Form 10-K for the Year Ended December 31, 2017
In a letter to us dated May 13, 2015, The Dow Chemical Company discussed its business with Sudan. We also are aware of news articles reporting that Emirates SkyCargo uses a DuPont product to protect sensitive cargo in transit, and that Emirates SkyCargo offers services to Sudan. As you know, Sudan is designated as a state sponsor of terrorism by the State Department and is subject to U.S. export controls.Rest of the question
You do not include disclosure about Sudan in the Form 10-K. Please describe to us the nature and extent of your past, current and anticipated contacts with Sudan since the May 2015 letter, including any contacts with its government, whether through subsidiaries, affiliates, customers or other direct or indirect arrangements. Please also discuss the materiality of those contacts, in quantitative terms and in terms of qualitative factors that a reasonable investor would deem important in making an investment decision. Tell us the approximate dollar amounts of revenues, assets and liabilities associated with Sudan for the last three fiscal years and the subsequent interim period. Address for us the potential impact of the investor sentiment evidenced by divestment and similar initiatives that have been directed toward companies that have operations associated with a U.S.-designated state sponsor of terrorism.
Prior to the Merger on August 31, 2017, as described in the DowDuPont 2017 10-K, DowDuPont did not have any operations. Since the Merger, DowDuPont conducts its business by and through its consolidated subsidiaries, DuPont and Dow and their respective consolidated subsidiaries and nonconsolidated affiliates, none of which has operations in Sudan.
Each of Dow and DuPont maintain separate policies regarding sensitive destinations. As a result, DowDuPont has not had and does not anticipate future sales into Sudan.Read in the reply ↗Rest of the answer
Dow, since the May 2015 letter, and DuPont, for the last three fiscal years and year-to-date, and their respective consolidated subsidiaries and principal nonconsolidated affiliates have not made sales into Sudan, have not had contact with Sudan, and do not provide products, technology or services into Sudan. For the foregoing respective periods of time, Dow, DuPont, and their respective, consolidated subsidiaries do not have any agreements, arrangements or other contacts, directly or indirectly, with the government of Sudan or entities under its control.
DuPont’s Luxembourg subsidiary sells standard TYVEK® airline covers, manufactured in the European Union, to Emirates SkyCargo ("Emirates") in Dubai, United Arab Emirates (UAE) for Emirates’ own use in a global business.
Please reconcile the pro forma adjustments used to calculate pro forma net income for the years ended December 31, 2017 and 2016 under ASC 805, as disclosed on page 100, with the pro forma amounts presented on pages 44 and 45.
We respectively acknowledge the Staff's comment. We note the pro forma results presented in Note 3 to the Consolidated Financial Statements in the DowDuPont 2017 10-K were prepared in accordance with Accounting Standards Codification ("ASC") Topic 805, "Business Combinations" ("ASC 805") whereas the supplemental pro forma results presented in Management’s Discussion & Analysis of Financial Condition and Results of Operations were prepared in accordance with Article 11 of Regulation S-X ("Article 11").Read in the reply ↗Rest of the answer
Further, for 2017 activity presented under Article 11, activity prior to August 31, 2017 (the “Merger Date”) was prepared on a pro forma basis and activity after the Merger Date was prepared on a consolidated U.S. GAAP basis as such results are reflective of the operations of the merged Company.
Pro forma results under ASC 805 and Article 11 give effect to the Merger as if it had been consummated on January 1, 2016 and 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.
Non-recurring items directly attributable to the Merger which are not expected to have a continuing impact on the combined results have been excluded from the pre-Merger date results as presented under Article 11; these items have been reflected in the pro forma results prepared in accordance with ASC 805 as if the Merger had occurred on January 1, 2016. The Company has summarized these key adjustments within Note 3 to the Consolidated Financial Statements in the DowDuPont 2017 10‑K.
The following summarizes these key adjustments and presents a reconciliation between the pro forma results prepared in accordance with ASC 805 and Article 11 for the years ended December 31, 2017 and 2016 in tabular form:
Reconciliation of Unaudited Pro Forma Combined Statements of Income Under ASC 805 to Unaudited Pro Forma Combined Statements of Income Under Article 11
For the years ended
In millions
Dec 31, 2017
Dec 31, 2016
Pro forma income from continuing operations, net of tax (ASC 805)
$
4,677
2,341
Merger costs incurred
(82
)
455
Inventory step-up
(931
2,254
Change in control provisions
(594
594
Change in tax attributes
(170
170
Other
(19
First report after the company's reply of 2018-10-09: 10-Q filed 2018-11-02 ↗.
No earlier 10-Q before the SEC's letter is in Tickdelta, so there is nothing to compare with.
We note you recorded a goodwill impairment charge in the Coatings & Performance Monomers reporting unit of $1,491 million in the fourth quarter of 2017. Please more fully explain to us the specific facts and circumstances that resulted in an impairment charge during the fourth quarter of 2017 and address the following: • Explain any changes to this reportable segment and reporting unit, including the allocation ofRest of the question
goodwill, that resulted from the Merger and the related reallocation of goodwill; • Tell us if you performed any interim impairment tests between your 2016 and 2017 annual impairment tests and explain why or why not; • Tell us the differences between the significant assumptions and estimates you used to determine the estimated fair values of this reporting unit in your 2017 and 2016 annual impairment tests; and • Explain when the changed circumstances related to this reporting unit occurred and tell us what, if any, cautionary disclosures regarding a potential material goodwill impairment charge related to this reporting unit you provided prior to your fiscal year 2017 Form 10-K.
