10-Q 1 dowdupont3q17093017.htm 10-Q Document
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 September 30, 2017

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: 001-38196

DOWDUPONT INC.
(Exact name of registrant as specified in its charter)
Delaware
81-1224539
State or other jurisdiction of incorporation or organization
(I.R.S. Employer Identification No.)

c/o The Dow Chemical Company
 
c/o E. I. du Pont de Nemours and Company
2030 Dow Center, Midland, MI 48674
 
974 Centre Road, Wilmington, DE 19805
(989) 636-1000
 
(302) 774-1000
(Name, address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

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.
þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 
Large accelerated filer
 
þ
 
Accelerated filer
 
¨
 
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
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. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes þ No

The registrant had 2,339,990,261 shares of common stock, $0.01 par value, outstanding at October 31, 2017.



DOWDUPONT INC.

QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2017

TABLE OF CONTENTS


PAGE
Item 1.
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 


2



DowDuPont Inc.

Throughout this Quarterly Report on Form 10-Q, except as otherwise noted by the context, the terms "Company" or "DowDuPont" used herein mean DowDuPont Inc. and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS
This communication 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 and financial condition, and often contain words such as “anticipate,” “believe,” “expect,” “intend,” “plan,” “see,” “seek,” “target,” “will,” “would,” similar expressions, and variations or negatives of these words.

On December 11, 2015, The Dow Chemical Company (“Dow”) and E. I. du Pont de Nemours and Company (“DuPont”) announced entry into an Agreement and Plan of Merger, as amended on March 31, 2017, (the “Merger Agreement”) under which the companies would combine in an all-stock merger of equals transaction (the “Merger Transaction”). Effective August 31, 2017, the Merger Transaction was completed and each of Dow and DuPont became subsidiaries of DowDuPont. For more information, please see DowDuPont’s, Dow’s and DuPont’s latest annual, quarterly and current reports on Forms 10-K, 10-Q and 8-K, as the case may be, and the joint proxy statement/prospectus included in the registration statement on Form S-4 filed by DowDuPont with the U.S. Securities and Exchange Commission ("SEC") on March 1, 2016 (File No. 333-209869), as last amended on June 7, 2016, and declared effective by the SEC on June 9, 2016 (the “Registration Statement”) in connection with the Merger Transaction.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain, including the intended separation of DowDuPont’s agriculture, materials science and specialty products businesses in one or more tax efficient transactions on anticipated terms (the “Intended Business Separations”). Forward-looking statements are not guarantees of future performance and are based on certain assumptions and expectations of future events which may not be realized. Forward-looking statements also involve risks and uncertainties, many of which are beyond the Company’s control. Some of the important factors that could cause DowDuPont’s, Dow’s or DuPont’s actual results to differ materially from those projected in any such forward-looking statements include, but are not limited to: (i) successful integration of the respective agriculture, materials science and specialty products businesses of Dow and DuPont, including anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, productivity actions, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the combined operations; (ii) impact of the divestitures required as a condition to consummation of the Merger Transaction as well as other conditional commitments; (iii) achievement of the anticipated synergies by DowDuPont’s agriculture, materials science and specialty products businesses; (iv) risks associated with the Intended Business Separations, including those that may result from the comprehensive portfolio review undertaken by the DowDuPont board, changes and timing, including a number of conditions which could delay, prevent or otherwise adversely affect the proposed transactions, including possible issues or delays in obtaining required regulatory approvals or clearances related to the Intended Business Separations, disruptions in the financial markets or other potential barriers; (v) the risk that disruptions from the Intended Business Separations will harm DowDuPont’s business (either directly or as conducted by and through Dow or DuPont), including current plans and operations; (vi) the ability to retain and hire key personnel; (vii) potential adverse reactions or changes to business relationships resulting from the completion of the merger or the Intended Business Separations; (viii) uncertainty as to the long-term value of DowDuPont common stock; (ix) continued availability of capital and financing and rating agency actions; (x) legislative, regulatory and economic developments; (xi) potential business uncertainty, including changes to existing business relationships, during the pendency of the Intended Business Separations that could affect the Company’s financial performance and (xii) unpredictability and severity of catastrophic events, including, but not limited to, acts of terrorism or outbreak of war or hostilities, as well as management’s response to any of the aforementioned factors. These risks, as well as other risks associated with the merger and the Intended Business Separations, are more fully discussed in (1) the Registration Statement and (2) the current, quarterly and annual reports filed with the SEC by DowDuPont and to the extent incorporated by reference into the Registration Statement, by Dow and DuPont. While the list of factors presented here is, and the list of factors presented in the Registration Statement are, considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on DowDuPont’s, Dow’s or DuPont’s consolidated financial condition, results of operations, credit rating or liquidity. Neither DowDuPont, Dow or DuPont assumes any obligation to publicly provide revisions or updates to any forward-looking statements whether as a result of new information, future developments or otherwise, should circumstances change, except as otherwise required by securities and other applicable laws. A detailed discussion of some of the significant risks and uncertainties which may cause results and events to differ materially from such forward-looking statements is included in the section titled "Risk Factors" (Part II, Item 1A of this Form 10-Q).

3




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DowDuPont Inc.
Consolidated Statements of Income

 
Three Months Ended
Nine Months Ended
In millions, except per share amounts (Unaudited)
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
Net sales
$
15,354

$
12,483

$
42,418

$
35,138

Cost of sales
12,170

9,840

33,130

27,066

Research and development expenses
522

399

1,343

1,159

Selling, general and administrative expenses
990

738

2,468

2,166

Amortization of intangibles
244

162

556

387

Restructuring and asset related charges - net
179


166

452

Integration and separation costs
354

127

599

228

Equity in earnings of nonconsolidated affiliates
152

70

402

191

Sundry income (expense) - net
361

22

237

1,369

Interest expense and amortization of debt discount
283

220

728

629

Income from continuing operations before income taxes
1,125

1,089

4,067

4,611

Provision for income taxes on continuing operations
571

271

1,239

291

Income from continuing operations, net of tax
554

818

2,828

4,320

Loss from discontinued operations, net of tax
(20
)

(20
)

Net income
534

818

2,808

4,320

Net income attributable to noncontrolling interests
20

14

85

54

Net income attributable to DowDuPont Inc.
514

804

2,723

4,266

Preferred stock dividends

85


255

Net income available for DowDuPont Inc. common stockholders
$
514

$
719

$
2,723

$
4,011

 
 
 
 
 
 
 
 
 
 
Per common share data:
 
 
 
 
Earnings per common share from continuing operations - basic
$
0.33

$
0.64

$
2.05

$
3.60

Loss per common share from discontinued operations - basic
(0.01
)

(0.01
)

Earnings per common share - basic
$
0.32

$
0.64

$
2.04

$
3.60

Earnings per common share from continuing operations - diluted
$
0.33

$
0.63

$
2.02

$
3.48

Loss per common share from discontinued operations - diluted
(0.01
)

(0.01
)

Earnings per common share - diluted
$
0.32

$
0.63

$
2.01

$
3.48

 
 
 
 
 
Dividends declared per share of common stock
$
0.46

$
0.46

$
1.38

$
1.38

Weighted-average common shares outstanding - basic
1,577.8

1,112.4

1,330.7

1,108.8

Weighted-average common shares outstanding - diluted
1,595.3

1,127.4

1,348.8

1,220.4

 
 
 
 
 
Depreciation
$
708

$
573

$
1,820

$
1,540

Capital Expenditures
$
752

$
1,060

$
2,301

$
2,877

See Notes to the Consolidated Financial Statements beginning on page 9.

4

DowDuPont Inc.
Consolidated Statements of Comprehensive Income

 
Three Months Ended
Nine Months Ended
In millions (Unaudited)
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
Net Income
$
534

$
818

$
2,808

$
4,320

Other comprehensive income (loss), net of tax
 
 


Unrealized gains (losses) on investments
(51
)
8

(43
)
42

Cumulative translation adjustments
(379
)
83

247

325

Pension and other postretirement benefit plans
105

93

308

640

Derivative instruments
32

(20
)
(57
)
(21
)
Total other comprehensive income (loss)
(293
)
164

455

986

Comprehensive Income
241

982

3,263

5,306

Comprehensive income attributable to noncontrolling interests, net of tax
26

35

119

103

Comprehensive Income Attributable to DowDuPont Inc.
$
215

$
947

$
3,144

$
5,203

See Notes to the Consolidated Financial Statements beginning on page 9.

5

DowDuPont Inc.
Consolidated Balance Sheets

In millions, except per share amounts (Unaudited)
Sep 30, 2017
Dec 31, 2016
Assets
 
 
Current Assets
 
 
Cash and cash equivalents (variable interest entities restricted - 2017: $115; 2016: $75)
$
13,148

$
6,607

Marketable securities
1,826


Accounts and notes receivable:


  Trade (net of allowance for doubtful receivables - 2017: $171; 2016: $110)
11,250

4,666

  Other
7,006

4,312

Inventories
17,255

7,363

Other current assets
1,145

711

Assets held for sale
3,171


Total current assets
54,801

23,659

Investments


Investment in nonconsolidated affiliates
5,650

3,747

Other investments (investments carried at fair value - 2017: $1,408; 2016: $1,959)
2,450

2,969

Noncurrent receivables
743

708

Total investments
8,843

7,424

Property


Property
72,227

57,438

Less accumulated depreciation
36,008

33,952

Net property (variable interest entities restricted - 2017: $925; 2016: $961)
36,219

23,486

Other Assets


Goodwill
60,698

15,272

Other intangible assets (net of accumulated amortization - 2017: $4,990; 2016: $4,295)
33,420

6,026

Deferred income tax assets
1,810

3,079

Deferred charges and other assets
2,736

565

Total other assets
98,664

24,942

Total Assets
$
198,527

$
79,511

Liabilities and Equity
 
 
Current Liabilities
 
 
Notes payable
$
5,176

$
272

Long-term debt due within one year
1,906

635

Accounts payable:


  Trade
7,648

4,519

  Other
3,862

2,097

Income taxes payable
729

600

Accrued and other current liabilities
7,849

4,481

Liabilities held for sale
108


Total current liabilities
27,278

12,604

Long-Term Debt (variable interest entities nonrecourse - 2017: $310; 2016: $330)
29,819

20,456

Other Noncurrent Liabilities


Deferred income tax liabilities
9,125

923

Pension and other postretirement benefits - noncurrent
18,413

11,375

Asbestos-related liabilities - noncurrent
1,266

1,364

Other noncurrent obligations
8,092

5,560

Total other noncurrent liabilities
36,896

19,222

Stockholders' Equity


Common stock (2017: authorized 5,000,000,000 shares of $0.01 par value each, issued 2,339,396,931 shares; 2016: authorized 1,500,000,000 shares of $2.50 par value each, issued 1,242,794,836)
23

3,107

Additional paid-in capital
81,116

4,262

Retained earnings
31,366

30,338

Accumulated other comprehensive loss
(9,367
)
(9,822
)
Unearned ESOP shares
(192
)
(239
)
Treasury stock at cost (2017: zero shares; 2016: 31,661,501 shares)

(1,659
)
DowDuPont's stockholders' equity
102,946

25,987

Noncontrolling interests
1,588

1,242

Total equity
104,534

27,229

Total Liabilities and Equity
$
198,527

$
79,511

See Notes to the Consolidated Financial Statements beginning on page 9.

