ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On December 11, 2015, The Dow Chemical Company ("Dow") and E. I. du Pont de Nemours and Company ("DuPont") entered into an Agreement and Plan of Merger ("Merger Agreement"), as amended on March 31, 2017, to effect an all-stock merger of equals strategic combination resulting in a newly formed corporation named DowDuPont Inc. ("DowDuPont" or the "Company"). On August 31, 2017, pursuant to the Merger Agreement, Dow and DuPont each merged with wholly owned subsidiaries of DowDuPont ("Mergers") and, as a result of the Mergers, Dow and DuPont became subsidiaries of DowDuPont (collectively, the "Merger"). Prior to the Merger, DowDuPont did not conduct any business activities other than those required for its formation and matters contemplated by the Merger Agreement. Dow was determined to be the accounting acquirer in the Merger. As a result, the historical financial statements of Dow for the periods prior to the Merger are considered to be the historical financial statements of DowDuPont. The results of DuPont are included in DowDuPont's consolidated results from the Merger date forward. See Note 3 to the Consolidated Financial Statements for additional information.
Except as otherwise indicated by the context, the term "Union Carbide" means Union Carbide Corporation, a wholly owned subsidiary of Dow; and, "Dow Corning" means Dow Corning Corporation, a wholly owned subsidiary of Dow.
Items Affecting Comparability of Financial Results
Due to the size of Dow and DuPont's businesses prior to the Merger, in this section certain supplemental unaudited pro forma financial information is provided that assumes the Merger had been consummated on January 1, 2016. For all periods presented in the unaudited pro forma financial information, adjustments have been made for (1) the preliminary purchase accounting impact, (2) accounting policy alignment, (3) the elimination of the effects of events that are directly attributable to the Merger Agreement (e.g., one-time transaction costs), (4) the elimination of the impact of transactions between Dow and DuPont, and (5) the elimination of the effect of consummated divestitures required as a condition of regulatory approval for the Merger. Events that are not expected to have a continuing impact on the combined results (e.g., inventory step-up costs) are excluded. These adjustments impacted the consolidated results as well as the reportable segments. For additional information, see the Supplemental Unaudited Pro Forma Combined Financial Information in this section.
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Table of Contents
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Page
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About DowDuPont Inc.
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34
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Overview
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34
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Results of Operations
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35
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Supplemental Unaudited Pro Forma Combined Financial Information
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42
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Segment Results
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47
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Agriculture
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47
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Performance Materials & Coatings
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49
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Industrial Intermediates & Infrastructure
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50
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Packaging & Specialty Plastics
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51
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Electronics & Imaging
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53
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Nutrition & Biosciences
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54
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Transportation & Advanced Polymers
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56
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Safety & Construction
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57
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Corporate
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58
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Liquidity and Capital Resources
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59
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Outlook
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65
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Other Matters
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66
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Critical Accounting Estimates
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66
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Environmental Matters
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70
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Asbestos-Related Matters of Union Carbide Corporation
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74
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Table of Contents
ABOUT DOWDUPONT INC.
DowDuPont is a holding company comprised of Dow and DuPont with the intent to form strong, independent, publicly traded companies in the agriculture, materials science and specialty products sectors (the "Intended Business Separations") that will lead their respective industries through productive, science-based innovation to meet the needs of customers and help solve global challenges.
In 2017, 37 percent of the Company’s net sales were to customers in the U.S. & Canada; 29 percent were in Europe, Middle East and Africa ("EMEA"); 22 percent were in Asia Pacific; and 12 percent were in Latin America. On a pro forma basis, 39 percent of the Company’s net sales were to customers in the U.S. & Canada; 28 percent were in EMEA; 22 percent were in Asia Pacific; and 11 percent were in Latin America.
In 2017, the Company and its consolidated subsidiaries did not operate in countries subject to U.S. economic sanctions and export controls as imposed by the U.S. State Department or in countries designated by the U.S. State Department as state sponsors of terrorism, including Iran, Sudan and Syria. The Company has policies and procedures in place designed to ensure that it and its consolidated subsidiaries remain in compliance with applicable U.S. laws and regulations.