Effective with the Merger, DowDuPont updated its reporting units to align with the level at which discrete financial information was reviewed by management. The Coatings & Performance Monomers reporting unit and associated goodwill balance was created from combining the historical Dow Coating Materials and historical Dow Performance Monomers reporting units. The goodwill carried by the Coatings & Performance Monomers reporting unit was not impacted by new goodwill recorded as a result of the Merger.Read in the reply ↗Rest of the answer
The Coatings & Performance Monomers reporting unit is a global business aligned with the Performance Materials & Coatings reportable segment.
Tell us if you performed any interim impairment tests between your 2016 and 2017 annual impairment tests and explain why or why not;
During the fourth quarter of 2016, Dow conducted quantitative impairment testing for the Dow Coating Materials and Performance Monomers reporting units, including sensitivity analyses, as disclosed in the Dow 2016 10-K. Following the testing in the fourth quarter of 2016, Dow continued to monitor the performance of the Dow Coating Materials and Performance Monomers reporting units through the Merger. The monitoring activities included:
Comparing actual results against the long-term financial plans for the reporting units; and
Evaluating industry and company-specific circumstances, such as customer consolidation, changes in demand growth in certain end-markets, fluctuations in sales growth in emerging geographies and results of new product launches.
The Company’s interim monitoring activities did not provide indication that the fair values of the Dow Coating Materials and Performance Monomers reporting units had more likely than not been reduced below their carrying values.
Effective with the Merger in the third quarter of 2017, DowDuPont combined the Dow Coating Materials and Performance Monomers reporting units into a single reporting unit called Coatings & Performance Monomers and no impairment indicators were identified as a result of this change. Prior to the impairment testing conducted in the fourth quarter of 2017, DowDuPont’s monitoring activities did not provide indication that the fair value of the Coatings & Performance Monomers reporting unit had more likely than not been reduced below its carrying value.
Tell us the differences between the significant assumptions and estimates you used to determine the estimated fair values of this reporting unit in your 2017 and 2016 annual impairment tests; and
Discounted cash flow methodologies were used in the 2016 and 2017 annual impairment tests. As compared with the 2016 annual impairment test performed for the Dow Coating Materials and Performance Monomers reporting units, the 2017 annual impairment test for the Coatings & Performance Monomers reporting unit reflected a reduction in projected revenue growth rates, primarily driven by modified sales volume and pricing assumptions, revised estimates of future growth rates, and lower profitability assumptions. These changes were an outcome of inconsistent results achieved by the reporting unit in comparison to expected financial performance targets, primarily driven by increasing market commoditization in coatings markets, increased competition and customer consolidation in end markets.
Explain when the changed circumstances related to this reporting unit occurred and tell us what, if any, cautionary disclosures regarding a potential material goodwill impairment charge related to this reporting unit you provided prior to your fiscal year 2017 Form 10-K.
The circumstances discussed in the response above developed gradually over multiple periods and culminated with the change in estimated fair value in the fourth quarter of 2017. In the Critical Accounting Policies section of the Dow 2016 10-K, Dow disclosed that it conducted quantitative impairment testing for the Dow Coating Materials and Performance Monomers reporting units, including sensitivity analyses, which indicated that the fair value of the Dow Coating Materials reporting unit did not significantly exceed its carrying amount. Prior to the issuance of the Company’s financial statements for the quarter ending September 30, 2017, the Company observed continued weakening in certain markets, the appearance of further commoditization of certain products, and the potential for expanded captive use of certain products. The Company’s evaluation of this information resulted in a determination that the “reasonably possible” threshold for disclosing a potential change in estimate in the near term had been met. As a result, DowDuPont’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, disclosed that if the Coatings & Performance Monomers reporting unit did not achieve expected financial performance, then it was reasonably possible that a goodwill impairment may result and that impairment testing would be completed in the fourth quarter of 2017. This disclosure was reflected in Note 10 to the Consolidated Financial Statements, as well as in the segment results discussion for the Performance Materials & Coatings reportable segment and the Critical Accounting Polices section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
First report after the company's reply of 2018-10-09: 10-Q filed 2018-11-02 ↗.
No earlier 10-Q before the SEC's letter is in Tickdelta, so there is nothing to compare with.
Please more fully explain to us how you determined your new operating segments, including how you integrated the business components of DuPont, how segment management was realigned, how you identified your chief operating decision maker (CODM), and what information is used by management to allocate resources and assess performance.
As noted in Note 24 to the Consolidated Financial Statements in the DowDuPont 2017 10-K, DowDuPont is comprised of nine operating segments, which are aggregated in to eight reportable segments: Agriculture: Performance Materials & Coatings; Industrial Intermediates & Infrastructure; Packaging & Specialty Plastics; Electronics & Imaging; Nutrition & Biosciences; Transportation & Advanced Polymers and Safety & Construction. Corporate contains the reconciliation between the totals for the reportable segments and the Company’s totals.Read in the reply ↗Rest of the answer
The Company’s Nutrition & Biosciences reportable segment consist of two operating segments, Nutrition & Health and Industrial Biosciences, which individually did not meet the quantitative thresholds.
