 billion in the first quarter of 2020, with increases across all geographic regions and operating segments, primarily driven by local price increases.
•Local price increased 19 percent compared with the same period last year with increases in all geographic regions and segments. Local price increased in Packaging & Specialty Plastics (up 24 percent), Industrial Intermediates & Infrastructure (up
21 percent) and Performance Materials & Coatings (up 4 percent).
•Volume was flat compared with the first quarter of 2020. Volume growth in Packaging & Specialty Plastics (up 5 percent) was offset by decreases in Industrial Intermediates & Infrastructure (down 6 percent) and Performance Materials & Coatings (down 4 percent). Volume increased in Asia Pacific and Europe, Middle East, Africa and India ("EMEAI") and decreased in the U.S. & Canada and Latin America. The volume decreases in Industrial Intermediates & Infrastructure, Performance Materials & Coatings, the U.S. & Canada and Latin America primarily reflected supply constraints due to Winter Storm Uri.
•Currency had a favorable impact of 3 percent on net sales,
driven by EMEAI (up 7 percent) and Asia Pacific (up 3 percent).
•Equity in earnings of nonconsolidated affiliates was $224 million in the first quarter of 2021, compared with equity losses of $89 million in the first quarter of 2020, driven by equity earnings at Sadara Chemical Company ("Sadara") as compared with losses in the same period last year, and higher equity earnings at the Kuwait and Thai joint ventures.
•Net income available for Dow Inc. and TDCC common stockholder(s) was $991 million and $983 million, respectively, in the first quarter of 2021, compared with $239 million in the first quarter of 2020. Earnings per share for Dow Inc. was $1.32 per share in the first quarter of 2021, compared with $0.32 per share in the first quarter of
2020.
•On February 11, 2021, Dow Inc. announced that its Board of Directors ("Board") declared a dividend of $0.70 per share, which was paid on March 12, 2021, to shareholders of record as of February 26, 2021.
•On March 4, 2021, TDCC announced changes to the design of its U.S. tax-qualified and non-qualified retirement programs. Separately, TDCC made contributions to certain U.S. pension plans totaling $1 billion.
•On March
25, 2021, Dow Inc. (together with Sadara and the Saudi Arabian Oil Company) completed a debt re-profiling agreement for Sadara with agency creditors and commercial lenders. The re-profiled debt repayment schedule is better aligned to match Sadara's expected future cash flow generation.
In addition to the highlights above, the following events occurred subsequent to the first quarter of 2021:
•On April 12, 2021, Dow was named as one of the 2021 Fortune 100 Best Companies to Work For®; as well as, being recognized by Great Place to Work® in several other countries around the world this year including: 2021 Best Workplaces™ in Argentina, Colombia and Saudi Arabia.
•On
April 13, 2021, Fitch Ratings ("Fitch") reaffirmed TDCC’s BBB+ and F2 rating, and revised its outlook from negative to stable. The decision was made as part of Fitch’s annual review process.
•On April 15, 2021, Dow Inc. announced that its Board declared a dividend of $0.70 per share, payable on June 11, 2021, to shareholders of record as of May 28, 2021.
•Effective April 15, 2021, following the Company's Annual Meeting of Stockholders ("2021 Meeting") Dow Inc.'s Board elected Richard K. Davis
to serve as Lead Director until the 2022 Annual Meeting of Stockholders. The Company also announced that Debra L. Dial, senior vice president and controller at AT&T Inc., and Luis Alberto Moreno, managing director at Allen & Co, LLC and former president of Inter-American Development Bank Group, were elected to the Board at the 2021 Meeting. Ajay Banga, Jacqueline K. Barton and James A. Bell retired from the Board following the 2021 Meeting as announced on February 11, 2021.
