DOW INC. This Quarterly Report on Form 10-Q is a combined report being filed byDow Inc. andThe Dow Chemical Company and its consolidated subsidiaries ("TDCC" and together withDow Inc. , "Dow" or the "Company") due to the parent/subsidiary relationship betweenDow Inc. and TDCC. The information reflected in the report is equally applicable to bothDow Inc. and TDCC, except where otherwise noted. Each ofDow Inc. and TDCC is filing information in this report on its own behalf and neither company makes any representation to the information relating to the other company.
Pursuant to General Instruction H(1)(a) and (b) for Form 10-Q "Omission of Information by Certain Wholly-Owned Subsidiaries," TDCC is filing this Form 10-Q with a reduced disclosure format.
Except as otherwise indicated by the context, the term "Union Carbide" means
STATEMENTS ON COVID-19 andU.S. GULF COAST FREEZE COVID-19 Additional information regarding actions taken by Dow since the onset of the pandemic can be found in the combinedDow Inc. and TDCC Annual Report on Form 10-K for the year endedDecember 31, 2020 ("2020 10-K"). The pandemic caused by coronavirus disease 2019 ("COVID-19") has impacted all geographic regions where Dow products are produced and sold. During this public health crisis, the Company is focused on the health and safety of its employees, contractors, customers and suppliers around the world as well as maintaining safe and reliable operations of its manufacturing sites. Although supply disruptions and related logistical issues challenge all modes of transportation, the Company's manufacturing sites have continued to operate during the COVID-19 pandemic, with no significant impact to manufacturing, whether through shutdowns or shortages in labor, raw materials or personal protective equipment. Supply chain and logistical challenges are expected to stabilize in 2022. Contingency plans remain in place in the event of significant impacts from COVID-19 infection resurgences. At the time of this filing, approximately half of Dow's global workforce is working remotely. The Company continues to encourage its workforce to practice safe behaviors both in the workplace and while away from work to help prevent community spread of COVID-19. The Company continues to monitor the ongoing mitigation efforts of each region to appropriately implement its comprehensive Return to Workplace plan. All regions continue to follow on-site workforce restrictions in accordance with government regulations. Certain locations have implemented advanced phases of the Company's Return to Workplace plan and it is expected that more locations will progress to their next phase as infection rates subside. The Company entered 2021 with sequential momentum and is well-positioned for continued profitable growth in the ongoing economic recovery and improving industry cycle. The Company will maintain its disciplined focus on capital allocation priorities as it benefits from an improving cost structure, financial flexibility and a low-cost operating model. Through the ongoing market recovery, Dow has experienced increasing margins as differentiated parts of the portfolio see improved demand and underlying market dynamics, which has enabled a return to preCOVID19 sales levels and end-market growth across most businesses. The Company has continued to maintain a strong financial position and liquidity throughout the economic recession triggered by the COVID-19 pandemic and its ongoing recovery. AtSeptember 30, 2021 , the Company had cash and committed and available forms of liquidity of$12.4 billion . The Company also has no substantive long-term debt maturities due until 2026.U.S. Gulf Coast Freeze In the first quarter of 2021, Winter Storm Uri had a broad impact on theU.S. Gulf Coast and in particular across the entire state ofTexas , which resulted in widespread utility and raw material supply disruptions and industry-wide production outages. All Dow ethylene production facilities located on theU.S. Gulf Coast were operational byMarch 31, 2021 , along with all sites. As a result of the winter storm, the product and supply chain impacts across the industry created very tight supply dynamics and generated pricing momentum for both raw materials and finished goods. The Company remains close to its customers and continues to work diligently to meet demand needs. 45 -------------------------------------------------------------------------------- Table of Contents OUTLOOK Dow continues to see robust end-market demand that is expected to extend into 2022, coupled with near-term logistics constraints and low inventory levels across its value chains. Longer term, Dow is well-positioned to increase earnings, cash flow and returns as it decarbonizes its footprint and achieves its 2030 and 2050 carbon emissions reduction targets. Dow will continue to build on its competitive advantage with growth from higher-margin, sustainability-driven, downstream solutions, and value-accretive investments to replace end-of-life assets with carbon-efficient and higher return production. Dow expects to deliver significant long-term value for shareholders as it continues to apply its balanced capital allocation approach to grow earnings while maintaining its strong operational and financial discipline.
OVERVIEW
The following is a summary of the results for the three months endedSeptember 30, 2021 : •The Company reported net sales in the third quarter of 2021 of$14.8 billion , up 53 percent from$9.7 billion in the third quarter of 2020, and up 7 percent from$13.9 billion in the second quarter of 2021, with increases across all operating segments and geographic regions. •Local price increased 50 percent compared with the third quarter of 2020 with increases in all operating segments and geographic regions, driven by tight supply and demand dynamics across key value chains. Local price increased in Packaging & Specialty Plastics (up 63 percent), Industrial Intermediates & Infrastructure (up 49 percent) and Performance Materials & Coatings (up 23 percent). Local price increased 5 percent compared with the second quarter of 2021. •Volume increased 2 percent compared with the third quarter of 2020 with increases in Packaging & Specialty Plastics (up 5 percent) and Performance Materials & Coatings (up 2 percent), partially offset by a decrease in Industrial Intermediates & Infrastructure (down 4 percent). Volume increased 2 percent compared with the second quarter of 2021. •Currency had a favorable impact of 1 percent on net sales compared with the third quarter of 2020, driven byEurope ,Middle East ,Africa andIndia ("EMEAI") (up 2 percent) andAsia Pacific (up 2 percent). •Equity in earnings of nonconsolidated affiliates was$249 million in the third quarter of 2021, compared with$60 million in the third quarter of 2020, primarily driven by margin expansion atSadara Chemical Company ("Sadara") and theKuwait joint ventures. •Net income available forDow Inc. and TDCC common stockholder(s) was$1,683 million and$1,679 million , respectively, in the third quarter of 2021, compared with a net loss of$25 million in the third quarter of 2020. Earnings per share forDow Inc. was$2.23 per share in the third quarter of 2021, compared with a loss of$0.04 per share in the third quarter of 2020. •Cash provided by operating activities - continuing operations was$2.7 billion in the third quarter of 2021, up$958 million compared with the same period last year and an increase of$698 million compared with the second quarter of 2021. •Dow reduced gross debt by$1.1 billion in the quarter. The Company's proactive liability management actions to tender existing notes have resulted in no substantive long-term debt maturities due until 2026 and reduced annual interest expense by more than$60 million . •OnAugust 12, 2021 ,Dow Inc. announced that its Board of Directors ("Board") declared a dividend of$0.70 per share, which was paid onSeptember 10, 2021 , to shareholders of record as ofAugust 31, 2021 . •Dow Inc. repurchased$400 million of the Company's common stock in the third quarter of 2021. In addition to the highlights above, the following events occurred subsequent to the third quarter of 2021: •OnOctober 6, 2021 ,Dow Inc. held an Investor Day event where it announced the following: investment plans to deliver more than$3 billion of additional underlying EBITDA growth with a clear path to zero-carbon emissions; the addition of eight new renewable power agreements, reducing emissions by more than 600,000 metric tons of carbon dioxide equivalent per year; a plan to build the world's first net-zero carbon emissions ethylene and derivatives complex; and expansion of global capabilities for circular plastics, with initial products available for customers in 2022. •OnOctober 14, 2021 ,Dow Inc. announced that its Board declared a dividend of$0.70 per share, payable onDecember 10, 2021 , to shareholders of record as ofNovember 30, 2021 . 46 -------------------------------------------------------------------------------- Table of Contents Selected Financial Data - Dow Inc. Three Months Ended Nine Months Ended In millions Sep 30, 2021