6

DowDuPont Inc.
Consolidated Statements of Cash Flows

 
Nine Months Ended
In millions (Unaudited)
Sep 30, 2017
Sep 30, 2016
Operating activities
 
 
Net income
$
2,808

$
4,320

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
2,518

2,067

Provision (credit) for deferred income tax
570

(990
)
Earnings of nonconsolidated affiliates less than dividends received
201

341

Net periodic pension benefit cost
306

312

Pension contributions
(463
)
(567
)
Net gain on sales of assets, businesses and investments
(475
)
(179
)
Net gain on step acquisition of nonconsolidated affiliate

(2,445
)
Restructuring and asset related charges - net
166

452

Amortization of inventory step-up
429


Other net loss
228

300

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


Accounts and notes receivable
(2,154
)
(1,435
)
Proceeds from interests in trade accounts receivable conduits
939

882

Inventories
(1,490
)
(39
)
Accounts payable
1,627

1,031

Other assets and liabilities, net
(741
)
(331
)
Cash provided by operating activities
4,469

3,719

Investing activities
 
 
Capital expenditures
(2,301
)
(2,877
)
Investment in gas field developments
(98
)
(81
)
Construction of assets pending sale / leaseback

(12
)
Proceeds from sale / leaseback of assets

32

Purchases of previously leased assets
(2
)

Payment into escrow account
(130
)
(835
)
Distribution from escrow account
130

835

Proceeds from sales of property and businesses, net of cash divested
522

217

Acquisitions of property and businesses, net of cash acquired
(28
)
(187
)
Cash acquired in merger transaction
4,005


Cash acquired in step acquisition of nonconsolidated affiliate

1,050

Investments in and loans to nonconsolidated affiliates
(694
)
(831
)
Distributions and loan repayments from nonconsolidated affiliates
56

10

Proceeds from sale of ownership interests in nonconsolidated affiliates
64


Purchases of investments
(476
)
(426
)
Proceeds from sales and maturities of investments
2,088

607

Other investing activities, net
(2
)

Cash provided by (used for) investing activities
3,134

(2,498
)
Financing activities
 
 
Changes in short-term notes payable
953

(69
)
Proceeds from issuance of long-term debt

32

Payments on long-term debt
(591
)
(523
)
Purchases of treasury stock

(416
)
Proceeds from issuance of company stock
32


Proceeds from sales of common stock
423

320

Employee taxes paid for share-based payment arrangements
(89
)
(65
)
Distributions to noncontrolling interests
(58
)
(85
)
Purchases of noncontrolling interests

(202
)
Dividends paid to stockholders
(1,947
)
(1,782
)
Other financing activities, net
(2
)
(2
)
Cash used for financing activities
(1,279
)
(2,792
)
Effect of exchange rate changes on cash
254

26

Cash reclassified as held for sale
(37
)

Increase (decrease) in cash and cash equivalents
6,541

(1,545
)
Cash and cash equivalents at beginning of year
6,607

8,577

Cash and cash equivalents at end of period
$
13,148

$
7,032

See Notes to the Consolidated Financial Statements beginning on page 9.

7

DowDuPont Inc.
Consolidated Statements of Equity


In millions (Unaudited)
Preferred Stock
Common Stock
Add'l Paid in Capital
Retained Earnings
Accum Other Comp Loss
Unearned ESOP
Treasury Stock
Non-controlling Interests
Total Equity
2016
 
 
 
 
 
 
 
 
 
Balance at Jan 1, 2016
$
4,000

$
3,107

$
4,936

$
28,425

$
(8,667
)
$
(272
)
$
(6,155
)
$
809

$
26,183

Net income available for DowDuPont Inc. common stockholders



4,011





4,011

Other comprehensive income (loss)




986




986

Dividends ($1.38 per common share)



(1,531
)




(1,531
)
Common stock issued/sold


320




606


926

Stock-based compensation and allocation of ESOP shares


(340
)


46



(294
)
Impact of noncontrolling interests







505

505

Treasury stock purchases






(416
)

(416
)
Other



(21
)




(21
)
Balance at Sep 30, 2016
$
4,000

$
3,107

$
4,916

$
30,884

$
(7,681
)
$
(226
)
$
(5,965
)
$
1,314

$
30,349

2017
 
 
 
 
 
 
 
 
 
Balance at Jan 1, 2017
$

$
3,107

$
4,262

$
30,338

$
(9,822
)
$
(239
)
$
(1,659
)
$
1,242

$
27,229

Net income available for DowDuPont Inc. common stockholders



2,723





2,723

Other comprehensive income (loss)




455




455

Dividends ($1.38 per common share)



(1,673
)




(1,673
)
Common stock issued/sold


455




724


1,179

Stock-based compensation and allocation of ESOP shares


(428
)


47



(381
)
Impact of noncontrolling interests







346

346

Merger impact

(3,084
)
76,829




935


74,680

Other


(2
)
(22
)




(24
)
Balance at Sep 30, 2017
$

$
23

$
81,116

$
31,366

$
(9,367
)
$
(192
)
$

$
1,588

$
104,534

See Notes to the Consolidated Financial Statements beginning on page 9.


8



DowDuPont Inc.
PART I - FINANCIAL INFORMATION, Item 1. Financial Statements
Notes to the Consolidated Financial Statements


Table of Contents



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Effective August 31, 2017, pursuant to the merger of equals transactions contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017 ("Merger Agreement"), The Dow Chemical Company ("Dow") and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont" or the "Company") and, as a result, Dow and DuPont became subsidiaries of DowDuPont (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 periods prior to the Merger are considered to be the historical financial statements of DowDuPont.

On August 31, 2017, Dow's common stock, par value $2.50 per share, and DuPont's common stock, par value $0.30 per share, were voluntarily delisted from the New York Stock Exchange ("NYSE") in connection with the Merger and were suspended from trading on the NYSE prior to the open of trading on September 1, 2017. DowDuPont's common stock, par value $0.01 per share, commenced trading on the NYSE under ticker symbol DWDP on September 1, 2017.

The unaudited interim consolidated financial statements of DowDuPont and its subsidiaries 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 unaudited interim consolidated financial statements also include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Company exercises control and, when applicable, entities for

9



which the Company has a controlling financial interest or is the primary beneficiary. Intercompany transactions and balances are eliminated in consolidation. Investments in nonconsolidated affiliates (20-50 percent owned companies or less than 20 percent owned companies over which significant influence is exercised) are accounted for using the equity method.

Except as otherwise indicated by the context, the term "Dow" means The Dow Chemical Company and its consolidated subsidiaries; "DuPont" means E. I. du Pont de Nemours and Company and its consolidated subsidiaries; "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.

Use of Estimates in Financial Statement Preparation
The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.

Significant Accounting Policies
Asbestos-Related Matters
Accruals for asbestos-related matters, including defense and processing costs, are recorded based on an analysis of claim and resolution activity, defense spending, and pending and future claims. These accruals are assessed at each balance sheet date to determine if the asbestos-related liability remains appropriate. Accruals for asbestos-related matters are included in the consolidated balance sheets in “Accrued and other current liabilities” and “Asbestos-related liabilities - noncurrent.”

Legal Costs
The Company expenses legal costs as incurred, with the exception of defense and processing costs associated with asbestos-related matters.

Foreign Currency Translation
The local currency or U.S. dollar have been primarily used as the functional currency throughout the world. Translation gains and losses of those operations that use local currency as the functional currency are included in the consolidated balance sheets in "Accumulated other comprehensive loss" ("AOCL"). For certain subsidiaries, the U.S. dollar is used as the functional currency. This occurs when the subsidiary operates in an economic environment where the products produced and sold are tied to U.S. dollar-denominated markets, or when the foreign subsidiary operates in a hyper-inflationary environment. Where the U.S. dollar is used as the functional currency, foreign currency translation gains and losses are reflected in income.

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. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the consolidated balance sheets in “Accrued and other current liabilities” and “Other noncurrent obligations” at undiscounted amounts. Accruals for related insurance or other third-party recoveries for environmental liabilities are recorded when it is probable that a recovery will be realized and are included in the consolidated balance sheets in “Accounts and notes receivable - Other.”

Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction and/or normal operation of a long-lived asset. Costs related to environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.

Cash and Cash Equivalents
Cash and cash equivalents include time deposits and investments with maturities of three months or less at the time of purchase.

Financial Instruments
The Company calculates the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Company uses standard pricing models with market-based inputs that take into account the present value of estimated future cash flows.

The Company utilizes derivatives to manage exposures to foreign currency exchange rates, commodity prices and interest rate risk. The fair values of all derivatives are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of

10



these instruments are reported in income or AOCL, depending on the use of the derivative and whether it qualifies for hedge accounting treatment.

Gains and losses on derivatives that are designated and qualify as cash flow hedging instruments are recorded in AOCL, to the extent the hedges are effective, until the underlying transactions are recognized in income. To the extent effective, gains and losses on derivative and nonderivative instruments used as hedges of the Company’s net investment in foreign operations are recorded in AOCL as part of the cumulative translation adjustment. The ineffective portions of cash flow hedges and hedges of net investment in foreign operations, if any, are recognized in income immediately.