As a result of the Merger, new operating segments were created which are used by management to allocate Company resources and assess performance. The new segments combined legacy businesses of Dow and DuPont to align with the market verticals they serve, while maintaining integration and innovation strengths within strategic value chains. In addition, the new segments have been established to allow for aggregation to divisional results. As disclosed in Note 3 to the Consolidated Financial Statements in the DowDuPont 2017 10-K, DowDuPont intends to pursue the separation of the combined Company’s agriculture, materials science and specialty products business divisions (the "Divisions") through one or more tax-efficient transactions (“Intended Business Separations”). The Agriculture division is based on the results of the Agriculture segment; for the Materials Science division, it is based on the combined results of the Performance Materials & Coatings segment, the Industrial Intermediates & Infrastructure segment and the Packaging & Specialty Plastics segment; and for the Specialty Products division it is based on the combined results of the Electronics & Imaging segment, the Nutrition & Biosciences segment, the Transportation & Advanced Polymers segment and the Safety & Construction segment.
The governance structure of DowDuPont at Merger and year end 2017 was as follows:
Executive Chairman: Andrew N. Liveris (retired effective July 1, 2018)
Non-Employee Executive Chairman: Jeff Fettig (effective July 1, 2018)
Chief Executive Officer (“CEO”): Edward D. Breen
Chief Financial Officer (“CFO”): Howard Ungerleider
Three Advisory Committees have been established to oversee the Divisions
The Divisions are led by Chief Operating Officers (“COOs”) who report to the Advisory Boards, CEO and employee or non-employee Executive Chair. The COOs are Jim Fitterling for the Materials Science division, James Collins for the Agriculture division, and Marc Doyle for the Specialty Products division.
Operating segments are managed by one of the COOs (Agriculture - Collins; Performance Materials & Coatings, Industrial Intermediates & Infrastructure and Packaging & Specialty Plastics - Fitterling; Electronics & Imaging, Nutrition & Health, Industrial Biosciences, Transportation & Advanced Polymers and Safety & Construction - Doyle).
In determining the operating segments for DowDuPont, management considered the guidance in ASC 280 - Segment Reporting (“ASC 280”).
Identification of Chief Operating Decision Maker (CODM):
In conjunction with the Merger, the Company identified the Executive Chairman and the CEO as the CODM of DowDuPont in accordance with ASC 280 based on:
The Executive Chairman’s and CEO’s responsibility for making the primary operating and resource allocation decisions,
The Executive Chairman’s and CEO’s responsibility, together with the Advisory Committees, for strategic decisions and overseeing the Intended Business Separations;
The Executive Chairman’s and CEO’s respective operational decision-making roles, responsibility for evaluating the Company’s operating results to assess performance and allocate resources; and
The Executive Chairman’s and CEO’s direct responsibility/management of the COOs and direct reporting line to the DowDuPont Board of Directors.
Identification of what the CODM Reviews:
On a monthly basis, or more frequently as needed, the CODM meets with the CFO and COOs, (collectively, “the operating team”), to provide an update on operating performance against key metrics used to evaluate total Company and division/operating segment performance. These operating team reviews are intended to provide the CODM an overview on operating performance against the key metrics used to evaluate operating segment performance (segment pro forma revenue and segment pro forma Operating EBITDA) that are consistent across all operating segments, a summary of operating highlights driving segment performance, and segment management perspective on the outlook for the segment against key metrics and known operating strategies.
The financial information presented to the CODM is consistent with information presented to the DowDuPont Board and the DowDuPont Advisory Committees.
Identification of Operating Segments:
The operating segments were determined based on the identification of the level at which profit objectives and strategic plans are set and presented to the CODM. It was determined that this is therefore the level at which operating decisions are made and assessment of performance. In addition, the operating segments represent the level at which the CODM allocates resources including R&D and capital expenditures. The COOs and operating segment management have discretion on the allocation of these resources to business groups below the segment.
First report after the company's reply of 2018-10-09: 10-Q filed 2018-11-02 ↗.
No earlier 10-Q before the SEC's letter is in Tickdelta, so there is nothing to compare with.
We note your measure of profit/loss for segment reporting purposes is pro forma Operating EBITDA (for the period of January 1, 2017 through August 31, 2017 and the twelve months ended December 31, 2016) since it is the manner in which your CODM assesses performance and allocates resources.Rest of the question
Please address the following: • Provide us details of the pro forma adjustments used to calculate pro forma Operating EBITDA for 2017 and 2016, similar to the tabular presentations you provide of significant items; • Clarify your disclosures that the pro forma adjustments include the elimination of the effect of events that are directly attributable to the Merger Agreement, such as transaction costs, and events not expected to have a continuing impact on combined results, such as inventory step-up costs, since it appears to us that these amounts are already excluded and identified as significant items; • Reconcile the pro forma adjustments used to calculate pro forma Operating EBITDA for 2017 and 2016 on page 186 with the pro forma adjustments on pages 44 and 45; and • Explain why no historical measures of profit/loss by segment are presented.