$ 14,837 $ 9,712$ 40,604 $ 27,836 Cost of sales ("COS")$ 11,611 $ 8,371$ 32,413 $ 24,211 Percent of net sales 78.3 % 86.2 % 79.8 % 87.0 % Research and development ("R&D") expenses $ 210 $ 193 $ 632 $ 554 Percent of net sales 1.4 % 2.0 % 1.6 % 2.0 % Selling, general and administrative ("SG&A") expenses $ 403 $ 372 $ 1,209 $ 1,063 Percent of net sales 2.7 % 3.8 % 3.0 % 3.8 % Effective tax rate 24.1 % 102.4 % 22.9 % 84.3 % Net income (loss) available forDow Inc. common stockholders $ 1,683 $ (25) $ 4,575 $ (11) Selected Financial Data - TDCC Three Months Ended Nine Months Ended In millions Sep 30, 2021 Sep 30, 2020 Sep 30, 2021 Sep 30, 2020 Net sales$ 14,837 $ 9,712$ 40,604 $ 27,836 COS$ 11,610 $ 8,371$ 32,410 $ 24,209 Percent of net sales 78.3 % 86.2 % 79.8 % 87.0 % R&D expenses $ 210 $ 193 $ 632 $ 554 Percent of net sales 1.4 % 2.0 % 1.6 % 2.0 % SG&A expenses $ 403 $ 372 $ 1,209 $ 1,062 Percent of net sales 2.7 % 3.8 % 3.0 % 3.8 % Effective tax rate 24.2 % 102.4 % 22.9 % 84.3 % Net income (loss) available for The Dow Chemical Company common stockholder $ 1,679 $ (25) $ 4,576 $ (11) 47
-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONSNet Sales The following tables summarize net sales and sales variances by operating segment and geographic region from the prior year: Summary of Sales Results Three Months Ended Nine Months Ended In millions Sep 30, 2021 Sep 30, 2020 Sep 30, 2021 Sep 30, 2020 Net sales$ 14,837 $ 9,712 $ 40,604 $ 27,836
Sales Variances by Operating Segment and
Three Months Ended Sep 30, 2021 Nine Months Ended Sep 30, 2021
Local Price & Local Price &
Percentage change from prior year Product Mix Currency Volume Total Product Mix Currency Volume
Total
Packaging & Specialty Plastics 63 % 1 % 5 % 69 % 52 % 3 % 4 % 59 % Industrial Intermediates & Infrastructure 49 2 (4) 47 41 3 - 44 Performance Materials & Coatings 23 1 2 26 14 3 3 20 Total 50 % 1 % 2 % 53 % 40 % 3 % 3 % 46 % Total, excluding the Hydrocarbons & Energy business 45 % 1 % (1) % 45 % 36 % 3 % - % 39 % U.S. & Canada 56 % - % 5 % 61 % 44 % - % 2 % 46 % EMEAI 55 2 3 60 45 6 5 56 Asia Pacific 28 2 (6) 24 24 3 - 27 Latin America 60 - (1) 59 51 - - 51 Total 50 % 1 % 2 % 53 % 40 % 3 % 3 % 46 % Net sales in the third quarter of 2021 were$14.8 billion , up 53 percent from$9.7 billion in the third quarter of 2020, with local price up 50 percent, volume up 2 percent and a favorable currency impact of 1 percent. Net sales increased in all operating segments and geographic regions. Local price increased in all operating segments and geographic regions, primarily driven by tight supply and demand dynamics across key value chains. Local price increased in Packaging & Specialty Plastics (up 63 percent), Industrial Intermediates & Infrastructure (up 49 percent) and Performance Materials & Coatings (up 23 percent). Volume increases in theU.S. &Canada and EMEAI were partially offset by volume decreases inLatin America andAsia Pacific . Volume increased in Packaging & Specialty Plastics (up 5 percent) and Performance Materials & Coatings (up 2 percent) and decreased in Industrial Intermediates & Infrastructure (down 4 percent). Currency favorably impacted net sales 1 percent, driven by EMEAI (up 2 percent) andAsia Pacific (up 2 percent). Excluding the Hydrocarbons & Energy business, sales increased 45 percent. Net sales for the first nine months of 2021 were$40.6 billion , up 46 percent from$27.8 billion in the same period last year, with local price up 40 percent, volume up 3 percent and a favorable currency impact of 3 percent. Net sales increased in all operating segments and geographic regions. Local price increased in all operating segments and geographic regions, primarily reflecting price gains due to tight supply and demand dynamics. Local price increased in Packaging & Specialty Plastics (up 52 percent), Industrial Intermediates & Infrastructure (up 41 percent) and Performance Materials & Coatings (up 14 percent). Volume increased in Packaging & Specialty Plastics (up 4 percent) and Performance Materials & Coatings (up 3 percent) and was flat in Industrial Intermediates & Infrastructure. Currency favorably impacted net sales 3 percent, driven by EMEAI (up 6 percent) andAsia Pacific (up 3 percent). Excluding the Hydrocarbons & Energy business, sales increased 39 percent. 48 -------------------------------------------------------------------------------- Table of Contents Cost of Sales COS was$11.6 billion in the third quarter of 2021, up from$8.4 billion in the third quarter of 2020, primarily due to increased sales volume and higher feedstock, energy and other raw material costs. For the first nine months of 2021, COS was$32.4 billion , up from$24.2 billion in the first nine months of 2020, primarily due to increased sales volume, higher feedstock and energy costs and impacts from Winter Storm Uri, which included higher raw material costs and repair costs. The third quarter of 2021 included$36 million ($106 million for the first nine months of 2021) of costs associated with implementing the Company's digital acceleration program (related to Corporate). COS as a percentage of net sales in the third quarter of 2021 was 78.3 percent (86.2 percent in the third quarter of 2020) and 79.8 percent for the first nine months of 2021 (87.0 percent for the first nine months of 2020). Research and Development Expenses R&D expenses totaled$210 million in the third quarter of 2021, compared with$193 million in the third quarter of 2020. R&D expenses for the first nine months of 2021 were$632 million , compared with$554 million in the first nine months of 2020. R&D expenses increased primarily due to higher performance-based compensation costs, fringe benefit expenses driven by stock market increases compared with the same period last year and increased spending due to the economic recovery from the COVID-19 pandemic. Selling, General and Administrative Expenses SG&A expenses totaled$403 million in the third quarter of 2021, compared with$372 million in the third quarter of 2020. For the first nine months of 2021, SG&A expenses were$1,209 million , compared with$1,063 million in the first nine months of 2020. SG&A expenses increased primarily due to higher performance-based compensation costs, fringe benefit expenses driven by stock market increases compared with the same period last year and increased spending due to the economic recovery from the COVID-19 pandemic. The first nine months of 2020 were favorably impacted by the recovery of legal costs related to theNova Chemicals Corporation ("Nova") ethylene asset matter and the reversal of a bad debt reserve related to an arbitration judgment. Amortization of Intangibles Amortization of intangibles was$100 million in the third quarter of 2021 and 2020. In the first nine months of 2021, amortization of intangibles was$301 million , compared with$300 million in the first nine months of 2020. See Note 10 to the Consolidated Financial Statements for additional information on intangible assets. Restructuring and Asset Related Charges - Net 2020 Restructuring Program OnSeptember 29, 2020 ,Dow Inc.'s Board approved restructuring actions to achieve the Company's structural cost improvement initiatives in response to the continued economic impact from the COVID-19 pandemic. The restructuring program is designed to reduce structural costs and enable the Company to further enhance competitiveness while the COVID-19 economic recovery continues. These actions are expected to be substantially complete by the end of 2021, except for certain cash payments in 2022. For the nine months endedSeptember 30, 2021 , the Company recorded pretax restructuring charges of$22 million , consisting of$12 million for asset write-downs and write-offs and$10 million for costs associated with exit and disposal activities, impacting Packaging & Specialty Plastics ($8 million ), Industrial Intermediates & Infrastructure ($1 million ), Performance Materials & Coatings ($10 million ) and Corporate ($3 million ). For the three months endedSeptember 30, 2020 , the Company recorded pretax restructuring charges of$575 million , consisting of severance and related benefit costs of$297 million , asset write-downs and write-offs of$197 million and costs associated with exit and disposal activities of$81 million , impacting Packaging & Specialty Plastics ($11 million ), Industrial Intermediates & Infrastructure ($22 million ), Performance Materials & Coatings ($174 million ) and Corporate ($368 million ). DowDuPont Cost Synergy Program In September andNovember 2017 , DowDuPont Inc. ("DowDuPont") approved post-merger restructuring actions under the DowDuPont Cost Synergy Program (the "Synergy Program") which was designed to integrate and optimize the organization following the merger and in preparation for the business separations. For the three months endedSeptember 30, 2020 , the Company recorded a favorable adjustment to the Synergy Program related to severance and related benefit costs of$4 million . For the nine months endedSeptember 30, 2020 , the Company recorded pretax restructuring charges of$90 million for severance and related benefit costs, related to Corporate. These were the final charges related to the Synergy Program. 49