Gains and losses on derivatives designated and qualifying as fair value hedging instruments, as well as the offsetting losses and gains on the hedged items, are reported in income in the same accounting period. Derivatives not designated as hedging instruments are marked-to-market at the end of each accounting period with the results included in income.

Inventories
Inventories are stated at the lower of cost or net realizable value. The method of determining cost for each subsidiary varies among last-in, first-out (“LIFO”); first-in, first-out (“FIFO”); and average cost, and is used consistently from year to year.

The Company routinely exchanges and swaps raw materials and finished goods with other companies to reduce delivery time, freight and other transportation costs. These transactions are treated as non-monetary exchanges and are valued at cost.

Property
Land, buildings and equipment, including property under capital lease agreements, are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of depreciable assets and is calculated using the straight-line method. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.

Impairment and Disposal of Long-Lived Assets
The Company evaluates long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value based on bids received from third parties, prices of similar assets or other valuation methodologies including a discounted cash flow analysis based on market participant assumptions.

Long-lived assets to be disposed of by sale, if material, are classified as held for sale and reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of other than by sale are classified as held and used until they are disposed of and reported at the lower of carrying amount or fair value, and depreciation is recognized over the remaining useful life of the assets.

Goodwill and Other Intangible Assets
The Company records goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the reporting unit level annually, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. When testing goodwill for impairment, the Company may first assess qualitative factors. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is performed. The Company may also elect to skip the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, the carrying value of goodwill is written down to fair value. The Company primarily utilizes a discounted cash flow methodology to calculate the fair value of its reporting units.

Finite-lived intangible assets such as purchased customer lists, developed technology, patents, trademarks and software, are amortized over their estimated useful lives, generally on a straight-line basis for periods ranging primarily from three to twenty years, or amortized based on units of production. Indefinite-lived intangible assets are reviewed for impairment or obsolescence annually, or more frequently when events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows.


11



Asset Retirement Obligations
The Company records asset retirement obligations as incurred and reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. The fair values of obligations are recorded as liabilities on a discounted basis and are accreted over time for the change in present value. Costs associated with the liabilities are capitalized and amortized over the estimated remaining useful life of the asset.

Investments
Investments in debt and marketable equity securities (including warrants) are classified as trading, available-for-sale or held-to-maturity. Investments classified as trading are reported at fair value with unrealized gains and losses related to mark-to-market adjustments included in income. Those classified as available-for-sale are reported at fair value with unrealized gains and losses recorded in AOCL. Those classified as held-to-maturity are recorded at amortized cost. The cost of investments sold is determined by FIFO or specific identification. The Company routinely reviews available-for-sale and held-to-maturity securities for other-than-temporary declines in fair value below the cost basis. When events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the security is written down to fair value, establishing a new cost basis.

Revenue
Sales are recognized when the revenue is realized or realizable, and the earnings process is complete. Revenue for product sales is recognized as risk and title to the product transfer to the customer, which usually occurs at the time shipment is made. As such, title to the product passes when the product is delivered to the freight carrier. The Company's standard terms of delivery are included in its contracts of sale, order confirmation documents and invoices. Freight costs and any directly related costs of transporting finished product to customers are recorded as “Cost of sales” in the consolidated statements of income.

Revenue related to Dow's insurance operations includes third-party insurance premiums, which are earned over the terms of the related insurance policies and reinsurance contracts. Revenue related to the initial licensing of patents and technology is recognized when earned; revenue related to running royalties is recognized according to licensee production levels.

Royalty Expense
The Company’s Agriculture segment currently has certain third party biotechnology trait license agreements, which require upfront and variable payments subject to the licensor meeting certain conditions. These payments are reflected as "Other current assets" and "Deferred charges and other assets" in the consolidated balance sheets and are amortized to "Cost of sales" in the consolidated statements of income as seeds containing the respective trait technology are utilized over the life of the license. The Company evaluates the carrying value of the prepaid royalties when events or changes in circumstances indicate the carrying value may not be recoverable.

Severance Costs
The Company routinely reviews its operations around the world in an effort to ensure competitiveness across its businesses and geographic regions. When the reviews result in a workforce reduction related to the shutdown of facilities or other optimization activities, severance benefits are provided to employees primarily under Dow and DuPont's ongoing benefit arrangements. These severance costs are accrued once management commits to a plan of termination and it becomes probable that employees will be entitled to benefits at amounts that can be reasonably estimated.

Integration and Separation Costs
The Company classifies expenses related to the Merger and the ownership restructure of Dow Corning as "Integration and separation costs" in the consolidated statements of income. Merger-related costs include: costs incurred to prepare for and close the Merger, post-Merger integration expenses and costs incurred to prepare for the separation of the Company’s agriculture, materials science and specialty products businesses. The Dow Corning related-costs include: costs incurred to prepare for and close the ownership restructure as well as integration expenses. These costs primarily consist of financial advisory, information technology, legal, accounting, consulting and other professional advisory fees associated with preparation and execution of these activities.

Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted tax rates. The effect of a change in tax rates on deferred tax assets or liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company accrues for other tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably

12



estimated. The current portion of uncertain income tax positions is included in “Income taxes payable” and the long-term portion is included in “Other noncurrent obligations” in the consolidated balance sheets.

Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.

Earnings per Common Share
The calculation of earnings per common share is based on the weighted-average number of the Company’s common shares outstanding for the applicable period. The calculation of diluted earnings per common share reflects the effect of all dilutive potential common shares that were outstanding during the respective periods, unless the effect of doing so is antidilutive.

Adoption of Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting"
In the first quarter of 2017, the Company adopted ASU 2016-09 and elected to apply changes on a retrospective basis to the consolidated statements of cash flows related to the classification of excess tax benefits and employee taxes paid for share-based payment arrangements. See Note 2 for additional information. A summary of the changes made to the consolidated statements of cash flows for the nine months ended September 30, 2016, is included in the following table:

Summary of Changes to the Consolidated Statements of Cash Flows
Nine Months Ended
 
Sep 30, 2016
In millions
As Filed
Updated
Operating Activities
 
 
    Excess tax benefits from share-based payment arrangements
$
(39
)
$

    Other assets and liabilities, net
$
455

$
520

    Cash provided by operating activities
$
3,615

$
3,719

Financing Activities
 
 
    Excess tax benefits from share-based payment arrangements
$
39

$

    Employee taxes paid for share-based payment arrangements
$

$
(65
)
    Cash used in financing activities
$
(2,688
)
$
(2,792
)

Changes in Financial Statement Presentation
As a result of the Merger, certain reclassifications of prior period amounts have been made to improve comparability and conform to the current period presentation. Presentation changes were made to the consolidated statements of income, consolidated balance sheets, consolidated statements of cash flows and consolidated statements of equity. In addition, certain reclassifications of prior period data have been made in the Notes to the Consolidated Financial Statements to conform to the current period presentation.

The changes to the financial statements are summarized as follows:

Consolidated Statements of Income
Costs associated with integration and separation activities are now separately reported as “Integration and separation costs” and have been reclassified from “Cost of sales” and “Selling, general and administrative expenses.” In addition, “Interest income” has been reclassified to “Sundry income (expense) - net.”  A summary of the changes made to the consolidated statements of income is as follows:

Summary of Changes to the Consolidated Statements of Income
Three Months Ended
Nine Months Ended
Sep 30, 2016
Sep 30, 2016
In millions
As Filed
Updated
As Filed
Updated
Cost of sales
$
9,841

$
9,840

$
27,067

$
27,066

Selling, general and administrative expenses
$
864

$
738

$
2,393

$
2,166

Integration and separation costs
$

$
127

$

$
228

Sundry income (expense) - net
$
(4
)
$
22

$
1,305

$
1,369

Interest income
$
26

$

$
64

$



13



Consolidated Balance Sheets
The Company reclassified “Dividends payable” to “Accrued and other current liabilities” and the current portion of deferred revenue has been reclassified from “Accounts payable - Other” to “Accrued and other current liabilities.” In addition, certain derivative assets have been reclassified from “Accounts and notes receivable - Other” to “Other current assets” and certain derivative liabilities have been reclassified from “Accounts payable - Other” to “Accrued and other current liabilities.” A summary of the changes made to the consolidated balance sheets is as follows:

Summary of Changes to the Consolidated Balance Sheets
Dec 31, 2016
In millions
As Filed
Updated
Accounts and notes receivable - Other
$
4,358

$
4,312

Other current assets
$
665

$
711

Accounts payable - Other
$
2,401

$
2,097

Dividends payable
$
508

$

Accrued and other current liabilities
$
3,669

$
4,481


Consolidated Statements of Cash Flows
A summary of the changes made to the consolidated statements of cash flows is as follows:

Summary of Changes to the Consolidated Statements of Cash Flows
Nine Months Ended
 
Sep 30, 2016
In millions
As Filed
Updated
Operating Activities
 
 
Net periodic pension benefit cost
$

$
312

Net gain on sales of assets, businesses and investments
$

$
(179
)
Net gain on sales of investments
$
(97
)
$

Net gain on sales of property, businesses and consolidated companies
$
(82
)
$

Other net loss
$
97

$
300

Accounts payable
$
695

$
1,031

Other assets and liabilities, net 1
$
520

$
(331
)
Financing Activities


Transaction financing, debt issuance and other costs
$
(2
)
$

Other financing activities, net
$

$
(2
)
1.
As updated for ASU 2016-09.

Consolidated Statements of Equity
A summary of the changes made to the consolidated statements of equity is as follows:

Summary of Changes to the Consolidated Statements of Equity
Nine Months Ended
 
Sep 30, 2016
In millions
As Filed
Updated
Dividend equivalents on participating securities
$
(21
)
$

Other
$

$
(21
)


NOTE 2 - RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In the first quarter of 2017, the Company adopted ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for share-based payment awards to employees, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Under the new guidance, excess tax benefits related to equity compensation are recognized in "Provision for income taxes on continuing operations" in the consolidated statements of income rather than in "Additional paid-in capital" in the consolidated balance sheets and this change was applied on a prospective basis. Changes to the

14



consolidated statements of cash flows related to the classification of excess tax benefits and employee taxes paid for share-based payment arrangements were implemented on a retrospective basis. See Note 1 for additional information.

