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DOW INC. - Quarter Report: 2019 June (Form 10-Q)

Table of Contents

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

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


Table of Contents

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

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

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Table of Contents

Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries

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

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

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

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

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


3
Table of Contents

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

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

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



4
Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


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

$
12,789

$
21,983

$
25,026

Cost of sales
9,420

10,540

18,562

20,520

Research and development expenses
208

221

398

429

Selling, general and administrative expenses
422

485

870

967

Amortization of intangibles
104

118

220

236

Restructuring and asset related charges - net
65

40

221

127

Integration and separation costs
348

262

800

486

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

(29
)
394

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

40

Interest income
21

18

39

38

Interest expense and amortization of debt discount
237

261

478

523

Income from continuing operations before income taxes
215

1,059

512

2,210

Provision for income taxes on continuing operations
125

249

266

475

Income from continuing operations, net of tax
90

810

246

1,735

Income from discontinued operations, net of tax
—

554

445

1,068

Net income
90

1,364

691

2,803

Net income attributable to noncontrolling interests
15

31

60

66

Net income available for Dow Inc. common stockholders
$
75

$
1,333

$
631

$
2,737

 








Per common share data:








Earnings per common share from continuing operations - basic
$
0.10

$
1.05

$
0.26

$
2.26

Earnings per common share from discontinued operations - basic
—

0.73

0.58

1.40

Earnings per common share - basic
$
0.10

$
1.78

$
0.84

$
3.66

Earnings per common share from continuing operations - diluted
$
0.10

$
1.05

$
0.26

$
2.26

Earnings per common share from discontinued operations - diluted
—

0.73

0.58

1.40

Earnings per common share - diluted
$
0.10

$
1.78

$
0.84

$
3.66

 








Weighted-average common shares outstanding - basic
742.8

747.2

745.0

747.2

Weighted-average common shares outstanding - diluted
747.9

747.2

747.6

747.2

 
 
 
 
 
Depreciation
$
538

$
540

$
1,081

$
1,094

Capital expenditures
$
470

$
489

$
912

$
868

See Notes to the Consolidated Financial Statements.


5
Table of Contents

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

$
1,364

$
691

$
2,803

Other comprehensive income (loss), net of tax




Unrealized gains (losses) on investments
33

(14
)
100

(39
)
Cumulative translation adjustments
67

(470
)
36

(94
)
Pension and other postretirement benefit plans
106

124

247

250

Derivative instruments
(204
)
118

(279
)
124

Total other comprehensive income (loss)
2

(242
)
104

241

Comprehensive income
92

1,122

795

3,044

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

(1
)
72

27

Comprehensive income attributable to Dow Inc.
$
71

$
1,123

$
723

$
3,017

See Notes to the Consolidated Financial Statements.


6
Table of Contents

Dow Inc. and Subsidiaries
Consolidated Balance Sheets

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


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

$
2,724

Marketable securities
20

100

Accounts and notes receivable:


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

5,646

Other
2,908

3,389

Inventories
6,841

6,899

Other current assets
761

712

Assets of discontinued operations - current
—

19,900

Total current assets
18,637

39,370

Investments


Investment in nonconsolidated affiliates
2,968

3,320

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

2,646

Noncurrent receivables
785

360

Total investments
6,311

6,326

Property


Property
54,937

53,984

Less accumulated depreciation
33,687

32,566

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

21,418

Other Assets


Goodwill
9,848

9,846

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

4,225

Operating lease right-of-use assets
2,183

—

Deferred income tax assets
1,857

1,779

Deferred charges and other assets
803

735

Total other assets
18,691

16,585

Total Assets
$
64,889

$
83,699

Liabilities and Equity


Current Liabilities


Notes payable
$
544

$
298

Long-term debt due within one year
297

338

Accounts payable:


Trade
4,188

4,456

Other
2,179

2,479

Operating lease liabilities - current
421

—

Income taxes payable
370

557

Accrued and other current liabilities
3,606

2,931

Liabilities of discontinued operations - current
—

4,488

Total current liabilities
11,605

15,547

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

19,253

Other Noncurrent Liabilities


Deferred income tax liabilities
500

501

Pension and other postretirement benefits - noncurrent
8,674

8,926

Asbestos-related liabilities - noncurrent
1,113

1,142

Operating lease liabilities - noncurrent
1,779

—

Other noncurrent obligations
5,563

4,709

Total other noncurrent liabilities
17,629

15,278

Stockholders’ Equity


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

—

Additional paid-in capital
7,186

7,042

Retained earnings
20,110

35,460

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

Dow Inc.’s stockholders’ equity
17,911

32,483

Noncontrolling interests
589

1,138

Total equity
18,500

33,621

Total Liabilities and Equity
$
64,889

$
83,699

See Notes to the Consolidated Financial Statements.

7
Table of Contents

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


Net income
$
691

$
2,803

Less: Income from discontinued operations, net of tax
445

1,068

Income from continuing operations, net of tax
246

1,735

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


Depreciation and amortization
1,486

1,451

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

Earnings of nonconsolidated affiliates less than dividends received
880

196

Net periodic pension benefit cost
57

169

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

20

Restructuring and asset related charges - net
221

127

Other net loss
115

241

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

(1,115
)
Inventories
58

(912
)
Accounts payable
(450
)
1,299

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

1,504

Cash provided by operating activities - discontinued operations
253

289

Cash provided by operating activities
2,256

1,793

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

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

14

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

55

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

751

Proceeds from interests in trade accounts receivable conduits
—

656

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

345

Proceeds from issuance of long-term debt
2,010

—

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

Proceeds from issuance of parent company stock
34

85

Transaction financing, debt issuance and other costs
(56
)
—

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

Dividends paid to stockholders
(517
)
—

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

(215
)
Other financing activities, net
—

3

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

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

6,208

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

$
4,868

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

45

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

$
4,823

See Notes to the Consolidated Financial Statements.


8
Table of Contents

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

$
—

$
—

$
—

Common stock issued
7

—

7

—

Balance at end of period
7

—

7

—

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

6,758

7,042

6,553

Common stock issued/sold
(1
)
—

(1
)
—

Issuance of parent company stock - DowDuPont Inc.
—

22

28

85

Stock-based compensation and allocation of ESOP shares
64

81

147

223

Other
(30
)
—

(30
)
—

Balance at end of period
7,186

6,861

7,186

6,861

Retained Earnings
 
 
 
 
Balance at beginning of period
35,403

33,899

35,460

33,742

Net income available for Dow Inc. common stockholders
75

1,333

631

2,737

Dividends to stockholders
(517
)
—

(517
)
—

Dividends to parent - DowDuPont Inc.
—

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

1,057

(111
)
989

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

35,192

20,110

35,192

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

(242
)
104

241

Common control transaction
793

—

793

—

Adoption of accounting standards
—

(1,057
)
—

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

5

35

44

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

—

—

—

Treasury stock purchases
(305
)
—

(305
)
—

Balance at end of period
(305
)
—

(305
)
—

Dow Inc.'s stockholders' equity
17,911

32,521

17,911

32,521

Noncontrolling Interests
589

1,152

589

1,152

Total Equity
$
18,500

$
33,673

$
18,500

$
33,673

 
 
 
 
 
Dividends declared per share of common stock
$
0.70

$
—

$
0.70

$
—

See Notes to the Consolidated Financial Statements.


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Table of Contents

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

$
12,789

$
21,983

$
25,026

Cost of sales
9,419

10,540

18,561

20,520

Research and development expenses
208

221

398

429

Selling, general and administrative expenses
418

485

866

967

Amortization of intangibles
104

118

220

236

Restructuring and asset related charges - net
65

40

221

127

Integration and separation costs
324

262

776

486

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

(29
)
394

Sundry income (expense) - net
109

(14
)
178

40

Interest income
21

18

39

38

Interest expense and amortization of debt discount
249

261

490

523

Income from continuing operations before income taxes
342

1,059

639

2,210

Provision for income taxes on continuing operations
125

249

266

475

Income from continuing operations, net of tax
217

810

373

1,735

Income from discontinued operations, net of tax
—

554

445

1,068

Net income
217

1,364

818

2,803

Net income attributable to noncontrolling interests
15

31

60

66

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

$
1,333

$
758

$
2,737

 
 
 
 
 
Depreciation
$
538

$
540

$
1,081

$
1,094

Capital expenditures
$
470

$
489

$
912

$
868

See Notes to the Consolidated Financial Statements.


10
Table of Contents

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

$
1,364

$
818

$
2,803

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

(14
)
100

(39
)
Cumulative translation adjustments
67

(470
)
36

(94
)
Pension and other postretirement benefit plans
106

124

247

250

Derivative instruments
(204
)
118

(279
)
124

Total other comprehensive income (loss)
2

(242
)
104

241

Comprehensive income
219

1,122

922

3,044

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

(1
)
72

27

Comprehensive income attributable to The Dow Chemical Company
$
198

$
1,123

$
850

$
3,017

See Notes to the Consolidated Financial Statements.

11
Table of Contents

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

$
2,724

Marketable securities
20

100

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

5,646

Other
2,912

3,389

Inventories
6,841

6,899

Other current assets
588

712

Assets of discontinued operations - current
—

19,900

Total current assets
18,468

39,370

Investments
 
 
Investment in nonconsolidated affiliates
2,968

3,320

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

2,646

Noncurrent receivables
771

360

Total investments
6,297

6,326

Property
 
 
Property
54,937

53,984

Less accumulated depreciation
33,687

32,566

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

21,418

Other Assets
 
 
Goodwill
9,848

9,846

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

4,225

Operating lease right-of-use assets
2,183

—

Deferred income tax assets
1,857

1,779

Deferred charges and other assets
801

735

Total other assets
18,689

16,585

Total Assets
$
64,704

$
83,699

Liabilities and Equity
 
 
Current Liabilities
 
 
Notes payable
$
1,691

$
298

Long-term debt due within one year
297

338

Accounts payable:
 
 
Trade
4,187

4,456

Other
2,179

2,479

Operating lease liabilities - current
421

—

Income taxes payable
370

557

Accrued and other current liabilities
3,072

2,931

Liabilities of discontinued operations - current
—

4,488

Total current liabilities
12,217

15,547

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

19,253

Other Noncurrent Liabilities
 
 
Deferred income tax liabilities
500

501

Pension and other postretirement benefits - noncurrent
8,674

8,926

Asbestos-related liabilities - noncurrent
1,113

1,142

Operating lease liabilities - noncurrent
1,779

—

Other noncurrent obligations
4,997

4,709

Total other noncurrent liabilities
17,063

15,278

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

—

Additional paid-in capital
7,192

7,042

Retained earnings
19,575

35,460

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

32,483

Noncontrolling interests
589

1,138

Total equity
18,269

33,621

Total Liabilities and Equity
$
64,704

$
83,699

See Notes to the Consolidated Financial Statements.

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Table of Contents

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

$
2,803

Less: Income from discontinued operations, net of tax
445

1,068

Income from continuing operations, net of tax
373

1,735

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


Depreciation and amortization
1,486

1,451

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

Earnings of nonconsolidated affiliates less than dividends received
880

196

Net periodic pension benefit cost
57

169

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

20

Restructuring and asset related charges - net
221

127

Other net loss
115

241

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




Accounts and notes receivable
240

(1,115
)
Inventories
58

(912
)
Accounts payable
(451
)
1,299

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

1,504

Cash provided by operating activities - discontinued operations
346

289

Cash provided by operating activities
2,323

1,793

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

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

14

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

55

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

751

Proceeds from interests in trade accounts receivable conduits
—

656

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

345

Changes in notes payable with Dow Inc.
1,135

—

Proceeds from issuance of long-term debt
2,010

—

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

85

Transaction financing, debt issuance and other costs
(56
)
—

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

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

3

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

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

6,208

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

$
4,868

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

45

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

$
4,823

See Notes to the Consolidated Financial Statements.

13
Table of Contents

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

$
—

$
—

$
—

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

6,758

7,042

6,553

Issuance of parent company stock - Dow Inc.
6

—

6

—

Issuance of parent company stock - DowDuPont Inc.
—

22

28

85

Stock-based compensation and allocation of ESOP shares
64

81

147

223

Other
(31
)
—

(31
)
—

Balance at end of period
7,192

6,861

7,192

6,861

Retained Earnings
 
 
 
 
Balance at beginning of period
35,403

33,899

35,460

33,742

Net income available for The Dow Chemical Company common stockholder
202

1,333

758

2,737

Dividends to parent - DowDuPont Inc.
—

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

1,057

(111
)
989

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

35,192

19,575

35,192

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

(242
)
104

241

Common control transaction
793

—

793

—

Adoption of accounting standards
—

(1,057
)
—

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

5

35

44

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

32,521

17,680

32,521

Noncontrolling Interests
589

1,152

589

1,152

Total Equity
$
18,269

$
33,673

$
18,269

$
33,673

See Notes to the Consolidated Financial Statements.











14
Table of Contents

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


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

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


15
Table of Contents

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

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

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

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

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

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

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


16
Table of Contents

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

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

2018
In the first quarter of 2018, the Company adopted Topic 606, ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" and ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." The adoption of these ASUs resulted in a net decrease of $68 million to retained earnings and a decrease of $20 million to accumulated other comprehensive loss ("AOCL") in the consolidated statements of equity at January 1, 2018. In the second quarter of 2018, the Company early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02")." The adoption of this standard resulted in a $1,057 million increase to retained earnings due to the reclassification from AOCL in the consolidated statements of equity at April 1, 2018.

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


NOTE 2 – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In the first quarter of 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)," and associated ASUs related to Topic 842, which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognize assets and liabilities for leases, and recognition, presentation and measurement in the financial statements will depend on its classification as a finance or operating lease. In addition, the new guidance requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. Lessor accounting remains largely unchanged from legacy U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance in Topic 606, issued in 2014. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption was permitted.

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

Accounting Guidance Issued But Not Adopted at June 30, 2019
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which is part of the FASB disclosure framework project to improve the effectiveness of disclosures in the notes to the financial statements. The amendments in the new guidance remove, modify and add certain disclosure requirements related to fair value measurements covered in Topic 820, "Fair Value Measurement." The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for either the entire standard or only the requirements that modify or eliminate

17
Table of Contents

the disclosure requirements, with certain requirements applied prospectively, and all other requirements applied retrospectively to all periods presented. The Company is currently evaluating the impact of adopting this guidance.

In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract," which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Topic 350, "Intangibles - Goodwill and Other" to determine which implementation costs to capitalize as assets or expense as incurred. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and an entity can elect to apply the new guidance on a prospective or retrospective basis. The Company is currently evaluating the impact of adopting this guidance.


NOTE 3 – SEPARATION FROM DOWDUPONT
On April 1, 2019, DowDuPont completed the previously announced separation of its materials science business. The separation was effected by way of a pro rata distribution of all of the then-issued and outstanding shares of Dow Inc. common stock to DowDuPont stockholders of record as of the close of business, Eastern Time, on March 21, 2019 (the “Record Date”). The shareholders of record of DowDuPont received one share of Dow Inc. common stock, par value $0.01 per share, for every three shares of DowDuPont common stock, par value $0.01 per share, held as of the Record Date ("Distribution Ratio"). No fractional shares of Dow Inc. common stock were issued. Instead, cash in lieu of any fractional shares was paid to DowDuPont registered shareholders. The number of shares of Dow Inc. common stock issued on April 1, 2019 was 748.8 million shares. Dow Inc. is now an independent, publicly traded company and Dow Inc. common stock is listed on the NYSE under the symbol “DOW.” Dow Inc. common stock began regular-way trading on April 2, 2019, the first day following the distribution.

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

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

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

Accounts and notes receivable - Trade
169

Accounts and notes receivable - Other
32

Inventories
529

Other current assets
6

Investment in nonconsolidated affiliates
116

Net property
817

Goodwill
3,617

Other intangible assets
1,484

Deferred income tax assets
9

Total Assets
$
6,780

Accounts payable - Trade
102

Accounts payable - Other
29

Accrued and other current liabilities
31

Deferred income tax liabilities
683

Pension and other postretirement benefits - noncurrent
6

Other noncurrent obligations
3

Total Liabilities
$
854

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



18
Table of Contents

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

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

$
2,953

$
6,456

Cost of sales
2,123

1,804

3,948

Research and development expenses
193

175

376

Selling, general and administrative expenses
272

262

555

Amortization of intangibles
63

61

127

Restructuring and asset related charges - net
56

78

138

Equity in earnings of nonconsolidated affiliates
41

28

83

Sundry income (expense) - net
1

(18
)
5

Interest income
3

3

11

Interest expense and amortization of debt discount
12

7

21

Income from discontinued operations before income taxes
$
723

$
579

$
1,390

Provision for income taxes
169

134

322

Income from discontinued operations, net of tax
$
554

$
445

$
1,068


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

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

Accounts and notes receivable - Other
773

Inventories
2,826

Other current assets
151

Investment in nonconsolidated affiliates
612

Other investments
2

Noncurrent receivables
35

Net property
3,014

Goodwill
7,590

Other intangible assets
1,830

Deferred income tax assets
239

Deferred charges and other assets
60

Total assets of discontinued operations
$
19,900

Notes payable
7

Long-term debt due within one year
4

Accounts payable - Trade
1,118

Accounts payable - Other
868

Income taxes payable
234

Accrued and other current liabilities
716

Long-Term Debt
5

Deferred income tax liabilities
568

Pension and other postretirement benefits - noncurrent
306

Other noncurrent obligations
662

Total liabilities of discontinued operations
$
4,488

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

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Table of Contents

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

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

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

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



20
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NOTE 4 – REVENUE
Revenue Recognition
The majority of Dow's revenue is derived from product sales. In the three and six months ended June 30, 2019, 98 percent of Dow's revenue related to product sales (99 percent for the three and six months ended June 30, 2018), with the remaining balance primarily related to the Company's insurance operations and licensing of patents and technologies. Product sales consist of sales of Dow's products to manufacturers and distributors and considers order confirmations or purchase orders, which in some cases are governed by master supply agreements, to be contracts with a customer. Dow enters into licensing arrangements in which it licenses certain rights of its patents and technology to customers. Revenue from Dow’s licenses for patents and technology is derived from sales-based royalties and licensing arrangements based on billing schedules established in each contract.

Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. At June 30, 2019, Dow had unfulfilled performance obligations of $652 million ($407 million at December 31, 2018) related to the licensing of technology. Dow expects revenue to be recognized for the remaining performance obligations over the next one to six years.

The remaining performance obligations are for product sales that have expected durations of one year or less, product sales of materials delivered through a pipeline for which Dow has elected the right to invoice practical expedient, or variable consideration attributable to royalties for licenses of patents and technology. Dow has received advance payments from customers related to long-term supply agreements that are deferred and recognized over the life of the contract, with remaining contract terms that range up to 22 years. Dow will have rights to future consideration for revenue recognized when product is delivered to the customer. These payments are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in Dow's consolidated balance sheets.

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

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

$
1,098

$
1,849

$
2,053

Consumer Solutions
1,409

1,526

2,789

2,898

Performance Materials & Coatings
$
2,356

$
2,624

$
4,638

$
4,951

Industrial Solutions
$
1,070

$
1,214

$
2,197

$
2,389

Polyurethanes & Construction Chemicals
2,269

2,752

4,619

5,371

Other
3

3

6

7

Industrial Intermediates & Infrastructure
$
3,342

$
3,969

$
6,822

$
7,767

Hydrocarbons & Energy
$
1,349

$
1,879

$
2,753

$
3,707

Packaging and Specialty Plastics
3,856

4,245

7,590

8,455

Packaging & Specialty Plastics
$
5,205

$
6,124

$
10,343

$
12,162

Corporate
$
111

$
72

$
180

$
146

Total
$
11,014

$
12,789

$
21,983

$
25,026


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

$
4,551

$
8,005

$
8,993

EMEAI 1
3,725

4,473

7,607

8,871

Asia Pacific
2,170

2,480

4,271

4,668

Latin America
1,047

1,285

2,100

2,494

Total
$
11,014

$
12,789

$
21,983

$
25,026

1. Europe, Middle East, Africa and India.

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Table of Contents

Contract Assets and Liabilities
Dow receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to Dow's contractual right to consideration for completed performance obligations not yet invoiced. Contract liabilities include payments received in advance of performance under the contract and are realized when the associated revenue is recognized under the contract. "Contract liabilities - current" primarily reflects deferred revenue from prepayments from customers for product to be delivered in 12 months or less. "Contract liabilities - noncurrent" includes advance payments that Dow has received from customers related to long-term supply agreements and royalty payments that are deferred and recognized over the life of the contract.

The increase in contract liabilities from December 31, 2018 to June 30, 2019 was due to advanced payments from a customer related to long-term product supply agreements. Revenue recognized in the first six months of 2019 from amounts included in contract liabilities at the beginning of the period was approximately $110 million (approximately $105 million in the first six months of 2018). In the first six months of 2019, the amount of contract assets reclassified to receivables as a result of the right to the transaction consideration becoming unconditional was $15 million (insignificant in the first six months of 2018).

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

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

$
5,646

Contract assets - current 1
$
34

$
19

Contract assets - noncurrent 2
$
2

$
1

Contract liabilities - current 3
$
205

$
134

Contract liabilities - noncurrent 4
$
1,648

$
1,318

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.



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Table of Contents

NOTE 5 – RESTRUCTURING AND ASSET RELATED CHARGES - NET
Charges for restructuring programs and other asset related charges, which includes other asset impairments, were $65 million for the three months ended June 30, 2019 ($40 million for the three months ended June 30, 2018) and $221 million for the six months ended June 30, 2019 ($127 million for the six months ended June 30, 2018). These charges were recorded in "Restructuring and asset related charges - net" in the consolidated statements of income. Further details on these charges are as follows.

Restructuring Plans
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont approved post-merger restructuring actions under the DowDuPont Cost Synergy Program (the "Synergy Program") which was designed to integrate and optimize the organization following the Merger and in preparation for the business separations. The following table summarizes the activities related to the Synergy Program, which are reflected on a continuing operations basis. The Company expects actions related to the Synergy Program to be substantially complete by the end of 2019.