-------------------------------------------------------------------------------- Table of Contents Asset Related Charges The Company recognized pretax impairment charges of$46 million and$58 million for the three and nine months endedSeptember 30, 2020 , respectively. Pretax impairment charges for the three months endedSeptember 30, 2020 , included a$15 million charge for the write-down of a non-manufacturing asset and the write-off of a capital project (related to Performance Materials & Coatings) and a$24 million charge associated with the write-down of certain corporate leased equipment (related to Corporate). Pretax impairment charges also included$7 million and$19 million for the three and nine months endedSeptember 30, 2020 , respectively, related to capital additions made to a bio-ethanol manufacturing facility inSanta Vitoria ,Minas Gerais, Brazil , which was impaired in 2017 and divested in 2020 (related to Packaging & Specialty Plastics). Integration and Separation Costs Integration and separation costs, which reflect costs related to business separation activities, were$63 million in the third quarter of 2020 and$174 million for the first nine months of 2020. Integration and business separation activities were completed as ofDecember 31, 2020 . Integration and separation costs are related to Corporate. Equity in Earnings (Losses) of Nonconsolidated AffiliatesThe Company's share of equity in earnings of nonconsolidated affiliates was$249 million in the third quarter of 2021, compared with equity earnings of$60 million in the third quarter of 2020. Equity in earnings of nonconsolidated affiliates was$751 million in the first nine months of 2021, compared with equity losses of$124 million in the first nine months of 2020. The improvement from the prior year was primarily due to equity earnings at Sadara compared with equity losses in the same period last year, and higher equity earnings at theKuwait and Thai joint ventures. See Note 9 to the Consolidated Financial Statements for additional information. Sundry Income (Expense) - Net Sundry income (expense) - net includes a variety of income and expense items such as foreign currency exchange gains and losses, dividends from investments, gains and losses on sales of investments and assets, non-operating pension and other postretirement benefit plan credits or costs, losses on early extinguishment of debt and certain litigation matters. For the three months endedSeptember 30, 2021 , Sundry income (expense) - net was expense of$350 million and$356 million forDow Inc. and TDCC, respectively, compared with income of$182 million and$181 million , respectively, for the three months endedSeptember 30, 2020 . The third quarter of 2021 included a$472 million loss on the early extinguishment of debt (related to Corporate and included in "Other net loss" in the consolidated statements of cash flows). This was partially offset by non-operating pension and postretirement benefit plan credits and a$54 million gain related to an arbitration award (related to Industrial Intermediates & Infrastructure). The third quarter of 2020 included a$233 million gain related to the sale of rail infrastructure in theU.S. &Canada (related to Packaging & Specialty Plastics and Corporate) and non-operating pension and postretirement benefit plan credits. These were partially offset by a$63 million loss on the early extinguishment of debt (related to Corporate and included in "Other net loss" in the consolidated statements of cash flows); a$13 million loss related to the divestiture of a bio-ethanol manufacturing facility inBrazil (related to Packaging & Specialty Plastics); and foreign currency exchange losses. For the nine months endedSeptember 30, 2021 , Sundry income (expense) - net was expense of$225 million and$231 million forDow Inc. and TDCC, respectively, compared with income of$154 million and$150 million , respectively, for the nine months endedSeptember 30, 2020 . The first nine months of 2021 included a$574 million loss on the early extinguishment of debt (related to Corporate and included in "Other net loss" in the consolidated statements of cash flows), and foreign currency exchange losses. These were partially offset by non-operating pension and postretirement benefit plan credits, gains on the sale of assets and investments and a$54 million gain related to an arbitration award (related to Industrial Intermediates & Infrastructure). In addition,Dow Inc. included a$5 million charge associated with agreements entered into with DuPont de Nemours, Inc. ("DuPont") and Corteva, Inc. ("Corteva") as part of the separation and distribution (related to Corporate). The first nine months of 2020 included a$233 million gain related to the sale of rail infrastructure in theU.S. &Canada (related to Packaging & Specialty Plastics and Corporate), a$6 million gain related to the Nova ethylene asset matter (related to Packaging & Specialty Plastics) and nonoperating pension and postretirement benefit plan credits. These were partially offset by a$149 million loss on the early extinguishment of debt (related to Corporate and included in "Other net loss" in the consolidated statements of cash flows); a$13 million loss related to the divestiture of a bioethanol manufacturing facility inBrazil (related to Packaging & Specialty Plastics); and foreign currency exchange losses. See Notes 6, 11, 16 and 22 to the Consolidated Financial Statements for additional information. 50 -------------------------------------------------------------------------------- Table of Contents Interest Expense and Amortization of Debt Discount Interest expense and amortization of debt discount was$178 million in the third quarter of 2021, compared with$202 million in the third quarter of 2020. Interest expense and amortization of debt discount was$561 million in the first nine months of 2021, compared with$617 million in the first nine months of 2020. The decrease in interest expense is primarily due to lower coupon rates and the redemption of debt. Provision for Income Taxes The Company's effective tax rate fluctuates based on, among other factors, where income is earned, the level of income relative to tax attributes and the level of equity earnings, since most earnings from the Company's equity method investments are taxed at the joint venture level. The effective tax rate for the third quarter of 2021 was 24.1 percent and 24.2 percent forDow Inc. and TDCC, respectively, compared with 102.4 percent for the third quarter of 2020. For the first nine months of 2021, the effective tax rate was 22.9 percent compared with 84.3 percent for the first nine months of 2020. The tax rate in the third quarter and for the first nine months of 2021 was favorably impacted by geographic mix of earnings and higher equity earnings. The tax rate in the third quarter and for the first nine months of 2020 was unfavorably impacted primarily by equity losses and geographic mix of earnings, non-deductible restructuring costs and an increase in tax reserves and was favorably impacted by a capital loss resulting from the divestiture of a bio-ethanol manufacturing facility inBrazil . Net Income (Loss) Available for Common Stockholder(s)Dow Inc. Net income available forDow Inc. common stockholders was$1,683 million , or$2.23 per share, in the third quarter of 2021, compared with a net loss of$25 million , or$0.04 per share, in the third quarter of 2020. Net income available forDow Inc. common stockholders was$4,575 million , or$6.06 per share, in the first nine months of 2021, compared with a net loss of$11 million , or$0.02 per share, in the first nine months of 2020. See Note 7 to the Consolidated Financial Statements for details onDow Inc.'s earnings per share calculations.