The
following tables summarize net sales and sales variances by operating segment and geographic region from the prior year:
Summary of Sales Results
Three Months Ended
In millions
Mar 31, 2021
Mar 31, 2020
Net sales
$
11,882
$
9,770
Sales
Variances by Operating Segment and Geographic Region
Three Months Ended Mar 31, 2021
Local Price & Product Mix
Currency
Volume
Total
Percentage change from prior year
Packaging & Specialty Plastics
24
%
3
%
5
%
32
%
Industrial
Intermediates & Infrastructure
21
3
(6)
18
Performance Materials & Coatings
4
3
(4)
3
Total
19
%
3
%
—
%
22
%
Total,
excluding the Hydrocarbons & Energy business
17
%
3
%
(2)
%
18
%
U.S. & Canada
21
%
—
%
(8)
%
13
%
EMEAI
16
7
4
27
Asia
Pacific
14
3
11
28
Latin America
25
(1)
(4)
20
Total
19
%
3
%
—
%
22
%
Net
sales in the first quarter of 2021 were $11.9 billion, up 22 percent from $9.8 billion in the first quarter of 2020, with local price up 19 percent, currency up 3 percent and volume flat. Net sales increased in all operating segments and geographic regions. Local price increased in all operating segments and geographic regions, primarily reflecting price gains in polyethylene and polyurethane applications due to strong supply and demand fundamentals and the impact of Winter Storm Uri. Local price increased in Packaging & Specialty Plastics (up 24 percent), Industrial Intermediates & Infrastructure (up 21 percent) and Performance Materials & Coatings (up 4 percent). Volume decreases in the U.S. & Canada and Latin America, primarily due to Winter Storm Uri, offset increases in Asia Pacific and EMEAI. Volume increased in Packaging & Specialty Plastics (up 5 percent) and decreased in Industrial Intermediates & Infrastructure (down 6 percent) and Performance
Materials & Coatings (down 4 percent). Currency favorably impacted net sales 3 percent compared with the same period last year, driven by EMEAI (up 7 percent) and Asia Pacific (up 3 percent), which were partially offset by Latin America (down 1 percent). Excluding the Hydrocarbons & Energy business, sales increased 18 percent. The volume decreases in Industrial Intermediates & Infrastructure, Performance Materials & Coatings, the U.S. & Canada and Latin America primarily reflected supply constraints due to Winter Storm Uri.
Cost of Sales
COS was $10.1 billion in the first quarter of 2021, up from $8.2 billion in the first quarter of 2020, primarily due to higher feedstock and energy costs as well as impacts from Winter Storm Uri, which included higher raw material costs and repair costs. The first quarter of 2021 included
$29 million of costs associated with implementing the Company's digital acceleration program (related to Corporate). COS as a percentage of net sales in the first quarter of 2021 was 84.7 percent (84.2 percent in the first quarter of 2020).
R&D expenses totaled $194 million in the first quarter of 2021, compared with $179 million in the first quarter of 2020. R&D expenses increased primarily due to increased fringe benefit expenses driven by stock market increases as compared with the same period
last year and higher performance-based compensation costs.
Selling, General and Administrative Expenses
SG&A expenses totaled $366 million in the first quarter of 2021, compared with $334 million in the first quarter of 2020. SG&A expenses increased primarily due to increased fringe benefit expenses driven by stock market increases as compared with the same period last year, and higher performance-based compensation costs. The first quarter of 2020 was favorably impacted by the reversal of a bad debt reserve related to an arbitration judgment.
Amortization of Intangibles
Amortization of intangibles was $101 million in the first quarter of 2021, compared with $100 million in the first quarter of 2020. 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 Inc. ("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. 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 Corporate.
These were the final charges related to the Synergy Program.
Asset Related Charges
The Company recognized a pretax impairment charge of $6 million for the three months ended March 31, 2020, related to capital additions made to a bio-ethanol manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017 and divested in 2020 (related to Packaging & Specialty Plastics).
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. Integration and business separation activities were completed as of December
31, 2020. Integration and separation costs are related to Corporate.
Equity in Earnings (Losses) of Nonconsolidated Affiliates
The Company's share of equity in earnings of nonconsolidated affiliates was $224 million in the first quarter of 2021, up from equity losses of $89 million in the first quarter of 2020, driven by equity earnings at Sadara compared with equity losses in the same period last year, and higher equity earnings at the Kuwait and Thai joint ventures. See Note 9 to the Consolidated Financial Statements for additional information. In addition, equity in earnings of nonconsolidated affiliates is now expected to be $400 million to $500 million in 2021 due to projected margin expansion at Sadara and the Kuwait and Thai joint ventures.
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, 2021, Sundry income (expense) - net was income of $128 million compared with expense of $81 million for the three months ended March 31, 2020. The first quarter of 2021 included increases in non-operating pension and postretirement benefit plan credits, a curtailment gain related to the remeasurement of U.S. pension plans and asset sales, which were partially offset by
foreign currency exchange losses. The first quarter of 2020 included an $86 million loss on the early extinguishment of debt (related to Corporate) and foreign currency exchange losses, which were partially offset by non-operating pension and postretirement benefit plan credits. See Notes 6, 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 $196 million in the first quarter of 2021, down from $215 million in the first quarter of 2020. The
decrease is primarily due to debt issuances at lower coupon rates in 2020 to repay or replace higher coupon rate debt.