Accounting Guidance Issued But Not Adopted at September 30, 2017
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," issued in August 2015, revised the effective date for this ASU to annual and interim periods beginning on or after December 15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public entities. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in ASU 2014-09.

In May 2014, the FASB and International Accounting Standards Board formed The Joint Transition Resource Group for Revenue Recognition ("TRG"), consisting of financial statement preparers, auditors and users, to seek feedback on potential issues related to the implementation of the new revenue standard. As a result of feedback from the TRG, the FASB issued additional guidance to provide clarification, implementation guidance and practical expedients to address some of the challenges of implementation. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which is an amendment on assessing whether an entity is a principal or an agent in a revenue transaction. This amendment addresses issues to clarify the principal versus agent assessment and lead to more consistent application. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," which contains amendments to the new revenue recognition standard on identifying performance obligations and accounting for licenses of intellectual property. The amendments related to identifying performance obligations clarify when a promised good or service is separately identifiable and allows entities to disregard items that are immaterial in the context of a contract. The licensing implementation amendments clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether revenue is recognized over time or at a point in time. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," which provides clarity and implementation guidance on assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The new standards have the same effective date and transition requirements as ASU 2014-09.

The Company has a team in place to analyze ASU 2014-09 and the related ASU's across all revenue streams to evaluate the impact of the new standard on revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. The Company is completing contract evaluations and validating the results from applying the requirements under the new standard. The Company is in the process of finalizing its accounting policies, drafting the new disclosures, quantifying the potential financial adjustment and completing its evaluation of the impact of the accounting and disclosure requirements on its business processes, controls and systems. Full implementation will be complete by the end of 2017. Based on analysis completed to date, the Company expects the potential impact on accounting for product sales and licensing arrangements to remain substantially unchanged. The Company expects to adopt the new standard using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company will adopt the new guidance in the first quarter of 2018 and the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (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 with lease terms of more than twelve months and recognition, presentation and measurement in the financial statements will depend on its classification as a finance or operating lease. In addition, the new

15



guidance will require 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 current U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, using a modified retrospective approach, and early adoption is permitted. The Company has a team in place to evaluate the new guidance and to facilitate the development of business processes and controls around leases to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statements of cash flows and addresses eight specific cash flow issues. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendments should be applied using a retrospective transition method to each period presented, if practicable. Early adoption is permitted, including adoption in an interim period, and any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. All amendments must be adopted in the same period. A key provision in the new guidance will impact the presentation of interests in certain trade accounts receivable conduits in the consolidated statements of cash flows. The Company is currently evaluating the impact of adopting this guidance in the first quarter of 2018.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. Early adoption is permitted in the first interim period of an annual reporting period for which financial statements have not been issued. The Company will adopt the new guidance in the first quarter of 2018 and the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which addresses the diversity in practice on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending total amounts shown on the statement of cash flows. This new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The new guidance will change the presentation of restricted cash in the consolidated statements of cash flows and will be applied retrospectively in the first quarter of 2018.

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805), Clarifying the Definition of a Business," which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The guidance requires an entity to evaluate if substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively the "set") is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs, as defined by the ASU. The new standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and should be applied prospectively. Early adoption is permitted. The Company will adopt the new guidance in the first quarter of 2018 and will apply it to all applicable transactions after the adoption date.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment." The new guidance eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new guidance, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company is planning to early adopt the new guidance for the annual goodwill impairment tests that will be performed in the fourth quarter of 2017.

In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial

16



Assets," which clarifies the scope of guidance on nonfinancial asset derecognition in Accounting Standards Codification ("ASC") 610-20 and the accounting for partial sales of nonfinancial assets. The new guidance also conforms the derecognition guidance for nonfinancial assets with the model in the new revenue standard (ASU 2014-09). The new standard is effective for annual reporting periods, and interim periods within those fiscal years, beginning after December 15, 2017, and an entity is required to apply the amendments at the same time that it applies the amendments in ASU 2014-09. The Company is planning to apply the new guidance with the implementation of the new revenue standard in the first quarter of 2018.

In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line item(s) that includes the service cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period in which the financial statements have not been issued. Entities must use a retrospective transition method to adopt the requirement for separate presentation of the income statement service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The Company is currently evaluating the impact of adopting this guidance.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends the hedge accounting recognition and presentation under ASC 815, with the objectives of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities and simplifying the application of hedge accounting by preparers. The new standard expands the strategies eligible for hedge accounting, relaxes the timing requirements of hedge documentation and effectiveness assessments, and permits, in certain cases, the use of qualitative assessments on an ongoing basis to assess hedge effectiveness. The new guidance also requires new disclosures and presentation. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted in any interim or annual period after issuance of the ASU. Entities must adopt the new guidance by applying a modified retrospective approach to hedging relationships existing as of the adoption date. The Company is currently evaluating the impact of adopting this guidance.


NOTE 3 - BUSINESS COMBINATIONS
Merger of Equals of Dow and DuPont
At the effective time of the Merger, each share of common stock, par value $2.50 per share, of Dow (the "Dow Common Stock") (excluding any shares of Dow Common Stock that were held in treasury immediately prior to the effective time of the Merger, which were automatically canceled and retired for no consideration) was converted into the right to receive one fully paid and non-assessable share of common stock, par value $0.01 per share, of DowDuPont (the "DowDuPont Common Stock"). Upon completion of the Merger, (i) each share of common stock, par value $0.30 per share, of DuPont (the “DuPont Common Stock”) (excluding any shares of DuPont Common Stock that were held in treasury immediately prior to the effective time of the Merger, which were automatically canceled and retired for no consideration) was converted into the right to receive 1.2820 fully paid and non-assessable shares of DowDuPont Common Stock, in addition to cash in lieu of any fractional shares of DowDuPont Common Stock, and (ii) each share of DuPont Preferred Stock $4.50 Series and DuPont Preferred Stock $3.50 Series (collectively, the “DuPont Preferred Stock”) issued and outstanding immediately prior to the effective time of the Merger remains issued and outstanding and was unaffected by the Merger.

As provided in the Merger Agreement, at the effective time of the Merger, Dow stock options and other equity awards were generally automatically converted into stock options and equity awards with respect to DowDuPont Common Stock and DuPont stock options and other equity awards, after giving effect to the exchange ratio, were converted into stock options and equity awards with respect to DowDuPont Common Stock, and otherwise generally on the same terms and conditions under the applicable plans and award agreements immediately prior to the effective time of the Merger. See Note 17 for additional information.

DowDuPont intends to pursue, subject to the receipt of regulatory approvals and approval by the board of directors of DowDuPont, the separation of the combined Company's agriculture, materials science and specialty products businesses through one or more tax-efficient transactions ("Intended Business Separations").


17



Preliminary Allocation of Purchase Price
Based on an evaluation of the provisions of ASC 805, "Business Combinations," Dow was determined to be the accounting acquirer in the Merger. DowDuPont has applied the acquisition method of accounting with respect to the assets and liabilities of DuPont, which have been measured at fair value as of the date of the Merger.

DuPont's assets and liabilities were measured at estimated fair values as of August 31, 2017, primarily using Level 3 inputs. Estimates of fair value represent management's best estimate and require a complex series of judgments about future events and uncertainties. Third-party valuation specialists were engaged to assist in the valuation of these assets and liabilities.

The total fair value of consideration transferred for the Merger was approximately $74,680 million. Total consideration is comprised of the equity value of the DowDuPont shares as of August 31, 2017, that were issued in exchange for DuPont shares, the cash value for fractional shares, and the portion of DuPont's share awards and share options earned as of August 31, 2017. Share awards and share options converted to DowDuPont equity instruments, but not vested, were $144 million as of August 31, 2017, which will be expensed over the remaining future vesting period.

The following table summarizes the fair value of consideration exchanged as a result of the Merger:

Consideration

(In millions, except exchange ratio)
 
DuPont Common Stock outstanding as of Aug 31, 2017
868.3

DuPont exchange ratio
1.2820

DowDuPont Common Stock issued in exchange for DuPont Common Stock
1,113.2

Fair value of DowDuPont Common Stock issued 1
$
74,195

Fair value of DowDuPont equity awards issued in exchange for outstanding DuPont equity awards 2
485

Total consideration
$
74,680

1.
Amount was determined based on the price per share of Dow Common Stock of $66.65 on August 31, 2017.
2.
Represents the fair value of replacement awards issued for DuPont's equity awards outstanding immediately before the Merger and attributable to the service periods prior to the Merger. The previous DuPont equity awards were converted into the right to receive 1.2820 shares of DowDuPont Common Stock.

The acquisition method of accounting requires, among other things, that identifiable assets acquired and liabilities assumed be recognized on the balance sheet at fair value as of the acquisition date. In determining the fair value, DowDuPont utilized various forms of the income, cost and market approaches depending on the asset or liability being fair valued. The estimation of fair value required significant judgment related to future net cash flows (including net sales, cost of products sold, selling and marketing costs, and working capital/contributory asset charges), discount rates reflecting the risk inherent in each cash flow stream, competitive trends, market comparables and other factors. Inputs were generally determined by taking into account historical data, supplemented by current and anticipated market conditions, and growth rates.