DowDuPont Synergy Program
Severance and Related Benefit Costs
Asset Write-downs and Write-offs
Costs Associated with Exit and Disposal Activities
Total
In millions
Reserve balance at Dec 31, 2017
$
270

$
—

$
5

$
275

 Industrial Intermediates & Infrastructure
$
—

$
—

$
11

$
11

 Packaging & Specialty Plastics
—

—

3

3

 Corporate
68

3

—

71

Total restructuring charges
$
68

$
3

$
14

$
85

Charges against the reserve
—

(3
)
—

(3
)
Cash payments
(48
)
—

(3
)
(51
)
Reserve balance at Mar 31, 2018
$
290

$
—

$
16

$
306

 Corporate
$
17

$
13

$
—

$
30

Total restructuring charges
$
17

$
13

$
—

$
30

Charges against the reserve
—

(13
)
—

(13
)
Cash payments
(54
)
—

(6
)
(60
)
Reserve balance at Jun 30, 2018
$
253

$
—

$
10

$
263

 Packaging & Specialty Plastics
$
—

$
4

$
—

$
4

 Corporate
43

—

—

43

Total restructuring charges
$
43

$
4

$
—

$
47

Charges against the reserve
—

(4
)
—

(4
)
Cash payments
(56
)
—

—

(56
)
Reserve balance at Sep 30, 2018
$
240

$
—

$
10

$
250

 Performance Materials & Coatings
$
—

$
7

$
—

$
7

 Packaging & Specialty Plastics
—

6

—

6

 Corporate
9

—

—

9

Total restructuring charges
$
9

$
13

$
—

$
22

Charges against the reserve
—

(13
)
—

(13
)
Cash payments
(39
)
—

(3
)
(42
)
Reserve balance at Dec 31, 2018
$
210

$
—

$
7

$
217

 Packaging & Specialty Plastics
$
—

$
—

$
1

$
1

 Corporate
52

76

15

143

Total restructuring charges
$
52

$
76

$
16

$
144

Charges against the reserve
—

(76
)
—

(76
)
Cash payments
(79
)
—

(4
)
(83
)
Reserve balance at Mar 31, 2019
$
183

$
—

$
19

$
202

 Performance Materials & Coatings
$
—

$
22

$
—

$
22

 Corporate
25

7

5

37

Total restructuring charges
$
25

$
29

$
5

$
59

Charges against the reserve
—

(29
)
(2
)
(31
)
Cash payments
(71
)
—

—

(71
)
Reserve balance at Jun 30, 2019
$
137

$
—

$
22

$
159


At June 30, 2019, $139 million was included in "Accrued and other current liabilities" ($205 million at December 31, 2018) and $20 million was included in "Other noncurrent obligations" ($12 million at December 31, 2018) in the Company's consolidated balance sheets.


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Table of Contents

The Company recorded pretax restructuring charges of $786 million inception-to-date under the Synergy Program, consisting of severance and related benefit costs of $521 million, asset write-downs and write-offs of $225 million and costs associated with exit and disposal activities of $40 million.

Asset Write-downs and Write-offs
The restructuring charges related to the write-down and write-off of assets for the three and six months ended June 30, 2019 and 2018, related primarily to miscellaneous asset write-downs and write-offs, including the shutdown of several small manufacturing facilities and the write-off of non-manufacturing assets and certain corporate facilities.

Costs Associated with Exit and Disposal Activities
The restructuring charges for costs associated with exit and disposal activities for the three and six months ended June 30, 2019, included contract cancellation penalties and environmental remediation liabilities.

The Company expects to incur additional costs in the future related to its restructuring activities. Future costs are expected to include demolition costs related to closed facilities and restructuring plan implementation costs; these costs will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.

Asset Related Charges
The Company recognized an additional pretax impairment charge of $6 million and $18 million for the three and six months ended June 30, 2019, respectively, related primarily to capital additions made to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017 (charge of $3 million and $6 million for the three and six months ended June 30, 2018). The impairment charge was included in “Restructuring and asset related charges - net” in the consolidated statements of income and related to the Packaging & Specialty Plastics segment. See Note 20 for additional information.


NOTE 6 – SUPPLEMENTARY INFORMATION
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.

TDCC
For the three months ended June 30, 2019, "Sundry income (expense) - net" was income of $109 million compared with expense of $14 million for the three months ended June 30, 2018. "Sundry income (expense) – net" increased primarily due to an increase in foreign currency exchange gains and non-operating pension and postretirement benefit plan credits compared with the second quarter of 2018. The second quarter of 2019 also included a $44 million loss on the early extinguishment of debt and a gain of $14 million on post-closing adjustments related to a previous divestiture (both related to the Corporate segment). The second quarter of 2018 included a $20 million loss for a post-closing adjustment related to the Dow Silicones ownership restructure (related to the Performance Materials & Coatings segment). "Sundry income (expense) - net" in the first six months of 2019 was income of $178 million compared with income of $40 million in the first six months of 2018. In addition to the amounts previously discussed, the first six months of 2018 included a $20 million gain related to the Company's sale of its equity interest in MEGlobal (related to the Industrial Intermediates & Infrastructure segment).

Dow Inc.
For the three months ended June 30, 2019, "Sundry income (expense) - net" was expense of $1 million compared with expense of $14 million for the three months ended June 30, 2018. For the six months ended June 30, 2019, "Sundry income (expense) - net" was income of $68 million compared with income of $40 million for the six months ended June 30, 2018. In addition to the amounts previously discussed above for TDCC, "Sundry income (expense) - net" for the three and six months ended June 30, 2019, included a $58 million loss on post-closing adjustments related to a previous divestiture and $52 million in charges associated with agreements entered into with DuPont and Corteva as part of the separation and distribution, which provides for cross-indemnities and allocations of obligations and liabilities for periods prior to, at and after completion of the separation (both related to the Corporate segment). See Notes 3, 12, 17 and 23 for additional information.



24
Table of Contents

NOTE 7 - EARNINGS PER SHARE CALCULATIONS
The following tables provide earnings per share calculations of Dow Inc. for the three and six months ended June 30, 2019 and 2018. In accordance with the accounting guidance for earnings per share, 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
Six Months Ended
 
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
 
 
Income from continuing operations, net of tax
$
90

$
810

$
246

$
1,735

 
Net income attributable to noncontrolling interests - continuing operations
15

25

47

46

 
Net income attributable to participating securities - continuing operations 1
2

—

2

—

 
Income from continuing operations attributable to common stockholders
$
73

$
785

$
197

$
1,689

 
Income from discontinued operations, net of tax
$
—

$
554

$
445

$
1,068

 
Net income attributable to noncontrolling interests - discontinued operations
—

6

13

20

 
Income from discontinued operations attributable to common stockholders
$
—

$
548

$
432

$
1,048

 
Net income attributable to common stockholders
$
73

$
1,333

$
629

$
2,737

 
Earnings Per Share Calculations - Basic
Three Months Ended
Six Months Ended
 
Dollars per share
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
 
 
Income from continuing operations attributable to common stockholders
$
0.10

$
1.05

$
0.26

$
2.26

 
Income from discontinued operations attributable to common stockholders
—

0.73

0.58

1.40

 
Net income attributable to common stockholders
$
0.10

$
1.78

$
0.84

$
3.66

 
Earnings Per Share Calculations - Diluted
Three Months Ended
Six Months Ended
 
Dollars per share
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
 
 
Income from continuing operations attributable to common stockholders
$
0.10

$
1.05

$
0.26

$
2.26

 
Income from discontinued operations attributable to common stockholders
—

0.73

0.58

1.40

 
Net income attributable to common stockholders
$
0.10

$
1.78

$
0.84

$
3.66

 
Share Count Information
Three Months Ended
Six Months Ended
 
Shares in millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
 
 
Weighted-average common shares - basic 2
742.8

747.2

745.0

747.2

 
Plus dilutive effect of equity compensation plans
5.1

—

2.6

—

 
Weighted-average common shares - diluted 2
747.9

747.2

747.6

747.2

 
Stock options and restricted stock units excluded from EPS calculations 3
6.4

—

3.2

—

1.
Restricted stock units (formerly termed deferred stock) are considered participating securities due to the Company's practice of paying dividend equivalents on unvested shares.
2.
Share amounts for the three and six months ended June 30, 2018, were based on 2,246.3 million DowDuPont common shares outstanding as of the Record Date for the April 1, 2019 distribution, less 4.6 million Employee Stock Ownership Plan ("ESOP") shares that had not been released and were not considered outstanding, adjusted for the Distribution Ratio. There was no dilutive effect for the three and six months ended June 30, 2018, as the Company did not engage in activities giving rise to dilution.
3.
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. For the three and six months ended June 30, 2018, the Company did not engage in activities giving rise to dilution.



25
Table of Contents

NOTE 8 – INVENTORIES
The following table provides a breakdown of inventories:

Inventories
Jun 30, 2019
Dec 31, 2018
In millions
Finished goods
$
3,988

$
4,313

Work in process
1,272

1,335

Raw materials
692

674

Supplies
837

826

Total
$
6,789

$
7,148

Adjustment of inventories to a LIFO basis
52

(249
)
Total inventories
$
6,841

$
6,899



NOTE 9 – NONCONSOLIDATED AFFILIATES
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
Jun 30, 2019
Dec 31, 2018
In millions
Investment in nonconsolidated affiliates
$
2,968

$
3,320

Other noncurrent obligations
(178
)
—

Net investment in nonconsolidated affiliates
$
2,790

$
3,320


EQUATE
In the first quarter of 2019, EQUATE Petrochemical Company K.S.C.C. ("EQUATE") paid a dividend of $440 million, reflected in "Earnings of nonconsolidated affiliates less than dividends received" in the consolidated statements of cash flows. As a result, the Company had a negative investment balance in EQUATE of $178 million at June 30, 2019, classified as "Other noncurrent obligations" in the consolidated balance sheets. At December 31, 2018, the Company had an investment balance in EQUATE of $131 million, classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets.


NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows changes in the carrying amount of goodwill by reportable segment:

Goodwill
Performance Materials & Coatings
Industrial Intermediates & Infrastructure
Packaging & Specialty Plastics
Total
In millions
Net goodwill at Dec 31, 2018
$
3,650

$
1,095

$
5,101

$
9,846

Foreign currency impact
7

(1
)
(4
)
2

Net goodwill at Jun 30, 2019
$
3,657

$
1,094

$
5,097

$
9,848


The separation from DowDuPont did not impact the composition of the Company's six reporting units: Coatings & Performance Monomers, Consumer Solutions, Hydrocarbons & Energy, Industrial Solutions, Packaging and Specialty Plastics and Polyurethanes & Construction Chemicals. The ECP businesses received as part of the separation from DowDuPont are included in the Hydrocarbons & Energy and Packaging and Specialty Plastics reporting units.

26
Table of Contents

The following table provides information regarding the Company’s other intangible assets:

Other Intangible Assets
Jun 30, 2019
Dec 31, 2018
In millions
Gross
Carrying
Amount
Accum
Amort
Net
Gross
Carrying
Amount
Accum
Amort
Net  
Intangible assets with finite lives:
 
 
 
 
 
 
Developed technology
$
2,634

$
(1,363
)
$
1,271

$
2,634

$
(1,252
)
$
1,382

Software
1,426

(847
)
579

1,404

(805
)
599

Trademarks/tradenames
352

(342
)
10

352

(329
)
23

Customer-related
3,242

(1,105
)
2,137

3,211

(993
)
2,218

Total other intangible assets, finite lives
$
7,654

$
(3,657
)
$
3,997

$
7,601

$
(3,379
)
$
4,222

In-process research and development
3

—

3

3

—

3

Total other intangible assets
$
7,657

$
(3,657
)
$
4,000

$
7,604

$
(3,379
)
$
4,225


The following table provides information regarding amortization expense from continuing operations related to intangible assets:

Amortization Expense from Continuing Operations
Three Months Ended
Six Months Ended
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Other intangible assets, excluding software
$
104

$
118

$
220

$
236

Software, included in “Cost of sales” from Continuing Operations
$
23

$
23

$
47

$
45


Total estimated amortization expense from continuing operations for 2019 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense from Continuing Operations
In millions
2019
$
516

2020
$
490

2021
$
468

2022
$
406

2023
$
376

2024
$
363



NOTE 11 – TRANSFERS OF FINANCIAL ASSETS
The Company historically sold trade accounts receivable of select North American entities and qualifying trade accounts receivable of select European entities on a revolving basis to certain multi-seller commercial paper conduit entities ("conduits"). The proceeds received were comprised of cash and interests in specified assets of the conduits (the receivables sold by the Company) that entitled the Company to the residual cash flows of such specified assets in the conduits after the commercial paper was repaid. Neither the conduits nor the investors in those entities had recourse to other assets of the Company in the event of nonpayment by the debtors.

In the fourth quarter of 2017, the Company suspended further sales of trade accounts receivable through these facilities and began reducing outstanding balances through collections of trade accounts receivable previously sold to such conduits. In September and October 2018, the North American and European facilities, respectively, were amended and the terms of the agreements changed from off-balance sheet arrangements to secured borrowing arrangements. See Note 12 for additional information on the secured borrowing arrangements.


27
Table of Contents

The following represents the cash flows between the Company and the conduits:

Cash Proceeds
Three Months Ended
Six Months Ended
In millions
Jun 30,
2019
Jun 30,
2018
Jun 30,
2019
Jun 30,
2018
Interests in conduits 1
$
—

$
211

$
—

$
656

1.
Presented in "Investing Activities" in the consolidated statements of cash flows.


NOTE 12 – NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
Notes Payable
Jun 30,
2019
Dec 31,
2018
In millions
Commercial paper
$
—

$
10

Notes payable to banks and other lenders
468

288

Notes payable to related companies 1
76

—

Total notes payable
$
544

$
298

Period-end average interest rates
5.67
%
8.28
%
1.
In addition, "Notes payable" for TDCC includes a $1.1 billion note payable to Dow Inc., which is not reflected in the table above. See Note 22 for additional information.

Long-Term Debt
2019 Average Rate
Jun 30,
2019
2018
Average
Rate
Dec 31,
2018
In millions
Promissory notes and debentures:
 
 
 
 
Final maturity 2019
9.80
%
$
3

9.80
%
$
7

Final maturity 2020
8.44
%
76

4.46
%
1,547

Final maturity 2021
4.71
%
1,424

4.71
%
1,424

Final maturity 2022
3.50
%
1,372

3.50
%
1,373

Final maturity 2023
7.64
%
325

7.64
%
325

Final maturity 2024
3.37
%
1,396

3.50
%
896

Final maturity 2025 and thereafter
5.70
%
9,480

5.98
%
7,963

Other facilities:
 
 
 
 
U.S. dollar loans, various rates and maturities
3.46
%
2,000

3.59
%
4,533

Foreign currency loans, various rates and maturities
3.38
%
619

3.20
%
708

Medium-term notes, varying maturities through 2025
3.34
%
695

3.26
%
778

Finance lease obligations 1
 
399

 
371

Unamortized debt discount and issuance costs
 
(337
)
 
(334
)
Long-term debt due within one year 2
 
(297
)
 
(338
)
Long-term debt
 
$
17,155

 
$
19,253

1.
See Note 14 for additional information.
2.
Presented net of current portion of unamortized debt issuance costs.

Maturities of Long-Term Debt for Next Five Years at Jun 30, 2019
In millions
2019
$
148

2020
$
380

2021 1
$
3,767

2022
$
1,513

2023
$
508

2024
$
1,471

1.
Assumes the option to extend will be exercised for the $2 billion Dow Silicones Term Loan Facility.


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2019 Activity
In the first six months of 2019, the Company redeemed an aggregate principal amount of $80 million of International Notes ("InterNotes") at maturity. In addition, approximately $134 million of long-term debt (net of $16 million of issuances) was repaid by consolidated variable interest entities.

In May 2019, the Company issued $2.0 billion of senior unsecured notes in an offering under Rule 144A of the Securities Act of 1933. The offering included $750 million aggregate principal amount of 4.80 percent notes due 2049; $750 million aggregate principal amount of 3.625 percent notes due 2026; and $500 million aggregate principal amount of 3.15 percent notes due 2024.

In June 2019 the Company redeemed $1.5 billion of 4.25 percent notes issued by the Company with maturity in 2020. As a result, the Company recognized a pretax loss of $42 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income and related to the Corporate segment.

In the second quarter of 2019, Dow Silicones voluntarily repaid $2.5 billion of principal under a certain third party credit agreement ("Term Loan Facility"). As a result, Dow Silicones recognized a pretax loss of $2 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income and related to the Corporate segment. Dow Silicones also intends to exercise the 2-year extension option on the remaining principal balance of $2 billion.

2018 Activity
In the first six months of 2018, the Company redeemed $333 million of 5.7 percent notes at maturity, and an aggregate principal amount of $20 million of InterNotes at maturity. In addition, approximately $75 million of long-term debt was repaid by consolidated variable interest entities. The Company also called an aggregate principal amount of $125 million tax-exempt bonds of various interest rates and maturities in 2029, 2033 and 2038. As a result of the redemptions, the Company recognized a pretax loss of $1 million on the early extinguishment of debt, included in “Sundry income (expense) - net” in the consolidated statements of income.

Available Credit Facilities
The following table summarizes the Company's credit facilities:

Committed and Available Credit Facilities at Jun 30, 2019
In millions
Committed Credit
Credit Available
Maturity Date
Interest
Five Year Competitive Advance and Revolving Credit Facility
$
5,000

$
5,000

October 2023
Floating rate
Term Loan Facility 1
2,000

—

December 2021
Floating rate
North American Securitization Facility
800

800

September 2019
Floating rate
European Securitization Facility 2
456

456

October 2020
Floating rate
Bilateral Revolving Credit Facility
100

100

October 2019
Floating rate
Bilateral Revolving Credit Facility
100

100

March 2020
Floating rate
Bilateral Revolving Credit Facility
100

100

March 2020
Floating rate
Bilateral Revolving Credit Facility
280

280

March 2020
Floating rate
Bilateral Revolving Credit Facility
100

100

March 2020
Floating rate
Bilateral Revolving Credit Facility
200

200

March 2020
Floating rate
Bilateral Revolving Credit Facility
200

200

May 2020
Floating rate
Bilateral Revolving Credit Facility
200

200

July 2020
Floating rate
Bilateral Revolving Credit Facility
100

100

August 2020
Floating rate
Total committed and available credit facilities
$
9,636

$
7,636

 
 
1.
Assumes the option to extend the Dow Silicones term loan facility will be exercised.
2.
Equivalent to Euro 400 million.

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 six months of 2019, except for what has been noted below. Information on the Company's debt covenants and default provisions can be found in Note 15 to the Consolidated Financial Statements included in TDCC's Annual Report on Form 10-K for the year ended December 31, 2018.


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Table of Contents

On April 1, 2019, DowDuPont completed the separation of its materials science business and Dow Inc. became the direct parent company of TDCC. In conjunction with the separation, Dow Inc. is obligated, substantially concurrently with the issuance of any guarantee in respect of outstanding or committed indebtedness under the Company's Five Year Competitive Advance and Revolving Credit Facility Agreement ("Revolving Credit Agreement"), to enter into a supplemental indenture with TDCC and the trustee under TDCC’s existing 2008 base indenture governing certain notes issued by TDCC. Under such supplemental indenture, Dow Inc. will guarantee all outstanding debt securities and all amounts due under such existing base indenture and will become subject to certain covenants and events of default under the existing base indenture.

In addition, the Revolving Credit Agreement includes an event of default which would be triggered in the event Dow Inc. incurs or guarantees third party indebtedness for borrowed money in excess of $250 million or engages in any material activity or directly owns any material assets, in each case, subject to certain conditions and exceptions. Dow Inc. may, at its option, cure the event of default by delivering an unconditional and irrevocable guarantee to the administrative agent within thirty days of the event or events giving rise to such event of default.

No such events have occurred or have been triggered at the time of the filing of this Quarterly Report on Form 10-Q.


NOTE 13 – COMMITMENTS AND CONTINGENT LIABILITIES
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 June 30, 2019, Dow had accrued obligations of $796 million for probable environmental remediation and restoration costs, including $156 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 current estimate of the costs for remediation and restoration with respect to environmental matters for which Dow has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on Dow’s results of operations, financial condition and cash flows. It is the opinion of Dow’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on Dow’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. In the second half of 2019, as a result of the business separations, and change in ownership of certain sites where there are remediation activities, additional costs may be incurred to effectively manage the ongoing activities. In addition, as a result of the potential culmination of long standing negotiations with regulators and/or agencies, additional charges for environmental matters may be recorded. Management believes that it is reasonably possible that the additional charges for environmental matters may be increased up to $400 million as a result of this review. At December 31, 2018, Dow had accrued obligations of $810 million for probable environmental remediation and restoration costs, including $156 million for the remediation of Superfund sites.

Litigation
Asbestos-Related Matters of Union Carbide Corporation
A summary of Asbestos-Related Matters of Union Carbide Corporation can be found in Note 16 to the Consolidated Financial Statements included in TDCC's Annual Report on Form 10-K for the year ended December 31, 2018.

Introduction
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.

Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.


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Table of Contents

Estimating the Asbestos-Related Liability
Since 2003, Union Carbide has engaged Ankura Consulting Group, LLC ("Ankura"), a third party actuarial specialist, to review Union Carbide's historical asbestos-related claim and resolution activity in order to assist Union Carbide's management in estimating the asbestos-related liability. Each year, Ankura has reviewed the claim and resolution activity to determine the appropriateness of updating the most recent Ankura study.

Based on the December 2018 Ankura review and Union Carbide's own review of the data, Union Carbide's total asbestos-related liability through the terminal year of 2049, including asbestos-related defense and processing costs, was $1,260 million at December 31, 2018, and included in “Accrued and other current liabilities” and “Asbestos-related liabilities - noncurrent” in the consolidated balance sheets.

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 all these factors in conjunction with the most recent Ankura study and determines whether a change in the estimate is warranted. Based on Union Carbide's review of 2019 activity, it was determined that no adjustment to the accrual was required at June 30, 2019.

Union Carbide’s asbestos-related liability for pending and future claims and defense and processing costs was $1,218 million at June 30, 2019, and approximately 17 percent of the recorded liability related to pending claims and approximately 83 percent related to future claims.

Summary
Dow's management believes the amounts recorded by Union Carbide for the asbestos-related liability (including defense and processing costs) reflect reasonable and probable estimates of the liability based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of defending and disposing of each such claim, as well as the numerous uncertainties surrounding asbestos litigation in the United States over a significant period of time, could cause the actual costs for Union Carbide to be higher or lower than those projected or those recorded. Any such events could result in an increase or decrease in the recorded liability.