OVERVIEW
The following is a summary of the results from continuing operations for the year ended December 31, 2017:
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The Company reported net sales for 2017 of $62.5 billion, up 30 percent from $48.2 billion in 2016, reflecting broad-based sales growth with increases across all segments and geographic regions. Portfolio actions contributed to 19 percent of the sales increase, including 15 percent from the Merger, impacting all segments except Industrial Intermediates & Infrastructure.
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Local price was up 6 percent compared with last year, driven primarily by broad-based pricing actions as well as higher feedstock and raw material costs. Local price was mixed by segment as gains in Industrial Intermediates & Infrastructure (up 10 percent) and Performance Materials & Coatings and Packaging & Specialty Plastics (both up 8 percent) more than offset declines in Agriculture and Electronics & Imaging (both down 1 percent). Local price remained flat in Nutrition & Biosciences, Transportation & Advanced Polymers and Safety & Construction. Local price increased in all geographic regions, including a double-digit increase in EMEA (up 10 percent). Currency remained flat with the same period last year.
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•
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Volume increased 5 percent compared with the same period last year, with increases in all segments except Agriculture, which declined 2 percent. Volume increased in all geographic regions, except Latin America (down 1 percent).
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•
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Research and development ("R&D") expenses totaled $2,110 million in 2017, up 33 percent from $1,584 million in 2016, primarily due to the Merger.
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Selling, general and administrative ("SG&A") expenses were $4,021 million in 2017, up 36 percent from $2,956 million in 2016, primarily due to the Merger.
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Restructuring, goodwill impairment and asset related charges - net was $3,280 in 2017, reflecting post-merger restructuring actions under the DowDuPont Cost Synergy Program which is designed to integrate and optimize the organization following the Merger and in preparation for the Intended Business Separations; a goodwill impairment charge of $1,491 million related to the Coatings & Performance Monomers reporting unit and $939 million of pretax impairment charges related to a manufacturing facility in Brazil, other manufacturing assets, surplus facilities and an equity method investment.
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Integration and separation costs were $1,101 million in 2017, up from $349 million in 2016. Integration and separation costs include costs related to the Merger, post-Merger integration and Intended Business Separation activities and costs related to the ownership restructure of Dow Corning.
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In the fourth quarter of 2017, the Company recorded a net tax benefit of $1,086 million related to the recognition of the effects of new U.S. tax legislation.
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On November 2, 2017, DowDuPont announced its Board of Directors declared a fourth quarter dividend of $0.38 per share, which was paid on December 15, 2017, and authorized an initial $4.0 billion share repurchase program. At December 31, 2017, $3.0 billion of the authorization remained available for repurchases. Although there is no timeline to complete the share repurchase program, DowDuPont intends to repurchase approximately $1.0 billion of the Company's stock in the first quarter of 2018.
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Table of Contents
Other notable events subsequent to December 31, 2017:
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On February 1, 2018, the Company announced it has updated the timing and sequence of the Intended Business Separations: materials science is expected to separate by the end of the first quarter of 2019, and agriculture and specialty products are expected to separate by June 1, 2019.
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On February 1, 2018, the Company announced it is increasing its cost synergy commitment from $3 billion to $3.3 billion.