The table that follows provides details of the “Pro forma adjustments” used in the reconciliation of Pro forma Operating EBITDA for 2017 and 2016 on page 186 of DowDuPont’s 2017 10-K:
Details of Pro Forma Adjustments
2017
2016
Total impact on "Income from continuing operations before income taxes" by category of adjustment:
Historical DuPont 1
2,196
3,265
Reclass 1
(33
Divestitures 1
(437
(687
Pro forma 1
(609
(930
Subtotal - Article 11 impact on "Income from continuing operations before income taxes"
1,117
1,670
+ Depreciation and amortization 2
1,577
2,374
- InterestRead in the reply ↗Rest of the answer
income 2
102
+ Interest expense and amortization of debt discount 2
174
250
- Foreign exchange gains (losses), net 2
(394
(106
Total Pro Forma Adjustments as used in Operating EBITDA Reconciliation
3,179
4,298
Reflects the total impact on "Income from continuing operations before income taxes" by category of adjustment as shown in the Unaudited Pro Forma Combined Statements of Income on pages 44 and 45 of the DowDuPont 2017 10-K.
2. Reflects the addition or subtraction of interest, depreciation, amortization and foreign exchange losses embedded within the Historical DuPont, Reclass, Divestitures, and Pro Forma categories of adjustment described above.
Clarify your disclosures that the pro forma adjustments include the elimination of the effect of events that are directly attributable to the Merger Agreement, such as transaction costs, and events not expected to have a continuing impact on combined results, such as inventory step-up costs, since it appears to us that these amounts are already excluded and identified as significant items;
Activity for full year 2016 and for the period of January 1, 2017 through August 31, 2017 reflects pro forma adjustments prepared under Article 11. The Company’s pro forma adjustments include the elimination of the effect of events that are directly attributable to the Merger Agreement, such as transaction costs. Events not expected to have a continuing impact on combined results, such as inventory step-up costs, were excluded from the pro forma adjustments. Page 180 of the DowDuPont 2017 10-K addresses the pro forma adjustments and includes the following disclosure (inserted for the Staff's convenience) within Note 24 to the Consolidated Financial Statements. The Company acknowledges the Staff’s comment and respectfully submits that the disclosure below adequately addresses the treatment of events that are directly attributable to the Merger and events that are not expected to have a continuing impact.
Pro forma adjustments used in the calculation of pro forma net sales and pro forma Operating EBITDA were determined in accordance with Article 11 of Regulation S-X. Pro forma financial information is based on the historical consolidated financial statements of Dow and DuPont, adjusted to give effect to the Merger as if it had been consummated on January 1, 2016. Pro forma adjustments have been made for (1) the preliminary purchase accounting impact, (2) accounting policy alignment, (3) the elimination of the effect of events that are directly attributable to the Merger Agreement (e.g., one-time transaction costs), (4) the elimination of the impact of transactions between Dow and DuPont, and (5) the elimination of the effect of consummated or probable and identifiable divestitures agreed to with certain regulatory agencies as a condition of approval for the Merger. Events that are not expected to have a continuing impact on the combined results (e.g., inventory step-up costs) are excluded from the pro forma adjustments.
Activity after the August 31, 2017 Merger Date was prepared on a consolidated U.S. GAAP basis and does not reflect pro forma adjustments. In periods after the Merger Date, material non-recurring charges, including inventory step-up costs, were identified as significant items and excluded when calculating the segment performance measures (pro forma Operating EBITDA). Presentation of material non-recurring charges as significant items is consistent with the manner in which the Company historically communicated such items to its CODM and investors. The 2017 and 2016 adjusted significant items shown in the tables on pages 187 and 188 of the DowDuPont 2017 10-K were adjusted, as needed, to avoid duplication with certain pro forma adjustments, such as the elimination of one-time transaction costs directly attributable to the Merger.
Reconcile the pro forma adjustments used to calculate pro forma Operating EBITDA for 2017 and 2016 on page 186 with the pro forma adjustments on pages 44 and 45; and
Refer to the table included under the first bullet point above for a reconciliation of pro forma adjustments used to calculate pro forma Operating EBITDA for 2017 and 2016 on page 186 with the adjustments on pages 44 and 45 of the DowDuPont 2017 10-K.
Explain why no historical measures of profit/loss by segment are presented.
Effective with the Merger, DowDuPont updated its organizational structure and operating segments, as well as its measures of segment performance used by the CODM. The Company's measure of profit/loss for segment reporting purposes is pro forma Operating EBITDA, as this is the manner in which the CODM assesses performance and allocates resources. In accordance with ASC Topic 280 "Segment reporting," the Company's segment disclosures were retrospectively recast to reflect these changes. The Company’s historical measures of profit/loss for segment reporting purposes are pro forma Operating EBITDA for the twelve months ended December 31, 2016 and Operating EBITDA for twelve months ended December 31, 2015, as presented on page 185.
First report after the company's reply of 2018-10-09: 10-Q filed 2018-11-02 ↗.
No earlier 10-Q before the SEC's letter is in Tickdelta, so there is nothing to compare with.
We note that you benchmarked each component of your Named Executive Officers' target pay to your disclosed peer group. In future filings, please disclose the components used for benchmarking and the level at which you benchmark. Please refer to Item 402(b)(2)(xiv) of Regulation S-K.
The Company acknowledges the Staff’s comment and respectfully submits that the use of benchmarks in setting base salary, the benchmarks and the company components are discussed on pages 34, 48 through 50 of its Definitive Proxy Statement. In Future Filings, the Company will continue to discuss how it uses benchmarks and the component companies per Item 402(b)(2)(xiv).