Because of the uncertainties described above, Union Carbide cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing Union Carbide and Amchem. As a result, it is reasonably possible that an additional cost of disposing of Union Carbide's asbestos-related claims, including future defense and processing costs, could have a material impact on Dow's results of operations and cash flows for a particular period and on the consolidated financial position.

Dow Silicones Chapter 11 Related Matters
A summary of the Dow Silicones Chapter 11 Related Matters can be found in Note 16 to the Consolidated Financial Statements included in TDCC's Annual Report on Form 10-K for the year ended December 31, 2018.

Introduction
In 1995, Dow Silicones, then a 50:50 joint venture between the Company and Corning Incorporated ("Corning"), voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code in order to resolve Dow Silicones’ breast implant liabilities and related matters (the “Chapter 11 Proceeding”). Dow Silicones emerged from the Chapter 11 Proceeding on June 1, 2004 (the “Effective Date”) and is implementing the Joint Plan of Reorganization (the “Plan”). The Plan provides funding for the resolution of breast implant and other product liability litigation covered by the Chapter 11 Proceeding and provides a process for the satisfaction of commercial creditor claims in the Chapter 11 Proceeding. As of June 1, 2016, Dow Silicones is a wholly owned subsidiary of the Company.

Breast Implant and Other Product Liability Claims
Under the Plan, a product liability settlement program administered by an independent claims office (the “Settlement Facility”) was created to resolve breast implant and other product liability claims. Product liability claimants rejecting the settlement program in favor of pursuing litigation must bring suit against a litigation facility (the “Litigation Facility”). Dow Silicones has an obligation to fund the Settlement Facility and the Litigation Facility over a 16-year period, commencing at the Effective Date. At June 30, 2019, Dow Silicones and its insurers have made life-to-date payments of $1,762 million to the Settlement Facility and the Settlement Facility reported an unexpended balance of $88 million.


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Dow Silicones' liability for breast implant and other product liability claims ("Implant Liability") was $263 million at June 30, 2019 and December 31, 2018, of which $201 million at June 30, 2019 ($111 million at December 31, 2018) was included in “Accrued and other current liabilities” and $62 million at June 30, 2019 ($152 million at December 31, 2018) was included in "Other noncurrent obligations" in the consolidated balance sheets. Dow Silicones is not aware of circumstances that would change the factors used in estimating the Implant Liability and believes the recorded liability reflects the best estimate of the remaining funding obligations under the Plan; however, the estimate relies upon a number of significant assumptions, including: future claim filing levels in the Settlement Facility will be similar to those in a prior settlement program, which management uses to estimate future claim filing levels for the Settlement Facility; future acceptance rates, disease mix, and payment values will be materially consistent with historical experience; no material negative outcomes in future controversies or disputes over Plan interpretation will occur; and the Plan will not be modified. If actual outcomes related to any of these assumptions prove to be materially different, the future liability to fund the Plan may be materially different than the amount estimated. If Dow Silicones was ultimately required to fund the full liability up to the maximum capped value, the liability would be $2,183 million at June 30, 2019.

Commercial Creditor Issues
The Plan provides that each of Dow Silicones' commercial creditors (the “Commercial Creditors”) would receive in cash the sum of (a) an amount equal to the principal amount of their claims and (b) interest on such claims. The actual amount of interest that will ultimately be paid to these Commercial Creditors is uncertain due to pending litigation between Dow Silicones and the Commercial Creditors regarding the appropriate interest rates to be applied to outstanding obligations from the 1995 bankruptcy filing date through the Effective Date, as well as the presence of any recoverable fees, costs and expenses. Upon the Plan becoming effective, Dow Silicones paid approximately $1,500 million to the Commercial Creditors, representing principal and an amount of interest that Dow Silicones considers undisputed.

On May 10, 2017, the U.S. District Court for the Eastern District of Michigan entered a stipulated order resolving pending discovery motions and established a discovery schedule for the Commercial Creditors matter. As a result, Dow Silicones and its third party consultants conducted further analysis of the Commercial Creditors claims and defenses. This analysis indicated the estimated remaining liability to Commercial Creditors to be within a range of $77 million to $260 million. No single amount within the range appeared to be a better estimate than any other amount within the range. Therefore, Dow Silicones recorded the minimum liability within the range. At June 30, 2019, the liability related to Dow Silicones' potential obligation to its Commercial Creditors in the Chapter 11 Proceeding was $84 million and is included in "Accrued and other current liabilities" in the consolidated balance sheets ($82 million at December 31, 2018). The actual amount of interest that will be paid to these creditors is uncertain and will ultimately be resolved through continued proceedings in the District Court.

Indemnifications
In connection with the June 1, 2016, ownership restructure of Dow Silicones, the Company is indemnified by Corning for 50 percent of future losses associated with certain pre-closing liabilities, including the Implant Liability and Commercial Creditors matters described above, subject to certain conditions and limits. The maximum amount of indemnified losses which may be recovered are subject to a cap that declines over time. Indemnification assets were insignificant at June 30, 2019 (zero at December 31, 2018).

Summary
The amounts recorded by Dow Silicones for the Chapter 11 related matters described above were based on current, known facts, which management believes reflect reasonable and probable estimates of the liability. However, future events could cause the actual costs for Dow Silicones to be higher or lower than those projected or those recorded. Any such events could result in an increase or decrease in the recorded liability.

Other Litigation Matters
In addition to the specific matters described above, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to product liability, patent infringement, employment matters, governmental tax and regulation disputes, contract and commercial litigation, and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. The Company has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies may provide coverage that could be utilized to minimize the financial impact, if any, of certain contingencies described above. It is the opinion of the Company’s management that the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, financial condition and cash flows of the Company.


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Table of Contents

Gain Contingency - Dow v. Nova Chemicals Corporation Patent Infringement Matter
On December 9, 2010, Dow filed suit in the Federal Court in Ontario, Canada ("Federal Court") alleging that Nova Chemicals Corporation ("Nova") was infringing the Company's Canadian polyethylene patent 2,106,705. Nova counterclaimed on the grounds of invalidity and non-infringement. On June 29, 2017, the Federal Court issued a Confidential Supplemental Judgment, concluding that Nova must pay $645 million Canadian dollars (equivalent to $495 million U.S. dollars) to the Company, plus pre- and post-judgment interest, for which the Company received payment of $501 million from Nova on July 6, 2017. Although Nova is appealing portions of the damages judgment, certain portions of it are indisputable and will be owed to the Company regardless of the outcome of any further appeals by Nova. At June 30, 2019, the Company had $341 million ($341 million at December 31, 2018) included in "Other noncurrent obligations" in the consolidated balance sheets related to the disputed portion of the damages judgment. The Company is confident of its chances of defending the entire judgment on appeal, particularly the trial court's determinations on important factual issues, which will be accorded deferential review on appeal. See Note 16 to the Consolidated Financial Statements included in TDCC's Annual Report on Form 10-K for the year ended December 31, 2018 for additional information.

Guarantees
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
Jun 30, 2019
Dec 31, 2018
In millions
Final
Expiration
Maximum 
Future Payments
Recorded  
Liability  
Final
Expiration
Maximum 
Future Payments
Recorded  
Liability  
Guarantees
2023
$
4,123

$
11

2023
$
4,273

$
22


Guarantees arise during the ordinary course of business from relationships with customers 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 one year to less than four years. The Company’s current expectation is that future payment or performance related to the non-performance of others is considered remote.

The Company has entered into guarantee agreements ("Guarantees") related to project financing for Sadara Chemical Company ("Sadara"), a nonconsolidated affiliate. The total of an Islamic bond and additional project financing (collectively “Total Project Financing”) obtained by Sadara is approximately $12.5 billion. Sadara had $11.2 billion of Total Project Financing outstanding at June 30, 2019 ($11.7 billion at December 31, 2018). The Company's guarantee of the Total Project Financing is in proportion to the Company's 35 percent ownership interest in Sadara, or up to approximately $4.1 billion when the project financing is fully drawn. Sadara successfully completed an extensive operational testing program in December 2018, however, the Guarantees will be released upon the satisfactory fulfillment of certain project completion conditions, which is expected in the second half of 2019, and must occur no later than December 2020.


NOTE 14 - LEASES
Operating lease ROU assets are included in "Operating lease right-of-use assets" while finance lease ROU assets are included in "Net property" in the consolidated balance sheets. With respect to lease liabilities, operating lease liabilities are included in "Operating lease liabilities - current" and "Operating lease liabilities - noncurrent," and finance lease liabilities are included in "Long-term debt due within one year" and "Long-Term Debt" in the consolidated balance sheets.

Dow routinely leases sales and administrative offices, power plants, production facilities, warehouses and tanks for product storage, aircraft, motor vehicles, railcars, computers, office machines and equipment. Some leases contain renewal provisions, purchase options and escalation clauses and the terms for these leased assets vary depending on the lease agreement. These leased assets have remaining lease terms that currently range from 1 to 50 years. See Notes 1 and 2 for additional information on leases.


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Table of Contents

The components of lease cost for operating and finance leases for the three and six months ended June 30, 2019 were as follows:

Lease Cost
Three Months Ended
Jun 30, 2019
Six Months Ended Jun 30, 2019
In millions
Operating lease cost
$
139

$
264

Finance lease cost
 
 
Amortization of right-of-use assets - finance
11

17

Interest on lease liabilities - finance
7

13

Total finance lease cost
$
18

$
30

Short-term lease cost
50

100

Variable lease cost
63

107

Sublease income
(1
)
(2
)
Total lease cost
$
269

$
499


The following table provides supplemental cash flow information related to leases:

Other Lease Information
Six Months Ended Jun 30, 2019
In millions
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
269

Operating cash flows from finance leases
$
13

Financing cash flows from finance leases
$
9


The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at June 30, 2019:

Lease Position
Balance Sheet Classification
Jun 30, 2019
In millions
Right-of-use assets obtained in exchange for lease obligations:
 
 
Operating leases 1
 
$
2,385

Finance leases
 
$
60

Assets
 
 
Operating lease assets
Operating lease right-of-use assets
$
2,183

Finance lease assets
Property
466

Finance lease amortization
Accumulated depreciation
(145
)
Total lease assets
 
$
2,504

Liabilities
 
 
Current
 
 
Operating
Operating lease liabilities - current
$
421

Finance
Long-term debt due within one year
35

Noncurrent
 
 
Operating
Operating lease liabilities - noncurrent
1,779

Finance
Long-Term Debt
364

Total lease liabilities
 
$
2,599

1.
Includes $2.3 billion related to the adoption of Topic 842. See Note 2 for additional information.


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Table of Contents

Lease Term and Discount Rate
Jun 30, 2019
Weighted-average remaining lease term
 
Operating leases
8.2 years

Finance leases
11.7 years

Weighted-average discount rate
 
Operating leases
4.21
%
Finance leases
6.72
%

The following table provides the maturities of lease liabilities at June 30, 2019:

Maturities of Lease Liabilities at Jun 30, 2019
Operating Leases
Finance Leases
In millions
2019
$
291

$
40

2020
510

70

2021
401

69

2022
346

52

2023
259

79

2024 and thereafter
979

308

Total future undiscounted lease payments
$
2,786

$
618

Less imputed interest
586

219

Total present value of lease liabilities
$
2,200

$
399


At June 30, 2019, Dow had additional leases of approximately $90 million, primarily for pipelines, buildings and equipment, which had not yet commenced. These leases are expected to commence later in 2019, with lease terms of up to 20 years.

Future minimum lease payments for operating leases accounted for under ASC 840, "Leases," with remaining non-cancelable terms in excess of one year at December 31, 2018 were as follows:

Minimum Lease Commitments at Dec 31, 2018
 
In millions
 
2019
$
366

2020
329

2021
296

2022
269

2023
227

2024 and thereafter
855

Total
$
2,342


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 June 30, 2019 and December 31, 2018. There was no recorded liability related to these residual value guarantees at June 30, 2019, as payment of such residual value guarantees was not determined to be probable. The lease agreements do not contain any material restrictive covenants.

Lease Guarantees
Jun 30, 2019
Dec 31, 2018
In millions
Final Expiration
Maximum Future Payments
Recorded Liability
Final Expiration
Maximum Future Payments
Recorded Liability
Residual value guarantees
2027
$
755

$
—

2028
$
885

$
130




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Table of Contents

NOTE 15 – STOCKHOLDERS' EQUITY
Common Stock
Dow Inc.
Dow Inc. was incorporated in 2018 with 100 authorized and issued shares of common stock, par value $0.01 per share, owned solely by its parent company, DowDuPont. In the first quarter of 2019, in connection with the separation and distribution of DowDuPont’s materials science business, the number of authorized shares of common stock was increased to 5,000,000,000 shares, par value $0.01 per share, and Dow Inc.'s 100 shares of issued common stock were recapitalized into 748,771,240 shares of common stock. Dow Inc.'s common stock was solely owned by DowDuPont through March 31, 2019, and on April 1, 2019, Dow Inc. became an independent, publicly traded company. Dow Inc. common stock is listed on the NYSE under the symbol “DOW.” See Note 3 for additional information.

TDCC
Effective with the Merger and through March 31, 2019, TDCC had 100 authorized and issued shares of common stock, par value $0.01 per share, owned solely by DowDuPont. Effective with the separation from DowDuPont, TDCC became a wholly owned subsidiary of Dow Inc., which now holds all 100 authorized and issued shares of common stock of TDCC. See Note 3 for additional information.

Retained Earnings
Dow Inc.
There are no significant restrictions limiting Dow Inc.'s ability to pay dividends. On April 11, 2019, Dow Inc.'s Board of Directors ("Board") declared a dividend of $0.70 per share, which was paid on June 14, 2019, to shareholders of record on May 31, 2019.

TDCC
Effective with the Merger, TDCC no longer had publicly traded common stock. TDCC's common shares were owned solely by DowDuPont, prior to the separation on April 1, 2019, and TDCC's Board of Directors determined whether or not there would be a dividend distribution to DowDuPont. Effective with the separation from DowDuPont on April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. and TDCC's common shares are owned solely by its parent company, Dow Inc.

See Note 3 for information on the impact of the receipt of ECP, which was accounted for as a transfer between entities under common control.

Treasury Stock
Dow Inc.
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, to be launched subsequent to Dow's separation from DowDuPont. In the second quarter of 2019, Dow Inc. repurchased $305 million of Dow Inc. common stock. At June 30, 2019, approximately $2.7 billion of the share repurchase program authorization remained available for repurchases.

The following table provides a reconciliation of Dow Inc. common stock activity for the six months ended June 30, 2019:

Shares of Dow Inc. Common Stock
Issued
Held in Treasury
 
Balance at Jan 1, 2019
100

—

Impact of recapitalization
748,771,140

—

Issued 1
254,522

—

Repurchased
—

5,813,756

Balance at Jun 30, 2019
749,025,762

5,813,756

1.
Shares issued to employees under the Company's equity compensation plans.


36
Table of Contents

Accumulated Other Comprehensive Loss
The changes in each component of AOCL for the three and six months ended June 30, 2019 and 2018 were as follows:

Accumulated Other Comprehensive Loss
Three Months Ended
Six Months Ended
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Unrealized Gains (Losses) on Investments
 
 
 
 
Beginning balance
$
16

$
(8
)
$
(51
)
$
17

Unrealized gains (losses) on investments
52

(18
)
138

(49
)
Less: Tax (expense) benefit
(11
)
3

(29
)
8

Net unrealized gains (losses) on investments
41

(15
)
109

(41
)
(Gains) losses reclassified from AOCL to net income 1
(11
)
1

(12
)
3

Less: Tax expense (benefit) 2
3

—

3

(1
)
Net (gains) losses reclassified from AOCL to net income
(8
)
1

(9
)
2

Other comprehensive income (loss), net of tax
33

(14
)
100

(39
)
Reclassification of stranded tax effects 3
—

(1
)
—

(1
)
Ending balance
$
49

$
(23
)
$
49

$
(23
)
Cumulative Translation Adjustment
 
 
 
 
Beginning balance
$
(1,844
)
$
(1,105
)
$
(1,813
)
$
(1,481
)
Gains (losses) on foreign currency translation
76

(443
)
64

(72
)
Less: Tax (expense) benefit
15

(25
)
14

(20
)
Net gains (losses) on foreign currency translation
91

(468
)
78

(92
)
(Gains) losses reclassified from AOCL to net income 4
(24
)
(2
)
(42
)
(2
)
Other comprehensive income (loss), net of tax
67

(470
)
36

(94
)
Impact of common control transaction 5
710

—

710

—

Reclassification of stranded tax effects 3
—

(107
)
—

(107
)
Ending balance
$
(1,067
)
$
(1,682
)
$
(1,067
)
$
(1,682
)
Pension and Other Postretirement Benefits
 
 
 
 
Beginning balance
$
(7,824
)
$
(6,872
)
$
(7,965
)
$
(6,998
)
Gains (losses) arising during the period
34

—

34

—

Less: Tax (expense) benefit
(10
)
—

(10
)
—

Net gains (losses) arising during the period
24

—

24

—

Amortization and recognition of net loss and prior service credits 6
108

158

274

312

Less: Tax expense (benefit) 2
(26
)
(34
)
(51
)
(62
)
Net loss and prior service credits reclassified from AOCL to net income
82

124

223

250

Other comprehensive income (loss), net of tax
106

124

247

250

Impact of common control transaction 5
83

—

83

—

Reclassification of stranded tax effects 3
—

(927
)
—

(927
)
Ending balance
$
(7,635
)
$
(7,675
)
$
(7,635
)
$
(7,675
)
Derivative Instruments
 
 
 
 
Beginning balance
$
(131
)
$
(103
)
$
(56
)
$
(109
)
Gains (losses) on derivative instruments
(263
)
108

(358
)
94

Less: Tax (expense) benefit
46

(17
)
73

(19
)
Net gains (losses) on derivative instruments
(217
)
91

(285
)
75

(Gains) losses reclassified from AOCL to net income 7
17

32

10

59

Less: Tax expense (benefit) 2
(4
)
(5
)
(4
)
(10
)
Net (gains) losses reclassified from AOCL to net income
13

27

6

49

Other comprehensive income (loss), net of tax
(204
)
118

(279
)
124

Reclassification of stranded tax effects 3
—

(22
)
—

(22
)
Ending balance
$
(335
)
$
(7
)
$
(335
)
$
(7
)
Total AOCL ending balance
$
(8,988
)
$
(9,387
)
$
(8,988
)
$
(9,387
)
1.
Reclassified to "Net sales" and "Sundry income (expense) - net."
2.
Reclassified to "Provision for income taxes."
3.
Amounts reclassified to "Retained earnings" as a result of the adoption of ASU 2018-02.
4.
Reclassified to "Sundry income (expense) - net."
5.
Reclassified to "Retained earnings" as a result of the separation from DowDuPont on April 1, 2019. See Note 3 for additional information.
6. 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 17 for additional information. For the six months ended June 30, 2019, a $45 million adjustment related to a joint venture was reclassified to "Investment in nonconsolidated affiliates" in the consolidated balance sheets.
7. Reclassified to "Cost of sales," "Sundry income (expense) - net" and "Interest expense and amortization of debt discount."

37
Table of Contents

NOTE 16 – NONCONTROLLING INTERESTS
Ownership interests in the Company's subsidiaries held by parties other than the Company are presented separately from the Company's equity in the consolidated balance sheets as "Noncontrolling interests." The amount of consolidated net income attributable to the Company and the noncontrolling interests are both presented on the face of the consolidated statements of income.

The following table summarizes the activity for equity attributable to noncontrolling interests for the three and six months ended June 30, 2019 and 2018:

Noncontrolling Interests
Three Months Ended
Six Months Ended

In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Balance at beginning of period
$
1,180

$
1,190

$
1,138

$
1,186

Net income attributable to noncontrolling interests - continuing operations
15

25

47

46

Net income attributable to noncontrolling interests - discontinued operations
—

6

13

20

Distributions to noncontrolling interests 1
(5
)
(37
)
(14
)
(61
)
Impact of common control transaction 2
(353
)
—

(353
)
—

Purchase of noncontrolling interest 3
(254
)
—

(254
)
—

Cumulative translation adjustments
6

(34
)
13

(40
)
Other
—

2

(1
)
1

Balance at end of period
$
589

$
1,152

$
589

$
1,152

1. Distributions to noncontrolling interests are net of $6 million for the three and six months ended June 30, 2018 in dividends paid to a joint venture, which were reclassified to "Equity in earnings of nonconsolidated affiliates" in the consolidated statements of income. Also includes amounts attributable to discontinued operations of zero for the three months ended June 30, 2019 ($23 million for the the three months ended June 30, 2018) and $7 million for the six months ended June 30, 2019 ($28 million for the six months ended June 30, 2018).
2.
Relates to the separation from DowDuPont. See Note 3 for additional information.
3.
Relates to the pending acquisition of full ownership in a propylene oxide manufacturing joint venture, which is expected to occur in the fourth quarter of 2019. See Note 21 for additional information. As a result of this arrangement, the carrying value of the noncontrolling interest was removed, a liability of $283 million was recognized, and “Additional paid-in capital” was adjusted by $29 million. After adjustment for subsequent dividends of $127 million, paid to the noncontrolling interest holder in the second quarter of 2019, the liability at June 30, 2019 was $156 million and is reflected in “Accrued and other current liabilities” in the consolidated balance sheets.



38
Table of Contents

NOTE 17 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
As a result of the Company’s separation from DowDuPont, the number of defined benefit pension plans administered by the Company decreased from 45 plans to 35 plans, of which approximately $270 million of net unfunded pension liabilities transferred to DowDuPont. Plans administered by other subsidiaries of DowDuPont that were transferred to the Company were not significant. There were no changes in the number of other postretirement benefit plans administered by the Company as a result of the separation. Existing Company plans that were significantly impacted by the transfer of active plan participants to DowDuPont were remeasured, resulting in curtailment gains and losses and recognition of special termination benefits.

