SEPARATION FROM DOWDUPONT Separation from DowDuPont (Notes)

9 Months Ended

Sep. 30, 2019

Discontinued Operations and Disposal Groups [Abstract]

SEPARATION FROM DOWDUPONT

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

On April 1, 2019, Dow Inc. received a cash contribution of $2,024 million from DowDuPont as part of the internal reorganization and business realignment steps between Dow Inc., TDCC and DowDuPont. Dow Inc. recognized a reduction to "Retained earnings" of $14,861 million in the nine months ended September 30, 2019 as a result of the cash contribution, the distribution of AgCo and SpecCo, and other separation related adjustments. TDCC recognized a reduction to "Retained earnings" of $16,022 million in the nine months ended September 30, 2019 as a result of the distribution of AgCo and SpecCo.

Receipt of ECP

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



ECP Assets Received and Liabilities Assumed on Aug 31, 2017	Carrying value
In millions	Carrying value
Cash and cash equivalents	$	1
Accounts and notes receivable - Trade	169
Accounts and notes receivable - Other	32
Inventories	529
Other current assets	6
Investment in nonconsolidated affiliates	116
Net property	817
Goodwill	3,617
Other intangible assets	1,484
Deferred income tax assets	9
Total Assets	$	6,780
Accounts payable - Trade	102
Accounts payable - Other	29
Accrued and other current liabilities	31
Deferred income tax liabilities	683
Pension and other postretirement benefits - noncurrent	6
Other noncurrent obligations	3
Total Liabilities	$	854
Net Assets (impact to "Retained earnings")	$	5,926

Distribution of AgCo and SpecCo

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



Results of Operations of AgCo and SpecCo	Three Months Ended			Nine Months Ended
	Sep 30, 2018			Sep 30, 2019			Sep 30, 2018
In millions
Net sales	$	2,719		$	2,953		$	9,175
Cost of sales	1,748			1,804			5,696
Research and development expenses	188			175			564
Selling, general and administrative expenses	273			262			828
Amortization of intangibles	61			61			188
Restructuring and asset related charges - net	64			78			202
Equity in earnings of nonconsolidated affiliates	31			28			114
Sundry income (expense) - net	(11		)	(18		)	(6		)
Interest income	5			3			16
Interest expense and amortization of debt discount	22			7			43
Income from discontinued operations before income taxes	$	388		$	579		$	1,778
Provision for income taxes	53			134			375
Income from discontinued operations, net of tax	$	335		$	445		$	1,403

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



Carrying Values of AgCo and SpecCo ¹	Dec 31, 2018
In millions	Dec 31, 2018
Accounts and notes receivable - Trade	$	2,768
Accounts and notes receivable - Other	773
Inventories	2,826
Other current assets	151
Investment in nonconsolidated affiliates	612
Other investments	2
Noncurrent receivables	35
Net property	3,014
Goodwill	7,590
Other intangible assets	1,830
Deferred income tax assets	239
Deferred charges and other assets	60
Total assets of discontinued operations	$	19,900
Notes payable	7
Long-term debt due within one year	4
Accounts payable - Trade	1,118
Accounts payable - Other	868
Income taxes payable	234
Accrued and other current liabilities	716
Long-Term Debt	5
Deferred income tax liabilities	568
Pension and other postretirement benefits - noncurrent	306
Other noncurrent obligations	662
Total liabilities of discontinued operations	$	4,488


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

Separation and Distribution, Tax Matters and Other Agreements

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

The impacts of indemnifications and other post-separation matters relating to the Agreements were primarily reflected in the consolidated financial statements of Dow Inc. In the second quarter of 2019, the Company recorded pretax charges related to the Agreements of $24 million in "Integration and separation costs" and $52 million in "Sundry income (expense) - net" in the consolidated statements of income of Dow Inc., and related to Corporate. At September 30, 2019, the Company had assets of $109 million included in "Other current assets" and $16 million included in "Noncurrent receivables," and liabilities of $368 million included in "Accrued and other current liabilities" and $154 million included in "Other noncurrent obligations" in the consolidated balance sheets of Dow Inc. related to the Agreements. Any adjustments to these assets and liabilities in subsequent periods will be recorded in Dow Inc.'s results of operations. In addition, the Company deferred approximately $400 million of the cash distribution received from DowDuPont at separation and recorded an associated liability in "Other noncurrent obligations," with an offset to "Retained earnings" in the consolidated balance sheets of Dow Inc. The final resolution of this liability is uncertain and any subsequent adjustments to the carrying value of this liability will be reflected in equity of Dow Inc. Following the separation, Dow Inc. made cash payments of $187 million related to the Agreements, recorded in "Cash flows from operating activities - discontinued operations" in the Dow Inc. consolidated statements of cash flows. The Company also received $63 million related to the Agreements, recorded in "Other assets and liabilities, net" within "Cash flows from operating activities - continuing operations" in the Dow Inc. consolidated statements of cash flows.

Continuing Involvement

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

Integration and Separation Costs

Integration and separation costs, which reflect costs related to post-Merger integration and business separation activities, as well as the ownership restructure of Dow Silicones (through May 31, 2018), were $164 million for Dow Inc. and TDCC in the third quarter of 2019, compared with $313 million in the third quarter of 2018. Integration and separation costs were $964 million and $940 million for Dow Inc. and TDCC, respectively, in the first nine months of 2019 compared with $799 million in the first nine months of 2018. Integration and separation costs related to post-Merger integration and business separation activities are expected to be substantially complete by the end of the second quarter of 2020.