18



The table below presents the preliminary fair value that was allocated to DuPont's assets and liabilities based upon fair values as determined by DowDuPont. The valuation process to determine the fair values is not yet complete. The Company will finalize the amounts recognized as it obtains the information necessary to complete the analysis, but no later than one year from the date of the Merger. Final determination of the fair values may result in further adjustments to the values presented in the following table:

DuPont Assets Acquired and Liabilities Assumed on Aug 31, 2017
In millions
Fair Value of Assets Acquired
 
Cash and cash equivalents
$
4,005

Marketable securities
2,849

Accounts and notes receivable - Trade
6,199

Accounts and notes receivable - Other
1,652

Inventories
8,886

Other current assets
360

Assets held for sale
3,184

Investment in nonconsolidated affiliates
1,685

Other investments
50

Noncurrent receivables
84

Net property
12,122

Goodwill 1
45,501

Other intangible assets 1
27,844

Deferred income tax assets
487

Deferred charges and other assets
1,942

Total Assets
$
116,850

Fair Value of Liabilities Assumed
 
Notes Payable
$
4,046

Long-term debt due within one year
1,273

Accounts payable - Trade
2,344

Accounts payable - Other
939

Income taxes payable
140

Accrued and other current liabilities
3,517

Liabilities held for sale
104

Long-Term debt
9,878

Deferred income tax liabilities
9,408

Pension and other postretirement benefits - noncurrent 2
8,092

Other noncurrent obligations
2,028

Total Liabilities
$
41,769

Noncontrolling interests
401

Net Assets (Consideration for the Merger)
$
74,680

1.
See Note 10 for additional information.
2.
Includes pension and other postretirement benefits as well as long-term disability obligations.


19



The significant fair value adjustments included in the preliminary allocation of purchase price are discussed below.

Inventories
Acquired inventory is comprised of finished goods of $5,115 million, work in process of $3,066 million and raw materials of $705 million. Fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort. Fair value of work in process inventory was primarily calculated as the estimated selling price, adjusted for estimated costs to complete the manufacturing, estimated costs of the selling effort, as well as a reasonable profit margin on the remaining manufacturing and selling effort. The fair value of raw materials was determined to approximate the historical carrying value. For inventory accounted for under the FIFO method and average cost method, the preliminary fair value step up of inventories will be recognized in "Cost of sales" as the inventory is sold. The pre-tax amount recognized for the three and nine months ended September 30, 2017, was $429 million, of which $360 million is reflected in "Cost of sales" within "Income from continuing operations before income taxes" and $69 million is reflected in "Loss from discontinued operations, net of tax" in the consolidated statements of income. For inventory accounted for under the LIFO method, the acquired inventory becomes the LIFO base layer inventory.

Net Property
Property, plant and equipment is comprised of land and land improvements of $967 million, buildings of $2,615 million, machinery and equipment of $7,540 million and construction in progress of $1,000 million. The preliminary estimated fair value was primarily determined using a market approach for land and certain types of equipment, and a replacement cost approach for property, plant and equipment. The market approach for certain types of equipment represents a sales comparison that measures the value of an asset through an analysis of sales and offerings of comparable assets. The replacement cost approach used for all other depreciable property, plant and equipment measures the value of an asset by estimating the cost to acquire or construct comparable assets and adjusts for age and condition of the asset.

Goodwill
The excess of the consideration for the Merger over the preliminary net fair value of assets and liabilities acquired was recorded as goodwill. The Merger resulted in the recognition of $45,501 million of goodwill, which is not deductible for tax purposes. Goodwill largely consists of expected cost synergies resulting from the Merger and the Intended Business Separations, the assembled workforce of DuPont and future technology and customers. Cost synergies will be achieved through a combination of workforce consolidations and savings from actions such as procurement synergies, harmonizing energy contracts at large sites, optimizing warehouse and logistics footprints, implementing materials and maintenance best practices and leveraging existing research and development knowledge management systems.

Other Intangible Assets
Other intangible assets primarily consist of acquired customer-related, developed technology, trademarks and tradenames and germplasm. The preliminary customer-related value was determined using the excess earnings method while the preliminary developed technology, trademarks and tradenames and germplasm values were primarily determined utilizing the relief from royalty method. Both the excess earnings and relief from royalty methods are forms of the income approach. Refer to Note 10 for further information on other intangible assets.

Deferred Income Tax Assets and Liabilities
The deferred income tax assets and liabilities include the expected future federal, state and foreign tax consequences associated with temporary differences between the preliminary fair values of the assets acquired and liabilities assumed and the respective tax bases. Tax rates utilized in calculating deferred income taxes generally represent the enacted statutory tax rates in the jurisdictions in which legal title of the underlying asset or liability resides. 

The preliminary fair value of “Deferred income tax assets” includes a $172 million adjustment to derecognize certain historical net operating losses that will not be fully realized as a result of the Merger. Included in the fair value adjustment related to “Deferred income tax liabilities” is a $546 million adjustment reflecting a change in determination as to the reinvestment strategy of certain foreign operations of DuPont.

Pension and Other Postretirement Liabilities
DowDuPont recognized a pretax net liability of $8,449 million, representing the unfunded portion of DuPont’s defined-benefit pension and other postretirement benefit ("OPEB") plans. Dow and DuPont did not merge their pension and OPEB plans as a result of the Merger. Refer to Note 16 for further information on pension and OPEB.

20



Other Assets Acquired and Liabilities Assumed
DowDuPont utilized the carrying values net of allowances to value accounts and notes receivable and accounts payable as well as other current assets and liabilities as it was determined that carrying values represent the fair value of those items at the Merger date. 

The following table provides "Net sales" and "Loss from continuing operations before income taxes" of DuPont included in the Company's results since the August 31, 2017 Merger. Included in the results from DuPont was $40 million of "Restructuring and asset related charges - net" (see Note 4 for additional information), $360 million that was recognized in "Cost of sales" as inventory was sold related to the fair value step-up of inventories and $71 million of "Integration and separation costs."

DuPont Results of Operations
Sep 1 -
In millions
Sep 30, 2017
Net sales
$
1,734

Loss from continuing operations before income taxes
$
(303
)

As a condition of the European Commission ("EC"), Chinese Ministry of Commerce, Brazilian Administrative Council for Economic Defense and U.S. Department of Justice ("DOJ") approval of the Merger, Dow and DuPont were required to divest the following:

Dow Merger Remedy - Divestiture of the Global Ethylene Acrylic Acid ("EAA") Copolymers and Ionomers Business
On February 2, 2017, as a condition of regulatory approval of the Merger, Dow announced it would divest its global EAA copolymers and ionomers business to SK Global Chemical Co., Ltd. The divestiture included production assets located in Freeport, Texas, and Tarragona, Spain, along with associated intellectual property and product trademarks. Under terms of the purchase agreement, SK Global Chemical Co., Ltd will honor certain customer and supplier contracts and other agreements. On September 1, 2017, the sale was completed for $296 million, net of working capital adjustments, costs to sell and other adjustments, with proceeds subject to customary post-closing adjustments.

In the third quarter of 2017, the Company recognized a pretax gain of $227 million on the sale, included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in the Packaging & Specialty Plastics segment.

EAA Copolymers and Ionomers Assets Divested on Sep 1, 2017
 
In millions
Current assets
$
34

Net property
12

Goodwill
23

Net carrying value divested
$
69


Dow Merger Remedy - Divestiture of a Portion of Dow AgroSciences' Corn Seed Business
On July 11, 2017, as a condition of regulatory approval of the Merger, Dow announced it had entered into a definitive agreement with CITIC Agri Fund to sell a select portion of Dow AgroSciences' corn seed business in Brazil, part of the Agriculture segment, for a purchase price of $1.1 billion. The agreement includes the sale of some seed processing plants and seed research centers, a copy of Dow AgroSciences' Brazilian corn germplasm bank, the MORGAN™ brand and a license for the use of the DOW SEMENTES™ brand for a certain period of time. The sale is expected to close in the fourth quarter of 2017.

The Company evaluated the divestiture of the EAA copolymers and ionomers business and determined it did not represent a strategic shift that had a major effect on the Company’s operations and financial results and did not qualify as an individually significant component of the Company. The expected divestiture of a portion of Dow AgroSciences' corn seed business does not qualify as a component of the Company. As a result, these divestitures were not reported as discontinued operations.

DuPont Merger Remedy - Divested Ag Business
As a condition of the regulatory approval of the Merger, DuPont is required to divest certain assets related to its Crop Protection business and research and development ("R&D") organization, specifically DuPont’s Cereal Broadleaf Herbicides and Chewing Insecticides portfolios, including Rynaxypyr®, Cyazypyr® and Indoxacarb as well as the Crop Protection R&D pipeline and organization, excluding seed treatment, nematicides, and late-stage R&D programs. On March 31, 2017, DuPont entered into a definitive agreement (the "FMC Transaction Agreement") with FMC Corporation ("FMC"). Under the FMC Transaction Agreement, FMC will acquire the Crop Protection business and R&D assets that DuPont is required to divest in order to obtain

21



EC approval of the Merger as described above (the "Divested Ag Business"), and DuPont has agreed to acquire certain assets relating to FMC’s Health and Nutrition segment, excluding its Omega-3 products, (the "Acquired H&N Business") (collectively, the "FMC Transactions"). The assets and liabilities related to the Divested Ag Business at September 30, 2017 are classified as held for sale and therefore are reported as discontinued operations in accordance with ASC 205-20, "Presentation of Financial Statements, Discontinued Operations." Earnings of the Divested Ag Business are included in “Loss from discontinued operations, net of tax" in the consolidated statements of income.

On November 1, 2017, DuPont completed the FMC Transactions through the disposition of the Divested Ag Business and the acquisition of the Acquired H&N Business. The preliminary fair value, as determined by DuPont, of the Acquired H&N Business is $1,900 million. The FMC Transactions include cash consideration payment to DuPont of approximately $1,200 million, which reflects the difference in value between the Divested Ag Business and the Acquired H&N Business, subject to adjustments for inventory of the Divested Ag Business and net working capital of the Acquired H&N Business.

The Company will apply the acquisition method of accounting in accordance with ASC 805, "Business Combinations," to the Acquired H&N Business which requires the assets acquired and liabilities assumed to be recognized on the balance sheet at their fair values as of the acquisition date. As a result of the very recent closing of the FMC Transactions and the Company's limited access to the Acquired H&N Business information prior to the closing, the initial accounting for the business combination is incomplete at this time. As a result, the Company is unable to provide amounts recognized as of the acquisition date for major classes of assets acquired and liabilities assumed.