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 in the first quarter of 2021 was 24.0 percent and 24.1 percent for Dow Inc. and TDCC, respectively, compared with 34.8 percent for the first quarter of 2020. The tax rate in the first quarter of 2021 was favorably impacted by geographic mix of earnings and improved equity earnings. The tax rate in the first quarter of 2020 was unfavorably impacted by geographic mix of earnings, equity losses and non-deductible
restructuring costs.
Net Income Available for Common Stockholder(s)
Dow Inc.
Net income available for Dow Inc. common stockholders was $991 million, or $1.32 per share, in the first quarter of 2021, compared with $239 million, or $0.32 per share, in the first quarter of 2020. See Note 7 to the Consolidated Financial Statements for details on Dow Inc.'s earnings per share calculations.
TDCC
Net income available for the TDCC common stockholder was $983 million in the first quarter of 2021, compared with $239 million in the first quarter of 2020. TDCC's common shares are owned solely by Dow Inc.
OUTLOOK
Dow
entered into the second quarter with strong momentum and expects the broadening economic recovery, aided by vaccine distribution progress and tight market fundamentals, to continue to benefit all value chains. Additionally, the Company's near term incremental investments will further support growth across Dow's consumer-led portfolio. Through differentiated feedstock flexibility, geographic scale, advantaged cost positions, top-quartile cash generation, and its leadership in high-growth end-markets, Dow is well positioned for continued value creation through 2021 and beyond.
SEGMENT RESULTS
Dow’s measure of profit/loss for segment reporting purposes is Operating EBIT 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 before income taxes") before interest, excluding the impact of significant items. Operating EBIT by segment includes all operating items relating to the businesses; items that principally apply to Dow as a whole are assigned to Corporate.
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; mobility; and infrastructure. Ethylene is transferred to downstream derivative businesses at market-based prices, which are generally equivalent to prevailing market prices for large volume purchases. This segment also includes the results of The Kuwait Styrene Company K.S.C.C. and The SCG-Dow Group, as well as a portion of the results of EQUATE Petrochemical Company K.S.C.C. ("EQUATE"), The Kuwait Olefins Company K.S.C.C. ("TKOC"), Map Ta Phut Olefins Company Limited ("Map Ta Phut") and Sadara, all joint ventures of the Company.
The Company is currently responsible for
marketing a majority of Sadara products outside of the Middle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee. In March 2021, Dow and the Saudi Arabian Oil Company agreed to transition the marketing rights and responsibilities for Sadara’s finished products to levels more consistent with each partner’s equity ownership. This transition will begin in mid-2021 and will be effectuated over the next five years.
Packaging
& Specialty Plastics net sales were $6,082 million in the first quarter of 2021, up 32 percent from net sales of $4,609 million in the first quarter of 2020, with local price up 24 percent, volume up 5 percent and a favorable currency impact of 3 percent, primarily in EMEAI. Local price increased in both businesses and across all geographic regions, driven by strong supply and demand fundamentals. Local price increased in Hydrocarbons & Energy as prices for co-products are generally correlated to Brent crude oil prices, which increased 20 percent compared with the first quarter of 2020. Local price increased in Packaging and Specialty Plastics driven by strong supply and demand fundamentals, notably in industrial and consumer packaging, and flexible food and beverage packaging applications. Volume increased in both businesses and across all geographic regions, except Latin America. Volume increased in Hydrocarbons & Energy, primarily in EMEAI and the U.S.
& Canada, more than offsetting decreases in Latin America. The volume increase in Packaging and Specialty Plastics was driven by Asia Pacific.
Operating EBIT was $1,228 million in the first quarter of 2021, up 112 percent from Operating EBIT of $580 million in the first quarter of 2020. Operating EBIT increased primarily due to integrated margin expansion and increased equity earnings at Sadara and the Kuwait and Thai joint ventures.
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, electronics, surfactants for cleaning and sanitization, 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
and Sadara, all joint ventures of the Company.