TDCC
Net income available for the TDCC common stockholder was$1,679 million in the third quarter of 2021, compared with a net loss of$25 million in the third quarter of 2020. Net income available for the TDCC common stockholder was$4,576 million in the first nine months of 2021, compared with a loss of$11 million in the first nine months of 2020. TDCC's common shares are owned solely byDow Inc. SEGMENT RESULTS Dow's measure of profit/loss for segment reporting purposes is Operating EBIT as this is the manner in which the Company's chief operating decision maker assesses performance and allocates resources. The Company defines Operating EBIT as earnings (i.e., "Income before income taxes") before interest, excluding the impact of significant items. Operating EBIT by segment includes all operating items relating to the businesses; items that principally apply to Dow as a whole are assigned to Corporate. PACKAGING & SPECIALTY PLASTICS Packaging & Specialty Plastics consists of two highly integrated global businesses: Hydrocarbons &Energy and Packaging and Specialty Plastics. The segment employs the industry's broadest polyolefin product portfolio, supported by the Company's proprietary catalyst and manufacturing process technologies, to work at the customer's design table throughout the value chain to deliver more reliable and durable, higher performing, and more sustainable plastics to customers in food and specialty packaging; industrial and consumer packaging; health and hygiene; caps, closures and pipe applications; consumer durables; mobility and transportation; and infrastructure. Ethylene is transferred to downstream derivative businesses at market-based prices, which are generally equivalent to prevailing market prices for large volume purchases. This segment also includes the results ofThe Kuwait Styrene Company K.S.C.C. and The SCG-Dow Group , as well as a portion of the results ofEQUATE Petrochemical Company K.S.C.C . ("EQUATE"),The Kuwait Olefins Company K.S.C.C . ("TKOC"),Map Ta Phut Olefins Company Limited ("Map Ta Phut") and Sadara, all joint ventures of the Company. The Company is currently responsible for marketing a majority of Sadara products outside of theMiddle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee. InMarch 2021 , Dow and the Saudi Arabian Oil Company agreed to transition the marketing rights and responsibilities for Sadara's finished products to levels more consistent with each partner's equity ownership. This transition began inJuly 2021 and is being implemented over the next five years. 51 -------------------------------------------------------------------------------- Table of Contents Packaging & Specialty Plastics Three Months Ended Nine Months Ended In millions Sep 30, 2021 Sep 30, 2020 Sep 30, 2021 Sep 30, 2020 Net sales$ 7,736 $ 4,565 $ 20,939 $ 13,175 Operating EBIT$ 1,954 $ 647$ 5,196 $ 1,545 Equity earnings$ 124 $ 71 $ 360 $ 96 Packaging & Specialty Plastics Three Months Ended Nine Months Ended Percentage change from prior year Sep 30, 2021 Sep 30, 2021 Change inNet Sales from Prior Period due to: Local price & product mix 63 % 52 % Currency 1 3 Volume 5 4 Total 69 % 59 % Packaging & Specialty Plastics net sales were$7,736 million in the third quarter of 2021, up 69 percent from net sales of$4,565 million in the third quarter of 2020, with local price up 63 percent, volume up 5 percent and a favorable currency impact of 1 percent, primarily in EMEAI. Local price increased in both businesses and across all geographic regions, driven by tight supply and demand dynamics. Local price increased in Hydrocarbons & Energy as prices for co-products are generally correlated to Brent crude oil prices, which increased 69 percent compared with the third quarter of 2020. Local price increased in Packaging and Specialty Plastics driven by tight supply and demand dynamics in polyethylene, notably in industrial and consumer packaging and flexible food and beverage packaging applications. Volume increased in Hydrocarbons & Energy, primarily in theU.S. &Canada , more than offsetting decreased volume in Packaging and Specialty Plastics driven by weather-related supply constraints.
Operating EBIT was
Packaging & Specialty Plastics net sales were$20,939 million in the first nine months of 2021, up 59 percent from net sales of$13,175 million in the first nine months of 2020, with local price up 52 percent, volume up 4 percent and a favorable currency impact of 3 percent, primarily in EMEAI. Local price increased in both businesses and across all geographic regions, driven by tight supply and demand dynamics. Local price increased in Hydrocarbons & Energy as prices for co-products are generally correlated to Brent crude oil prices, which, on average, increased 60 percent compared with the first nine months of 2020. Local price increased in Packaging and Specialty Plastics driven by favorable supply and demand dynamics in polyethylene, notably in industrial and consumer packaging and flexible food and beverage packaging applications. Volume increased in Hydrocarbons & Energy, primarily in theU.S. &Canada and EMEAI, more than offsetting decreased volume inAsia Pacific . Volume decreased in Packaging and Specialty Plastics, primarily inLatin America andAsia Pacific , more than offsetting increases in theU.S. &Canada and EMEAI as supply constraints continue to lower exports. Operating EBIT was$5,196 million in the first nine months of 2021, up$3,651 million from Operating EBIT of$1,545 million in the first nine months of 2020. Operating EBIT increased primarily due to integrated margin expansion and increased equity earnings at Sadara and the Thai andKuwait joint ventures. INDUSTRIAL INTERMEDIATES & INFRASTRUCTURE Industrial Intermediates & Infrastructure consists of two customer-centric global businesses - Industrial Solutions and Polyurethanes & Construction Chemicals - that develop important intermediate chemicals that are essential to manufacturing processes, as well as downstream, customized materials and formulations that use advanced development technologies. These businesses primarily produce and market ethylene oxide and propylene oxide derivatives that are aligned to market segments as diverse as appliances, coatings, electronics, surfactants for cleaning and sanitization, infrastructure and oil and gas. The global scale and reach of these businesses, worldclass technology and R&D capabilities and materials science expertise enable the Company to be a premier solutions provider, offering customers value-add sustainable solutions to enhance comfort, energy efficiency, product effectiveness and durability across a wide range of home comfort and appliances, building and construction, adhesives and lubricant applications, among others. This segment also includes a portion of the results of EQUATE, TKOC, Map Ta Phut and Sadara, all joint ventures of the Company. 52 -------------------------------------------------------------------------------- Table of Contents The Company is currently responsible for marketing a majority of Sadara products outside of theMiddle East zone through the Company's established sales channels. As part of this arrangement, the Company purchases and sells Sadara products for a marketing fee. InMarch 2021 , Dow and the Saudi Arabian Oil Company agreed to transition the marketing rights and responsibilities for Sadara's finished products to levels more consistent with each partner's equity ownership. This transition began inJuly 2021 and is being implemented over the next five years. Industrial Intermediates & Infrastructure Three Months Ended Nine Months Ended In millions Sep 30, 2021 Sep 30, 2020 Sep 30, 2021 Sep 30, 2020 Net sales$ 4,481 $ 3,058 $ 12,303 $ 8,520 Operating EBIT$ 713 $ 104$ 1,687 $ 59 Equity earnings (losses)$ 122
$ (13) $ 381