We trust that the foregoing responses satisfactorily address the Staff's comments.Read in the reply ↗Rest of the answer
If you have questions, please feel free to contact either Jeanmarie Desmond by telephone at (302) 999-4476 or by e-mail at jeanmarie.f.desmond@dupont.com or Ron Edmonds by telephone at (989) 636-5018 or by e-mail at ronedmonds@dow.com.
Best regards,
/s/ JEANMARIE F. DESMOND
/s/ RONALD C. EDMONDS
Jeanmarie F. Desmond
Ronald C. Edmonds
Co-Controller, Wilmington, Delaware
Co-Controller, Midland, Michigan cc:
Anne McConnell, Division of Corporation Finance
Sergio Chinos, Division of Corporate Finance
Jay Ingram, Division of Corporate Finance
®
Trademark of The Dow Chemical Company ("Dow") or E.I. du Pont de Nemours and Company ("DuPont") or affiliated companies of Dow or DuPont.
First report after the company's reply of 2018-10-09: 10-Q filed 2018-11-02 ↗.
No earlier 10-Q before the SEC's letter is in Tickdelta, so there is nothing to compare with.
We note your response to comment 6 of our letter dated September 26, 2018. On page ix, you state each component of target pay benchmarked to median of either the peer group or the general market.Please note that the term benchmarking includes using compensation data about other companies as a reference point on which, either wholly or in part, to base, justify or provide a framework for a compensation decision.Rest of the question
Please see Question 118.05 of Compliance and Disclosure Interpretations for Regulation S-K. To the extent you engaged in benchmarking, for each applicable component of your compensation program, please identify the benchmark and disclose where actual compensation fell within the targeted parameters. To the extent actual compensation was outside the targeted range, please explain why. Please see Item 402(b)(1)(v) and (b)(2)(xiv) of Regulation S-K.
The Company acknowledges the Staff’s comment and respectfully submits that its disclosure satisfied the requirements of Item 402(b)(1)(v), which requires that the CD&A describe “[h]ow the registrant determines the amount (and, where applicable, the formula) for each element to pay,” and Item 402(b)(2)(xiv), which provides that, depending upon the facts and circumstances, it may be appropriate for the CD&A to include information regarding “[w]hether the registrant engaged in any benchmarking of total compensation, or any material element of compensation, identifying the benchmark and, ifRead in the reply ↗Rest of the answer
applicable, its components (including component companies).” C&DI 118.05 elaborates on this latter provision and provides further that such benchmarking disclosure is not required in “a situation in which a company reviews or considers a broad-based third-party survey for a more general purpose, such as to obtain a general understanding of current compensation practices.”
The Company described its use of “benchmarking” in the Definitive Proxy Statement-though, as noted there, some of that disclosure related to the use of general industry market data, which the C&DI makes clear is not benchmarking within the meaning of Item 402(b)(xiv). For example, the Definitive Proxy Statement noted at Page ix that target pay was benchmarked to the median of “either the peer group or the general market, as applicable.” More specifically, among other disclosure in the CD&A, the Company described the peer group for each of Dow (at Page 49) and DuPont (at Page 50) and noted:
- at Page 48 that: “Dow targeted the median of the Survey Peer Group for all compensation elements in order to attract, motivate, develop and retain top level executive talent. Annual Performance Award targets and long-term incentive grants reflected market median values while actual payouts were dependent on performance.”
- at Page 49 that “DuPont assessed compensation primarily against published compensation surveys,” that peer group data was a “secondary data point” and that, because of the smaller number of companies in the peer group, “DuPont used market survey information as the primary source of competitive data.”
- at Page 34 that base pay for each of Dow and DuPont was targeted to the median of the peer group or general industry market data, as applicable.
The Definitive Proxy Statement then described, in considerable detail, the design of the respective Dow and DuPont annual and long-term incentive programs for 2017 (at Pages 38-41 and 43-45 respectively)-including threshold, target and maximum performance levels-and, for the annual incentive programs, the actual results thereof for 2017 and the resulting actual payment amounts (at Page 39 in the case of Dow and at Page 42 in the case of DuPont).
Accordingly, the Company respectfully submits that its disclosure satisfied the requirements of Items 402(b)(1)(v) and 402(b)(2)(xiv) and that, to [and even beyond] the extent required, the disclosure identified applicable benchmarks, disclosed where actual compensation fell within targeted parameters, and, to the extent actual compensation was outside the targeted range, explained why, all as requested in your October 31 letter. The Company will provide additional information about benchmarking-including a description of the development and use of an integrated DowDuPont peer group for 2018-in its 2019 proxy statement to the extent it believes such information is required by the applicable disclosure rules or otherwise appropriate and useful to investors.
First report after the company's reply of 2018-11-13: 10-K filed 2019-02-11 ↗.
No earlier 10-K before the SEC's letter is in Tickdelta, so there is nothing to compare with.
We note your disclosure that on October 18, 2018, DuPont, a subsidiary of DowDuPont, announced that it would recognize non-cash impairment charges associated with DuPont’s agriculture reporting unit in the quarter ended September 30, 2018, of $4.5 billion for goodwill and $0.1 billion for other assets.Rest of the question
We also note your disclosure that DowDuPont’s results of operations and financial statements for the quarter ended September 30, 2018, will not be impacted by DuPont’s expected $4.5 billion goodwill impairment charge, as the fair value of DowDuPont’s agriculture reporting unit continues to exceed its carrying value at September 30, 2018. Please address the following: • Tell us the significant assumptions DuPont used to determine the estimated fair value of its agriculture reporting unit during the quarter ended September 30, 2018 and more fully explain the facts and circumstances that resulted in these impairments being recorded during the current interim period; • Tell us the significant assumptions DowDuPont used to determine the estimated fair value of its agriculture reporting unit during the quarter ended September 30, 2018 and more fully explain the differences between the agriculture reporting units of DowDuPont and DuPont; • Tell us the amount or percent by which the estimated fair value of DowDuPont’s agriculture reporting unit exceeded its carrying value at September 30, 2018; and • Explain if and how the impairments recorded by DuPont will be reflected in DowDuPont's financial statements either before or after the intended spin-off of the Agriculture Division.