The results of operations of DuPont's Divested Ag Business are presented as discontinued operations as summarized below, representing activity subsequent to the Merger:

Results of Operations of DuPont's Divested Ag Business
Three and Nine Months Ended
In millions
Sep 30, 2017
Net sales
$
116

Cost of sales
110

Research and development expenses
9

Selling, general and administrative expenses
29

Loss from discontinued operations before income taxes
$
(32
)
Benefit from income taxes
(12
)
Loss from discontinued operations, net of tax
$
(20
)

The following table presents capital expenditures of the discontinued operations related to DuPont's Divested Ag Business, representing activity subsequent to the Merger:

Capital Expenditures of DuPont's Divested Ag Business
Three and Nine Months Ended
In millions
Sep 30, 2017
Capital expenditures
$
4




22



The carrying amount of major classes of assets and liabilities classified as assets and liabilities held for sale at September 30, 2017, related to DuPont's Divested Ag Business consists of the following:

Carrying Values of Assets and Liabilities of DuPont's Divested Ag Business
 
In millions
Sep 30, 2017
Cash and cash equivalents
$
125

Accounts and notes receivable - net
39

Inventories
973

Other current assets
1

Net property
523

Goodwill
145

Other intangible assets
1,360

Deferred charges and other assets
5

Total assets held for sale
$
3,171

Accounts payable
$
62

Accrued and other current liabilities
13

Pension and other postretirement benefits - noncurrent
12

Other noncurrent obligations
21

Total liabilities held for sale
$
108


Unaudited Supplemental Pro Forma Information
The DowDuPont unaudited pro forma results presented below were prepared pursuant to the requirements of ASC 805, "Business Combinations" and give effect to the Merger as if it had been consummated on January 1, 2016. The pro forma results have been prepared for comparative purposes only and do not necessarily represent what the revenue or results of operations would have been had the Merger been completed on January 1, 2016. In addition, these results are not intended to be a projection of future operating results and do not reflect synergies that might be achieved from DowDuPont.

The pro forma results include adjustments for the preliminary purchase accounting impact (including, but not limited to, depreciation and amortization associated with the acquired tangible and intangible assets, amortization of the fair value adjustment to investment in nonconsolidated affiliates, and reduction of interest expense related to the fair value adjustment to long-term debt, along with the related tax impacts), the alignment of accounting policies, and the elimination of transactions between Dow and DuPont. Other adjustments are reflected in the pro forma results as follows:

From January 1, 2016 through September 30, 2017, Dow and DuPont have collectively incurred $441 million after tax ($536 million pre tax) of costs to prepare for and close the Merger. These Merger costs have been reflected within the results of operations in the pro forma results presented below as if they were incurred on January 1, 2016. The costs incurred related to integration and to prepare for the Intended Business Separations are reflected in the pro forma results in the period in which they were incurred.

The Company incurred an after tax charge of $253 million ($302 million pre tax) in the third quarter of 2017 related to the fair value step-up of inventories acquired and sold, excluding the acquired inventory related to DuPont's Seed business. The 2017 pro forma results were adjusted to exclude this charge. The pro forma results for the nine months ended September 30, 2016 were adjusted to include this charge, as well as estimated charges of $769 million after tax ($868 million pre tax) related to the remaining fair value step-up of inventories to be sold, excluding acquired inventory related to DuPont's Seed business.

To align with seasonality, charges related to the fair value step-up of acquired inventory related to DuPont’s Seed business are reflected in the pro forma results based on actual quantity of units sold during those periods as if the fair value step-up of inventories had occurred on January 1, 2016. Accordingly, $35 million after tax ($50 million pre tax) and $273 million after tax ($393 million pre tax) of charges for the three and nine months ended September 30, 2017 and $105 million after tax ($151 million pre tax) and $1,102 million after tax ($1,495 million pre tax) of charges for the three and nine months ended September 30, 2016 are reflected in the pro forma results.

The pro forma results for the nine months ended September 30, 2016 were adjusted to include charges related to change-in-control provisions within a U.S. non-qualified pension plan for Dow and within other certain employee agreements as if they were incurred on January 1, 2016. The majority of these charges represent a pension settlement charge of

23



approximately $300 million after tax ($450 million pre tax) expected to be recorded in the fourth quarter of 2017. See Note 16 for further information.

The 2017 pro forma results were adjusted to exclude a $170 million after tax charge incurred in September 2017 related to the impact of change in tax attributes. The pro forma results for the nine months ended September 30, 2016, were adjusted to include this charge as if it were incurred on January 1, 2016.

The unaudited pro forma results for all periods presented below exclude the results of operations of the DuPont Divested Ag Business as this divestiture is reflected as discontinued operations. The Dow global EAA copolymers and ionomers business, through August 31, 2017, and Dow Agrosciences’ corn seed business divestitures are included in the results from continuing operations in the unaudited pro forma results presented below, for all periods presented, as these divestitures do not qualify for discontinued operations.

DowDuPont Pro Forma Results of Operations
Three Months Ended
Nine Months Ended
 
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
In millions
Net sales
$
18,319

$
17,109

$
59,620

$
53,388

Income from continuing operations, net of tax
$
762

$
516

$
4,351

$
2,744

Earnings per common share from continuing operations - basic
$
0.31

$
0.18

$
1.82

$
1.08

Earnings per common share from continuing operations - diluted
$
0.31

$
0.18

$
1.80

$
1.07


Integration and Separation Costs
"Integration and separation costs" have been and are expected to be significant. The Company incurred "Integration and separation costs" for the three months ended September 30, 2017 of $354 million ($127 million for the three months ended September 30, 2016) and $599 million for the nine months ended September 30, 2017 ($228 million for the nine months ended September 30, 2016). These costs to date primarily have consisted of financial advisory, information technology, legal, accounting, consulting, and other professional advisory fees associated with the preparation and execution of activities related to the Merger, post-merger integration and separation, and ownership restructure of Dow Corning. While the Company has assumed that a certain level of expenses would be incurred, there are many factors that could affect the total amount or the timing of these expenses, and many of the expenses that will be incurred are, by their nature, difficult to estimate.

Ownership Restructure of Dow Corning
On June 1, 2016, Dow announced the closing of the transaction with Corning Incorporated ("Corning"), Dow Corning and HS Upstate Inc., (“Splitco”), pursuant to which Corning exchanged with Dow Corning its 50 percent equity interest in Dow Corning for 100 percent of the stock of Splitco which held Corning's historical proportional interest in the Hemlock Semiconductor Group ("HSC Group") and approximately $4.8 billion in cash (the “DCC Transaction”). As a result of the DCC Transaction, Dow Corning, previously a 50:50 joint venture between Dow and Corning, became a wholly owned subsidiary of Dow.

At June 1, 2016, Dow's equity interest in Dow Corning, excluding the HSC Group, was $1,968 million. This equity interest was remeasured to fair value. As a result, Dow recognized a non-taxable gain of $2,445 million in the second quarter of 2016, net of closing costs and other comprehensive loss related to Dow's interest in Dow Corning. The gain was included in "Sundry income (expense) - net" and related to Performance Materials & Coatings ($1,617 million), Electronics & Imaging ($512 million) and Transportation & Advanced Polymers ($316 million). Dow recognized a tax benefit of $141 million on the DCC Transaction in the second quarter of 2016, primarily due to the reassessment of a previously recognized deferred tax liability on the basis difference in Dow’s investment in Dow Corning.


24



Dow utilized an income approach with a discounted cash flow model to determine the fair value of Dow Corning. The valuation process resulted in a fair value of $9,636 million. The following table summarizes the fair values of Dow Corning's assets and liabilities, excluding the HSC Group, which are now fully consolidated by Dow. The valuation process was complete at December 31, 2016.

Dow Corning Assets Acquired and Liabilities Assumed on Jun 1, 2016
In millions
Fair Value of Previously Held Equity Investment, excluding the HSC Group
$
4,818

Fair Value of Assets Acquired
 
Cash and cash equivalents
$
1,050

Accounts and notes receivable - Trade
647

Accounts and notes receivable - Other
223

Inventories
1,147

Other current assets
51

Investment in nonconsolidated affiliates
110

Noncurrent receivables
112

Net property
3,996

Other intangible assets 1
2,987

Deferred income tax assets
999

Other assets
98

Total Assets Acquired
$
11,420

Fair Value of Liabilities Assumed
 
Accounts payable - Trade
$
374

Income taxes payable
260

Accrued and other current liabilities
404

Other current liabilities
112

Long-Term Debt
4,672

Deferred income tax liabilities
1,858

Pension and other postretirement benefits - noncurrent 2
1,241

Other noncurrent obligations
437

Total Liabilities Assumed
$
9,358

Noncontrolling interests
$
473

Goodwill
$
3,229

1.
Includes $30 million of trademarks, $1,200 million of developed technology, $2 million of software and $1,755 million of customer-related intangibles.
2.
Includes pension and other postretirement benefits as well as long-term disability obligations.

The DCC Transaction resulted in the recognition of $3,229 million of goodwill which is not deductible for tax purposes. Goodwill largely consists of expected synergies resulting from the DCC Transaction. Cost synergies will be achieved through a combination of workforce consolidation and savings from actions such as harmonizing energy contracts at large sites, optimizing warehouse and logistics footprints, implementing materials and maintenance best practices, combining information technology service structures and leveraging existing research and development knowledge management systems.

The fair value of "Accounts and notes receivable - Trade" acquired was $647 million, with gross amounts receivable of $654 million. The fair value step-up in "Inventories" acquired was an increase of $317 million, which was expensed to "Cost of sales" over a three-month period beginning on June 1, 2016, and reflected in the Performance Materials & Coatings ($213 million), Electronics & Imaging ($69 million) and Transportation & Advanced Polymers ($35 million) segments. Liabilities assumed from Dow Corning on June 1, 2016, included certain contingent liabilities relating to breast implant and other product liability claims which were valued at $290 million and included in "Other noncurrent obligations" and commercial creditor issues which were valued at $105 million and included in “Accrued and other current liabilities” in the consolidated balance sheets. See Note 13 for additional information on these contingent liabilities. Gross operating loss carryforwards of $568 million were assumed from Dow Corning on June 1, 2016. The operating loss carryforwards expire either in years beyond 2020 or have an indefinite carryforward period.

The Company evaluated the disclosure requirements under ASC 805, "Business Combinations," and determined the DCC Transaction was not considered a material business combination for purposes of disclosing the revenue and earnings of Dow Corning since the date of the ownership restructure as well as supplemental pro forma information.