Industrial Intermediates & Infrastructure Three Months Ended Nine Months Ended Percentage change from prior year Sep 30, 2021 Sep 30, 2021 Change inNet Sales from Prior Period due to: Local price & product mix 49 % 41 % Currency 2 3 Volume (4) - Total 47 % 44 % Industrial Intermediates & Infrastructure net sales were$4,481 million in the third quarter of 2021, up 47 percent from$3,058 million in the third quarter of 2020, with local price up 49 percent, a favorable currency impact of 2 percent and volume down 4 percent. Local price increased in both businesses and in all geographic regions, driven by strong supply and demand dynamics. Volume decreased in Polyurethanes & Construction Chemicals, with decreases in theU.S. &Canada andAsia Pacific , partially offset by an increase inLatin America , primarily driven by a planned transition of a low-margin co-producer contract. Industrial Solutions volume increased in all geographic regions, except EMEAI, due to strong consumer demand in industrial specialties which more than offset decreased volume in performance intermediates. Currency favorably impacted sales in both businesses driven byAsia Pacific and EMEAI. Operating EBIT was$713 million in the third quarter of 2021, up$609 million from Operating EBIT of$104 million in the third quarter of 2020. Operating EBIT increased primarily due to margin expansion from strong supply and demand dynamics in both businesses and higher equity earnings at Sadara and theKuwait joint ventures. Industrial Intermediates & Infrastructure net sales were$12,303 million in the first nine months of 2021, up 44 percent from net sales of$8,520 million in the first nine months of 2020, driven by an increase in price of 41 percent and a favorable currency impact of 3 percent. Volume was flat. Local price increased in both businesses and in all geographic regions, driven by strong supply and demand dynamics and rising energy prices. Currency favorably impacted sales in both businesses and in EMEAI andAsia Pacific . Volume in Polyurethanes & Construction Chemicals increased due to gains inLatin America and EMEAI, partially offset by decreased volume in theU.S. &Canada andAsia Pacific , and was primarily due to robust consumer demand in polyurethane systems which more than offset a decrease in vinyl chloride monomers mainly due to a planned transition of a low-margin co-producer contract. Volume in Industrial Solutions decreased in all geographic regions, exceptLatin America , largely driven by supply constraints which more than offset strengthening consumer demand. Operating EBIT was$1,687 million in the first nine months of 2021, up$1,628 million from Operating EBIT of$59 million in the first nine months of 2020. Operating EBIT increased primarily due to margin expansion from strong supply and demand dynamics in Polyurethanes & Construction Chemicals and higher equity earnings at Sadara and theKuwait joint ventures. 53 -------------------------------------------------------------------------------- Table of Contents PERFORMANCE MATERIALS & COATINGS Performance Materials & Coatings includes industry-leading franchises that deliver a wide array of solutions into consumer and infrastructure end-markets. The segment consists of two global businesses: Coatings & Performance Monomers and Consumer Solutions. These businesses primarily utilize the Company's acrylics-, cellulosics- and silicone-based technology platforms to serve the needs of the architectural and industrial coatings; home care and personal care; consumer and electronics; mobility and transportation; industrial and chemical processing; and building and infrastructure end-markets. Both businesses employ materials science capabilities, global reach and unique products and technology to combine chemistry platforms to deliver differentiated offerings to customers. Performance Materials & Coatings Three Months Ended Nine Months Ended In millions Sep 30, 2021 Sep 30, 2020 Sep 30, 2021 Sep 30, 2020 Net sales$ 2,526 $ 2,002 $ 7,114 $ 5,922 Operating EBIT$ 284 $ 75 $ 571 $ 264 Equity earnings$ 3 $ 1 $ 5 $ 4 Performance Materials & Coatings Three Months Ended Nine Months Ended Percentage change from prior year Sep 30, 2021 Sep 30, 2021 Change inNet Sales from Prior Period due to: Local price & product mix 23 % 14 % Currency 1 3 Volume 2 3 Total 26 % 20 % Performance Materials & Coatings net sales were$2,526 million in the third quarter of 2021, up 26 percent from net sales of$2,002 million in the third quarter of 2020, with local price up 23 percent, volume up 2 percent and a favorable currency impact of 1 percent. Local price increased in both businesses and all geographic regions. Local price increased in Consumer Solutions primarily due to favorable supply and demand dynamics in siloxanes. Local price increased in Coatings & Performance Monomers primarily in response to higher raw material costs and favorable supply and demand dynamics. Volume increased in Consumer Solutions, which was partially offset by a decrease in Coatings & Performance Monomers. The increase in Consumer Solutions volume was driven by strong demand for downstream silicones. Volume decreased in Coatings & Performance Monomers as an increase inLatin America was more than offset by decreases inAsia Pacific , theU.S. &Canada and EMEAI as a result of supply constraints. Operating EBIT was$284 million in the third quarter of 2021, up$209 million from Operating EBIT of$75 million in the third quarter of 2020. Operating EBIT increased due to margin expansion and higher volume in Consumer Solutions. Performance Materials & Coatings net sales were$7,114 million in the first nine months of 2021, up 20 percent from net sales of$5,922 million in the first nine months of 2020, with local price up 14 percent, volume up 3 percent, and a favorable currency impact of 3 percent. Local price increased in both businesses and all geographic regions. Consumer Solutions local price increased primarily in upstream siloxanes due to favorable supply and demand dynamics. Local price increased in Coatings & Performance Monomers primarily due to improved supply and demand dynamics in acrylic monomers and architectural coatings. Volume increases inAsia Pacific ,Latin America and EMEAI were partially offset by a decrease in volume in theU.S &Canada . Consumer Solutions volume increased due to higher demand in all regions. Volume decreased in Coatings & Performance Monomers as decreases in theU.S. &Canada and EMEAI were partially offset by increases inAsia Pacific andLatin America , primarily due to supply availability challenges due to weather-related outages and third-party supply and logistics constraints. The favorable currency impact was driven byAsia Pacific and EMEAI. Operating EBIT was$571 million in the first nine months of 2021, up$307 million from Operating EBIT of$264 million in the first nine months of 2020. Operating EBIT increased due to margin expansion and higher volume in Consumer Solutions. 54
-------------------------------------------------------------------------------- Table of Contents CORPORATE Corporate includes certain enterprise and governance activities (including insurance operations, environmental operations, etc.); non-business aligned joint ventures; non-business aligned litigation expenses; and discontinued or non-aligned businesses. Corporate Three Months Ended Nine Months Ended In millions Sep 30, 2021 Sep 30, 2020 Sep 30, 2021 Sep 30, 2020 Net sales$ 94 $ 87$ 248 $ 219 Operating EBIT$ (65) $ (65)$ (186) $ (207) Equity earnings (losses) $ - $ 1$ 5 $ (22) Net sales for Corporate, which primarily relate to the Company's insurance operations, were$94 million in the third quarter of 2021, an increase from net sales of$87 million in the third quarter of 2020. Net sales were$248 million in the first nine months of 2021, up from net sales of$219 million in the first nine months of 2020. Operating EBIT was a loss of$65 million in the third quarter of 2021 and 2020. Operating EBIT was a loss of$186 million in the first nine months of 2021, compared with a loss of$207 million in the first nine months of 2020. Operating EBIT improved primarily due to reduced equity losses. CHANGES IN FINANCIAL CONDITION The Company had cash and cash equivalents of$2,911 million atSeptember 30, 2021 and$5,104 million atDecember 31, 2020 , of which$1,699 million atSeptember 30, 2021 and$862 million atDecember 31, 2020 was held by subsidiaries in foreign countries, includingU.S. territories. For each of its foreign subsidiaries, Dow makes an assertion regarding the amount of earnings intended for permanent reinvestment, with the balance available to be repatriated tothe United States . The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries' operational activities and future foreign investments. Dow has the ability to repatriate additional funds to theU.S. , which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/orU.S. state income taxes and the impact of foreign currency movements. AtSeptember 30, 2021 , management believed that sufficient liquidity was available in theU.S. The Company has and expects to continue repatriating certain funds from its nonU.S. subsidiaries that are not needed to finance local operations; however, these particular repatriation activities have not and are not expected to result in a significant incremental tax liability to the Company. 55 -------------------------------------------------------------------------------- Table of Contents The Company's cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized in the following table: Cash Flow Summary Dow Inc. TDCC Nine Months Ended Nine Months Ended In millions Sep 30, 2021 Sep 30, 2020 Sep 30, 2021 Sep 30, 2020 Cash provided by (used for): Operating activities - continuing operations$ 4,512 $ 4,596 $ 4,634 $ 4,604 Operating activities - discontinued operations (78) - - - Operating activities 4,434 4,596 4,634 4,604 Investing activities (1,535) (616) (1,535) (616) Financing activities (4,974) (1,809) (5,174) (1,817) Effect of exchange rate changes on cash, cash equivalents and restricted cash (57) 4 (57) 4