The Company is currently responsible for marketing a majority of Sadara products outside of the Middle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee. In March 2021, Dow and the Saudi Arabian Oil Company agreed to transition the marketing rights and responsibilities for Sadara’s finished products to levels more consistent with each partner’s equity ownership. This transition will begin in mid-2021 and will be effectuated over the next five years.
Industrial
Intermediates & Infrastructure net sales were $3,607 million in the first quarter of 2021, up 18 percent from $3,045 million in the first quarter of 2020, with local price up 21 percent, volume down 6 percent and a favorable currency impact of 3 percent. Local price increased in both businesses and in all geographic regions. Local price increased in Polyurethanes & Construction Chemicals driven by strong price gains in polyurethanes. Industrial Solutions local price increased primarily in offerings for coatings, industrial and electronics end-market applications on strong supply and demand fundamentals and rising energy prices. Volume decreased in both businesses following temporary production outages and supply shortages in the U.S. resulting from Winter Storm Uri. Volume in Polyurethanes & Construction Chemicals increased in all geographic regions, except the U.S & Canada, as resilient buying patterns in consumer durable goods and applications and industrial
end-markets drove demand growth, which was more than offset by a decrease in supply volumes in the U.S Gulf Coast due to production outages and other third party supply shortages. Volume in Industrial Solutions increased in Asia Pacific and Latin America which was offset by decreases in the U.S. & Canada and EMEAI. Currency favorably impacted sales in both businesses and in EMEAI and Asia Pacific.
Operating EBIT was $326 million in the first quarter of 2021, up 86 percent from Operating EBIT of $175 million in the first quarter of 2020. Operating EBIT increased primarily due to higher equity earnings at Sadara and strong supply and demand fundamentals in Polyurethanes & Construction Chemicals.
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; consumer and electronics; mobility; industrial and chemical processing; and building and infrastructure 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 net sales were $2,123 million in the first quarter of 2021, up 3 percent from net sales of $2,065 million in the first quarter of 2020, with local price up 4 percent, volume down 4 percent and favorable currency impact of 3 percent. Local price increased in both businesses and all geographic regions. Local price increased in Consumer Solutions primarily due to favorable supply and demand fundamentals in siloxanes. Local price increased in Coatings & Performance Monomers primarily due to improved supply and demand fundamentals in acrylic monomers. Volume decreased in both businesses due to lower supply volumes as a result of production outages and supply shortages related to Winter Storm Uri in the U.S Gulf Coast. Consumer Solutions volume decreased as growth in electronics, mobility and construction end-markets was more than offset by lower volumes in upstream siloxanes as a result of planned maintenance turnaround activity. Volume decreased
in Coatings & Performance Monomers primarily due to temporary production outages as a result of Winter Storm Uri and planned maintenance turnaround activity which more than offset higher demand for architectural coatings as residential construction end-market dynamics improved and consumers continued do-it-yourself projects at home. The favorable impact of currency was driven by EMEAI and Asia Pacific.
Operating EBIT was $62 million in the first quarter of 2021, down 62 percent from Operating EBIT of $162 million in the first quarter of 2020. Operating EBIT decreased as margins were impacted by production outages and supply constraints driven by Winter Storm Uri and planned maintenance turnaround activity that more than offset higher selling prices.
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, 2021
Mar 31, 2020
Net
sales
$
70
$
51
Operating EBIT
$
(62)
$
(74)
Equity
earnings (losses)
$
1
$
(19)
Net sales for Corporate, which primarily relate to the Company's insurance operations, were $70 million in the first quarter of 2021, an increase from net sales of $51 million in the first quarter of 2020.
Operating EBIT was a loss of $62 million in the first quarter of 2021, compared with a loss of $74 million in the first quarter of 2020. Operating EBIT improved primarily due to reduced equity losses.
The Company had cash and cash equivalents of $4,133 million at March 31, 2021 and $5,104 million at December 31, 2020, of which $1,612 million at March 31, 2021 and $862 million at December 31, 2020 was held by subsidiaries in foreign countries, including U.S. 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 to the United States.
The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance
the subsidiaries' operational activities and future foreign investments. Dow has the ability to repatriate additional funds to the U.S., which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/or U.S. state income taxes and the impact of foreign currency movements. At March 31, 2021, management believed that sufficient liquidity was available in the U.S. The Company has and expects to continue repatriating certain funds from its non-U.S. subsidiaries that are not needed to finance local operations; however, these particular repatriation activities have not and are not expected to result in a significant incremental tax liability to the Company.