A summary of the Company's pension plans and other postretirement benefits can be found in Note 19 to the Consolidated Financial Statements included in TDCC’s Annual Report on Form 10-K for the year ended December 31, 2018. 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
Six Months Ended
In millions
Jun 30,
2019
Jun 30,
2018
Jun 30,
2019
Jun 30,
2018
Defined Benefit Pension Plans:
 
 
 
 
Service cost
$
95

$
132

$
207

$
265

Interest cost
227

217

468

435

Expected return on plan assets
(421
)
(404
)
(838
)
(810
)
Amortization of prior service credit
(5
)
(6
)
(11
)
(12
)
Amortization of net loss
147

170

279

341

Curtailment/special termination benefits 1
(27
)
—

(27
)
—

Net periodic benefit cost
$
16

$
109

$
78

$
219

Less: discontinued operations
—

25

21

50

Net periodic benefit cost - continuing operations
$
16

$
84

$
57

$
169

 
 
 
 
 
Other Postretirement Benefits:
 
 
 
 
Service cost
$
2

$
3

$
4

$
6

Interest cost
12

11

26

22

Amortization of net gain
(5
)
(6
)
(11
)
(12
)
Curtailment/special termination benefits 1
(3
)
—

(3
)
—

Net periodic benefit cost
$
6

$
8

$
16

$
16

Less: discontinued operations
—

1

—

2

Net periodic benefit cost - continuing operations
$
6

$
7

$
16

$
14

1.
The 2019 impact relates to plan curtailments and associated special termination benefits resulting from the reduction in plan participation by employees transferred to DowDuPont.

Net periodic benefit cost, other than the service cost component, is included in "Sundry income (expense) - net" in the consolidated statements of income.

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. The Company expects to contribute approximately $285 million to its pension plans in 2019, of which $152 million has been contributed through June 30, 2019.



39
Table of Contents

NOTE 18 – STOCK-BASED COMPENSATION
A summary of the Company's stock-based compensation plans can be found in Note 20 to the Consolidated Financial Statements included in TDCC’s Annual Report on Form 10-K for the year ended December 31, 2018.

Stock Incentive Plan
The Company grants stock-based compensation to employees and non-employee directors in the form of stock incentive plans, which include stock options, restricted stock units ("RSUs") (formerly termed deferred stock) and restricted stock. The Company also provides stock-based compensation in the form of performance stock units ("PSUs") (formerly termed performance deferred stock).

The Company has historically granted stock-based compensation to employees and non-employee directors under The Dow Chemical Company Amended and Restated 2012 Stock Incentive Plan (the "2012 Plan"). In connection with the Merger, on August 31, 2017 ("Conversion Date") all outstanding TDCC stock options and RSU awards were converted into stock options and RSU awards with respect to DowDuPont common stock. The stock options and RSU awards had the same terms and conditions under the applicable plans and award agreements prior to the Merger. All outstanding and nonvested PSU awards were converted into RSU awards with respect to DowDuPont common stock at the greater of the applicable performance target or the actual performance as of the effective time of the Merger. Changes in the fair value of liability instruments are recognized as compensation expense each quarter. TDCC and Historical DuPont did not merge their stock-based compensation plans as a result of the Merger. TDCC and Historical DuPont stock-based compensation plans were assumed by DowDuPont and continued in place with the ability to grant and issue DowDuPont common stock until separation. There was minimal grant activity in the first quarter of 2019.

In connection with the separation on April 1, 2019, outstanding stock options, RSU and PSU awards were converted to Dow Inc. denominated awards under the “Employer Method,” or DowDuPont denominated awards under the “Shareholder Method,” and adjusted to maintain the intrinsic value of those awards before and after the date of the separation. In connection with the Corteva separation transaction on June 3, 2019, the outstanding DowDuPont denominated stock options, RSU and PSU awards were converted to Corteva and DuPont denominated awards and adjusted to maintain the intrinsic value of those awards before and after the date of the Corteva separation. The awards have the same terms and conditions under the applicable plans and award agreements prior to the separation transactions.

The conversions of stock awards resulted in no incremental compensation expense. Approximately 5,000 employees were impacted by the conversion on April 1, 2019 in connection with the separation. Approximately 4,000 employees were impacted by the conversion on June 3, 2019 in connection with the Corteva separation transaction.

On April 1, 2019 ("Original Effective Date"), in connection with the separation, the Company adopted the 2019 Stock Incentive Plan (the "2019 Plan"). Under the 2019 Plan, the Company may grant stock options, RSUs, PSUs, restricted stock, stock appreciation rights and stock units to employees and non-employee directors until the tenth anniversary of the Original Effective Date, subject to an aggregate limit and annual individual limits. The terms of the grants are fixed at the grant date. In the second quarter of 2019, Dow Inc. granted the following stock-based compensation awards to employees and non-employee directors:

•
1.6 million stock options with a weighted-average exercise price of $54.89 and a weighted-average fair value of $7.99 per share;
•
1.8 million RSUs with a weighted-average fair value of $54.85 per share; and
•
1.2 million PSUs with a weighted-average fair value of $57.58 per share.



40
Table of Contents

NOTE 19 – FINANCIAL INSTRUMENTS
A summary of the Company's financial instruments, risk management policies, derivative instruments and hedging activities can be found in Note 21 of the Consolidated Financial Statements included in TDCC's Annual Report on Form 10-K for the year ended December 31, 2018. If applicable, updates have been included in the respective section below.

The following table summarizes the fair value of financial instruments at June 30, 2019 and December 31, 2018:

Fair Value of Financial Instruments
Jun 30, 2019
Dec 31, 2018
In millions
Cost
Gain
Loss
Fair Value
Cost
Gain
Loss
Fair Value
Cash equivalents
$
530

$
—

$
—

$
530

$
566

$
—

$
—

$
566

Marketable securities
$
20

$
—

$
—

$
20

$
100

$
—

$
—

$
100

Other investments:
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
Government debt 1
$
540

$
28

$
(5
)
$
563

$
714

$
9

$
(23
)
$
700

Corporate bonds
1,054

63

(13
)
1,104

1,026

20

(63
)
983

Total debt securities
$
1,594

$
91

$
(18
)
$
1,667

$
1,740

$
29

$
(86
)
$
1,683

Equity securities 2
15

7

(1
)
21

16

1

(1
)
16

Total other investments
$
1,609

$
98

$
(19
)
$
1,688

$
1,756

$
30

$
(87
)
$
1,699

Total cash equivalents, marketable securities and other investments
$
2,159

$
98

$
(19
)
$
2,238

$
2,422

$
30

$
(87
)
$
2,365

Long-term debt including debt due within one year 3
$
(17,452
)
$
2

$
(1,922
)
$
(19,372
)
$
(19,591
)
$
351

$
(972
)
$
(20,212
)
Derivatives relating to:
 
 
 
 
 
 
 
 
Interest rates 4
$
—

$
11

$
(225
)
$
(214
)
$
—

$
—

$
(64
)
$
(64
)
Foreign currency
—

52

(38
)
14

—

120

(43
)
77

Commodities 4
—

84

(170
)
(86
)
—

91

(178
)
(87
)
Total derivatives
$
—

$
147

$
(433
)
$
(286
)
$
—

$
211

$
(285
)
$
(74
)
1. U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
2.
Equity securities with a readily determinable fair value.
3.
Cost includes fair value hedge adjustments of $1 million at June 30, 2019 and $18 million at December 31, 2018 on $2,590 million of debt at June 30, 2019 and $2,290 million of debt at December 31, 2018.
4.
Presented net of cash collateral where master netting arrangements allow.

Debt Securities
The Company's investments in debt securities are primarily classified as available-for-sale. The following table provides the investing results from available-for-sale securities for the six months ended June 30, 2019 and 2018:

Investing Results
Six Months Ended
In millions
Jun 30,
2019
Jun 30,
2018
Proceeds from sales of available-for-sale securities
$
534

$
625

Gross realized gains
$
22

$
15

Gross realized losses
$
(10
)
$
(18
)

Equity Securities
The Company’s investments in equity securities with a readily determinable fair value totaled $21 million at June 30, 2019 ($16 million at December 31, 2018). The aggregate carrying value of the Company’s investments in equity securities where fair value is not readily determinable totaled $206 million at June 30, 2019 ($204 million at December 31, 2018), reflecting the carrying value of the investments. There were no adjustments to the carrying value of the not readily determinable investments for impairment or observable price changes for the three and six months ended June 30, 2019 and 2018. The net unrealized gain recognized in earnings on equity securities totaled $1 million for the three months ended June 30, 2019 ($1 million net unrealized loss for the three months ended June 30, 2018) and a net unrealized gain of $6 million for the six months ended June 30, 2019 ($8 million net unrealized gain for the six months ended June 30, 2018).


41
Table of Contents

Derivatives
The following tables provide the fair value and balance sheet classification of derivative instruments at June 30, 2019 and December 31, 2018:

Fair Value of Derivative Instruments
Jun 30, 2019
In millions
Balance Sheet Classification
Gross
Counterparty and Cash Collateral Netting 1
Net Amounts Included in the Consolidated Balance Sheet
Asset derivatives:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Interest rate contracts
Other current assets
$
11

$
—

$
11

Foreign currency contracts
Other current assets
104

(85
)
19

Commodity contracts
Other current assets
53

(17
)
36

Commodity contracts
Deferred charges and other assets
42

(7
)
35

Total
 
$
210

$
(109
)
$
101

Derivatives not designated as hedging instruments:
 
 
 
 
Interest rate contracts
Other current assets
$
1

$
(1
)
$
—

Foreign currency contracts
Other current assets
44

(11
)
33

Commodity contracts
Other current assets
14

(4
)
10

Commodity contracts
Deferred charges and other assets
4

(1
)
3

Total
 
$
63

$
(17
)
$
46

Total asset derivatives
 
$
273

$
(126
)
$
147

 
 
 
 
 
Liability derivatives:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Interest rate contracts
Accrued and other current liabilities
$
98

$
—

$
98

Interest rate contracts
Other noncurrent obligations
127

—

127

Foreign currency contracts
Accrued and other current liabilities
116

(85
)
31

Commodity contracts
Accrued and other current liabilities
117

(20
)
97

Commodity contracts
Other noncurrent obligations
57

(12
)
45

Total
 
$
515

$
(117
)
$
398

Derivatives not designated as hedging instruments:
 
 
 
 
Interest rate contracts
Accrued and other current liabilities
$
2

$
(2
)
$
—

Foreign currency contracts
Accrued and other current liabilities
18

(11
)
7

Commodity contracts
Accrued and other current liabilities
31

(6
)
25

Commodity contracts
Other noncurrent obligations
4

(1
)
3

Total
 
$
55

$
(20
)
$
35

Total liability derivatives
 
$
570

$
(137
)
$
433

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.


42
Table of Contents

Fair Value of Derivative Instruments
Dec 31, 2018
In millions
Balance Sheet Classification
Gross
Counterparty and Cash Collateral Netting 1
Net Amounts Included in the Consolidated Balance Sheet
Asset derivatives:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Foreign currency contracts
Other current assets
$
98

$
(42
)
$
56

Commodity contracts
Other current assets
47

(13
)
34

Commodity contracts
Deferred charges and other assets
18

(3
)
15

Total
 
$
163

$
(58
)
$
105

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency contracts
Other current assets
$
128

$
(64
)
$
64

Commodity contracts
Other current assets
41

(1
)
40

Commodity contracts
Deferred charges and other assets
4

(2
)
2

Total
 
$
173

$
(67
)
$
106

Total asset derivatives
 
$
336

$
(125
)
$
211

 
 
 
 
 
Liability derivatives:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Interest rate swaps
Other noncurrent obligations
$
64

$
—

$
64

Foreign currency contracts
Accrued and other current liabilities
46

(42
)
4

Commodity contracts
Accrued and other current liabilities
111

(18
)
93

Commodity contracts
Other noncurrent obligations
86

(9
)
77

Total
 
$
307

$
(69
)
$
238

Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency contracts
Accrued and other current liabilities
$
103

$
(64
)
$
39

Commodity contracts
Accrued and other current liabilities
7

(4
)
3

Commodity contracts
Other noncurrent obligations
8

(3
)
5

Total
 
$
118

$
(71
)
$
47

Total liability derivatives
 
$
425

$
(140
)
$
285

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 $36 million at June 30, 2019 ($26 million at December 31, 2018). There was no counterparty cash collateral posted with the Company at June 30, 2019 ($34 million at December 31, 2018).

Net Foreign Investment Hedges
For derivative instruments that are designated and qualify as net foreign investment hedges, the effective portion of the gain or loss on the derivative is included in “Cumulative Translation Adjustments” in AOCL. The Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $186 million at June 30, 2019 ($182 million at December 31, 2018). For the six months ended June 30, 2019, the results of hedges of the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCL was a net loss of $101 million after tax (net gain of $53 million after tax for the six months ended June 30, 2018). The Company recognized after-tax gains of $66 million related to excluded components of net foreign investment hedges included in “Cumulative Translation Adjustments” in AOCL for the three months ended June 30, 2019 and after-tax gains of $152 million for the six months ended June 30, 2019. For the three months ended June 30, 2019, gains of $25 million were amortized to “Sundry income (expense) - net” in the consolidated statements of income. For the six months ended June 30, 2019, gains of $50 million were amortized to “Sundry income (expense) - net” in the consolidated statements of income.


43
Table of Contents

Cash Flow Hedges
For derivatives that are designated and qualify as cash flow hedging instruments, the gain or loss on the derivative is recorded in AOCL; it is reclassified to income in the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCL fluctuate based on changes in the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCL and net income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market conditions during any period.

For the six months ended June 30, 2019, the Company terminated certain interest rate contracts and realized net losses in AOCL of $113 million after tax. The net loss from open and realized interest rate contract hedges included in AOCL at June 30, 2019 was $213 million after tax (net gain of $23 million after tax at December 31, 2018).

Fair Value Hedges
For interest rate instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedge item attributable to the hedged risk are recognized in current period income and reflected as “Interest expense and amortization of debt discount” in the consolidated statements of income, except for amounts excluded from the assessment of effectiveness that are recognized in earnings through an amortization approach.

During the second quarter of 2019, the Company entered into interest rate contracts designated as fair value hedges of underlying fixed rate debt obligations with maturity dates extending through 2048. The fair value adjustment resulting from these contracts was a net gain on the derivative of $16 million, with a net loss of $4 million after tax for excluded components recognized in AOCL.

Income Statement Effect of Derivative Instruments
Foreign currency derivatives not designated as hedges are used to offset foreign exchange gains or losses resulting from the underlying exposures of foreign currency denominated assets and liabilities. The amounts charged on a pretax basis related to foreign currency derivatives not designated as a hedge, which were included in “Sundry income (expense) - net” in the consolidated statements of income, were a gain of $38 million for the three months ended June 30, 2019 (gain of $82 million for the three months ended June 30, 2018) and a gain of $6 million for the six months ended June 30, 2019 (gain of $65 million for the six months ended June 30, 2018). The income statement effects of other derivatives were immaterial.

Reclassification from AOCL
The net after-tax amounts to be reclassified from AOCL to income within the next 12 months are a $1 million gain for interest rate contracts, a $49 million loss for commodity contracts, a $6 million gain for foreign currency contracts and a $60 million gain for excluded components.



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NOTE 20 – FAIR VALUE MEASUREMENTS
A summary of the Company's recurring and nonrecurring fair value measurements can be found in Note 22 to the Consolidated Financial Statements included in TDCC's Annual Report on Form 10-K for the year ended December 31, 2018. If applicable, updates have been included in the respective section below.

Fair Value Measurements on a Recurring Basis
The following tables summarize 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
Jun 30, 2019
Dec 31, 2018
Quoted Prices in Active Markets for Identical Items
(Level 1)
Significant Other Observable Inputs
(Level 2)
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 1
$
—

$
530

$
530

$
—

$
566

$
566

Marketable securities
—

20

20

—

100

100

Equity securities 2
21

—

21

16

—

16

Debt securities: 2
 
 
 
 
 
 
Government debt 3
—

563

563

—

700

700

Corporate bonds
22

1,082

1,104

—

983

983

Derivatives relating to: 4
 
 
 
 
 
 
Interest rates
—

12

12

—

—

—

Foreign currency
—

148

148

—

226

226

Commodities
15

98

113

17

93

110

Total assets at fair value
$
58

$
2,453

$
2,511

$
33

$
2,668

$
2,701

Liabilities at fair value:
 
 
 
 
 
 
Long-term debt including debt due within one year 5
$
—

$
19,372

$
19,372

$
—

$
20,212

$
20,212

Derivatives relating to: 4
 
 
 
 
 
 
Interest rates
—

227

227

—

64

64

Foreign currency
—

134

134

—

149

149

Commodities
18

191

209

23

189

212

Total liabilities at fair value
$
18

$
19,924

$
19,942

$
23

$
20,614

$
20,637

1.
Treasury bills, time deposits, and money market funds included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value.
2.
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.
3.
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
4.
See Note 19 for the classification of derivatives in the consolidated balance sheets.
5.
See Note 19 for information on fair value measurements of long-term debt.
For equity securities calculated at net asset value per share (or its equivalent), the Company had $122 million in private market securities and $29 million in real estate at June 30, 2019 ($120 million in private market securities and $29 million in real estate at December 31, 2018). There are no redemption restrictions and the unfunded commitments on these investments were $86 million at June 30, 2019 ($89 million at December 31, 2018).

Fair Value Measurements on a Nonrecurring Basis
As part of the Synergy Program, the Company has or will shut down a number of manufacturing and corporate facilities around the world. In the first six months of 2019, manufacturing facilities associated with this plan were written down to zero. In addition, impairments of leased, non-manufacturing facilities, which were classified as Level 3 measurements, resulted in a write-down of right-of-use assets to $104 million using unobservable inputs. The impairment charges related to the Synergy Program, totaling $105 million, were included in "Restructuring and asset related charges - net" in the consolidated statements of income.

In the first six months of 2019, the Company recognized an additional pretax impairment charge of $18 million related primarily to capital additions made to the biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, that was impaired in 2017. The assets were written down to zero in 2019. The impairment charge was included in “Restructuring and asset related charges - net” in the consolidated statements of income. See Note 5 for additional information on the Company's restructuring activities.

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NOTE 21 – VARIABLE INTEREST ENTITIES
A summary of the Company's variable interest entities ("VIEs") can be found in Note 23 to the Consolidated Financial Statements included in TDCC's Annual Report on Form 10-K for the year ended December 31, 2018.

Assets and Liabilities of Consolidated VIEs
The Company's consolidated financial statements include the assets, liabilities and results of operations of VIEs for which the Company is the primary beneficiary. The other equity holders’ interests are reflected in “Net income attributable to noncontrolling interests” in the consolidated statements of income and "Noncontrolling interests" in the consolidated balance sheets.

The following table summarizes the carrying amounts of these entities' assets and liabilities included in the Company’s consolidated balance sheets at June 30, 2019 and December 31, 2018:

Assets and Liabilities of Consolidated VIEs
Jun 30,
2019
Dec 31,
2018
In millions
Cash and cash equivalents
$
26

$
71

Other current assets
101

101

Net property
657

683

Other noncurrent assets
23

14

Total assets 1
$
807

$
869

Current liabilities
$
436

$
307

Long-term debt
45

75

Other noncurrent obligations
22

14

Total liabilities 2
$
503

$
396

1.
All assets were restricted at June 30, 2019 and December 31, 2018.
2.
All liabilities were nonrecourse at June 30, 2019 and December 31, 2018.

Amounts presented in the consolidated balance sheets and the table above as restricted assets or nonrecourse obligations relating to consolidated VIEs at June 30, 2019 and December 31, 2018 are adjusted for intercompany eliminations and parental guarantees.

The Company is a 50 percent indirect owner in a propylene oxide ("PO") manufacturing joint venture in Asia Pacific. The Company has a variable interest in this joint venture relating to arrangements between the joint venture and the Company involving the majority of the output on take-or-pay terms, with pricing ensuring a guaranteed return to the joint venture. On April 30, 2019, the Company executed an agreement to acquire full ownership in the PO manufacturing joint venture for an estimated cash purchase price of $312 million, with an expected closing date in the fourth quarter of 2019. Approximately half of the purchase price is expected to be attributed to the Company’s proportionate equity interest in the entity that owns the PO manufacturing joint venture.

Nonconsolidated VIEs
The following table summarizes the carrying amounts of assets included in the consolidated balance sheets at June 30, 2019 and December 31, 2018, 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, unless otherwise noted below.

Carrying Amounts of Assets Related to Nonconsolidated VIEs
 
Jun 30,
2019
Dec 31,
2018
In millions
Description of asset
Silicon joint ventures
Equity method investments 1
$
98

$
100

AgroFresh Solutions, Inc.
Equity method investment 1
$
31

$
48

Other receivable 2
$
8

$
8

1.
Classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets.
2.
Classified as "Accounts and notes receivable - Other" in the consolidated balance sheets.



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NOTE 22 – RELATED PARTY TRANSACTIONS
Effective with the separation from DowDuPont on April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. and reported transactions with Dow Inc. as related party transactions. From the Merger date through March 31, 2019, TDCC reported transactions with DowDuPont and Historical DuPont and its affiliates as related party transactions.

TDCC
TDCC committed to fund Dow Inc.'s dividends paid to common stockholders, share repurchases and certain governance expenses. Funding was accomplished through intercompany loans. At June 30, 2019, TDCC's outstanding intercompany loan balance with Dow Inc. was $1,147 million, included in "Notes payable" in the consolidated balance sheets.

DowDuPont
Pursuant to the Merger Agreement, TDCC committed to fund a portion of DowDuPont's dividends paid to common stockholders and certain governance expenses. In addition, share repurchases by DowDuPont were partially funded by TDCC through 2018. Funding was accomplished through intercompany loans. On a quarterly basis, TDCC's Board reviewed and determined a dividend distribution to DowDuPont to settle the intercompany loans. The dividend distribution considered the level of TDCC’s earnings and cash flows and the outstanding intercompany loan balances. For the three months ended March 31, 2019, TDCC declared and paid dividends to DowDuPont of $535 million ($1,053 million and $2,110 million for the three and six months ended June 30, 2018, respectively). In addition, at December 31, 2018, TDCC had a receivable related to a tax sharing agreement with DowDuPont of $89 million, included in "Accounts and notes receivable - Other" in the consolidated balance sheets.