Summary
Increase (decrease) in cash, cash equivalents and restricted cash (2,132) 2,175 (2,132) 2,175
Cash, cash equivalents and restricted cash at beginning of period
5,108 2,380 5,108 2,380
Cash, cash equivalents and restricted cash at end of period
$ 2,976 $
4,555
65 6 65 6
Cash and cash equivalents at end of period $ 2,911 $
4,549
Cash Flows from Operating Activities Cash provided by operating activities from continuing operations in the first nine months of 2021 was primarily driven by the Company's cash earnings and dividends from equity method investments, which were partially offset by elective pension contributions, cash used for working capital requirements and performance-based compensation payments. Cash provided by operating activities from continuing operations in the first nine months of 2020 was primarily driven by the Company's cash earnings, cash receipts related to an advance payment from a customer and the Nova ethylene asset matter, dividends from equity method investments and working capital improvements. These items were partially offset by pension contributions. Net Working Capital Dow Inc. TDCC In millions Sep 30, 2021 Dec 31, 2020 Sep 30, 2021 Dec 31, 2020 Current assets$ 20,393 $ 19,084 $ 20,359 $ 18,998 Current liabilities 12,793 11,108 12,505 10,574 Net working capital$ 7,600 $ 7,976 $ 7,854 $ 8,424 Current ratio 1.59:1 1.72:1 1.63:1 1.80:1 Working Capital Metrics Three Months Ended Sep 30, 2021 Jun 30, 2021 Sep 30, 2020 Days sales outstanding in trade receivables 41 39 43 Days sales in inventory 56 56 63 Days payables outstanding 58 55 58 Cash used for operating activities from discontinued operations in the first nine months of 2021 primarily related to cash payments and receiptsDow Inc. had with DuPont and Corteva that related to certain agreements and matters related to the separation from DowDuPont. See Note 3 to the Consolidated Financial Statements for additional information. 56 -------------------------------------------------------------------------------- Table of Contents Cash Flows from Investing Activities Cash used for investing activities in the first nine months of 2021 was primarily for capital expenditures, purchases of investments and acquisitions of property and businesses, which were partially offset by proceeds from sales and maturities of investments. Cash used for investing activities in the first nine months of 2020 was primarily for capital expenditures, purchases of investments, investments in and loans to nonconsolidated affiliates (related to Sadara) and acquisitions of property and businesses, which were partially offset by proceeds from sales and maturities of investments, which included partial monetization of the Company's investment in company-owned life insurance policies, and proceeds from sales of property and businesses.
The Company's capital expenditures were
As a result of Sadara's debt re-profiling completed in the first quarter of 2021, the Company does not expect to provide any shareholder loans or equity contributions to Sadara in 2021. In the first nine months of 2020, the Company loaned$280 million to Sadara. Cash Flows from Financing Activities Cash used for financing activities in the first nine months of 2021 included payments on long-term debt and transaction financing, debt issuance and other costs, which were partially offset by proceeds from issuance of stock and proceeds from issuance of short-term debt greater than three months. In addition,Dow Inc. included cash outflows for dividends paid to stockholders and purchases of treasury stock and TDCC included a cash outflow for dividends paid toDow Inc. Cash used for financing activities in the first nine months of 2020 included payments on long-term debt, changes in short-term notes payable and transaction financing, debt issuance and other costs, which were partially offset by proceeds from issuance of long-term debt. In addition,Dow Inc. included cash outflows for dividends paid to common stockholders and purchases of treasury stock and TDCC included cash outflows for dividends paid toDow Inc. See Note 11 to the Consolidated Financial Statements for additional information related to the issuance and retirement of debt.Dow Inc. Non-GAAP Cash Flow Measures Free Cash Flow Dow defines free cash flow as "Cash provided by operating activities - continuing operations," less capital expenditures. Under this definition, free cash flow represents the cash generated by Dow from operations after investing in its asset base. Free cash flow, combined with cash balances and other sources of liquidity, represents the cash available to fund obligations and provide returns to shareholders. Free cash flow is an integral financial measure used in the Company's financial planning process. Operating EBITDA Dow defines Operating EBITDA as earnings (i.e., "Income before income taxes") before interest, depreciation and amortization, excluding the impact of significant items. Cash Flow Conversion (Operating EBITDA to Cash Flow From Operations) Dow defines cash flow conversion (Operating EBITDA to cash flow from operations) as "Cash provided by operating activities - continuing operations," divided by Operating EBITDA. Management believes cash flow conversion is an important financial metric as it helps the Company determine how efficiently it is converting its earnings into cash flow. 57 -------------------------------------------------------------------------------- Table of Contents These financial measures are not recognized in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP") and should not be viewed as alternatives toU.S. GAAP financial measures of performance. All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, Dow's definitions may not be consistent with the methodologies used by other companies. Reconciliation of Free Cash Flow
Nine Months Ended
In millions Sep 30, 2021 Sep 30, 2020 Cash provided by operating activities - continuing operations (GAAP)$ 4,512 $ 4,596 Capital expenditures (1,035) (955) Free cash flow (non-GAAP) 1
1.Free cash flow in the first nine months of 2021 reflects a
Reconciliation of Cash Flow Conversion (Operating EBITDA to Cash Flow from Operations)
Nine Months Ended
In millions Sep 30, 2021 Sep 30, 2020 Net income (GAAP)$ 4,644 $ 40 + Provision for income taxes 1,383 215 Income before income taxes$ 6,027 $ 255 - Interest income 35 27 + Interest expense and amortization of debt discount 561 617 - Significant items ¹ (715) (816) Operating EBIT (non-GAAP)$ 7,268 $ 1,661 + Depreciation and amortization 2,187 2,148 Operating EBITDA (non-GAAP)$ 9,455 $ 3,809
Cash provided by operating activities - continuing operations (GAAP)
4,596
Cash flow conversion (Operating EBITDA to cash flow from operations) (non-GAAP) 2
47.7 % 120.7 %
1.The nine months ended September 30, 2021 includes costs associated with the
Company's digital acceleration program; restructuring, implementation costs and
asset related charges - net; a loss on early extinguishment of debt; litigation
related charges, awards and adjustments; and indemnification and other
transaction related costs. The nine months ended September 30, 2020 includes
integration and separation costs; restructuring, implementation costs and asset
related charges - net; a net gain on divestitures; a loss on early
extinguishment of debt; and a gain related to a legal matter with Nova. See Note
22 to the Consolidated Financial Statements for additional information.