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 Ended
Three Months Ended
Mar 31, 2021
Mar 31, 2020
Mar
31, 2021
Mar 31, 2020
In millions
Cash provided by (used for):
Operating activities - continuing operations
$
(228)
$
1,236
$
(109)
$
1,239
Operating
activities - discontinued operations
(63)
3
—
—
Operating activities
(291)
1,239
(109)
1,239
Investing activities
(13)
(153)
(13)
(153)
Financing
activities
(595)
265
(777)
265
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(48)
(86)
(48)
(86)
Summary
Increase
(decrease) in cash, cash equivalents and restricted cash
(947)
1,265
(947)
1,265
Cash, cash equivalents and restricted cash at beginning of period
5,108
2,380
5,108
2,380
Cash, cash equivalents and restricted cash at end of period
$
4,161
$
3,645
$
4,161
$
3,645
Less:
Restricted cash and cash equivalents, included in "Other current assets"
28
12
28
12
Cash and cash equivalents at end of period
$
4,133
$
3,633
$
4,133
$
3,633
Cash
Flows from Operating Activities
In the first three months of 2021, the Company had cash used for operating activities from continuing operations compared with cash provided by operating activities from continuing operations in the first three months of 2020. The change was primarily due to elective pension contributions, an increase in cash used for working capital requirements, an increase in performance-based compensation payments and the absence of a cash receipt related to the Nova Chemicals Corporation ethylene asset matter. These items were partially offset by an increase in the Company's cash earnings as well as dividends received from nonconsolidated affiliates.
1.The decrease in days sales outstanding in receivables was primarily due to an increase in net sales, which more than offset an increase in average accounts receivables.
2.The decrease in days
sales in inventory was primarily due to an increase in COS and a decrease in average inventory.
3.The decrease in days payables outstanding was primarily due to an increase in COS and an increase in the change in inventory, which more than offset an increase in average accounts payable.
Cash provided by (used for) operating activities from discontinued operations in the first three months of 2021 and 2020 primarily related to cash payments and receipts Dow Inc. had with DuPont de Nemours, Inc. and Corteva Inc. that related to certain agreements and matters related to the separation from DowDuPont. See Note 3 to the Consolidated Financial Statements for additional information.
Cash Flows from Investing Activities
Cash
used for investing activities in the first three months of 2021 was primarily for capital expenditures and purchases of investments, which were partially offset by proceeds from sales and maturities of investments, which included partial monetization of the Company's investment in company-owned life insurance policies. Cash used for investing activities 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.
The Company's capital expenditures were $289 million in the first three months of 2021, compared with $395 million in the first three months of 2020. The Company expects full
year capital spending in 2021 to be approximately $1.6 billion. The Company will adjust its spending through the year as economic conditions evolve.
As a result of Sadara's debt re-profiling completed in the first quarter of 2021, the Company does not expect to provide any shareholder loans or equity contributions to Sadara in 2021. In the first three months of 2020, the Company loaned $114 million to Sadara.
Cash Flows from Financing Activities
Cash used for financing activities in the first three months of 2021 included payments on long-term debt, which was partially offset by proceeds from issuance of stock. In addition, Dow Inc. included a cash outflow for dividends paid to stockholders and TDCC included a cash outflow for dividends paid to Dow Inc. Cash
provided by financing activities 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 common stockholders and repurchases of common stock and TDCC included cash outflows for dividends paid to Dow Inc. See Note 11 to the Consolidated Financial Statements for additional information related to the issuance and retirement of debt.
Dow Inc. Non-GAAP Cash Flow Measures
Free Cash Flow
Dow defines free cash flow as "Cash provided by (used for) operating activities - continuing operations," less capital expenditures. Under this definition, free cash flow
represents the cash generated by Dow 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
Dow defines Operating EBITDA as earnings (i.e., "Income before income taxes") before interest, depreciation and amortization, excluding the impact of significant items.
Cash
Flow Conversion (Operating EBITDA to Cash Flow From Operations)
Dow defines cash flow conversion (Operating EBITDA to cash flow from operations) as "Cash provided by (used for) operating activities - continuing operations," divided by 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 into cash flow.
These financial measures are not recognized in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and should not be viewed as alternatives to U.S. GAAP financial measures of performance. All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, Dow's definitions may not be consistent with the methodologies used by other companies.