As noted in Note 12 to the interim Consolidated Financial Statements in DuPont's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, as filed on November 2, 2018, the Company assembled updated cash flow projections in connection with strategic business reviews that were conducted during the third quarter.Read in the reply ↗Rest of the answer
The revised cash flow projections of DuPont's agriculture reporting unit assessed and quantified the impacts of developing market conditions, events and circumstances that have evolved throughout 2018, resulting in a reduction in the forecasts of sales and profitability as compared to prior forecasts. The reduction in cash flow projections was principally driven by lower growth in sales and margins in North America and Latin America and unfavorable currency impacts related to the Brazilian real. The lower growth expectation is driven by reduced planted area, an expected unfavorable shift to soybeans from corn in Latin America, and delays in expected product registrations. In addition, decreases in commodity prices and higher than anticipated industry grain inventories are expected to impact farmers’ income and buying choices resulting in shifts to lower technologies and pricing pressure. DuPont considered the combination of these factors and the resulting reduction in its forecasted projections for the agriculture reporting unit and determined it was more likely than not that the fair value of the agriculture reporting unit was less than the carrying value, thus requiring the performance of an updated goodwill and intangible asset impairment analysis for the agriculture reporting unit as of September 30, 2018.
DuPont performed an interim impairment analysis for its agriculture reporting unit using a discounted cash flow model (a form of the income approach), utilizing Level 3 unobservable inputs. DuPont’s significant estimates in this analysis include, but are not limited to, future cash flow projections, Merger-related cost and growth synergies, the weighted average cost of capital, the terminal growth rate, and the tax rate. DuPont believes the current assumptions and estimates utilized are both reasonable and appropriate. The key assumption driving the change in fair value was the lower financial projections discussed above. DuPont’s estimates of future cash flows are based on current regulatory and economic climates, recent operating results, and planned business strategy. Based on the analysis performed, DuPont determined that the carrying amount of its agriculture reporting unit exceeded its fair value resulting in a pretax, non-cash goodwill impairment charge of $4,503 million in the third quarter of 2018.
In reviewing the indefinite-lived intangible assets, DuPont also determined that the fair value of certain IPR&D assets had declined as a result of delays in timing of commercialization and increases to expected R&D costs. DuPont performed an analysis of the fair value using the relief from royalty method (a form of the income approach) using Level 3 inputs within the fair value hierarchy. The key assumptions used in the calculation included projected revenue, royalty rates and discount rates. As a result, DuPont recorded a pretax, non-cash intangible asset impairment charge of $85 million.
Tell us the significant assumptions DowDuPont used to determine the estimated fair value of its agriculture reporting unit during the quarter ended September 30, 2018 and more fully explain the differences between the agriculture reporting units of DowDuPont and DuPont;
DOWDUPONT'S RESPONSE
Given the impairment at the DuPont subsidiary, the Company performed an interim impairment test for the Agriculture reporting unit at the DowDuPont level using a discounted cash flow model. The Company’s significant estimates in this analysis include, but are not limited to, future cash flow projections, Merger-related cost and growth synergies, the weighted average cost of capital, the terminal growth rate, and the tax rate. The future cash flow projections of the DowDuPont Agriculture reporting unit reflect the impacts of the developing market conditions, events and circumstances discussed above.
The Agriculture reporting unit for the Company consists of the legacy agriculture business of Dow and the acquired agricultural business of DuPont and is organized and operated under a single management team. This contrasts with the agriculture reporting unit at the DuPont subsidiary, which consists of only the legacy DuPont agriculture business, stepped up to its acquisition date fair value, that resides within the legal entities of DuPont. The resulting difference in the unit of account between the parent (DowDuPont) and the subsidiary (DuPont) and the fact that only the net assets of DuPont were reflected at fair value in conjunction with the Merger are the principal drivers of the separate impairment assessments yielding different results.
Tell us the amount or percent by which the estimated fair value of DowDuPont's agriculture reporting unit exceeded its carrying value at September 30, 2018; and
DOWDUPONT'S RESPONSE
As discussed in the Other Matters section in DowDuPont's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, as filed on November 2, 2018, based on the analysis performed at the DowDuPont level, the fair value of the Agriculture reporting unit exceeded its carrying value by more than ten percent.
Explain if and how the impairments recorded by DuPont will be reflected in DowDuPont's financial statements either before or after the intended spin-off of the Agriculture Division.
DOWDUPONT'S RESPONSE
As noted above, the Company’s assessment of goodwill and any potential loss on impairment is performed at the consolidated DowDuPont level separate from the assessment and loss recognized at the DuPont level. It was determined that there was no impairment of goodwill at the Company's consolidated level. However, consistent with the disclosure in Note 10 to the interim Consolidated Financial Statements in DowDuPont’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, as filed on November 2, 2018, the $0.1 billion impairment related to IPR&D assets has been reflected at the DowDuPont level as the related unit of account in accordance with Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and Other” is the same for the Company and DuPont for these assets.