2.Cash flow conversion in the first nine months of 2021 reflects a $1 billion
elective pension contribution.
Liquidity & Financial Flexibility
The Company's primary source of incremental liquidity is cash flows from
operating activities. The generation of cash from operations and the Company's
ability to access capital markets is expected to meet the Company's cash
requirements for working capital, capital expenditures, debt maturities,
contributions to pension plans, dividend distributions to stockholders, share
repurchases and other needs. In addition to cash from operating activities, the
Company's current liquidity sources also include TDCC's U.S. and Euromarket
commercial paper programs, committed and uncommitted credit facilities,
committed accounts receivable facilities, a U.S. retail note program
("InterNotes®") and other debt markets.
The Company continues to maintain a strong financial position with all of its
committed credit facilities undrawn and fully available at September 30, 2021 .
Cash and committed and available forms of liquidity were $12.4 billion at
September 30, 2021 . The Company also has no substantive long-term debt
maturities due until 2026. 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 September 30, 2021 and
December 31, 2020 . TDCC maintains access to the commercial paper market at
competitive rates. Amounts outstanding under TDCC's commercial paper programs
during the period may be greater, or less than, the amount reported at the end
of the period. Subsequent to September 30, 2021 , TDCC issued approximately $2.4
billion of commercial paper.
58-------------------------------------------------------------------------------- Table of Contents Committed Credit Facilities The Company also has the ability to access liquidity through TDCC's committed and available credit facilities. AtSeptember 30, 2021 , TDCC had total committed and available credit facilities of$8.1 billion . See Note 11 to the Consolidated Financial Statements for additional information on committed and available credit facilities. Committed Accounts Receivable Facilities In addition to the above committed credit facilities, the Company maintains a committed accounts receivable facility in theU.S. where eligible trade accounts receivable, up to$900 million , may be sold at any point in time. The Company also maintains a committed accounts receivable facility inEurope where eligible trade accounts receivable, up to €400 million, may be sold at any point in time. AtSeptember 30, 2021 , there were no receivables sold under theU.S. andEurope committed accounts receivable facilities. For additional information, see Note 14 to the Consolidated Financial Statements included in the 2020 10-K.Company-Owned Life Insurance The Company has investments in company-owned life insurance ("COLI") policies, which are recorded at their cash surrender value as of each balance sheet date. The Company has the ability to monetize its investment in its COLI policies as an additional source of liquidity. In the first quarter of 2021, the Company monetized$200 million of its existing COLI policies' surrender value. In the second quarter of 2021, the Company repaid the drawdown against the cash surrender value. The Company had no outstanding monetization of its existing COLI policies' surrender value atSeptember 30, 2021 . Uncommitted Credit Facilities The Company has entered into various uncommitted bilateral credit arrangements as a potential source of excess liquidity. These lines can be used to support short-term liquidity needs and for general purposes, including letters of credit. The Company had no drawdowns outstanding atSeptember 30, 2021 .
Debt
As the Company continues to maintain its strong balance sheet and financial flexibility, management is focused on net debt (a non-GAAP financial measure), as the Company believes this is the best representation of its financial leverage at this point in time. As shown in the following table, net debt is equal to total gross debt minus "Cash and cash equivalents" and "Marketable securities." AtSeptember 30, 2021 , net debt as a percent of total capitalization decreased to 40.4 percent and 39.9 percent forDow Inc. and TDCC, respectively, compared with 47.9 percent and 46.8 percent atDecember 31, 2020 . Total Debt Dow Inc. TDCC In millions Sep 30, 2021 Dec 31, 2020 Sep 30, 2021 Dec 31, 2020 Notes payable $ 270 $ 156 $ 270 $ 156 Long-term debt due within one year 291 460 291 460 Long-term debt 14,027 16,491 14,027 16,491 Gross debt$ 14,588 $ 17,107 $ 14,588 $ 17,107 - Cash and cash equivalents 2,911 5,104 2,911 5,104 - Marketable securities 1 141 45 141 45 Net debt$ 11,536 $ 11,958 $ 11,536 $ 11,958 Total equity$ 17,028 $ 13,005 $ 17,393 $ 13,569 Gross debt as a percent of total capitalization 46.1 % 56.8 % 45.6 % 55.8 % Net debt as a percent of total capitalization 40.4 % 47.9 % 39.9 % 46.8 %
1.Included in "Other current assets" in the consolidated balance sheets.
In the second quarter of 2021, the Company redeemed
In the third quarter of 2021, the Company completed cash tender offers for certain debt securities. In total,$1,042 million aggregate principal amount was tendered and retired. In addition, the Company voluntarily repaid$81 million of long-term debt due within one year. 59 -------------------------------------------------------------------------------- Table of Contents 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 0.44 to 1.00 atSeptember 30, 2021 . Management believes TDCC was in compliance with all of its covenants and default provisions atSeptember 30, 2021 . For information on TDCC's debt covenants and default provisions, see Note 15 to the Consolidated Financial Statements included in the 2020 10-K. There were no material changes to the debt covenants and default provisions related to TDCC's outstanding long-term debt and primary, private credit agreements in the first nine months of 2021.
While taking into consideration the current economic environment, management expects that the Company will continue to have sufficient liquidity and financial flexibility to meet all of its business obligations.
Credit Ratings AtSeptember 30, 2021 , 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
On
OnJune 10, 2021 ,Standard & Poor's ("S&P") announced a credit rating upgrade for TDCC from BBB- and A-3 to BBB and A-2, maintaining stable outlook. The decision from S&P reflects the expectation for an ongoing macroeconomic recovery, the Company's supportive financial policies and the strengthening of its operating performance in 2021 relative to 2020.
Dividends
Dow Inc. Dow Inc. has paid dividends on a quarterly basis since the separation from DowDuPont and expects to continue to do so, subject to approval by the Board. The dividends declared by the Board align to the Company's strategy announced in 2018 of returning approximately 45 percent of operating net income1 to the shareholders through the dividend and total shareholder remuneration of approximately 65 percent, when including share repurchases, over the economic cycle. The following table summarizes cash dividends declared by the Board and paid to common stockholders of record byDow Inc. in 2021.
Declaration Date Record Date Payment Date Amount (per share)
February 11, 2021 February 26, 2021 March 12, 2021 $ 0.70
April 15, 2021 May 28, 2021 June 11, 2021 $ 0.70
August 12, 2021 August 31, 2021 September 10, 2021 $ 0.70
October 14, 2021 November 30, 2021 December 10, 2021 $ 0.70
1.Operating net income is a non-GAAP measure that Dow defines as "Net income
(loss) available for
60
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TDCC
TDCC has committed to fund Dow Inc.'s dividends paid to common stockholders and
share repurchases, as approved by Dow Inc.'s Board from time to time, as well as
certain governance expenses. Funding is accomplished through intercompany loans.