Historical DuPont and its Affiliates
TDCC sold to and procured from Historical DuPont and its affiliates certain raw materials that were consumed in each company's manufacturing process. The following table presents amounts due to or due from Historical DuPont and its affiliates:

Balances Due To or Due From Historical DuPont and its Affiliates
Jun 30, 2019
Dec 31, 2018
In millions
Accounts and notes receivable - Other
$
—

$
89

Accounts payable - Other
$
—

$
19


The following table presents revenue earned and expenses incurred related to transactions with Historical DuPont and its affiliates:

Sales to Historical DuPont and its Affiliates
Three Months Ended
Six Months Ended
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Net sales
$
—

$
13

$
12

$
25

Cost of sales
$
—

$
11

$
9

$
20


Purchases from Historical DuPont and its affiliates were insignificant for the three months ended March 31, 2019 and the three and six months ended June 30, 2018.


NOTE 23 – SEGMENTS AND GEOGRAPHIC REGIONS
Dow combines one of the broadest technology sets in the industry with asset integration, focused innovation and global scale to achieve profitable growth and become the most innovative, customer centric, inclusive and sustainable materials science company. Dow’s portfolio of performance materials, industrial intermediates and plastics businesses delivers a broad range of differentiated science-based products and solutions for our customers in high-growth segments, such as packaging, infrastructure and consumer care.

Effective with the Merger, TDCC's business activities were components of DowDuPont's business operations and were reported as a single operating segment. Following the separation from DowDuPont, the Company changed the manner in which its business activities were managed. The Company's portfolio now includes six global businesses which are organized into the following operating segments: Performance Materials & Coatings, Industrial Intermediates & Infrastructure and Packaging & Specialty Plastics. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. The Company did not aggregate any operating segments when determining its reportable segments.


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Following the separation from DowDuPont, the Company changed its practice of transferring ethylene to its downstream derivative businesses at cost to transferring ethylene at market prices. The Company also changed certain of its Corporate segment allocation practices including costs previously assigned to AgCo and SpecCo, which are now allocated to the operating segments. These changes have been consistently applied to all periods presented.

Dow reported geographic information for the following regions: U.S. & Canada, Asia Pacific, Latin America and EMEAI. As a result of the separation from DowDuPont, the Company changed the geographic alignment for the country of India to be reflected in EMEAI (previously reported in Asia Pacific).

Dow’s measure of profit/loss for segment reporting purposes is pro forma Operating EBIT (for the six months ended June 30, 2019 and the three and six months ended June 30, 2018) and Operating EBIT (for the three months ended June 30, 2019) as this is the manner in which the Company's chief operating decision maker ("CODM") assesses performance and allocates resources. The Company defines pro forma Operating EBIT as earnings (i.e., "Income from continuing operations before income taxes") before interest, plus pro forma adjustments, excluding the impact of significant items. The Company defines Operating EBIT as earnings (i.e., "Income from continuing operations before income taxes") before interest, excluding the impact of significant items. Pro forma Operating EBIT and Operating EBIT by segment include all operating items relating to the businesses; items that principally apply to Dow as a whole are assigned to Corporate. These measures have been reflected retrospectively for all periods presented, and reconciliations of these measures are provided at the end of this footnote. The Company also presents pro forma net sales for the six months ended June 30, 2019 and the three and six months ended June 30, 2018 in this footnote as it is included in management's measure of segment performance and is regularly reviewed by the CODM. Pro forma net sales includes the impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont.
 
Corporate Profile
Dow conducts its worldwide operations through global businesses which are reflected in the following reportable segments:

Performance Materials & Coatings
Performance Materials & Coatings includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. These businesses primarily utilize the Company's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of the architectural and industrial coatings, home care and personal care end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to combine chemistry platforms to deliver differentiated offerings to customers.

Coatings & Performance Monomers
Coatings & Performance Monomers consists of two businesses: Coating Materials and Performance Monomers. The Coating Materials business makes critical ingredients and additives that help advance the performance of paints and coatings. The business offers innovative and sustainable products to accelerate paint and coatings performance across diverse market segments, including architectural paints and coatings, as well as industrial coatings applications used in maintenance and protective industries, wood, metal packaging, traffic markings, thermal paper and leather. These products enhance coatings by improving hiding and coverage characteristics, enhancing durability against nature and the elements, reducing volatile organic compounds (“VOC”) content, reducing maintenance and improving ease of application. The Performance Monomers business manufactures critical building blocks based on acrylics needed for the production of coatings, textiles, and home and personal care products.

Consumer Solutions
Consumer Solutions consists of three businesses: Performance Silicones; Silicone Feedstocks & Intermediates; and Home & Personal Care. Performance Silicones uses innovative, versatile silicone-based technology to provide ingredients and solutions to customers in high performance building, consumer goods, elastomeric applications and the pressure sensitive adhesives industry that help them meet modern consumer preferences in attributes such as texture, feel, scent, durability and consistency. The Company’s wide array of silicone-based products and solutions enables customers to: increase the appeal of their products; extend shelf life; improve performance of products under a wider range of conditions; and provide a more sustainable offering. Silicone Feedstocks & Intermediates provides standalone silicone materials that are used as intermediates in a wide range of applications including adhesion promoters, coupling agents, crosslinking agents, dispersing agents and surface modifiers. The Home & Personal Care business collaborates closely with global and regional brand owners to deliver innovative solutions for creating new and unrivaled consumer benefits and experiences in cleaning, laundry and skin and hair care applications, among others.


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Table of Contents

Industrial Intermediates & Infrastructure
Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & Construction Chemicals - that develop important intermediate chemicals that are essential to manufacturing processes, as well as downstream, customized materials and formulations that use advanced development technologies. These businesses primarily produce and market ethylene oxide and propylene oxide derivatives that are aligned to market segments as diverse as appliances, coatings, infrastructure and oil and gas. The global scale and reach of these businesses, world-class technology and R&D capabilities and materials science expertise enable the Company to be a premier solutions provider offering customers value-add sustainable solutions to enhance comfort, energy efficiency, product effectiveness and durability across a wide range of home comfort and appliances, building and construction, adhesives and lubricant applications, among others.

Industrial Solutions
Industrial Solutions is the world’s largest producer of purified ethylene oxide. It provides a broad portfolio of solutions that address world needs by enabling and improving the manufacture of consumer and industrial goods and services. The business’ solutions minimize friction and heat in mechanical processes, manage the oil and water interface, deliver ingredients for maximum effectiveness, facilitate dissolvability, enable product identification and provide the foundational building blocks for the development of chemical technologies. The business supports manufacturers associated with a large variety of end-markets, notably better crop protection offerings in agriculture, coatings, detergents and cleaners, solvents for electronics processing, inks and textiles.

Polyurethanes & Construction Chemicals
Polyurethanes & Construction Chemicals consists of three businesses: Polyurethanes, Chlor-Alkali & Vinyl (“CAV”) and Construction Chemicals (“DCC”). The Polyurethanes business is the world’s largest producer of propylene oxide, propylene glycol and polyether polyols, and a leading producer of aromatic isocyanates and fully formulated polyurethane systems for rigid, semi-rigid and flexible foams, and coatings, adhesives, sealants, elastomers and composites that serve energy efficiency, consumer comfort, industrial and enhanced mobility market sectors. The CAV business provides cost-advantaged chlorine and caustic soda supply and markets caustic soda, a valuable co-product of the chlor-alkali manufacturing process, and ethylene dichloride and vinyl chloride monomer. The DCC business provides cellulose ethers, redispersible latex powders, silicones and acrylic emulsions used as key building blocks for differentiated building and construction materials across many market segments and applications ranging from roofing and flooring to gypsum-, cement-, concrete- or dispersion-based building materials.

Joint Ventures
This segment includes a portion of the Company's share of the results of the following joint ventures:

•
EQUATE - a Kuwait-based company that manufactures ethylene, polyethylene and ethylene glycol, and manufactures and markets monoethylene glycol, diethylene glycol and polyethylene terephthalate resins; owned 42.5 percent by the Company.
•
The Kuwait Olefins Company K.S.C.C. (“TKOC”) - a Kuwait-based company that manufactures ethylene and ethylene glycol; owned 42.5 percent by the Company.
•
Map Ta Phut Olefins Company Limited ("Map Ta Phut") - a Thailand-based company that manufactures propylene and ethylene; the Company has an effective ownership of 32.77 percent (of which 20.27 percent is owned directly by the Company and aligned with the Industrial Intermediates & Infrastructure segment and 12.5 percent is owned indirectly through the Company’s equity interest in Siam Polyethylene Company Limited, an entity that is part of The SCG-Dow Group and aligned with the Packaging & Specialty Plastics segment).
•
Sadara - a Saudi Arabian company that manufactures chlorine, ethylene, propylene and aromatics for internal consumption and manufactures and sells polyethylene, ethylene oxide and propylene oxide derivative products, and isocyanates; owned 35 percent by the Company.

Packaging & Specialty Plastics
Packaging & Specialty Plastics is a world leader in plastics and consists of two highly integrated global businesses: Hydrocarbons & Energy and Packaging and Specialty Plastics. The segment employs the industry’s broadest polyolefin product portfolio, supported by the Company’s proprietary catalyst and manufacturing process technologies, to work at the customer’s design table throughout the value chain to deliver more reliable and durable, higher performing, and more sustainable plastics to customers in food and specialty packaging; industrial and consumer packaging; health and hygiene; caps, closures and pipe applications; consumer durables; and infrastructure.

The Company’s unique advantages compared with its competitors include: the Company’s extensive low-cost feedstock positions around the world; unparalleled scale, footprint, and market reach, with world-class manufacturing sites in every geography; deep customer and brand owner understanding; and market-driven application development and technical support.


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Table of Contents

The segment remains agile and adaptive by participating in the entire ethylene-to-polyethylene chain integration, enabling the Company to manage market swings, and therefore optimize returns while reducing long-term earnings volatility. The Company’s unrivaled value chain ownership, combined with its Pack Studio locations in every geography, which help customers and brand owners deliver faster and more efficient packaging product commercialization through a global network of laboratories, technical experts and testing equipment, together differentiate the Company from its competitors.

Hydrocarbons & Energy
Hydrocarbons & Energy is the largest global producer of ethylene, an internal feedstock that is consumed primarily within the Packaging & Specialty Plastics segment. In addition to ethylene, the business is a leading producer of propylene and aromatics products that are used to manufacture materials that consumers use every day. The business also produces and procures the power and feedstocks used by the Company’s manufacturing sites.

Packaging and Specialty Plastics
Packaging and Specialty Plastics serves growing, high-value sectors using world-class technology, broad existing product lines, and a rich product pipeline that creates competitive advantages for the entire packaging value chain. The business is also a leader in polyolefin elastomers and ethylene propylene diene monomer ("EPDM") rubber serving automotive, consumer, wire and cable and construction markets. Market growth is expected to be driven by major shifts in population demographics; improving socioeconomic status in emerging geographies; consumer and brand owner demand for increased functionality; global efforts to reduce food waste; growth in telecommunications networks; global development of electrical transmission and distribution infrastructure; and renewable energy applications.

Joint Ventures
This segment also includes the results of the following joint ventures of the Company, as well as a portion of the results of EQUATE, TKOC, Map Ta Phut and Sadara:

•
The Kuwait Styrene Company K.S.C.C. - a Kuwait-based company that manufactures styrene monomer; owned 42.5 percent by the Company.
•
The SCG-Dow Group - a group of Thailand-based companies (consisting of Siam Polyethylene Company Limited; Siam Polystyrene Company Limited; Siam Styrene Monomer Co., Ltd.; and Siam Synthetic Latex Company Limited) that manufacture polyethylene, polystyrene, styrene, latex and specialty elastomers; owned 50 percent by the Company.

Corporate
Corporate includes certain enterprise and governance activities (including insurance operations, environmental operations, etc.); non-business aligned joint ventures; gains and losses on sales of financial assets; non-business aligned litigation expenses; and discontinued or non-aligned businesses.


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Table of Contents

Segment Information
Perf. Materials & Coatings
Ind. Interm. & Infrast.
Pack. & Spec. Plastics
Corp.
Total
In millions
Three months ended Jun 30, 2019
 
 
 
 
 
Net sales
$
2,356

$
3,342

$
5,205

$
111

$
11,014

Equity in earnings (losses) of nonconsolidated affiliates
1

(78
)
74

(12
)
(15
)
Dow Inc. Operating EBIT 1
214

154

768

(77
)
1,059

Three months ended Jun 30, 2018










Net sales
$
2,624

$
3,969

$
6,124

$
72

$
12,789

Pro forma net sales
2,673

3,972

6,134

72

12,851

Equity in earnings (losses) of nonconsolidated affiliates
1

96

108

(12
)
193

Pro forma Operating EBIT
292

502

926

(81
)
1,639

Six months ended Jun 30, 2019










Net sales
$
4,638

$
6,822

$
10,343

$
180

$
21,983

Pro forma net sales
4,676

6,831

10,343

180

22,030

Equity in earnings (losses) of nonconsolidated affiliates
1

(126
)
112

(16
)
(29
)
Dow Inc. pro forma Operating EBIT 2
485

431

1,458

(172
)
2,202

Six months ended Jun 30, 2018










Net sales
$
4,951

$
7,767

$
12,162

$
146

$
25,026

Pro forma net sales
5,044

7,775

12,182

146

25,147

Equity in earnings (losses) of nonconsolidated affiliates
1

245

167

(19
)
394

Pro forma Operating EBIT
647

962

1,897

(170
)
3,336

1.
Operating EBIT for TDCC for the three months ended June 30, 2019 is substantially the same as that of Dow Inc. and therefore has not been disclosed separately in the table above. A reconciliation of "Income from continuing operations, net of tax" to Operating EBIT is provided below.
2.
Pro forma Operating EBIT for TDCC for the six months ended June 30, 2019 is substantially the same as that of Dow Inc. (same for the three and six months ended June 30, 2018) and therefore has not been disclosed separately in the table above. A reconciliation of "Income from continuing operations, net of tax" to pro forma Operating EBIT is provided below.

Reconciliation of "Income from continuing operations, net of tax" to Operating EBIT
Three Months Ended
In millions
Jun 30, 2019
Income from continuing operations, net of tax
$
90

+ Provision for income taxes on continuing operations
125

Income from continuing operations before income taxes
$
215

- Interest income
21

+ Interest expense and amortization of debt discount
237

- Significant items
(628
)
Operating EBIT
$
1,059


Reconciliation of "Income from continuing operations, net of tax" to Pro Forma Operating EBIT
Three Months Ended
Six Months Ended
In millions
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Income from continuing operations, net of tax
$
810

$
246

$
1,735

+ Provision for income taxes on continuing operations
249

266

475

Income from continuing operations before income taxes
$
1,059

$
512

$
2,210

- Interest income
18

39

38

+ Interest expense and amortization of debt discount
261

478

523

+ Pro forma adjustments 1
51

65

96

- Significant items
(286
)
(1,186
)
(545
)
Pro forma Operating EBIT
$
1,639

$
2,202

$
3,336

1.
Pro forma adjustments include (1) the margin impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont, (2) the removal of the amortization of ECP's inventory step-up recognized in connection with the Merger, and (3) the elimination of the impact of events directly attributable to the Merger, internal reorganization and business realignment, separation, distribution and other related transactions (e.g., one-time transaction costs).

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Table of Contents

The following tables summarize the pretax impact of significant items by segment that are excluded from Operating EBIT and pro forma Operating EBIT:

Significant Items by Segment
Three Months Ended Jun 30, 2019
Six Months Ended Jun 30, 2019
Perf. Mat. & Coatings
Ind. Interm. & Infrast.
Pack. & Spec. Plastics
Corp.
Total
Perf. Mat. & Coatings
Ind. Interm. & Infrast.
Pack. & Spec. Plastics
Corp.
Total
In millions
Indemnification and other transaction related costs 1
$
—

$
—

$
—

$
(127
)
$
(127
)
$
—

$
—

$
—

$
(127
)
$
(127
)
Integration and separation costs 2
—

—

—

(348
)
(348
)
—

—

—

(750
)
(750
)
Restructuring and asset related charges - net 3
(22
)
—

(6
)
(37
)
(65
)
(22
)
—

(19
)
(180
)
(221
)
Loss on divestiture 4
—

—

—

(44
)
(44
)
—

—

—

(44
)
(44
)
Loss on early extinguishment of debt 5
—

—

—

(44
)
(44
)
—

—

—

(44
)
(44
)
Total
$
(22
)
$
—

$
(6
)
$
(600
)
$
(628
)
$
(22
)
$
—

$
(19
)
$
(1,145
)
$
(1,186
)
1.
Includes charges primarily associated with agreements entered into with DuPont and Corteva as part of the separation and distribution which, among other matters, provides for cross-indemnities and allocations of obligations and liabilities for periods prior to, at and after the completion of the separation.
2.
Costs related to post-Merger integration and business separation activities. The six months ended June 30, 2019 excludes one-time transaction costs directly attributable to the Merger.
3.
Includes Board approved restructuring plans and asset-related charges, which includes other asset impairments. See Note 5 for additional information.
4.
Includes post-closing adjustments on a previous divestiture.
5.
The Company retired outstanding long-term debt resulting in a loss on early extinguishment. See Note 12 for additional information.

Significant Items by Segment
Three Months Ended Jun 30, 2018
Six Months Ended Jun 30, 2018
Perf. Mat. & Coatings
Ind. Interm. & Infrast.
Pack. & Spec. Plastics
Corp.
Total
Perf. Mat. & Coatings
Ind. Interm. & Infrast.
Pack. & Spec. Plastics
Corp.
Total
In millions
Impact of Dow Silicones ownership restructure 1
$
(20
)
$
—

$
—

$
—

$
(20
)
$
(20
)
$
—

$
—

$
—

$
(20
)
Integration and separation costs 2
—

—

—

(234
)
(234
)
—

—

—

(441
)
(441
)
Restructuring and asset related charges - net 3
(15
)
—

(3
)
(14
)
(32
)
(14
)
(11
)
(9
)
(70
)
(104
)
Gain on divestiture 4
—

—

—

—

—

—

20

—

—

20

Total
$
(35
)
$
—

$
(3
)
$
(248
)
$
(286
)
$
(34
)
$
9

$
(9
)
$
(511
)
$
(545
)
1.
Includes a loss related to a post-closing adjustment related to the Dow Silicones ownership restructure.
2.
Costs related to post-Merger integration and business separation activities, and costs related to the ownership restructure of Dow Silicones. Excludes one-time transaction costs directly attributable to the Merger.
3.
Includes Board approved restructuring plans and asset related charges, which include other asset impairments. See Note 5 for additional information. Excludes one-time transaction costs directly attributable to the Merger.
4.
Includes a gain related to the Company's sale of its equity interest in MEGlobal.


52
Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
On April 1, 2019, DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc. or "DuPont") completed the separation of its materials science business and Dow Inc. became the direct parent company of The Dow Chemical Company and its consolidated subsidiaries (“TDCC” and together with Dow Inc., “Dow” or the “Company”), owning all of the outstanding common shares of TDCC. For filings related to the period commencing April 1, 2019 and thereafter, TDCC was deemed the predecessor to Dow Inc., and the historical results of TDCC are deemed the historical results of Dow Inc. for periods prior to and including March 31, 2019.
The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017. TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries (“Historical DuPont”) each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business.

As of the effective date and time of the distribution, DowDuPont does not beneficially own any equity interest in Dow and no longer consolidates Dow and its consolidated subsidiaries into its financial results. The consolidated financial results of Dow for all periods presented reflect the distribution of TDCC’s agricultural sciences business (“AgCo”) and specialty products business (“SpecCo”) as discontinued operations, as well as reflect the receipt of Historical DuPont’s ethylene and ethylene copolymers businesses (other than its ethylene acrylic elastomers business) (“ECP”) as a common control transaction from the closing of the Merger on August 31, 2017. See Note 3 to the Consolidated Financial Statements and Dow Inc.'s Amendment No. 4 to the Registration Statement on Form 10 filed with the U.S. Securities and Exchange Commission ("SEC") on March 8, 2019 for additional information.

Throughout this Current Report on Form 10-Q, unless otherwise indicated, amounts and activity are presented on a continuing operations basis.

Except as otherwise indicated by the context, the terms "Union Carbide" means Union Carbide Corporation, and "Dow Silicones" means Dow Silicones Corporation, both wholly owned subsidiaries of the Company.

Items Affecting Comparability of Financial Results
As a result of the separation from DowDuPont, pro forma net sales and pro forma Operating EBIT are provided in this section which were based on the consolidated financial statements of TDCC, adjusted to give effect to the separation from DowDuPont as if it had been consummated on January 1, 2017. Pro forma adjustments include (1) the margin impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva, Inc. ("Corteva") in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont, (2) the removal of the amortization of ECP's inventory step-up recognized in connection with the Merger, and (3) the elimination of the impact of events directly attributable to the Merger, internal reorganization and business realignment, separation, distribution and other related transactions (e.g., one-time transaction costs). These adjustments impacted the consolidated results as well as the reportable segments. See Note 23 to the Consolidated Financial Statements for a summary of the pro forma adjustments impacting segment measures for the six months ended June 30, 2019 and the three and six months ended June 30, 2018.

OVERVIEW
The following is a summary of the results from continuing operations for Dow for the three months ended June 30, 2019:

•
The Company reported net sales in the second quarter of 2019 of $11.0 billion, down 14 percent from $12.8 billion in the second quarter of 2018, with declines across all geographic regions and segments. These declines were due to a decrease in local price of 9 percent, a volume decline of 4 percent and a 2 percent unfavorable currency impact which were partially offset by a 1 percent increase in Portfolio & Other.

•
Local price decreased 9 percent compared with the same period last year, with decreases in all segments, including a double-digit decline in Industrial Intermediates & Infrastructure (down 12 percent). Local price decreased in all geographic regions, including double-digit declines in Latin America (down 15 percent) and U.S. & Canada and Asia Pacific (both down 10 percent).



53
Table of Contents

•
Volume decreased 4 percent compared with the second quarter of 2018, with decreases in all operating segments: Performance Materials & Coatings (down 7 percent), Packaging & Specialty Plastics (down 4 percent) and Industrial Intermediates & Infrastructure (down 2 percent). Volume decreased in Europe, Middle East, Africa and India ("EMEAI") (down 6 percent), Latin America (down 4 percent) and U.S. & Canada (down 3 percent). Volume was flat in Asia Pacific.