Upon the Company’s distribution of the Corteva, Inc. shares to its shareholders, the applicable net assets, including the Agriculture reporting unit’s goodwill, will be removed from the Company’s balance sheet through a reduction of equity in accordance with ASC 505, “Equity” (“ASC 505”). As such, the goodwill impairment recorded by DuPont will not have an impact to the Company’s financial statements, either before or after the intended spin-off of the Agriculture Division.
We trust that the foregoing responses satisfactorily address the Staff's comments. If you have questions, please feel free to contact either Jeanmarie Desmond by telephone at (302) 999-4476 or by e-mail at jeanmarie.f.desmond@dupont.com or Ron Edmonds by telephone at (989) 636-5018 or by e-mail at ronedmonds@dow.com.
Best regards,
/s/ JEANMARIE F. DESMOND
/s/ RONALD C. EDMONDS
Jeanmarie F. Desmond
Ronald C. Edmonds
Co-Controller, Wilmington, Delaware
Co-Controller, Midland, Michigan cc:
First report after the company's reply of 2018-11-13: 10-K filed 2019-02-11 ↗.
No earlier 10-K before the SEC's letter is in Tickdelta, so there is nothing to compare with.
We note your response to comment 2 from our letter dated October 31, 2018. In regard to the $4.5 billion non-cash impairment charge associated with DuPont's agriculture reporting unit that was recognized during the quarter ended September 30, 2018, please address the following: • Provide us the quantified significant assumptions that DuPont used to determine the estimated fair value of its agriculture reporting unitRest of the question
during the quarter ended September 30, 2018 and that DowDuPont used to determine the estimated fair value of its agriculture reporting unit during the quarter ended September 30, 2018; and • More fully explain to us how DowDuPont determined that its Agriculture operating segment is the reporting unit for Agriculture based on the provisions of ASC 350-2035-34. In this regard, of DuPont’s 8 reporting units and Dow Chemical’s 14 reporting units, tell us the number of those reporting units included in DowDuPont’s Agriculture operating segment and more fully explain how DowDuPont determined it is appropriate to aggregate those reporting units based on the provisions of ASC 350-2035-35.
We note the Staff’s comments and advise that the agriculture reporting unit of DowDuPont consists of the combination of the legacy agriculture business of Dow and the acquired agriculture business of DuPont. As a result, financial forecasts for the agriculture reporting unit of DowDuPont are materially higher than the financial forecasts for the agriculture reporting unit of DuPont since the latter consists of only the legacy DuPont agriculture business.Read in the reply ↗Rest of the answer
However, in calculating the estimated fair value of their respective agriculture reporting units during the quarter ended September 30, 2018, each of
DowDuPont and DuPont made substantially similar assumptions surrounding weighted average cost of capital, terminal growth rate and tax rate. For purposes of the Staff’s review, we provide below the following key assumptions used in the impairment analysis as of September 30, 2018 for the agriculture reporting unit of DuPont and the agriculture reporting unit of DowDuPont:
[***]
The financial forecasts and related assumptions used in the impairment analysis for DuPont and DowDuPont as of September 30, 2018 were derived from the strategic business reviews performed by management in the third quarter of 2018. As part of management’s process for establishing the forecasts, we considered historical results in comparison to previous forecasts, quantified the impacts of developing market conditions, events and circumstances that evolved throughout 2018, resulting in a reduction in the forecasts of sales and profitability as compared to prior forecasts. The reduction in financial projections was principally driven by lower growth in sales and margins in North America and Latin America and unfavorable currency impacts related to the Brazilian real. The lower growth expectation is driven by reduced planted area, an expected unfavorable shift to soybeans from corn in Latin America, and delays in expected product registrations. In addition, decreases in commodity prices and higher than anticipated industry grain inventories are expected to impact farmers’ income and buying choices resulting in shifts to lower technologies and pricing pressure. These market conditions, events and circumstances impacted the financial forecasts, and resulting fair values, of the agriculture reporting units of both DuPont and DowDuPont.
However, as a result of the Merger accounting considerations and the differences in the composition in the carrying value of the agriculture reporting unit of DuPont (the legacy DuPont agriculture business was stepped up to fair value at the Merger resulting in no “headroom” in the DuPont agriculture reporting unit at the Merger date) and the agriculture reporting unit of DowDuPont (all legacy “head room” associated with the Dow agriculture business is retained), the fair value of the
DowDuPont agriculture reporting unit continued to exceed its carrying value by more than 10 percent, despite the lower fair values caused by the market conditions, events and circumstances discussed previously.
More fully explain to us how DowDuPont determined that its Agriculture operating segment is the reporting unit for Agriculture based on the provisions of ASC 350-20-35-34. In this regard, of DuPont’s 8 reporting units and Dow Chemical’s 14 reporting units, tell us the number of those reporting units included in DowDuPont’s Agriculture operating segment and more fully explain how DowDuPont determined it is appropriate to aggregate those reporting units based on the provisions of ASC 350-20-35-35.