25



Beginning in June 2016, the results of Dow Corning, excluding the HSC Group, are fully consolidated in Dow’s consolidated statements of income. Prior to June 2016, Dow’s 50 percent share of Dow Corning’s results of operations was reported in “Equity in earnings of nonconsolidated affiliates” in the consolidated statements of income. The results of the HSC Group continue to be treated as an equity method investment and are reported as “Equity in earnings of nonconsolidated affiliates” in the consolidated statements of income.


NOTE 4 - RESTRUCTURING AND ASSET RELATED CHARGES
DowDuPont Cost Synergy Program
In September 2017, the Company approved initial post-merger actions under the DowDuPont Cost Synergy Program (the "Synergy Program") which is designed to integrate and optimize the organization following the Merger and Intended Business Separations. As a result of these actions, the Company recorded pretax restructuring charges of $179 million in the third quarter of 2017, comprised of severance and related benefit costs. These actions are expected to be substantially completed by September 30, 2019. The impact of these charges is shown as "Restructuring and asset related charges - net" in the consolidated statements of income and reflected in Corporate. The following table summarizes the activities related to the Company's 2017 restructuring reserve, which is included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets.

2017 Restructuring Activities
Severance and Related Benefit Costs
In millions
2017 restructuring charges
$
179

Cash payments
(20
)
Non-cash compensation
(7
)
Reserve balance at Sep 30, 2017
$
152


Subsequent Event
On November 1, 2017, DowDuPont's Board of Directors (the “Board”) approved restructuring actions under the Synergy Program. The Company expects to record total pretax restructuring charges of about $2 billion, comprised of approximately $875 million to $975 million of severance and related benefits costs; $450 million to $800 million of asset related charges, and $400 million to $450 million of costs related to contract terminations. Current estimated total pretax restructuring charges include the $180 million recorded in the third quarter of 2017, comprised of severance and related benefit costs. The Company expects to record pretax restructuring charges of approximately $1 billion in the fourth quarter of 2017, with the remaining restructuring charges to be incurred by the end of 2019. The Synergy Program includes certain asset actions, including strategic decisions regarding the cellulosic biofuel business reflected in the preliminary fair value measurement of DuPont’s assets as of the merger date. Current estimated total pretax restructuring charges could be impacted by future adjustments to the preliminary fair value of DuPont’s assets.

The Company expects to incur additional costs in the future related to its restructuring activities, as the Company continually looks for ways to enhance the efficiency and cost effectiveness of its operations, and to ensure competitiveness across its businesses and geographic areas. 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.

Restructuring Plans Initiated Prior to Merger
Dow 2016 Restructuring Plan
On June 27, 2016, the Board of Directors of Dow approved a restructuring plan that incorporated actions related to the ownership restructure of Dow Corning. These actions, aligned with Dow's value growth and synergy targets, will result in a global workforce reduction of approximately 2,500 positions, with most of these positions resulting from synergies related to the ownership restructure of Dow Corning. These actions are expected to be substantially completed by June 30, 2018.


26



As a result of these actions, Dow recorded pretax restructuring charges of $449 million in the second quarter of 2016 consisting of severance and related benefit costs of $268 million, asset related charges and other of $153 million and costs associated with exit and disposal activities of $28 million. The impact of these charges is shown as "Restructuring and asset related charges - net" in the consolidated statements of income and reflected in the segment results in the table that follows. The table also summarizes the activities related to Dow's 2016 restructuring reserve, which is included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets.

2016 Restructuring Activities
Severance and Related Benefit Costs
Asset Related Charges and Other
Costs Associated with Exit and Disposal Activities
Total
In millions
Performance Materials & Coatings
$

$
27

$
15

$
42

Industrial Intermediates & Infrastructure

70

13

83

Packaging & Specialty Plastics

10


10

Corporate
268

46


314

2016 restructuring charges
$
268

$
153

$
28

$
449

Charges against the reserve

(153
)

(153
)
Cash payments
(67
)

(1
)
(68
)
Reserve balance at Dec 31, 2016
$
201

$

$
27

$
228

Adjustments to the reserve 1


(3
)
(3
)
Cash payments
(141
)


(141
)
Reserve balance at Sep 30, 2017
$
60

$

$
24

$
84

1.
Included in "Restructuring and asset related charges - net" in the consolidated statements of income and reflected in the Performance Materials & Coatings segment.

Severance and Related Benefit Costs
The restructuring charge included severance and related benefit costs of $268 million for the separation of approximately 2,500 employees under the terms of Dow's ongoing benefit arrangements, primarily by June 30, 2018. These costs were charged against Corporate. At December 31, 2016, severance of $67 million was paid, leaving a liability of $201 million for approximately 1,700 employees. In the first nine months of 2017, severance of $141 million was paid, leaving a liability of $60 million for approximately 630 employees at September 30, 2017.

Asset Related Charges and Other
Asset related charges and other recorded in the second quarter of 2016 totaled $153 million. Details regarding the asset related charges and other are as follows:

Dow recorded a charge of $70 million for asset write-downs and write-offs including the shutdown of a solar manufacturing facility in Midland, Michigan; the write-down of a solar facility in Milpitas, California; and, the write-off of capital projects and in-process research and development. The charge was reflected in Industrial Intermediates & Infrastructure. The Midland facility was shut down in the third quarter of 2016.

To enhance competitiveness and streamline costs associated with the ownership restructure of Dow Corning, silicones manufacturing facilities in Yamakita, Japan, and Greensboro, North Carolina, will be shut down by the end of 2018. In addition, an idled facility was shut down in the second quarter of 2016. As a result, Dow recorded a charge of $25 million, reflected in Performance Materials & Coatings.

Dow will close and/or consolidate certain corporate facilities and data centers. Write-downs of $25 million were charged against Corporate. These facilities will be shut down no later than the end of the second quarter of 2018.

A decision was made to shut down a small manufacturing facility and to write-down other non-manufacturing assets, including a cost method investment and certain aircraft. Write-downs of $33 million were recorded, impacting Performance Materials & Coatings ($2 million), Packaging & Specialty Plastics ($10 million) and Corporate ($21 million). The manufacturing facility was shut down in the second quarter of 2016.


27



Costs Associated with Exit and Disposal Activities
The restructuring charges for costs associated with exit and disposal activities, including contract cancellation penalties, environmental remediation and warranty liabilities, totaled $28 million in the second quarter of 2016, impacting Industrial Intermediates & Infrastructure ($13 million) and Performance Materials & Coatings ($15 million).

Dow 2015 Restructuring Plan
The 2015 restructuring activities were substantially completed at June 30, 2017, with remaining liabilities for severance and related benefit costs and costs associated with exit and disposal activities to be settled over time.

Adjustments to Dow's 2015 Restructuring Plan
The following table summarizes adjustments made to the 2015 restructuring reserve for the three- and nine-month periods ended September 30, 2017 and 2016.

Adjustments to the 2015 Restructuring Reserve 1
Three Months Ended
Nine Months Ended
In millions
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
Severance and related benefit credits 2
$

$

$
(9
)
$

Asset related credits and other 3
$

$
(1
)
$

$
(3
)
Costs (credits) associated with exit and disposal activities 4
$

$
1

$
(1
)
$
6

1.
Included in "Restructuring and asset related charges - net" in the consolidated statements of income.
2.
The adjustment for the nine months ended September 30, 2017, was reflected in Corporate.
3.
The adjustments for the three- and nine-month periods ended September 30, 2016, were reflected in Safety & Construction.
4.
The adjustment for the three months ended September 30, 2016, was reflected in Agriculture. The adjustment for the nine months ended September 30, 2017, was reflected in Agriculture (reflected in Agriculture ($5 million) and Nutrition & Biosciences ($1 million) for the nine months ended September 30, 2016).

Severance and Related Benefit Costs
The severance component of the 2015 restructuring charge of $235 million was for the separation of approximately 2,250 positions under the terms of Dow's ongoing benefit arrangements. These costs were charged against Corporate. At December 31, 2016, severance of $190 million was paid, leaving a liability of $45 million for approximately 290 employees. In the first six months of 2017, severance of $33 million was paid and Dow recorded a favorable adjustment of $9 million to the severance reserve, leaving a liability of $3 million for approximately 40 employees at June 30, 2017.


NOTE 5 - SUPPLEMENTARY INFORMATION
The Company uses "Sundry income (expense) – net" to record a variety of income and expense items such as foreign exchange gains and losses, interest income, dividends from investments, gains and losses on sales of investments and assets, and certain litigation matters. During the three months ended September 30, 2017, "Sundry income (expense) - net" was income of $361 million (income of $22 million during the three months ended September 30, 2016). During the nine months ended September 30, 2017, "Sundry income (expense) - net" was income of $237 million (income of $1,369 million during the nine months ended September 30, 2016).

The following table provides the most significant transactions recorded in "Sundry income (expense) - net" for the three- and nine-month periods ended September 30, 2017 and 2016.

Sundry Income (Expense) - Net
Three Months Ended
Nine Months Ended
In millions
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
Gain on Dow's divestiture of the EAA copolymers and ionomers business 1
$
227

$

$
227

$

Foreign exchange gains (losses)
$
72

$
(37
)
$
16

$
(102
)
Interest income
$
39

$
26

$
86

$
64

Gain on sales of other assets and investments
$
11

$
45

$
148

$
130

Gain related to Dow's Nova patent infringement award 2
$

$

$
137

$

Loss related to Dow's Bayer CropScience arbitration matter 2
$

$

$
(469
)
$

Gain on Dow's ownership restructure of Dow Corning 1
$

$

$

$
2,445

Settlement of Dow's urethane matters class action lawsuit and opt-out cases 2
$

$

$

$
(1,235
)
Obligation related to the split-off of Dow's chlorine value chain
$

$
(33
)
$

$
(33
)
1.
See Note 3 for additional information.
2.
See Note 13 for additional information.