TDCC's Board reviews and determines a dividend distribution to Dow Inc. to
settle the intercompany loans. For the three months ended September 30, 2021 ,
TDCC declared and paid a dividend to Dow Inc. of $919 million ($2,361 million
for the nine months ended September 30, 2021 ). At September 30, 2021 , TDCC's
intercompany loan balance with Dow Inc. was insignificant. See Note 21 to the
Consolidated Financial Statements for additional information.
Share Repurchase Program
On April 1, 2019 , Dow Inc.'s Board ratified the share repurchase program
originally approved on March 15, 2019 , authorizing up to $3.0 billion to be
spent on the repurchase of the Company's common stock, with no expiration date.
The Company repurchased $400 million of its common stock in the third quarter of
2021 ($600 million in the first nine months of 2021). At September 30, 2021 ,
approximately $1,775 million of the share repurchase program authorization
remained available for repurchases. The Company intends to, at a minimum,
repurchase shares to cover dilution and will continue to evaluate value creating
share repurchases as economic conditions develop. The share repurchases, when
coupled with the Company's dividends, intend to ensure that total shareholder
remuneration is approximately 65 percent over the economic cycle.
Pension Plans
OnMarch 4, 2021 , the Company announced changes to the design of itsU.S. tax-qualified and non-qualified pension plans (collectively, the "U.S. Plans") and, effectiveDecember 31, 2023 , the Company will freeze the pensionable compensation and credited service amounts used to calculate pension benefits for employees who participate in theU.S. Plans. Additionally, the Company elected to contribute$1 billion to itsU.S. tax-qualified pension plans. As a result, the Company increased its estimated global 2021 pension contributions to approximately$1,230 million , of which$1,165 million has been contributed throughSeptember 30, 2021 . In connection with the foregoing plan amendments and inclusive of the additional discretionary contributions to theU.S. tax-qualified pension plans, the Company remeasured theU.S. Plans effectiveFebruary 28, 2021 , which resulted in a decrease of approximately$200 million in the expected net periodic pension benefit cost for 2021, inclusive of curtailment gains of$19 million , recognized in the first quarter of 2021. The Company's total net periodic pension benefit cost is expected to be approximately$40 million in 2021, inclusive of curtailment gains and subject to foreign currency fluctuations and events or actions that may require additional plan remeasurements.
See Note 16 to the Consolidated Financial Statements and Note 20 to the Consolidated Financial Statements included in the 2020 10-K for additional information related to the Company's pension plans.
Restructuring
The actions related to the 2020 Restructuring Program are expected to result in additional cash expenditures of$212 million , primarily through the first quarter of 2022, consisting of severance and related benefit costs and costs associated with exit and disposal activities, including contract cancellation penalties and environmental remediation. Restructuring implementation costs, primarily decommissioning and demolition activities related to asset actions, are expected to result in additional cash expenditures of approximately$80 million , primarily through the third quarter of 2022. Restructuring implementation costs totaled$16 million in the third quarter of 2021 ($47 million in the first nine months of 2021). The Company expects to incur additional costs in the future related to its restructuring activities, which will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits related to its other optimization activities. These costs cannot be reasonably estimated at this time. See Note 5 to the Consolidated Financial Statements for additional information on the Company's restructuring activities. 61
-------------------------------------------------------------------------------- Table of Contents Digital Acceleration In the first quarter of 2021, Dow announced plans to further advance and expand its digitalization efforts to deliver long-term value creation, by accelerating investment in three key areas: expanding digital tools to accelerate materials science innovation; further enhancing the e-commerce buying and fulfillment experience for Dow's customers; and adopting real-time digital manufacturing insights, operational data intelligence and demand sensing to enhance the productivity and reliability of Dow's operations. The Company expects more than$300 million in incremental annual run rate Operating EBITDA generation by the end of 2025 related to digital acceleration, with an additional one-time$100 million in structural working capital efficiency gains, driven in part by enhanced planning from digital tools. The activities related to digital acceleration are expected to result in additional cash expenditures of approximately$280 million , primarily through the end of 2022. Digital acceleration expenses totaled$40 million in the third quarter of 2021 ($121 million in the first nine months of 2021). Contractual Obligations Information related to the Company's contractual obligations, commercial commitments and expected cash requirements for interest can be found in Notes 15, 16, 17 and 20 to the Consolidated Financial Statements included in the 2020 10-K. With the exception of the items noted below, there have been no material changes in the Company's contractual obligations sinceDecember 31, 2020 . Contractual Obligations at Sep 30, 2021 Payments Due In 2026 and In millions 2021 2022-2023 2024-2025 beyond Total Long-term debt obligations 1$ 122 $ 536 $ 405 $ 13,568 $ 14,631 Expected cash requirements for interest 2$ 157 $ 1,226 $ 1,173 $ 7,907 $ 10,463 Pension and other postretirement benefits$ 71 $ 655 $ 649 $ 7,367 $ 8,742 Operating leases 3$ 140 $ 785 $ 474 $ 744 $ 2,143 1.Excludes unamortized debt discount and issuance costs of$313 million . Includes finance lease obligations of$542 million . 2.Cash requirements for interest on long-term debt was calculated using current interest rates atSeptember 30, 2021 , and includes$110 million of various floating rate notes. 3.Includes imputed interest of$302 million . Off-Balance Sheet Arrangements Off-balance sheet arrangements are obligations the Company has with nonconsolidated entities related to transactions, agreements or other contractual arrangements. The Company holds variable interests in joint ventures accounted for under the equity method of accounting. The Company is not the primary beneficiary of these joint ventures and therefore is not required to consolidate these entities (see Note 20 to the Consolidated Financial Statements). Guarantees arise during the ordinary course of business from relationships with customers, committed accounts receivable facilities and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others if specific triggering events occur. Additional information related to guarantees can be found in the "Guarantees" section of Note 12 to the Consolidated Financial Statements. Fair Value Measurements See Note 19 to the Consolidated Financial Statements for information concerning fair value measurements. 62 -------------------------------------------------------------------------------- Table of Contents OTHER MATTERS Recent Accounting Guidance See Note 2 to the Consolidated Financial Statements for a summary of recent accounting guidance. Critical Accounting Estimates The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted inthe United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements included in the 2020 10-K describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The Company's critical accounting policies that are impacted by judgments, assumptions and estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 10-K. Since December 31, 2020, there have been no material changes in the Company's accounting policies that are impacted by judgments, assumptions and estimates. Asbestos-Related Matters ofUnion 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 asbestoscontaining products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide's premises, and Union Carbide's responsibility for asbestos suits filed against a former Union Carbide subsidiary,Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide's products. The table below provides information regarding asbestos-related claims pending against Union Carbide and Amchem based on criteria developed by Union Carbide and its external consultants: Asbestos-Related Claim Activity 2021 2020 Claims unresolved at Jan 1 9,126 11,117 Claims filed 3,177 3,623 Claims settled, dismissed or otherwise resolved (3,340)
(5,099)
Claims unresolved atSep 30 8,963
9,641
Claimants with claims against both Union Carbide and Amchem (2,312) (3,168)
Individual claimants at
6,651 6,473
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 ofUnion Carbide Corporation in Note 12 to the Consolidated Financial Statements and Note 16 to the Consolidated Financial Statements included in the 2020 10-K, and Part II, Item 1. Legal Proceedings. 63
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