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RESULTS OF OPERATIONS
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Summary of Sales Results
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In millions
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2017
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2016
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2015
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Net sales
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$
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62,484
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$
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48,158
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$
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48,778
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Pro forma net sales
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$
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79,535
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$
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70,894
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|
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Sales Variances by Segment and Geographic Region - As Reported
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2017
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2016
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Percentage change from prior year
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Local Price & Product Mix
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Currency
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Volume
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Portfolio & Other 1
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Total
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Local Price & Product Mix
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Currency
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Volume
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Portfolio & Other 2
|
Total
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Agriculture
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(1
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)%
|
—
|
%
|
(2
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)%
|
25
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%
|
22
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%
|
1
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%
|
(1
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)%
|
(2
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)%
|
—
|
%
|
(2
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)%
|
Performance Materials & Coatings
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8
|
|
—
|
|
2
|
|
27
|
|
37
|
|
(8
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)
|
(1
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)
|
(2
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)
|
53
|
|
42
|
|
Industrial Intermediates & Infrastructure
|
10
|
|
—
|
|
7
|
|
—
|
|
17
|
|
(8
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)
|
(1
|
)
|
1
|
|
(13
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)
|
(21
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)
|
Packaging & Specialty Plastics
|
8
|
|
1
|
|
5
|
|
3
|
|
17
|
|
(8
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)
|
—
|
|
9
|
|
(1
|
)
|
—
|
|
Electronics & Imaging
|
(1
|
)
|
—
|
|
9
|
|
37
|
|
45
|
|
(3
|
)
|
—
|
|
3
|
|
16
|
|
16
|
|
Nutrition & Biosciences
|
—
|
|
—
|
|
10
|
|
178
|
|
188
|
|
(3
|
)
|
—
|
|
(2
|
)
|
—
|
|
(5
|
)
|
Transportation & Advanced Polymers
|
—
|
|
—
|
|
6
|
|
175
|
|
181
|
|
(1
|
)
|
(1
|
)
|
7
|
|
49
|
|
54
|
|
Safety & Construction
|
—
|
|
—
|
|
3
|
|
57
|
|
60
|
|
(1
|
)
|
—
|
|
(2
|
)
|
—
|
|
(3
|
)
|
Total
|
6
|
%
|
—
|
%
|
5
|
%
|
19
|
%
|
30
|
%
|
(6
|
)%
|
—
|
%
|
3
|
%
|
2
|
%
|
(1
|
)%
|
U.S. & Canada
|
6
|
%
|
—
|
%
|
4
|
%
|
16
|
%
|
26
|
%
|
(7
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)%
|
—
|
%
|
3
|
%
|
2
|
%
|
(2
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)%
|
EMEA
|
10
|
|
1
|
|
5
|
|
16
|
|
32
|
|
(6
|
)
|
(1
|
)
|
4
|
|
(1
|
)
|
(4
|
)
|
Asia Pacific
|
4
|
|
—
|
|
7
|
|
27
|
|
38
|
|
(6
|
)
|
—
|
|
6
|
|
9
|
|
9
|
|
Latin America
|
2
|
|
—
|
|
(1
|
)
|
18
|
|
19
|
|
(6
|
)
|
—
|
|
—
|
|
(1
|
)
|
(7
|
)
|
Total
|
6
|
%
|
—
|
%
|
5
|
%
|
19
|
%
|
30
|
%
|
(6
|
)%
|
—
|
%
|
3
|
%
|
2
|
%
|
(1
|
)%
|
|
|
1.
|
Portfolio & Other reflects sales related to the Merger (impacts all segments, except Performance Materials & Coatings and Industrial Intermediates & Infrastructure), the acquisition of FMC's Health and Nutrition Business (the "H&N Business"), acquired on November 1, 2017 (impacting Nutrition & Biosciences) and the ownership restructure of Dow Corning announced on June 1, 2016 (impacts Performance Materials & Coatings, Electronics & Imaging and Transportation & Advanced Polymers). Portfolio & Other also reflects the following divestitures: a portion of Dow AgroSciences' Brazil corn seed business ("DAS Divested Ag Business"), divested on November 30, 2017 (impacting Agriculture), global Ethylene Acrylic Acid copolymers and ionomers business ("EAA Business"), divested on September 1, 2017 (impacting Packaging & Specialty Plastics) and SKC Haas Display Films group of companies, divested June 30, 2017 (impacting Electronics & Imaging).
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|
|
2.
|
Portfolio & Other reflects sales related to the ownership restructure of Dow Corning and sales from January 1, 2016 through April 30, 2016 for the step acquisition of Univation, acquired on May 5, 2015 (Packaging & Specialty Plastics). Portfolio & Other also reflects the following divestitures: the chlorine value chain, divested on October 5, 2015 (Industrial Intermediates & Infrastructure and Packaging & Specialty Plastics), ANGUS Chemical Company, divested on February 2, 2015 and the global Sodium Borohydride business, divested on January 30, 2015 (both included in Industrial Intermediates & Infrastructure).
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