•
Currency had an unfavorable impact of 2 percent on net sales, driven primarily by EMEAI (down 5 percent).

•
Portfolio & Other increased 1 percent as a result of the sales impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation, impacting Performance Materials & Coatings.

•
Research and development ("R&D") expenses were $208 million in the second quarter of 2019, down from $221 million in the second quarter of 2018. Selling, general and administrative ("SG&A") expenses for Dow Inc. and TDCC were $422 million and $418 million, respectively, in the second quarter of 2019, down from $485 million in the second quarter of 2018. R&D and SG&A expenses decreased primarily due to cost reductions and lower performance-based compensation costs.

•
Restructuring and asset related charges - net were $65 million in the second quarter of 2019, primarily reflecting post-merger restructuring actions under the DowDuPont Cost Synergy Program.

•
Integration and separation costs for Dow Inc. and TDCC were $348 million and $324 million, respectively, in the second quarter of 2019, up from $262 million in the second quarter of 2018, reflecting post-Merger integration and business separation activities.

•
Equity in earnings (losses) of nonconsolidated affiliates was a loss of $15 million in the second quarter of 2019, down from earnings of $193 million in the second quarter of 2018, primarily due to increased equity losses from Sadara and lower equity earnings from the Kuwait joint ventures and the Thai joint ventures.

•
Sundry income (expense) - net for Dow Inc. and TDCC were an expense of $1 million and income of $109 million, respectively, in the second quarter of 2019, compared with expense of $14 million in the second quarter of 2018. Sundry income (expense) - net increased for TDCC primarily due to an increase in foreign currency exchange gains and non-operating pension and postretirement benefit plan credits compared with the second quarter of 2018. In addition to the items discussed for TDCC, Dow Inc. incurred a loss on post-closing adjustments related to a previous divestiture and charges associated with agreements entered into with DuPont and Corteva as part of the separation and distribution.

•
Net income available for Dow Inc. and TDCC common stockholder(s) was $75 million and $202 million, respectively, in the second quarter of 2019, compared with $1,333 million in the second quarter of 2018. Earnings per share for Dow Inc. was $0.10 per share in the second quarter of 2019, compared with $1.78 per share in the second quarter of 2018.

•
On April 11, 2019, Dow Inc. announced that its Board of Directors declared a dividend of $0.70 per share, paid on June 14, 2019, to shareholders of record on May 31, 2019.

•
In May 2019, the Company issued $2.0 billion of senior unsecured notes in an offering under Rule 144A of the Securities Act of 1933. In June 2019, the Company redeemed $1.5 billion of 4.25 percent notes issued by the Company with maturity in 2020. In addition, in April and June of 2019, the Company voluntarily repaid $2.0 billion and $500 million, respectively, of principal on the Dow Silicones Term Loan Facility.

•
Dow Inc. repurchased $305 million of the Company's common stock in the second quarter of 2019. Dow Inc. remains on track to repurchase an additional $200 million of the Company's common stock in the second half of 2019 to reach its full-year target of approximately $500 million of repurchases.

In addition to the financial highlights above, the following event occurred subsequent to the second quarter of 2019:

•
On July 25, 2019, the Company announced that after a detailed analysis of project returns and future demand growth, it has decided to postpone construction of the planned 450 KTA polyolefins facility in Europe.


54
Table of Contents

Selected Financial Data - Dow Inc.
Three Months Ended
Six Months Ended
In millions
Jun 30,
2019
Jun 30,
2018
Jun 30,
2019
Jun 30,
2018
Net sales
$
11,014

$
12,789

$
21,983

$
25,026

 
 
 
 
 
Cost of sales ("COS")
$
9,420

$
10,540

$
18,562

$
20,520

Percent of net sales
85.5
%
82.4
%
84.4
%
82.0
%
 
 
 
 
 
R&D
$
208

$
221

$
398

$
429

Percent of net sales
1.9
%
1.7
%
1.8
%
1.7
%
 
 
 
 
 
SG&A
$
422

$
485

$
870

$
967

Percent of net sales
3.8
%
3.8
%
4.0
%
3.9
%
 
 
 
 
 
Effective tax rate
58.1
%
23.5
%
52.0
%
21.5
%
 
 
 
 
 
Net income available for common stockholders
$
75

$
1,333

$
631

$
2,737


Selected Financial Data - TDCC
Three Months Ended
Six Months Ended
In millions
Jun 30,
2019
Jun 30,
2018
Jun 30,
2019
Jun 30,
2018
Net sales
$
11,014

$
12,789

$
21,983

$
25,026

 
 
 
 
 
COS
$
9,419

$
10,540

$
18,561

$
20,520

Percent of net sales
85.5
%
82.4
%
84.4
%
82.0
%
 
 
 
 
 
R&D
$
208

$
221

$
398

$
429

Percent of net sales
1.9
%
1.7
%
1.8
%
1.7
%
 
 
 
 
 
SG&A
$
418

$
485

$
866

$
967

Percent of net sales
3.8
%
3.8
%
3.9
%
3.9
%
 
 
 
 
 
Effective tax rate
36.5
%
23.5
%
41.6
%
21.5
%
 
 
 
 
 
Net income available for the common stockholder
$
202

$
1,333

$
758

$
2,737




55
Table of Contents

RESULTS OF OPERATIONS
Net Sales
The following tables summarize net sales, pro forma net sales and sales variances by segment and geographic region from the prior year:

Summary of Sales Results
Three Months Ended
Six Months Ended
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Net sales
$
11,014

$
12,789

$
21,983

$
25,026

Pro forma net sales
 
$
12,851

$
22,030

$
25,147


Sales Variances by Segment and Geographic Region - As Reported
 
Three Months Ended Jun 30, 2019
Six Months Ended Jun 30, 2019
Local Price & Product Mix
Currency
Volume
Portfolio & Other 1
Total
Local Price & Product Mix
Currency
Volume
Portfolio & Other 1
Total
Percentage change from prior year
Performance Materials & Coatings
(4
)%
(2
)%
(7
)%
3
%
(10
)%
(3
)%
(2
)%
(3
)%
2
%
(6
)%
Industrial Intermediates & Infrastructure
(12
)
(2
)
(2
)
—

(16
)
(12
)
(2
)
2

—

(12
)
Packaging & Specialty Plastics
(9
)
(2
)
(4
)
—

(15
)
(10
)
(2
)
(3
)
—

(15
)
Total
(9
)%
(2
)%
(4
)%
1
%
(14
)%
(9
)%
(2
)%
(1
)%
—
%
(12
)%
U.S. & Canada
(10
)%
—
 %
(3
)%
2
%
(11
)%
(8
)%
—
 %
(4
)%
1
%
(11
)%
EMEAI
(6
)
(5
)
(6
)
—

(17
)
(7
)
(5
)
(2
)
—

(14
)
Asia Pacific
(10
)
(2
)
—

—

(12
)
(11
)
(2
)
4

—

(9
)
Latin America
(15
)
—

(4
)
—

(19
)
(14
)
—

(2
)
—

(16
)
Total
(9
)%
(2
)%
(4
)%
1
%
(14
)%
(9
)%
(2
)%
(1
)%
—
%
(12
)%
1.
Portfolio & Other includes the sales impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont.

Net sales in the second quarter of 2019 were $11.0 billion, down 14 percent from $12.8 billion in the second quarter of last year, primarily due to a decrease in local price, softer demand and the unfavorable impact of currency. Sales decreased in all geographic regions and operating segments. Local price decreased 9 percent, primarily in response to lower feedstock and raw material costs, as well as pricing pressure. Local price decreased in Industrial Intermediates & Infrastructure (down 12 percent), Packaging & Specialty Plastics (down 9 percent) and Performance Materials & Coatings (down 4 percent). Local price decreased in all geographic regions. Volume decreased 4 percent with declines in all operating segments and geographic regions, except Asia Pacific which was flat. Volume decreased in Performance Materials & Coatings (down 7 percent), Packaging & Specialty Plastics (down 4 percent) and Industrial Intermediates & Infrastructure (down 2 percent). Currency unfavorably impacted sales 2 percent compared with the same period last year, driven primarily by EMEAI (down 5 percent). Portfolio & Other increased 1 percent compared with the same period last year.

Net sales for the first six months of 2019 were $22.0 billion, down 12 percent from $25.0 billion from the same period last year, primarily due to a decrease in local price, the unfavorable impact of currency and softer demand. Sales decreased in all geographic regions and operating segments. Local price decreased 9 percent, primarily in response to lower feedstock and raw material costs, as well as pricing pressure. Local price decreased in Industrial Intermediates & Infrastructure (down 12 percent), Packaging & Specialty Plastics (down 10 percent) and Performance Materials & Coatings (down 3 percent). Local price decreased in all geographic regions with double-digit declines in Latin America (down 14 percent) and Asia Pacific (down 11 percent). Currency unfavorably impacted sales 2 percent compared with the same period last year, driven primarily by EMEAI (down 5 percent). Volume decreased 1 percent as declines in Packaging & Specialty Plastics and Performance Materials & Coatings (both down 3 percent) more than offset an increase in Industrial Intermediates & Infrastructure (up 2 percent). Volume decreased in all geographic regions, except Asia Pacific (up 4 percent). Portfolio & Other was flat compared with the same period last year.


56
Table of Contents

Sales Variances by Segment and Geographic Region - Pro Forma Basis
 
Three Months Ended Jun 30, 2019
Six Months Ended Jun 30, 2019
Local Price & Product Mix
Currency
Volume
Portfolio & Other
Total
Local Price & Product Mix
Currency
Volume
Portfolio & Other 1
Total
Percentage change from prior year
Performance Materials & Coatings
(5
)%
(2
)%
(5
)%
—
%
(12
)%
(3
)%
(2
)%
(2
)%
—
 %
(7
)%
Industrial Intermediates & Infrastructure
(12
)
(3
)
(1
)
—

(16
)
(12
)
(3
)
3

—

(12
)
Packaging & Specialty Plastics
(9
)
(2
)
(4
)
—

(15
)
(10
)
(2
)
(3
)
—

(15
)
Total
(9
)%
(2
)%
(3
)%
—
%
(14
)%
(9
)%
(2
)%
(1
)%
—
 %
(12
)%
U.S. & Canada
(9
)%
—
 %
(2
)%
—
%
(11
)%
(8
)%
—
 %
(3
)%
(1
)%
(12
)%
EMEAI
(6
)
(5
)
(6
)
—

(17
)
(7
)
(5
)
(2
)
—

(14
)
Asia Pacific
(11
)
(2
)
—

—

(13
)
(11
)
(2
)
4

—

(9
)
Latin America
(15
)
—

(4
)
—

(19
)
(14
)
—

(2
)
—

(16
)
Total
(9
)%
(2
)%
(3
)%
—
%
(14
)%
(9
)%
(2
)%
(1
)%
—
 %
(12
)%
1.
Portfolio & Other includes the sales impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont.

Net sales in the second quarter of 2019 were $11.0 billion, down 14 percent from pro forma net sales of $12.9 billion in the second quarter of last year, primarily due to a decrease in local price, softer demand and the unfavorable impact of currency. Sales decreased in all geographic regions and operating segments. Local price decreased 9 percent, primarily in response to lower feedstock and raw material costs, as well as pricing pressure. Local price decreased in Industrial Intermediates & Infrastructure (down 12 percent), Packaging & Specialty Plastics (down 9 percent) and Performance Materials & Coatings (down 5 percent). Local price decreased in all geographic regions. Volume decreased 3 percent with declines in all operating segments and geographic regions, except Asia Pacific which was flat. Volume decreased in Performance Materials & Coatings (down 5 percent), Packaging & Specialty Plastics (down 4 percent) and Industrial Intermediates & Infrastructure (down 1 percent). Currency unfavorably impacted sales 2 percent compared with the same period last year, driven primarily by EMEAI (down 5 percent). Portfolio & Other was flat compared with the same period last year.

Pro forma net sales for the first six months of 2019 were $22.0 billion, down 12 percent from pro forma net sales of $25.1 billion from the same period last year, primarily due to a decrease in local price, the unfavorable impact of currency and softer demand. Sales decreased in all geographic regions and operating segments. Local price decreased 9 percent, primarily in response to lower feedstock and raw material costs, as well as pricing pressure. Local price decreased in Industrial Intermediates & Infrastructure (down 12 percent), Packaging & Specialty Plastics (down 10 percent) and Performance Materials & Coatings (down 3 percent). Local price decreased in all geographic regions with double-digit declines in Latin America (down 14 percent) and Asia Pacific (down 11 percent). Currency unfavorably impacted sales 2 percent compared with the same period last year, driven primarily by EMEAI (down 5 percent). Volume decreased 1 percent as declines in Packaging & Specialty Plastics (down 3 percent) and Performance Materials & Coatings (down 2 percent) more than offset an increase in Industrial Intermediates & Infrastructure (up 3 percent). Volume decreased in all geographic regions, except Asia Pacific (up 4 percent). Portfolio & Other was flat compared with the same period last year.

Cost of Sales
COS was $9.4 billion in the second quarter of 2019, down from $10.5 billion in the second quarter of 2018. For the first six months of 2019, COS was $18.6 billion, down from $20.5 billion in the first six months of 2018. For the three and six months ended June 30, 2019, COS decreased primarily due to lower feedstock and other raw material costs, decreased sales volume and cost synergies which were partially offset by $75 million of transaction-related costs related to the separation from DowDuPont. COS as a percentage of net sales in the second quarter of 2019 was 85.5 percent (82.4 percent in the second quarter of 2018) and was 84.4 percent for the first six months of 2019 (82.0 percent for the first six months of 2018).

Research and Development Expenses
R&D expenses totaled $208 million in the second quarter of 2019, down $13 million (6 percent) from $221 million in the second quarter of 2018. For the first six months of 2019, R&D expenses totaled $398 million, down $31 million (7 percent) from $429 million in the first six months of 2018. R&D expenses for the three and six months ended June 30, 2019 decreased compared with the same periods last year primarily due to cost reductions and lower performance-based compensation costs.

57
Table of Contents

Selling, General and Administrative Expenses
SG&A expenses for Dow Inc. and TDCC were $422 million and $418 million, respectively, in the second quarter of 2019, down from $485 million in the second quarter of last year. For the first six months of 2019, SG&A expenses for Dow Inc. and TDCC were $870 million and $866 million, respectively, down from $967 million in the first six months of 2018. SG&A expenses for the three and six months ended June 30, 2019 decreased compared with the same periods last year primarily due to cost reductions and lower performance-based compensation costs.

Amortization of Intangibles
Amortization of intangibles was $104 million in the second quarter of 2019, down from $118 million in the second quarter of 2018. In the first six months of 2019, amortization of intangibles was $220 million, down from $236 million in the first six months of 2018. See Note 10 to the Consolidated Financial Statements for additional information on intangible assets.

Restructuring and Asset Related Charges - Net
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont approved post-merger restructuring actions under the DowDuPont Cost Synergy Program (the "Synergy Program") which was designed to integrate and optimize the organization following the Merger and in preparation for the business separations. The restructuring charges below reflect charges from continuing operations.

For the three months ended June 30, 2019, the Company recorded pretax restructuring charges of $59 million, consisting of severance and related benefit costs of $25 million, asset write-downs and write-offs of $29 million and costs associated with exit and disposal activities of $5 million. For the six months ended June 30, 2019, the Company recorded pretax restructuring charges of $203 million, consisting of severance and related benefit costs of $77 million, asset write-downs and write-offs of $105 million and costs associated with exit and disposal activities of $21 million.

For the three months ended June 30, 2018, the Company recorded pretax restructuring charges of $30 million, consisting of severance and related benefit costs of $17 million and asset write-downs and write-offs of $13 million. For the six months ended June 30, 2018, the Company recorded pretax restructuring charges of $115 million, consisting of severance and related benefit costs of $85 million, asset write-downs and write-offs of $16 million and costs associated with exit and disposal activities of $14 million. The Company expects actions related to the Synergy Program to be substantially complete by the end of 2019.

Asset Related Charges
The Company recognized an additional pretax impairment charge of $6 million and $18 million for the three and six months ended June 30, 2019, respectively, related primarily to capital additions made to a biopolymers manufacturing facility in Santa Vitoria, Minas Gerais, Brazil, which was impaired in 2017 (charge of $3 million and $6 million for the three and six months ended June 30, 2018). See Note 5 to the Consolidated Financial Statements for details on the Company's restructuring and asset related charges, including charges by segment.

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

Equity in Earnings (Losses) of Nonconsolidated Affiliates
The Company's share of the earnings (losses) of nonconsolidated affiliates was a loss of $15 million in the second quarter of 2019, down from earnings of $193 million in the second quarter of 2018, and a loss of $29 million in the first six months of 2019, down from earnings of $394 million in the first six months of 2018. The decrease in equity earnings for the three and six months ended June 30, 2019, is primarily due to increased equity losses from Sadara and lower equity earnings from the Kuwait joint ventures (due to lower monoethylene glycol and polyethylene prices) and the 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.


58
Table of Contents

TDCC
For the three months ended June 30, 2019, sundry income (expense) - net was income of $109 million compared with expense of $14 million for the three months ended June 30, 2018. Sundry income (expense) - net increased primarily due to an increase in foreign currency exchange gains and non-operating pension and postretirement benefit plan credits compared with the second quarter of 2018. The second quarter of 2019 also included a $44 million loss on the early extinguishment of debt and a gain of $14 million on post-closing adjustments related to a previous divestiture (both related to the Corporate segment). The second quarter of 2018 included a $20 million loss for a post-closing adjustment related to the Dow Silicones ownership restructure (related to the Performance Materials & Coatings segment). In the first six months of 2019, sundry income (expense) - net was income of $178 million compared with income of $40 million in the first six months of 2018. In addition to the amounts previously discussed, the first six months of 2018 included a $20 million gain related to the Company's sale of its equity interest in MEGlobal (related to the Industrial Intermediates & Infrastructure segment).

Dow Inc.
For the three months ended June 30, 2019, sundry income (expense) - net was expense of $1 million compared with expense of $14 million for the three months ended June 30, 2018. For the six months ended June 30, 2019, sundry income (expense) - net was income of $68 million compared with income of $40 million for the six months ended June 30, 2018. In addition to the amounts previously discussed above under TDCC, sundry income (expense) - net for the three and six months ended June 30, 2019, included a $58 million loss on post-closing adjustments related to a previous divestiture and $52 million in charges associated with agreements entered into with DuPont and Corteva as part of the separation and distribution, which provides for cross-indemnities and allocations of obligations and liabilities for periods prior to, at and after completion of the separation (both related to the Corporate segment). See Notes 3, 6, 12, 17 and 23 to the Consolidated Financial Statements for additional information.

Interest Expense and Amortization of Debt Discount
Dow Inc.
Interest expense and amortization of debt discount was $237 million in the second quarter of 2019, down from $261 million in the second quarter of 2018. Interest expense and amortization of debt discount was $478 million in the first six months of 2019, down from $523 million in the first six months of 2018. The decrease is primarily due to lower interest bearing notes issued in the fourth quarter of 2018, which replaced higher interest bearing notes redeemed in the fourth quarter of 2018.

TDCC
Interest expense and amortization of debt discount was $249 million in the second quarter of 2019, down from $261 million in the second quarter of 2018. Interest expense and amortization of debt discount was $490 million in the first six months of 2019, down from $523 million in the first six months of 2018. In addition to the amounts previously discussed above for Dow Inc., TDCC includes additional interest expense related to an intercompany loan with Dow Inc. See Note 22 to the Consolidated Financial Statements for additional information.

Provision for Income Taxes
Dow'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 of the earnings from Dow's equity method investments are taxed at the joint venture level. The effective tax rate for the second quarter of 2019 for Dow Inc. and TDCC was 58.1 percent and 36.5 percent respectively, compared with 23.5 percent for the second quarter of 2018. For the first six months of 2019, the effective tax rate for Dow Inc. and TDCC was 52.0 percent and 41.6 percent respectively, compared with 21.5 percent for the first six months of 2018. The tax rate for TDCC in the second quarter of 2019 was unfavorably impacted by non-deductible restructuring costs and was favorably impacted as a result of a change in deferred taxes related to fixed assets. The tax rate for the first six months of 2019 was unfavorably impacted by tax impacts related to spin preparation activities and favorably impacted by tax benefits related to the issuance of stock-based compensation and deferred tax remeasurement in foreign jurisdictions. The tax rate in the second quarter of 2018 was favorably impacted by the reduced U.S. federal corporate income tax rate and unfavorably impacted by non-deductible restructuring costs and certain provisions in the Tax Cuts and Jobs Act related to the taxability of foreign earnings. The tax rate for the first six months of 2018 was favorably impacted by tax benefits related to the issuance of stock-based compensation. In addition, the tax rate for Dow Inc. in the second quarter of 2019 was unfavorably impacted by indemnification and other post-separation related charges.

Income from Discontinued Operations, Net of Tax
Income from discontinued operations, net of tax was $554 million in the second quarter of 2018 and $445 million and $1,068 million in the first six months of 2019 and 2018, respectively, related to the distribution of AgCo and SpecCo to DowDuPont as a result of the separation. See Note 3 to the Consolidated Financial Statements for additional information.


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Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests from continuing operations was $15 million in the second quarter of 2019, down from $25 million in the second quarter of 2018. For the first six months of 2019, net income attributable to noncontrolling interests from continuing operations was $47 million, compared with $46 million for the same period last year.

Net income attributable to noncontrolling interests from discontinued operations was zero in the second quarter of 2019, compared with $6 million in the second quarter of 2018. For the first six months of 2019, net income attributable to noncontrolling interests from discontinued operations was $13 million, compared with $20 million for the same period last year.

Net Income Available for the Common Stockholder(s)
Dow Inc.
Net income available for Dow Inc. common stockholders was $75 million, or $0.10 per share, in the second quarter of 2019, compared with $1,333 million, or $1.78 per share, in the second quarter of 2018. Net income available for Dow Inc. common stockholders was $631 million, or $0.84 per share, in the first six months of 2019, compared with $2,737 million, or $3.66 per share, in the first six months of 2018. 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 $202 million in the second quarter of 2019, compared with $1,333 million in the second quarter of 2018. Net income available for the TDCC common stockholder was $758 million in the first six months of 2019, compared with $2,737 million in the first six months of 2018. Following the separation from DowDuPont, TDCC's common shares are owned solely by Dow Inc.