Cash flow conversion (Operating EBITDA to cash flow from operations) (non-GAAP) 2
(10.0)
%
78.9
%
1.The
three months ended March 31, 2021 includes restructuring implementation costs and costs associated with the Company's digital acceleration program. The three months ended March 31, 2020 includes integration and separation costs, restructuring and asset related charges - net and a loss on early extinguishment of debt. See Note 22 to the Consolidated Financial Statements for additional information.
2.Cash flow conversion in the first quarter of 2021 reflects a $1 billion elective pension contribution.
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's U.S. and Euromarket commercial paper programs, committed and uncommitted credit facilities, committed accounts receivable facilities, a U.S. retail note program (“InterNotes®”) and other debt markets.
The Company continues to maintain a strong financial position with all of its committed credit facilities undrawn and fully available at March 31, 2021. Cash and committed and available forms of liquidity were $13.6 billion at March 31,
2021. The Company also has no substantive long-term debt maturities until the second half of 2024. Additional details on sources of liquidity are as follows:
TDCC issues promissory notes under its U.S. and Euromarket commercial paper programs. TDCC had no commercial paper outstanding at March 31, 2021 and December 31, 2020. TDCC maintains access to the commercial paper market at competitive rates.Amounts outstanding under TDCC's commercial paper programs during the period may be greater, or less than, the amount reported at the end of the period. Subsequent to March 31, 2021, TDCC issued approximately $500 million of commercial paper.
Committed Credit Facilities
The Company also has the ability to access liquidity through TDCC's committed and available credit facilities. At March 31, 2021, TDCC had total committed and available credit facilities of $8.1 billion. See Note 11 to the Consolidated Financial Statements for additional information on committed and available credit facilities.
Committed Accounts Receivable Facilities
In
addition to the above committed credit facilities, the Company maintains a committed accounts receivable facility in the U.S. where eligible trade accounts receivable, up to $900 million, may be sold at any point in time. The Company also maintains a committed accounts receivable facility in Europe where eligible trade accounts receivable, up to €400 million, may be sold at any point in time. At March 31, 2021, there were no receivables sold under the U.S. and Europe committed accounts receivable facilities. For additional information, see Note 14 to the Consolidated Financial Statements included in the 2020 10-K.
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. At March 31, 2021, the Company had monetized $200 million of its existing COLI policies' value. For additional information, see Note 6 to the Consolidated Financial Statements included in the 2020 10-K.
Uncommitted Credit Facilities
Dow has entered into various uncommitted bilateral credit arrangements as a potential source of excess liquidity. These lines can be used to support short-term liquidity needs and for general purposes, including letters of credit. Dow had no drawdowns outstanding at March 31, 2021.
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." At March 31, 2021, net debt as a percent of total capitalization decreased to 46.5 percent and 45.8 percent for Dow Inc. and TDCC, respectively, compared with 47.9 percent and 46.8 percent at December 31, 2020.
Total
Debt
Dow Inc.
TDCC
Mar 31, 2021
Dec 31, 2020
Mar 31, 2021
Dec 31, 2020
In millions
Notes payable
$
152
$
156
$
152
$
156
Long-term
debt due within one year
492
460
492
460
Long-term debt
16,200
16,491
16,200
16,491
Gross debt
$
16,844
$
17,107
$
16,844
$
17,107
-
Cash and cash equivalents
4,133
5,104
4,133
5,104
- Marketable securities 1
72
45
72
45
Net debt
$
12,639
$
11,958
$
12,639
$
11,958
Total
equity
$
14,563
$
13,005
$
14,936
$
13,569
Gross debt as a percent of total capitalization
53.6
%
56.8
%
53.0
%
55.8
%
Net
debt as a percent of total capitalization
46.5
%
47.9
%
45.8
%
46.8
%
1.Included in "Other current assets" in the consolidated balance sheets.
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.
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 0.51 to 1.00 at March 31, 2021. Management believes TDCC was in compliance with all of its covenants and default provisions at March 31, 2021. For information on TDCC's debt covenants and default provisions, see Note 15 to the Consolidated Financial Statements included in the 2020 10-K. 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 2021.
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
At April 23, 2021, 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
Stable
On April 13, 2021, Fitch Ratings reaffirmed TDCC’s BBB+ and F2 rating, and revised its outlook from negative to 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.