DOWDUPONT'S RESPONSE
The Agriculture operating segment was determined to be the reporting unit for DowDuPont. Effective with the Merger, the Company updated its operating segments and reporting units. Reporting units were determined to be the operating segment or one level below the operating segment. In accordance with Accounting Standards Codification (“ASC”) 350-20-35-34, the Company identified the level below the operating segment, or component, to be a business in which discrete financial information is available and regularly reviewed by segment management. Furthermore, the Company aggregates certain components into reporting units based on economic similarities in accordance with the provisions of ASC 350-20-35-35. The following represents the analysis conducted by the Company in making that determination in accordance with ASC 350:
Determination of segment management and components:
The segment manager is James C. Collins, Jr., Chief Operating Officer (COO) of the Agriculture segment of DowDuPont. The COO reports directly to the Chief Operating Decision Maker for DowDuPont and is directly accountable for the operating activities, financial results and forecasts for the Agriculture segment. Due to integration of the legacy Dow agriculture business and the acquired agriculture business of DuPont post-Merger and re-organization under a single management reporting structure, the COO reviews and evaluates operating performance of the global Seed and Crop Protection businesses of DowDuPont. Each of the Seed and
Crop Protection businesses have a global leader responsible for the operations of their respective global businesses across both subsidiaries. The COO meets regularly with these leaders to evaluate the operating activities, financial results and forecasts of the global Seed and Crop Protection businesses. As a result of this organization and operating structure, the components, or one level below the operating segment for Agriculture, were determined to be the segment’s two global businesses, Seed and Crop Protection, as this represents the level at which discrete financial information is available and regularly reviewed by the COO.
The agriculture reporting unit at the DuPont subsidiary and the agriculture reporting unit at the Dow subsidiary do not meet the criteria to be considered a component for the DowDuPont Agriculture operating segment as segment management is not managing the operating results in this manner. Instead, each of the Seed and Crop Protection businesses have a global leader responsible for the operations of their respective global businesses across both subsidiaries that reside in the separate legal entities of DuPont and Dow. Therefore, while the operations of the agricultural reporting units of Dow and DuPont are both fully included within the DowDuPont operating segment, those operations are not managed along the lines of their separate legal entity structures.
Aggregation of components based on similar economic conditions:
The Company aggregates the Seed and Crop Protection components into one reporting unit pursuant to ASC 350-20-35-35, and therefore, DowDuPont’s
Agriculture reporting unit is the same as the Agriculture operating segment for DowDuPont. The Company considered the following factors included in ASC 350-20-55-6 through 8 and its guidance that the aggregation analysis is a matter of judgment that depends on specific facts and circumstances and should be more qualitative than quantitative:
The nature of the products and services are similar. The Seed and Crop Protection businesses are both focused on delivering products and services for the agriculture industry that are specifically targeted to achieve gains in crop yields and productivity.
Both businesses are heavily dependent on research and development, with recent efforts focused on integrated product development – solutions that provide both a seed and chemical solution. The success of the Crop Protection business is dependent upon its ability to leverage new agricultural chemistries and compounds by way of research and development aimed to increase grower productivity and crop yield. The Seed business uniquely develops integrated products for specific regional application based on local product advancement and testing of the product concepts. It is these chemistries and compounds that drive the combined products success in the market place.
The Seed and Crop Protection businesses have partnered, and continue to partner, to negotiate deals with third party players in the global agriculture industry to couple Seed’s trait technologies with herbicide, fungicide and insecticide products offered by the Crop Protection business.
Both businesses have a similar customer base (i.e., farmers and agribusiness) and similar means of product distribution through a highly integrated sales organization. Customers have the option to choose a solution that is seed-based or chemical-based or a combination thereof. For example, many products being introduced today are integrated products that incorporate both a seed and a chemical solution. Some recent examples include SmartStax™, Refuge Advanced powered by SmartStax™ and Powercore™, EnlistTM, and seed applied technologies.
In the case of SmartStax™ and PowerCore™, the business was able to combine corn seeds with genes that express insecticidal toxins, harmful only to the targeted insects. Historically, the seed did not provide insecticidal benefit and crop protection solutions were needed to aid in insect protection. Enlist™, combines seeds, traits and crop protection. The Company believes that this solution allows the customer to better control hard-to-control weeds that have become resistant to other chemical solutions while not damaging the crop. Seed applied technologies, which involve applying crop protection chemistry directly to the seed, are integrated product solutions driving to improve early plant growth and yield.
The Seed and Crop Protection businesses are subject to the same regulatory environment which includes national regulatory approvals. Further, patents, technology and know-how are critical for current and future product development in both businesses and protecting intellectual property is a priority for each of the Seed and Crop Protection businesses.
Key functions including research & development, human resources, finance, legal, information technology, and communications are managed at the Agriculture operating segment level.
We trust that the foregoing responses satisfactorily address the Staff's comments. If you have questions, please feel free to contact Jeanmarie Desmond by telephone at (302) 999-4476 or by e-mail at jeanmarie.f.desmond@dupont.com.
Best regards,
/s/ JEANMARIE F. DESMOND
/s/ RONALD C. EDMONDS
Jeanmarie F. Desmond
Ronald C. Edmonds
Co-Controller, Wilmington, Delaware
Co-Controller, Midland, Michigan cc:
First report after the company's reply of 2019-01-18: 10-K filed 2019-02-11 ↗.
No earlier 10-K before the SEC's letter is in Tickdelta, so there is nothing to compare with.
Also in this review: closing letter, 2019-03-19