OUTLOOK
Looking ahead, the Company still sees global growth, but the pace of that expansion has slowed, as buying patterns remain cautious due to ongoing trade and geopolitical uncertainties. In this environment, the Company will maintain cost and operating discipline by continuing cost synergy and stranded cost removal actions, by reducing the Company's planned capital expenditures for the year from $2.5 billion to $2 billion, without sacrificing high-return growth projects, and by continuing with disciplined margin management. These near-term steps are responsive to the current market environment.

Over the longer-term, the Company's purpose-built portfolio and leading business positions, combined with a leaner cost structure and a suite of incremental, high-return growth investments, will continue to differentiate Dow and drive the Company's earnings growth trajectory.

SEGMENT RESULTS
Effective with the Merger, TDCC's business activities were components of DowDuPont's business operations and were reported as a single operating segment. Following the separation from DowDuPont, the Company changed the manner in which its business activities were managed. The Company's portfolio now includes six global businesses which are organized into the following operating segments: Performance Materials & Coatings, Industrial Intermediates & Infrastructure and Packaging & Specialty Plastics. Corporate contains the reconciliation between the totals for the operating segments and the Company's totals. The Company did not aggregate any operating segments when determining its reportable segments.

Following the separation from DowDuPont, the Company changed its practice of transferring ethylene to its downstream derivative businesses at cost to transferring ethylene at market prices. The Company also changed certain of its Corporate segment allocation practices, including costs previously assigned to AgCo and SpecCo ("stranded costs"), which are now allocated to the operating segments. These changes to the Company's segment results have been consistently applied to all periods presented.

Dow reported geographic information for the following regions: U.S. & Canada, Asia Pacific, Latin America and EMEAI. As a result of the separation from DowDuPont, the Company changed the geographic alignment for the country of India to be reflected in EMEAI (previously reported in Asia Pacific).

Dow’s measure of profit/loss for segment reporting purposes is pro forma Operating EBIT (for the six months ended June 30, 2019 and the three and six months ended June 30, 2018) and Operating EBIT (for the three months ended June 30, 2019) as this is the manner in which the Company's chief operating decision maker ("CODM") assesses performance and allocates resources. The Company defines pro forma Operating EBIT as earnings (i.e., "Income from continuing operations before income taxes") before interest, plus pro forma adjustments, excluding the impact of significant items. The Company defines Operating EBIT as earnings (i.e., "Income from continuing operations before income taxes") before interest, excluding the impact of significant items. Pro forma Operating EBIT and Operating EBIT by segment include all operating items relating to the businesses; items that principally apply to Dow as a whole are assigned to Corporate. The Company also presents pro forma net sales for the six months

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ended June 30, 2019 and the three and six months ended June 30, 2018 as it is included in management's measure of segment performance and is regularly reviewed by the CODM. Pro forma net sales includes the impact of various manufacturing, supply and service related agreements entered into with DuPont and Corteva in connection with the separation which provide for different pricing than the historical intercompany and intracompany pricing practices of TDCC and Historical DuPont. See Note 23 to the Consolidated Financial Statements for reconciliations of these measures and a summary of the pro forma adjustments impacting segment measures for the six months ended June 30, 2019 and the three and six months ended June 30, 2018.

PERFORMANCE MATERIALS & COATINGS
Performance Materials & Coatings includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. These businesses primarily utilize the Company's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of the architectural and industrial coatings, home care and personal care end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to combine chemistry platforms to deliver differentiated offerings to customers.

Performance Materials & Coatings
Three Months Ended
Six Months Ended
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Net sales
$
2,356

$
2,624

$
4,638

$
4,951

Pro forma net sales
 
$
2,673

$
4,676

$
5,044

Operating EBIT
$
214

 
 
 
Pro forma Operating EBIT
 
$
292

$
485

$
647

Equity earnings
$
1

$
1

$
1

$
1


Performance Materials & Coatings
Three Months Ended
Six Months Ended
Percentage change from prior year
Jun 30, 2019
Jun 30, 2019
Change in Net Sales from Prior Period due to:
 
 
Local price & product mix
(4
)%
(3
)%
Currency
(2
)
(2
)
Volume
(7
)
(3
)
Portfolio & other
3

2

Total
(10
)%
(6
)%
Change in Pro Forma Net Sales from Prior Period due to: 1
 
 
Local price & product mix
(5
)%
(3
)%
Currency
(2
)
(2
)
Volume
(5
)
(2
)
Portfolio & other
—

—

Total
(12
)%
(7
)%
1.
As reported net sales for the three months ended June 30, 2019 compared with pro forma net sales for the three months ended June 30, 2018.

Performance Materials & Coatings net sales were $2,356 million in the second quarter of 2019, down 10 percent from net sales of $2,624 million in the second quarter of 2018. Net sales decreased 12 percent compared with pro forma net sales of $2,673 million in the same quarter last year, with volume and local price each down 5 percent and currency down 2 percent. Local price decreased in both businesses and all geographic regions. Consumer Solutions local price decreased primarily due to pricing pressure on siloxanes in Asia Pacific. Local price decreased in Coatings & Performance Monomers in response to lower feedstock and other raw material costs. Volume decreased in both businesses and all geographic regions. Volume decreased in Consumer Solutions due to slower demand in automotive and consumer electronics end-markets, as well as a result of targeted reductions of low-margin business in the home care market sector. Delayed seasonal demand due to wet weather in the U.S. & Canada and EMEAI decreased volume in Coatings & Performance Monomers, along with shipping restrictions at a performance monomers facility in Deer Park, Texas, due to a fire at a nearby third-party storage and terminal facility.

Operating EBIT was $214 million in the second quarter of 2019, down 27 percent from pro forma Operating EBIT of $292 million in the second quarter of 2018. Operating EBIT decreased primarily due to margin compression in siloxanes, higher planned maintenance turnaround costs and shipping restrictions at a performance monomers facility in Deer Park, Texas.


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Performance Materials & Coatings net sales for the first six months of 2019 were $4,638 million, down 6 percent from net sales of $4,951 million in the first six months of 2018. Pro forma net sales for the first six months of 2019 were $4,676 million, down 7 percent from pro forma net sales of $5,044 million in the first six months of 2018, with local price down 3 percent, volume down 2 percent and an unfavorable currency impact of 2 percent. Local price decreased in both businesses and EMEAI and Asia Pacific, while U.S. & Canada and Latin America were flat. Local price decreased in Consumer Solutions due to siloxanes pricing pressure in Asia Pacific, which more than offset local price increases in U.S. & Canada and Latin America. Coatings & Performance Monomers local price declined in all geographic regions. Volume decreased in all geographic regions, except Asia Pacific, which increased modestly. Consumer Solutions volume was flat with volume growth in Asia Pacific offsetting declines in all other geographic regions. Volume growth in silicone intermediates was offset by declines in the home and personal care end-markets from shedding low-margin business. Despite volume improvement for vinyl acetate monomer, Coatings & Performance Monomers volume declined due to soft demand for architectural binders, acrylates and methacrylates and the unfavorable impact of currency.

Pro forma Operating EBIT for the first six months of 2019 was $485 million, down 25 percent from pro forma Operating EBIT of $647 million in the first six months of 2018. Pro forma Operating EBIT decreased primarily due to siloxanes margin compression, shipping restrictions at a performance monomers facility in Deer Park, Texas, and higher planned maintenance turnaround costs which more than offset cost synergies and the impact of lower feedstock and other raw material costs.

INDUSTRIAL INTERMEDIATES & INFRASTRUCTURE
Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & Construction Chemicals - that develop important intermediate chemicals that are essential to manufacturing processes, as well as downstream, customized materials and formulations that use advanced development technologies. These businesses primarily produce and market ethylene oxide and propylene oxide derivatives that are aligned to market segments as diverse as appliances, coatings, infrastructure and oil and gas. The global scale and reach of these businesses, world-class technology and R&D capabilities and materials science expertise enable the Company to be a premier solutions provider offering customers value-add sustainable solutions to enhance comfort, energy efficiency, product effectiveness and durability across a wide range of home comfort and appliances, building and construction, adhesives and lubricant applications, among others. This segment also includes a portion of the results of EQUATE Petrochemical Company K.S.C.C. ("EQUATE"), The Kuwait Olefins Company K.S.C.C. ("TKOC"), Map Ta Phut Olefins Company Limited and Sadara, all joint ventures of the Company.

The Company is 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.

Industrial Intermediates & Infrastructure
Three Months Ended
Six Months Ended
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Net sales
$
3,342

$
3,969

$
6,822

$
7,767

Pro forma net sales
 
$
3,972

$
6,831

$
7,775

Operating EBIT
$
154

 
 
 
Pro forma Operating EBIT
 
$
502

$
431

$
962

Equity earnings (losses)
$
(78
)
$
96

$
(126
)
$
245


Industrial Intermediates & Infrastructure
Three Months Ended
Six Months Ended
Percentage change from prior year
Jun 30, 2019
Jun 30, 2019
Change in Net Sales from Prior Period due to:
 
 
Local price & product mix
(12
)%
(12
)%
Currency
(2
)
(2
)
Volume
(2
)
2

Portfolio & other
—

—

Total
(16
)%
(12
)%
Change in Pro Forma Net Sales from Prior Period due to: 1
 
 
Local price & product mix
(12
)%
(12
)%
Currency
(3
)
(3
)
Volume
(1
)
3

Portfolio & other
—

—

Total
(16
)%
(12
)%
1.
As reported net sales for the three months ended June 30, 2019 compared with pro forma net sales for the three months ended June 30, 2018.

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Table of Contents

Industrial Intermediates & Infrastructure net sales were $3,342 million in the second quarter of 2019, down 16 percent from $3,969 million in the second quarter of 2018. Net sales decreased 16 percent compared with pro forma net sales of $3,972 million in the same quarter last year, with local price down 12 percent, unfavorable currency impact of 3 percent and volume down 1 percent. Local price decreased in all businesses and geographic regions. The decrease in local price was primarily driven by lower feedstock and other raw material costs and price declines in isocyanates, propylene glycols, propylene oxide and polyols. Currency had an unfavorable impact of 3 percent, primarily in EMEAI. Polyurethanes & Construction Chemicals volume was flat, with decreases in Asia Pacific and U.S & Canada offset by an increase in EMEAI, as increased supply from Sadara and higher demand for isocyanates and systems applications was offset by lower demand for caustic, propylene oxide and commodity polyols. Latin America volume was flat. Industrial Solutions volume decreased, driven by declines in EMEAI and U.S. & Canada, primarily as a result of soft demand for industrial specialties used in agriculture, automotive and electronics end-markets.

Operating EBIT was $154 million in the second quarter of 2019, down 69 percent from pro forma Operating EBIT of $502 million in the second quarter of 2018. Operating EBIT decreased as the impact of margin compression in isocyanates products, lower equity earnings from the Kuwait joint ventures and increased equity losses from Sadara more than offset lower feedstock and other raw material costs.

Industrial Intermediates & Infrastructure net sales for the first six months of 2019 were $6,822 million, down 12 percent from net sales of $7,767 million in the first six months of 2018. Pro forma net sales for the first six months of 2019 were $6,831 million, down 12 percent from pro forma net sales of $7,775 million in the first six months of 2018, with local price down 12 percent, unfavorable currency impact of 3 percent and volume up 3 percent. Local price was down in all geographic regions and both businesses driven by lower feedstock and other raw material costs and price declines in isocyanates, propylene glycols, propylene oxide and polyols. Currency had an unfavorable impact of 3 percent, primarily in EMEAI. Polyurethanes & Construction Chemicals volume increased in all geographic regions, except Asia Pacific which was flat, primarily due to increased supply from Sadara. Industrial Solutions volume was flat as lower demand for products used in oil and gas applications was offset by increased demand for industrial specialties.

Pro forma Operating EBIT was $431 million for the first six months of 2019, down 55 percent from pro forma Operating EBIT of $962 million in the first six months of 2018. Pro forma Operating EBIT decreased as margin compression in isocyanates, lower equity earnings from the Kuwait joint ventures and increased equity losses from Sadara more than offset lower feedstock and other raw material costs and volume growth.

PACKAGING & SPECIALTY PLASTICS
Packaging & Specialty Plastics is a world leader in plastics and consists of two highly integrated global businesses: Hydrocarbons & Energy and Packaging and Specialty Plastics. The segment employs the industry’s broadest polyolefin product portfolio, supported by the Company’s proprietary catalyst and manufacturing process technologies, to work at the customer’s design table throughout the value chain to deliver more reliable and durable, higher performing, and more sustainable plastics to customers in food and specialty packaging; industrial and consumer packaging; health and hygiene; caps, closures and pipe applications; consumer durables; and infrastructure. 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, TKOC, Map Ta Phut Olefins Company Limited and Sadara, all joint ventures of the Company.

Packaging & Specialty Plastics
Three Months Ended
Six Months Ended
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Net sales
$
5,205

$
6,124

$
10,343

$
12,162

Pro forma net sales
 
$
6,134

$
10,343

$
12,182

Operating EBIT
$
768

 
 
 
Pro forma Operating EBIT
 
$
926

$
1,458

$
1,897

Equity earnings
$
74

$
108

$
112

$
167



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Table of Contents

Packaging & Specialty Plastics
Three Months Ended
Six Months Ended
Percentage change from prior year
Jun 30, 2019
Jun 30, 2019
Change in Net Sales from Prior Period due to:
 
 
Local price & product mix
(9
)%
(10
)%
Currency
(2
)
(2
)
Volume
(4
)
(3
)
Portfolio & other
—

—

Total
(15
)%
(15
)%
Change in Pro Forma Net Sales from Prior Period due to: 1
 
 
Local price & product mix
(9
)%
(10
)%
Currency
(2
)
(2
)
Volume
(4
)
(3
)
Portfolio & other
—

—

Total
(15
)%
(15
)%
1.
As reported net sales for the three months ended June 30, 2019 compared with pro forma net sales for the three months ended June 30, 2018.

Packaging & Specialty Plastics net sales were $5,205 million in the second quarter of 2019, down 15 percent from net sales of $6,124 million in the second quarter of 2018. Net sales decreased 15 percent compared with pro forma net sales of $6,134 million in the same quarter last year, with local price down 9 percent, volume down 4 percent and an unfavorable currency impact of 2 percent, primarily in EMEAI. Local price decreased in both businesses and across all geographic regions driven by reduced polyethylene prices and lower prices for Hydrocarbons & Energy co-products. Volume decreased across all geographic regions, except Asia Pacific, and in Hydrocarbons & Energy, which more than offset increased volume in Packaging and Specialty Plastics. Volume decreased in Hydrocarbons & Energy due to reduced olefin co-product production and a planned maintenance turnaround at an ethylene production facility in Germany. Volume increased in Packaging and Specialty Plastics in Asia Pacific and EMEAI, supported by new capacity additions. Packaging and Specialty Plastics volume growth was driven by increased demand for industrial and consumer packaging and health and hygiene applications.

Operating EBIT was $768 million in the second quarter of 2019, down 17 percent from pro forma Operating EBIT of $926 million in the second quarter of 2018. Operating EBIT decreased as the impact of lower selling prices, lower sales volume and reduced equity earnings from the Kuwait joint ventures due to lower polyethylene pricing, more than offset lower feedstock and other raw material costs, cost synergies, and decreased planned maintenance turnaround costs.

Packaging & Specialty Plastics net sales for the first six months of 2019 were $10,343 million, down from net sales of $12,162 million in the first six months of 2018. Pro forma net sales for the first six months of 2019 were $10,343 million, down 15 percent compared with pro forma net sales of $12,182 million in the first six months of 2018, with local price down 10 percent, volume down 3 percent and an unfavorable currency impact of 2 percent, primarily in EMEAI. Local price decreased in both businesses and across all geographic regions driven by reduced polyethylene prices and lower prices for Hydrocarbons & Energy co-products. Volume decreased across all geographic regions, except Asia Pacific, and in Hydrocarbons & Energy, which more than offset increased volume in Packaging and Specialty Plastics. Volume decreased in Hydrocarbons & Energy due to a planned maintenance turnaround at an ethylene production facility in Germany as well as increased internal consumption of ethylene on the U.S. Gulf Coast. In addition, lower volumes of co-products were available for sale in U.S. & Canada and EMEAI due to feedstock selection in those regions. Volume increased in Packaging and Specialty Plastics driven by higher demand in Asia Pacific, supported by new capacity additions. Packaging and Specialty Plastics volume growth was driven by increased demand for industrial and consumer packaging, flexible food and specialty packaging and health and hygiene applications.

Pro forma Operating EBIT was $1,458 million for the first six months of 2019, down 23 percent from pro forma Operating EBIT of $1,897 million in the first six months of 2018. Pro forma Operating EBIT decreased as the impact of lower selling prices, lower sales volume and reduced equity earnings, driven by lower equity earnings at the Kuwait joint ventures due to lower polyethylene pricing, more than offset lower feedstock and other raw material costs, cost synergies and decreased planned maintenance turnaround costs.


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Table of Contents

CORPORATE
Corporate includes certain enterprise and governance activities (including insurance operations, environmental operations, etc.); non-business aligned joint ventures; gains and losses on sales of financial assets; non-business aligned litigation expenses; and discontinued or non-aligned businesses.

Corporate
Three Months Ended
Six Months Ended
In millions
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
Net sales
$
111

$
72

$
180

$
146

Pro forma net sales
 
$
72

$
180

$
146

Operating EBIT
$
(77
)
 
 
 
Pro forma Operating EBIT
 
$
(81
)
$
(172
)
$
(170
)
Equity losses
$
(12
)
$
(12
)
$
(16
)
$
(19
)

Net sales for Corporate, which primarily relate to the Company's insurance operations, were $111 million in the second quarter of 2019, up from net sales and pro forma net sales of $72 million in the second quarter of 2018. Net sales and pro forma net sales were $180 million in the first six months of 2019, up from net sales and pro forma net sales of $146 million in the first six months of 2018.

Operating EBIT was a loss of $77 million in the second quarter of 2019, compared with a pro forma Operating EBIT loss of $81 million in the second quarter of 2018. Pro forma Operating EBIT was a loss of $172 million in the first six months of 2019, compared with a pro forma Operating EBIT loss of $170 million in the first six months of 2018.

CHANGES IN FINANCIAL CONDITION
The Company had cash and cash equivalents of $2,446 million at June 30, 2019 and $2,724 million at December 31, 2018, of which $1,416 million at June 30, 2019 and $2,013 million at December 31, 2018, was held by subsidiaries in foreign countries, including United States territories. For each of its foreign subsidiaries, Dow makes an assertion regarding the amount of earnings intended for permanent reinvestment, with the balance available to be repatriated 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. During 2019, Dow has and expects to continue repatriating certain funds from its non-U.S. subsidiaries that are not needed to finance local operations or separation activities; however, these particular repatriation activities have not and are not expected to result in a significant incremental tax liability to the Company.


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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
 
Six Months Ended
Six Months Ended
 
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
In millions
Cash provided by (used for):
 
 
 
 
Operating activities - continuing operations
$
2,003

$
1,504

$
1,977

$
1,504

Operating activities - discontinued operations
253

289

346

289

Operating activities
2,256

1,793

2,323

1,793

Investing activities - continuing operations
(846
)
(340
)
(846
)
(340
)
Investing activities - discontinued operations
(34
)
(112
)
(34
)
(112
)
Investing activities
(880
)
(452
)
(880
)
(452
)
Financing activities - continuing operations
(1,649
)
(2,569
)
(1,716
)
(2,569
)
Financing activities - discontinued operations
(18
)
(43
)
(18
)
(43
)
Financing activities
(1,667
)
(2,612
)
(1,734
)
(2,612
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
10

(69
)
10

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

6,208

2,764

6,208

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

$
4,868

$
2,483

$
4,868

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

45

37

45

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

$
4,823

$
2,446

$
4,823

 
Cash Flows from Operating Activities
Cash provided by operating activities from continuing operations increased in the first six months of 2019 compared with the first six months of 2018. The improvement was primarily due to a decrease in cash used for working capital, advance payments from a customer for product supply agreements, lower pension contributions and higher dividends received from nonconsolidated affiliates which were partially offset by a decrease in cash earnings.
Net Working Capital
Dow Inc.
TDCC
 
Jun 30, 2019
Dec 31, 2018
Jun 30, 2019
Dec 31, 2018
In millions
Current assets 1
$
18,637

$
19,470

$
18,468

$
19,470

Current liabilities 1
11,605

11,059

12,217

11,059

Net working capital
$
7,032

$
8,411

$
6,251

$
8,411

Current ratio
1.61:1

1.76:1

1.51:1

1.76:1

1.
Amounts at December 31, 2018, exclude assets and liabilities of discontinued operations.

Working Capital Metrics
Three Months Ended
 
Jun 30, 2019
Jun 30, 2018
 
Days sales outstanding in receivables 1
47

44

Days sales in inventory 2
67

60

Days payables outstanding
63

64

1.
The increase in days sales outstanding in receivables (“DSO”) was primarily due to an increase in accounts receivable as a result of the Company’s accounts receivable securitization facilities moving from off-balance sheet arrangements to secured borrowing arrangements in the second half of 2018.
2.
The increase in days sales in inventory is primarily due to a decrease in COS for the three months ended June 30, 2019 compared with the three months ended June 30, 2018.


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Cash provided by operating activities from discontinued operations decreased for Dow Inc. and increased for TDCC in the first six months of 2019 compared with the first six months of 2018. A reduction in cash used for working capital requirements of AgCo and SpecCo, which were separated on April 1, 2019, resulted in increases for both Dow Inc. and TDCC. For Dow Inc., this increase was more than offset by cash payments in the second quarter of 2019 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 from continuing operations in the first six months of 2019 was primarily for capital expenditures, purchases of investments and investments in and loans to nonconsolidated affiliates, primarily with Sadara, which were partially offset by proceeds from sales and maturities of investments. Cash used for investing activities from continuing operations in the first six months of 2018 was primarily for purchases of investments and capital expenditures, which were partially offset by proceeds from sales and maturities of investments and proceeds from interests in trade accounts receivable conduits.