TDCC has committed to fund Dow Inc.'s dividends paid to common stockholders and share repurchases, as approved by Dow Inc.'s Board from time to time, as well as certain governance expenses. Funding is accomplished through intercompany loans. TDCC's Board reviews and determines a dividend distribution to Dow Inc. to settle the intercompany loans. For the three months ended March 31, 2021, TDCC declared and paid a dividend to Dow Inc. of $703 million. At March 31, 2021, TDCC's intercompany loan balance with Dow Inc. was insignificant. See Note 21 to the Consolidated Financial Statements for additional information.
Share
Repurchase Program
On April 1, 2019, Dow Inc.'s Board ratified the share repurchase program originally approved on March 15, 2019, authorizing up to $3.0 billion to be spent on the repurchase of the Company's common stock, with no expiration date. The Company did not repurchase any of its common stock in the first quarter of 2021. At March 31, 2021, approximately $2.4 billion of the share repurchase program authorization remained available for repurchases. The Company will continue to evaluate the repurchase of additional shares to cover dilution as economic conditions develop.
The Company has both funded and unfunded defined benefit pension plans that cover employees in the United States and a number of other countries. The Company's funding policy is to contribute to funded plans when pension laws and/or economics either require or encourage funding.
On March 4, 2021, the Company announced changes to the design of its U.S. tax-qualified and non-qualified pension plans (collectively, the "U.S. Plans") and, effective December 31, 2023, the Company will freeze the pensionable compensation and credited service amounts used to calculate pension benefits for employees who participate in the U.S. Plans. Additionally, the Company elected
to contribute $1 billion to its U.S. tax-qualified pension plans. As a result, the Company increased its estimated global 2021 pension contributions to approximately $1,230 million, of which $1,061 million has been contributed through March 31, 2021.
In connection with the foregoing plan amendments and inclusive of the additional discretionary contributions to the U.S. tax-qualified pension plans, the Company remeasured the U.S. Plans effective February 28, 2021, which resulted in a decrease of approximately $200 million in the expected net periodic pension benefit cost for 2021, inclusive of curtailment gains of $19 million, recognized in the first quarter of 2021. The Company's total net periodic pension benefit cost is expected to be approximately $40 million in 2021, inclusive of curtailment
gains and subject to foreign currency fluctuations and events or actions that may require additional plan remeasurements.
See Note 16 to the Consolidated Financial Statements and Note 20 to the Consolidated Financial Statements included in the 2020 10-K for additional information related to the Company's pension plans.
Restructuring
The actions related to the 2020 Restructuring Program are expected to result in additional cash expenditures of approximately $315 million, primarily through the first quarter of 2022, consisting of severance and related benefit costs and costs associated with exit and disposal activities, including contract cancellation penalties and environmental remediation. Restructuring implementation costs, primarily decommissioning and demolition
activities related to asset actions, are expected to result in additional cash expenditures of approximately $150 million, primarily through the third quarter of 2022. Restructuring implementation costs totaled $10 million for the three months ended March 31, 2021.
The Company expects to incur additional costs in the future related to its restructuring activities, which will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits related to its other optimization activities. These costs cannot be reasonably estimated at this time. See Note 5 to the Consolidated Financial Statements for additional information on the Company's restructuring activities.
Digital Acceleration
In
the first quarter of 2021, Dow announced plans to further advance and expand its digitalization efforts to deliver long-term value creation, by accelerating investment in three key areas: expanding digital tools to accelerate materials science innovation; further enhancing the e-commerce buying and fulfillment experience for Dow's customers; and adopting real-time digital manufacturing insights, operational data intelligence and demand sensing to enhance the productivity and reliability of Dow’s operations. The Company expects more than $300 million in incremental annual run rate Operating EBITDA generation by the end of 2025 related to digital acceleration, with an additional one-time $100 million in structural working capital efficiency gains, driven in part by enhanced planning from digital tools. The activities related to digital acceleration are expected to result in additional cash expenditures of approximately $370 million, primarily through the end of 2022. Digital
acceleration expenses totaled $33 million for the three months ended March 31, 2021.
Contractual Obligations
Information related to the Company’s contractual obligations, commercial commitments and expected cash requirements for interest can be found in Notes 15, 16, 17 and 20 to the Consolidated Financial Statements included in the 2020 10-K. With the exception of the items noted below, there have been no material changes in the Company’s contractual obligations since December 31, 2020.
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. Additional information related
to guarantees can be found in the "Guarantees" section of Note 12 to the Consolidated Financial Statements.