28



Accrued and Other Current Liabilities
“Accrued and other current liabilities” were $7,849 million at September 30, 2017 and $4,481 million at December 31, 2016. Components of "Accrued and other current liabilities" that were more than 5 percent of total current liabilities were:

Accrued and Other Current Liabilities
Sep 30, 2017
Dec 31, 2016
In millions
Accrued payroll
$
1,676

$
1,105

Employee retirement plans 1
$
1,490

$
364

1.
See Note 16 for additional information.

Other Noncurrent Obligations
Dow received $524 million in the third quarter of 2017 for advance payments from customers related to long-term ethylene supply agreements, of which $12 million was classified as "Accrued and other current liabilities" and $512 million was classified as "Other noncurrent obligations" in the consolidated balance sheets at September 30, 2017.


NOTE 6 - INCOME TAXES
As a result of the Merger and subsequent change in ownership, certain net operating loss carryforwards available for Dow's consolidated German tax group were derecognized. In addition, the sale of stock between two Dow consolidated subsidiaries in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the Intended Business Separations. As a result, in the third quarter of 2017, the Company decreased “Deferred income tax assets” in the consolidated balance sheets and recorded a charge to “Provision for income taxes on continuing operations” in the consolidated statements of income of $267 million.

The total amount of gross unrecognized tax benefits for uncertain tax positions of the Company, including positions impacting only the timing of tax benefits, was $504 million at September 30, 2017 and $231 million at December 31, 2016. Gross uncertain tax benefits increased substantially as a result of the Merger, due to inclusion of DuPont's historical uncertain tax positions. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $377 million at September 30, 2017 and $223 million at December 31, 2016.

Each year the Company files hundreds of tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. It is reasonably possible that changes to the Company's global unrecognized tax benefits could be significant; however, due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.


29



NOTE 7 - EARNINGS PER SHARE CALCULATIONS
The following tables provide earnings per share calculations for the three- and nine-month periods ended September 30, 2017 and 2016:

Net Income for Earnings Per Share Calculations - Basic

Three Months Ended
Nine Months Ended

In millions
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
Income from continuing operations, net of tax
$
554

$
818

$
2,828

$
4,320

Net income attributable to noncontrolling interests
(20
)
(14
)
(85
)
(54
)
Preferred stock dividends 1

(85
)

(255
)
Net income attributable to participating securities 2
(3
)
(4
)
(13
)
(23
)
Income from continuing operations attributable to common stockholders
$
531

$
715

$
2,730

$
3,988

Loss from discontinued operations, net of tax
(20
)

(20
)

Net income attributable to common stockholders
$
511

$
715

$
2,710

$
3,988

Earnings Per Share Calculations - Basic
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
Dollars per share
Income from continuing operations attributable to common stockholders
$
0.33

$
0.64

$
2.05

$
3.60

Loss from discontinued operations, net of tax
(0.01
)

(0.01
)

Net income attributable to common stockholders
$
0.32

$
0.64

$
2.04

$
3.60

Net Income for Earnings Per Share Calculations - Diluted
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
In millions
Income from continuing operations, net of tax
$
554

$
818

$
2,828

$
4,320

Net income attributable to noncontrolling interests
(20
)
(14
)
(85
)
(54
)
Preferred stock dividends 1,3

(85
)


Net income attributable to participating securities 2
(3
)
(4
)
(13
)
(23
)
Income from continuing operations attributable to common stockholders
$
531

$
715

$
2,730

$
4,243

Loss from discontinued operations, net of tax
(20
)

(20
)

Net income attributable to common stockholders
$
511

$
715

$
2,710

$
4,243

Earnings Per Share Calculations - Diluted
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
Dollars per share
Income from continuing operations attributable to common stockholders
$
0.33

$
0.63

$
2.02

$
3.48

Loss from discontinued operations, net of tax
(0.01
)

(0.01
)

Net income attributable to common stockholders
$
0.32

$
0.63

$
2.01

$
3.48

Share Count Information
Sep 30, 2017
Sep 30, 2016
Sep 30, 2017
Sep 30, 2016
Shares in millions
Weighted-average common shares - basic 4
1,577.8

1,112.4

1,330.7

1,108.8

Plus dilutive effect of equity compensation plans 4
17.5

15.0

18.1

14.8

Plus dilutive effect of assumed conversion of preferred stock 1,5



96.8

Weighted-average common shares - diluted 4
1,595.3

1,127.4

1,348.8

1,220.4

Stock options and deferred stock awards excluded from EPS calculations 6
2.2


1.8

2.5

1.
On December 30, 2016, Dow converted all shares of its Cumulative Convertible Perpetual Preferred Stock, Series A ("Preferred Stock") into shares of Dow common stock. As a result of this conversion, no shares of Dow's Preferred Stock are issued or outstanding. See Note 14 for additional information.
2.
Deferred stock awards are considered participating securities due to the Company's practice of paying dividend equivalents on unvested shares.
3.
Preferred Stock dividends were not added back in the calculation of diluted earnings per share for the three-month period ended September 30, 2016, because the effect of adding them back would have been antidilutive.
4.
As a result of the Merger, the share amounts in the three- and nine-month periods ended September 30, 2017, reflect a weighted averaging effect of Dow shares outstanding prior to August 31, 2017 and DowDuPont shares outstanding on and after August 31, 2017.
5.
Conversion of Preferred Stock into Dow's common stock was excluded from the calculation of diluted earnings per share for the three-month period ended September 30, 2016, because the effect of including them would have been antidilutive.
6.
These outstanding options to purchase shares of common stock and deferred stock awards were excluded from the calculation of diluted earnings per share because the effect of including them would have been antidilutive.



30



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

Inventories
Sep 30, 2017
Dec 31, 2016
In millions
Finished goods
$
9,094

$
4,230

Work in process
5,221

1,510

Raw materials
1,365

853

Supplies
1,210

823

Total
$
16,890

$
7,416

Adjustment of inventories to a LIFO basis
365

(53
)
Total inventories
$
17,255

$
7,363


Total inventories increased $9,892 million from December 31, 2016, primarily due to the Merger. See Note 3 for additional information.


NOTE 9 - PROPERTY
The following table provides a breakdown of property:

Property 1
Estimated Useful Lives (Years)
Sep 30, 2017
Dec 31, 2016
In millions
Land and land improvements
0-25

$
3,479

$
2,524

Buildings
1-50

8,389

5,935

Machinery and equipment
1-25

48,174

38,499

Other property
3-50

5,218

4,380

Construction in progress

6,967

6,100

Total property

$
72,227

$
57,438

1.
Prior year data has been updated to conform to the current year presentation.

The increase in property is primarily due to the Merger. In connection with the Merger, the Company recorded $12,122 million of property representing the preliminary fair value at the Merger date. See Note 3 for additional information on this transaction.



31



NOTE 10 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company changed its reportable segments as a result of the Merger to reflect the manner in which the Company's chief operating decision maker assesses performance and allocates resources.  Effective with the Merger, the Company also updated its reporting units to align with the level at which discrete financial information is available for review by management.  In connection with the Merger, the Company recorded $45,501 million of goodwill, representing the preliminary fair value as of effective date of the Merger. Goodwill resulting from the Merger was assigned to reporting units based on the acquisition method of accounting and is considered preliminary. For the remaining goodwill balance, a relative fair value method was used to reallocate goodwill for reporting units the composition of which had changed.  The following table reflects the carrying amounts of goodwill by reportable segment.  Prior year data has been updated to conform to the current year presentation.

Goodwill
Agri-culture
Perf. Materials & Coatings
Ind. Interm. & Infrast.
Pack. & Spec. Plastics
Elect. & Imaging
Nutrition & Biosciences
Transp. & Adv. Polymers
Safety & Const.
Total
In millions
Net goodwill at Dec 31, 2016
$
1,472

$
4,918

$
1,085

$
1,518

$
4,155

$
340

$
601

$
1,183

$
15,272

Goodwill recognized from the Merger 1
13,109



3,617

3,942

10,522

8,042

6,269

45,501

Sale of SKC Haas Display Films 2




(34
)



(34
)
Divestiture of EAA copolymers and ionomers business 3



(23
)




(23
)
Other
(11
)


(1
)




(12
)
Foreign currency impact
(89
)
179

14

18

7

(91
)
(33
)
(11
)
(6
)
Net goodwill at Sep 30, 2017
$
14,481

$
5,097

$
1,099

$
5,129

$
8,070

$
10,771

$
8,610

$
7,441

$
60,698

1.
Final determination of the goodwill value assignment may result in adjustments to the preliminary value recorded.
2.
On June 30, 2017, Dow sold its ownership interest in the SKC Haas Display Films group of companies. See Note 15 for additional information.
3.
On September 1, 2017, Dow divested its global EAA copolymers and ionomers business to SK Global Chemical Co., Ltd. See Note 3 for additional information.

As part of its 2016 annual goodwill impairment testing, Dow performed additional sensitivity analysis which indicated that the fair value of the Dow Coating Materials reporting unit (now part of Coatings & Performance Monomers) did not significantly exceed its carrying amount. Dow has continued to monitor the performance of the Coatings & Performance Monomers reporting unit, as benchmarked against its long-term financial plan, and evaluates industry and company-specific circumstances which affect the financial results of this reporting unit, including customer consolidation, changes in demand growth in certain end-markets, fluctuations in sales growth in emerging geographies and results of new product launches. At September 30, 2017, the Company concluded that no events or changes in circumstances have occurred which would indicate that the fair value of the Coatings & Performance Monomers reporting unit has more likely than not been reduced below its carrying amount.  

The long-term financial plan for the Coatings & Performance Monomers reporting unit, which underlies the above conclusion, contains numerous assumptions including, but not limited to: expected market growth rates; success of sales and marketing efforts; commercialization of innovation programs; benefit of cost reduction programs; availability of capital and expense resources to execute growth initiatives; impact of competitor actions; industry supply and demand balances; and, macroeconomic factors such as foreign currency exchange rates and interest rates. If the Coatings & Performance Monomers reporting unit does not achieve the financial performance that the Company expects, it is reasonably possible that an impairment of goodwill may result. An annual goodwill impairment test for the Coatings & Performance Monomers reporting unit will be completed during the fourth quarter of 2017. At September 30, 2017, the Coatings & Performance Monomers reporting unit had goodwill of $2,509 million.


32



Other Intangible Assets
The following table provides information regarding the Company's other intangible assets:

Other Intangible Assets 1
Sep 30, 2017
Dec 31, 2016
In millions
Gross
Carrying
Amount
Accum Amort
Net