The Company's capital expenditures related to continuing operations, including capital expenditures of consolidated variable interest entities, were $912 million in the first six months of 2019, compared with $868 million in the first six months of 2018. The Company expects full year capital spending in 2019 to be approximately $2.0 billion, below depreciation and amortization expense and inclusive of capital spending for targeted cost synergy and business separation projects.

In the first six months of 2019, the Company waived $135 million of accounts receivable with Sadara, which was converted into equity. In the first six months of 2019, the Company loaned $228 million to Sadara and converted $105 million of the loan balance into equity. The Company expects to loan up to $500 million to Sadara during the remainder of 2019 and all or a portion of the loans could potentially be converted into equity in future periods.

Cash used in investing activities from discontinued operations in the first six months of 2019 was primarily for capital expenditures, partially offset by proceeds from the sales of property, businesses and ownership interests in nonconsolidated affiliates. Cash used in investing activities from discontinued operations in the first six months of 2018 was primarily for capital expenditures, partially offset by proceeds from the sale of property and businesses.

Cash Flows from Financing Activities
Cash used for financing activities from continuing operations in the first six months of 2019 included payments on long-term debt and dividends paid to DowDuPont, which were partially offset by proceeds from the issuance of long-term debt. In addition, Dow Inc. received cash as part of the separation from DowDuPont, which more than offset dividends paid to common stockholders and repurchases of common stock. TDCC was further impacted by the change in the note payable with Dow Inc. Cash used for financing activities from continuing operations in the first six months of 2018 primarily related to dividends paid to DowDuPont and payments of long-term debt. See Notes 12 and 15 to the Consolidated Financial Statements for additional information related to the issuance and retirement of debt and the Company's share repurchases and dividends.

Cash used for financing activities from discontinued operations in the first six months of 2019 and 2018 primarily related to distributions to noncontrolling interests and employee taxes paid for share-based payment arrangements.

Non-GAAP Cash Flow Measures
Cash Flows from Operating Activities - Continuing Operations - Excluding Impact of ASU 2016-15
Cash flows from operating activities - continuing operations, excluding the impact of Accounting Standards Update 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), is defined as cash provided by (used for) operating activities - continuing operations, excluding the impact of ASU 2016-15 and related interpretive guidance. Management believes this non-GAAP financial measure is relevant and meaningful as it presents cash flows from operating activities inclusive of all trade accounts receivable collection activity, which Dow utilizes in support of its operating activities.

Free Cash Flow
The Company defines free cash flow as cash flows from operating activities - continuing operations, excluding the impact of ASU 2016-15, less capital expenditures. Under this definition, free cash flow represents the cash generated by the Company from operations after investing in its asset base. Free cash flow, combined with cash balances and other sources of liquidity, represent 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.

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These financial measures are not recognized in accordance with 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, the Company's definitions may not be consistent with the methodologies used by other companies.

Reconciliation of Non-GAAP Measures
Dow Inc.
TDCC
 
Jun 30, 2019
Jun 30, 2018
Jun 30, 2019
Jun 30, 2018
In millions
Cash provided by operating activities - continuing operations (GAAP)
$
2,003

$
1,504

$
1,977

$
1,504

Impact of ASU 2016-15 and related interpretive guidance
—

656

—

656

Cash flows from operating activities - continuing operations - excluding impact of ASU 2016-15 (Non-GAAP)
$
2,003

$
2,160

$
1,977

$
2,160

Capital expenditures
(912
)
(868
)
(912
)
(868
)
Free cash flow (Non-GAAP)
$
1,091

$
1,292

$
1,065

$
1,292


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 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 credit facilities and other debt markets. Additional details on sources of liquidity are as follows:

Commercial Paper
TDCC issues promissory notes under its U.S. and Euromarket commercial paper programs. TDCC had no commercial paper outstanding at June 30, 2019 ($10 million at December 31, 2018). 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 June 30, 2019, TDCC issued approximately $1,500 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 June 30, 2019, TDCC had total committed credit facilities of $9.6 billion and available credit facilities of $7.6 billion. See Note 12 to the Consolidated Financial Statements for additional information on committed and available credit facilities.

In connection with the ownership restructure of Dow Silicones on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness under a certain third party credit agreement ("Term Loan Facility"). In the second quarter of 2019, Dow Silicones voluntarily repaid $2.5 billion of principal on the Term Loan Facility and intends to exercise the 2-year extension option on the remaining principal balance of $2.0 billion. See Note 12 to the Consolidated Financial Statements for additional information on the Term Loan Facility.

Shelf Registration - U.S.
Dow Inc. and TDCC expect to file a shelf registration in the third quarter of 2019 with the SEC. The shelf will indicate that Dow Inc. may offer common stock; preferred stock; depositary shares; debt securities; guarantees; warrants to purchase common stock, preferred stock and debt securities; and stock purchase contracts and stock purchase units, with pricing and availability of any such offerings depending on market conditions. The shelf will also indicate that TDCC may offer debt securities, guarantees and warrants to purchase debt securities, with pricing and availability of any such offerings depending on market conditions. TDCC also expects to file a new prospectus supplement under this shelf registration in the third quarter of 2019 to register an unlimited amount of securities for issuance under a U.S. retail medium-term note program (“InterNotes”).


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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 June 30, 2019, net debt as a percent of total capitalization increased to 45.6 percent and 47.7 percent for Dow Inc. and TDCC, respectively, compared with 33.7 percent for both companies at December 31, 2018. The increase is primarily due to a reduction in stockholders' equity for both companies as a result of the separation from DowDuPont.

Total Debt
Dow Inc.
TDCC
 
Jun 30, 2019
Dec 31, 2018
Jun 30, 2019
Dec 31, 2018
In millions
Notes payable
$
544

$
298

$
1,691

$
298

Long-term debt due within one year
297

338

297

338

Long-term debt
17,155

19,253

17,155

19,253

Gross debt
$
17,996

$
19,889

$
19,143

$
19,889

 - Cash and cash equivalents
2,446

2,724

2,446

2,724

 - Marketable securities
20

100

20

100

Net debt
$
15,530

$
17,065

$
16,677

$
17,065

Gross debt as a percent of total capitalization
49.3
%
37.2
%
51.2
%
37.2
%
Net debt as a percent of total capitalization
45.6
%
33.7
%
47.7
%
33.7
%

In May 2019, the Company issued $2.0 billion of senior unsecured notes in an offering under Rule 144A of the Securities Act of 1933. The offering included $750 million aggregate principal amount of 4.80 percent notes due 2049; $750 million aggregate principal amount of 3.625 percent notes due 2026; and $500 million aggregate principal amount of 3.15 percent notes due 2024.

In June 2019, the Company redeemed $1.5 billion of 4.25 percent notes issued by the Company with maturity in 2020.

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 0.49 to 1.00 at June 30, 2019. Management believes TDCC was in compliance with all of its covenants and default provisions at June 30, 2019. For information on TDCC's covenants and default provisions, see Note 15 to the Consolidated Financial Statements in TDCC's Annual Report on Form 10-K for the year ended December 31, 2018. 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 six months of 2019.

On April 1, 2019, DowDuPont completed the separation of its materials science business and Dow Inc. became the direct parent company of TDCC. In conjunction with the separation, Dow Inc. is obligated, substantially concurrently with the issuance of any guarantee in respect of outstanding or committed indebtedness under the Revolving Credit Agreement, to enter into a supplemental indenture with TDCC and the trustee under TDCC’s existing 2008 base indenture governing certain notes issued by TDCC. Under such supplemental indenture, Dow Inc. will guarantee all outstanding debt securities and all amounts due under such existing base indenture and will become subject to certain covenants and events of default under the existing base indenture.

In addition, the Revolving Credit Agreement includes an event of default which would be triggered in the event Dow Inc. incurs or guarantees third party indebtedness for borrowed money in excess of $250 million or engages in any material activity or directly owns any material assets, in each case, subject to certain conditions and exceptions. Dow Inc. may, at its option, cure the event of default by delivering an unconditional and irrevocable guarantee to the administrative agent within thirty days of the event or events giving rise to such event of default.

No such events have occurred or have been triggered at the time of the filing of this Quarterly Report on Form 10-Q.

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Management expects that the Company will continue to have sufficient liquidity and financial flexibility to meet all of its business obligations.

Credit Ratings
At June 30, 2019, TDCC's credit ratings were as follows:

Credit Ratings
Long-Term Rating
Short-Term Rating
Outlook
Standard & Poor’s
BBB
A-2
Stable
Moody’s Investors Service
Baa2
P-2
Stable
Fitch Ratings
BBB+
F2
Stable

Downgrades in TDCC's credit ratings will increase borrowing costs on certain indentures and could impact its ability to access debt capital markets.

Dividends
Dow Inc.
On April 11, 2019, Dow Inc.’s Board of Directors declared a dividend of $0.70 per share, paid on June 14, 2019, to shareholders of record on May 31, 2019.

TDCC
Effective with the Merger, TDCC no longer has publicly traded common stock. From the Merger date through March 31, 2019, TDCC's common shares were owned solely by DowDuPont. Pursuant to the Merger Agreement, TDCC committed to fund a portion of DowDuPont's dividends paid to common stockholders and certain governance expenses. In addition, share repurchases by DowDuPont were partially funded by TDCC through 2018. Funding was accomplished through intercompany loans. On a quarterly basis, TDCC's Board of Directors reviewed and determined a dividend distribution to DowDuPont to settle the intercompany loans. The dividend distribution considered the level of TDCC’s earnings and cash flows and the outstanding intercompany loan balances. For the three months ended March 31, 2019, TDCC declared and paid dividends to DowDuPont of $535 million ($1,053 million and $2,110 million for the three and six months ended June 30, 2018, respectively). See Note 22 to the Consolidated Financial Statements for additional information.

Effective with the separation from DowDuPont on April 1, 2019, TDCC became a wholly owned subsidiary of Dow Inc. TDCC's common shares are owned solely by Dow Inc.

Share Repurchase Program
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. In the second quarter of 2019, Dow Inc. repurchased $305 million of the Company's common stock. At June 30, 2019, approximately $2.7 billion of the share repurchase program authorization remained available for repurchases. Dow Inc. remains on track to repurchase an additional $200 million of the Company's common stock in the second half of 2019 to reach its full-year target of approximately $500 million of repurchases.

TDCC Intercompany Loan with Dow Inc.
At June 30, 2019, TDCC's outstanding intercompany loan balance with Dow Inc. was a payable of $1,147 million. The intercompany loan with Dow Inc. will continue to be used to further fund dividends paid to common stockholders, share repurchases and certain governance expenses of Dow Inc.

Pension Plans
The Company has both funded and unfunded defined benefit pension plans that cover employees in the United States and a number of other countries. As a result of the Company’s separation from DowDuPont, the number of defined benefit pension plans administered by the Company decreased from 45 plans to 35 plans, of which approximately $270 million of net unfunded pension liabilities transferred to DowDupont. Plans administered by other subsidiaries of DowDuPont that were transferred to the Company were not significant. There were no changes in the number of other postretirement benefit plans administered by the Company as a result of the separation. Existing Company plans that were significantly impacted by the transfer of active plan participants to DowDuPont were remeasured, resulting in curtailment gains and losses and recognition of special termination benefits.

For funded 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. The Company expects to contribute approximately $285 million to its pension plans in 2019, of which $152 million had been contributed though June 30, 2019.

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Restructuring
The activities related to the Synergy Program are expected to result in additional cash expenditures of approximately $175 million, primarily through the end of 2019, consisting of severance and related benefit costs and costs associated with exit and disposal activities, including environmental remediation (see Note 5 to the Consolidated Financial Statements). The Company expects to incur additional costs in the future related to its restructuring activities. Future costs are expected to include demolition costs related to closed facilities and restructuring plan implementation costs; these costs will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.

Integration and Separation Costs
Integration and separation costs related to post-Merger integration and business separation activities are expected to result in additional cash expenditures of approximately $300 million to $400 million through the end of 2019.

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 and 19 to the Consolidated Financial Statements in TDCC’s Annual Report on Form 10-K for the year ended December 31, 2018. With the exception of the items noted below, there have been no material changes in the Company’s contractual obligations since December 31, 2018.

Contractual Obligations at Jun 30, 2019
Payments Due In
 
In millions
2019
2020-2021
2022-2023
2024 and beyond
Total
Dow Inc. and TDCC
 
 
 
 
 
Long-term debt obligations 1
$
148

$
4,147

$
2,021

$
11,473

$
17,789

Expected cash requirements for interest 2
$
435

$
1,688

$
1,321

$
7,886

$
11,330

Operating leases
$
291

$
911

$
605

$
979

$
2,786

Purchase obligations 3
$
2,902

$
4,572

$
3,707

$
5,853

$
17,034

Dow Inc.
 
 
 
 
 
Other noncurrent obligations 4
$
—

$
1,205

$
634

$
1,303

$
3,142

TDCC
 
 
 
 
 
Other noncurrent obligations 4
$
—

$
877

$
599

$
1,140

$
2,616

1.
Excludes unamortized debt discount and issuance costs of $337 million. Includes finance lease obligations of $399 million. Assumes the option to extend will be exercised for $2 billion of the Dow Silicones Term Loan Facility.
2.
Cash requirements for interest on long-term debt was calculated using current interest rates at June 30, 2019, and includes $2,367 million of various floating rate notes.
3.
Includes outstanding purchase orders and other commitments greater than $1 million obtained through a survey conducted within the Company.
4.
Includes liabilities related to asbestos litigation, environmental remediation, legal settlements, obligations with DuPont and Corteva and other noncurrent liabilities. The table excludes uncertain tax positions due to uncertainties in the timing of the effective settlement of tax positions with the respective taxing authorities and deferred tax liabilities as it is impractical to determine whether there will be a cash impact related to these liabilities. The table also excludes deferred revenue as it does not represent future cash requirements arising from contractual payment obligations.

Off-Balance Sheet Arrangements
Off-balance sheet arrangements are obligations the Company has with nonconsolidated entities related to transactions, agreements or other contractual arrangements. The Company holds variable interests in joint ventures accounted for under the equity method of accounting. The Company is not the primary beneficiary of these joint ventures and therefore is not required to consolidate these entities (see Note 21 to the Consolidated Financial Statements).

Guarantees arise during the ordinary course of business from relationships with customers and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others if specific triggering events occur. The Company had outstanding guarantees at June 30, 2019 of $4,123 million, down from $4,273 million at December 31, 2018. Additional information related to guarantees can be found in the "Guarantees" section of Note 13 to the Consolidated Financial Statements.

Fair Value Measurements
See Note 20 to the Consolidated Financial Statements for additional information concerning fair value measurements.


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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 in TDCC’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 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 in TDCC’s 2018 10-K. Since December 31, 2018, 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 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
2019
2018
Claims unresolved at Jan 1
12,780

15,427

Claims filed
2,819

3,537

Claims settled, dismissed or otherwise resolved
(3,477
)
(5,230
)
Claims unresolved at Jun 30
12,122

13,734

Claimants with claims against both Union Carbide and Amchem
(4,217
)
(4,928
)
Individual claimants at Jun 30
7,905

8,806


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 13 to the Consolidated Financial Statements and Part II, Item 1. Legal Proceedings.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Note 19 to the Consolidated Financial Statements. See also Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk in TDCC's 2018 Annual Report on Form 10-K for information on the Company's utilization of financial instruments and an analysis of the sensitivity of these instruments.



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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.



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Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries
PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
Asbestos-Related Matters of Union Carbide Corporation
No material developments regarding this matter occurred in the second quarter of 2019. For a current status of this matter, see Note 13 to the Consolidated Financial Statements.

Environmental Matters
In April 2012 and May 2015, Dow Silicones Corporation ("Dow Silicones"), a wholly owned subsidiary of the Company, received the following notifications from the U.S. Environmental Protection Agency ("EPA"), Region 5 related to Dow Silicones' Midland, Michigan, manufacturing facility (the “Facility”): 1) a Notice of Violation and Finding of Violation which alleges a number of violations in connection with the detection, monitoring and control of certain organic hazardous air pollutants at the Facility and various recordkeeping and reporting violations under the Clean Air Act and 2) a Notice of Violation alleging a number of violations relating to the management of hazardous wastes at the Facility pursuant to the Resource Conservation and Recovery Act. On June 25, 2019, the U.S. Department of Justice ("DOJ") filed a proceeding on behalf of the EPA against Dow Silicones in the U.S. District Court for the Eastern District of Michigan which proposes to resolve the previously reported allegations of noncompliance with requirements of federal air, water, waste and chemical release reporting laws at the Facility predating the ownership restructure of Dow Silicones. The proposed consent decree, which is subject to a public comment period, provides for a penalty of $4.55 million, performance of supplemental environmental projects and enhancements at the site that will cost approximately $2 million, as well as additional environmental studies and other actions. 

On November 27, 2018, Union Carbide Corporation ("Union Carbide"), a wholly owned subsidiary of the Company, signed a consent decree with the DOJ on behalf of the EPA, Region 2 relating to alleged disposal of mercury by a third party which Union Carbide contracted with at the Port Refinery site in Rye Brook, New York. The consent decree was approved by the United States District Judge on May 9, 2019. Pursuant to the consent decree, Union Carbide made a payment of $120,198 to the EPA.

On March 5, 2019, Union Carbide received an informal notice that the EPA, Region 6 was contemplating filing a Notice of Violation with a proposed penalty for alleged violations uncovered during a prior inspection related to the management of hazardous materials at Union Carbide's Seadrift, Texas, manufacturing facility, pursuant to the Risk Management Plan requirements of the Clean Air Act. On June 25, 2019, Union Carbide entered into a Consent Agreement and Final Order with the EPA, Region 6 including a payment of $114,313 relating to the alleged violations.


ITEM 1A. RISK FACTORS
Since December 31, 2018, there have been no material changes to the Company's Risk Factors, except as noted below:

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



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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 June 30, 2019:

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
April 2019
—

$
—

—

$
3,000

May 2019
5,813,756

$
52.54

5,813,756

$
2,695

June 2019
—

$
—

—

$
2,695

Second quarter 2019
5,813,756

$
52.54

5,813,756

$
2,695

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.


ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


ITEM 5. OTHER INFORMATION
Not applicable.


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Table of Contents

ITEM 6. EXHIBITS
 
EXHIBIT NO.
 
DESCRIPTION
 
 
Separation and Distribution Agreement, dated as of April 1, 2019, by and among Corteva, Inc., Dow Inc. and DowDuPont Inc. (incorporated by reference to Exhibit 2.1 to Dow Inc.'s Current Report on Form 8-K filed with the SEC on April 2, 2019).
 
 
Amended and Restated Certificate of Incorporation of Dow Inc. (incorporated by reference to Exhibit 3.1 to Dow Inc.’s Current Report on Form 8-K filed with the SEC on April 2, 2019).
 
 
Amended and Restated Bylaws of Dow Inc. (incorporated by reference to Exhibit 3.2 to Dow Inc.’s Current Report on Form 8-K filed with the SEC on April 2, 2019).
 
 
Second Supplemental Indenture, dated May 20, 2019, between The Dow Chemical Company, Dow Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, to the 2008 Indenture (incorporated by reference to Exhibit 4.1 to The Dow Chemical Company's Current Report on Form 8-K, filed with the SEC on May 20, 2019).
 
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.
 
 
Tax Matters Agreement, dated as of April 1, 2019, by and among DowDuPont Inc., Dow Inc., and Corteva, Inc. (incorporated by reference to Exhibit 10.1 to Dow Inc.’s Current Report on Form 8-K filed with the SEC on April 2, 2019).
 
 
Employee Matters Agreement, dated as of April 1, 2019, by and among DowDuPont Inc., Dow Inc., and Corteva, Inc. (incorporated by reference to Exhibit 10.2 to Dow Inc.’s Current Report on Form 8-K filed with the SEC on April 2, 2019).
 
 
MatCo/SpecCo Intellectual Property Cross License Agreement, dated as of April 1, 2019, by and between Dow Inc. et al and DowDuPont Inc. et al (incorporated by reference to Exhibit 10.3 to Dow Inc.’s Current Report on Form 8‑K filed with the SEC on April 2, 2019).
 
 
MatCo/AgCo Intellectual Property Cross License Agreement, dated as of April 1, 2019, by and between Dow Inc. et al and Corteva, Inc. et al (incorporated by reference to Exhibit 10.4 to Dow Inc.’s Current Report on Form 8-K filed with the SEC on April 2, 2019).
 
 
Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019).
 
 
Form of Performance Stock Unit Award Agreement under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.1 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019).
 
 
Form of Restricted Stock Award Agreement under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.2 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019).
 
 
Form of Restricted Stock Unit Award Agreement under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.3 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019).
 
 
Form of Stock Appreciation Right Award Agreement under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.4 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019).
 
 
Form of Stock Option Award Agreement under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.5 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019).
 
 
Form of Restricted Stock Unit Award Agreement (Director) under the Dow Inc. 2019 Stock Incentive Plan effective as of April 1, 2019 (incorporated by reference to Exhibit 4.4.6 to Dow Inc.’s Registration Statement on Form S-3, filed with the SEC on April 1, 2019).
 
 
The Dow Chemical Company Elective Deferral Plan (Pre-2005), restated and effective as of April 1, 2019 (incorporated by reference to Exhibit 10.8 to Dow Inc. and The Dow Chemical Company's Quarterly Report on Form 10-Q, filed with the SEC on May 3, 2019).
 
 
The Dow Chemical Company Elective Deferral Plan (Post 2004), restated and effective as of April 1, 2019 (incorporated by reference to Exhibit 4.1 to The Dow Chemical Company’s Registration Statement on Form S-8 POS, filed with the SEC on April 1, 2019).
 
 
Dow Inc. Voluntary Deferred Compensation Plan for Non-Employee Directors, restated and effective as of April 1, 2019 (incorporated by reference to Exhibit 10.10 to Dow Inc. and The Dow Chemical Company's Quarterly Report on Form 10‑Q, filed with the SEC on May 3, 2019).
 
23 *
 
Ankura Consulting Group, LLC's Consent.
 
31.1 *
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2 *
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1 *
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2 *
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS
 
XBRL Instance Document.
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith

76
Table of Contents

Dow Inc. and Subsidiaries
The Dow Chemical Company and Subsidiaries
Signature

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.

DOW INC.
THE DOW CHEMICAL COMPANY
Date: July 25, 2019


/s/ RONALD C. EDMONDS
Ronald C. Edmonds
Controller and Vice President
of Controllers and Tax
 

77