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 in the United States of America (“U.S. GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements included in the 2020 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 2020 10-K. Since December 31, 2020, there have been no material changes in the Company’s accounting policies that are impacted by judgments, assumptions and estimates.
Asbestos-Related
Matters of Union Carbide Corporation
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). 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
2021
2020
Claims unresolved at Jan 1
9,126
11,117
Claims
filed
1,110
1,296
Claims settled, dismissed or otherwise resolved
(1,428)
(1,269)
Claims unresolved at Mar 31
8,808
11,144
Claimants with claims against both Union Carbide and Amchem
(2,541)
(3,809)
Individual
claimants at Mar 31
6,267
7,335
Plaintiffs’ lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous claimants. As a result, the damages alleged are not expressly identified as to Union Carbide, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only Union Carbide and/or Amchem are the sole named defendants. For these reasons and based upon Union Carbide’s litigation and settlement experience, Union Carbide does not consider the damages alleged against Union Carbide and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.
For
additional information, see Asbestos-Related Matters of Union Carbide Corporation in Note 12 to the Consolidated Financial Statements and Note 16 to the Consolidated Financial Statements included in the 2020 10-K, and Part II, Item 1. Legal Proceedings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Note 18 to the Consolidated Financial Statements and Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31,
2020, for information on the Company's utilization of financial instruments and an analysis of the sensitivity of these instruments.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, Dow Inc. and The Dow Chemical Company (the "Companies") carried out an evaluation, under the supervision and with the participation of the Companies' Disclosure Committee and the Companies' management, including the
Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Companies' disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companies' disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companies' internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companies' internal control over financial reporting.
Asbestos-Related Matters of Union Carbide Corporation
No material developments regarding this matter occurred in the first quarter of 2021. For a current
status of this matter, see Note 12 to the Consolidated Financial Statements.
Environmental Proceedings
On December 18, 2020, Dow and several other parties received a complaint and proposed consent decree from the U.S. Environmental Protection Agency ("EPA") relating to environmental contamination at the Gulfco Marine Maintenance Superfund Site in Freeport, Texas. The proposed consent decree included a requirement for three defendants to make a collective payment of $1.2 million for the EPA’s past response costs as well as an obligation to conduct certain response actions at the site. On February 23, 2021, the consent decree was approved by the court and became effective. Pursuant to the consent decree, payment for the EPA's past response
costs must be made by April 26, 2021.
ITEM 1A. RISK FACTORS
Since December 31, 2020, there have been no material changes to the Company's Risk Factors.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of Dow Inc. common stock by the Company during the three months ended March 31, 2021:
Issuer Purchases of Equity Securities
Total number of shares purchased as part of the
Company's publicly announced share repurchase program
Approximate dollar value of shares that may yet be purchased under the Company's publicly announced share repurchase program 1
(In millions)
Period
Total number of shares purchased
Average price paid per share
January 2021
—
$
—
—
$
2,375
February
2021
—
$
—
—
$
2,375
March 2021
—
$
—
—
$
2,375
First quarter 2021
—
$
—
—
$
2,375
1.On
April 1, 2019, Dow Inc.'s Board of Directors ratified the share repurchase program originally approved on March 15, 2019, authorizing up to $3.0 billion to be spent on the repurchase of the Company's common stock, with no expiration date.
Amended
and Restated Shareholders' Agreement, effective as of March 25, 2021, between Excellent Performance Chemicals Company and Dow Saudi Arabia Holding B.V. (portions of this exhibit have been omitted because it is both (i) not material and (ii) the type of information that The Dow Chemical Company treats as private or confidential) (incorporated by reference to Exhibit 99.1 to Dow Inc. and The Dow Chemical Company's Current Report on Form 8-K filed with the SEC on April 23, 2021).
4.3
Dow Inc. agrees to provide the SEC, on request, copies of all other such indentures and instruments that define the rights of holders of long-term debt of Dow Inc. and its consolidated
subsidiaries, including The Dow Chemical Company, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K.
Cover Page Interactive Data File. The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
The following registered trademark of Incapital Holdings appears in this report: InterNotes®
The
following registered trademarks of Great Place to Work® Institute, Inc. appear in this report: Great Place to Work®, Fortune 100 Best Companies to Work For®, Best Workplaces™
®
™ Trademark of The Dow Chemical Company ("TDCC") or an affiliated company, except as otherwise specified.
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
