Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2010

Commission File Number:  1-3433

THE DOW CHEMICAL COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware

 

38-1285128

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

2030 DOW CENTER, MIDLAND, MICHIGAN 48674

(Address of principal executive offices) (Zip Code)

989-636-1000

(Registrant’s telephone number, including area code)

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer   þ    Accelerated filer   ¨  
  Non-accelerated filer   ¨    Smaller reporting company   ¨  

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

 

Class

 

Outstanding at June 30, 2010

Common Stock, par value $2.50 per share

 

1,159,855,566 shares


Table of Contents

The Dow Chemical Company

QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended June 30, 2010

TABLE OF CONTENTS

 

             PAGE

PART I – FINANCIAL INFORMATION

  
 

Item 1.

 

Financial Statements.

   3
   

Consolidated Statements of Operations

   3
   

Consolidated Balance Sheets

   4
   

Consolidated Statements of Cash Flows

   5
   

Consolidated Statements of Equity

   6
   

Consolidated Statements of Comprehensive Income

   7
   

Notes to the Consolidated Financial Statements

   8
 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

   49
   

Disclosure Regarding Forward-Looking Information

   49
   

Results of Operations

   50
   

Changes in Financial Condition

   66
   

Other Matters

   70
 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk.

   74
 

Item 4.

 

Controls and Procedures.

   75

PART II – OTHER INFORMATION

  
 

Item 1.

 

Legal Proceedings.

   76
 

Item 1A. 

 

Risk Factors.

   76
 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

   76
 

Item 6.

 

Exhibits.

   76

SIGNATURE

   78

EXHIBIT INDEX

   79

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Operations

 

   

Three Months Ended

 

   

Six Months Ended

 

 
In millions, except per share amounts    (Unaudited)  

June 30,

 

2010

  

June 30,

 

2009

   

June 30,

 

2010

  

June 30,

 

2009

 

Net Sales

  $ 13,618    $ 11,322      $ 27,035    $ 20,363   

 Cost of sales

    11,580      9,764        23,121      17,902   

 Research and development expenses

    407      381        814      673   

 Selling, general and administrative expenses

    648      663        1,310      1,106   

 Amortization of intangibles

    125      112        253      134   

 Restructuring charges

    13      662        29      681   

 Acquisition and integration related expenses

    37      52        63      100   

 Equity in earnings of nonconsolidated affiliates

    244      122        548      187   

 Sundry income - net

    95      23        178      20   

 Interest income

    10      9        17      21   

 Interest expense and amortization of debt discount

    367      525        743      679   

Income (Loss) from Continuing Operations Before Income Taxes

    790      (683     1,445      (684

 Provision (Credit) for income taxes

    131      (248     234      (273

Net Income (Loss) from Continuing Operations

    659      (435     1,211      (411

 Income from discontinued operations, net of income taxes

    -      103        -      114   

Net Income (Loss)

    659      (332     1,211      (297

 Net income attributable to noncontrolling interests

    8      12        9      23   

Net Income (Loss) Attributable to The Dow Chemical Company

    651      (344     1,202      (320

 Preferred stock dividends

    85      142        170      142   

Net Income (Loss) Available for The Dow Chemical Company Common Stockholders

  $ 566    $ (486   $ 1,032    $ (462
                               

Per Common Share Data:

                             

 Net income (loss) from continuing operations available for common stockholders

  $ 0.50    $ (0.57   $ 0.92    $ (0.59

 Discontinued operations attributable to common stockholders

    -          0.10        -          0.12   

 Earnings (Loss) per common share - basic

  $ 0.50    $ (0.47   $ 0.92    $ (0.47
                               

 Net income (loss) from continuing operations available for common stockholders

  $ 0.50    $ (0.57   $ 0.91    $ (0.59

 Discontinued operations attributable to common stockholders

    -          0.10        -          0.12   

 Earnings (Loss) per common share - diluted

  $ 0.50    $ (0.47   $ 0.91    $ (0.47
                               

Common stock dividends declared per share of common stock

  $ 0.15    $ 0.15      $ 0.30    $ 0.30   

Weighted-average common shares outstanding - basic

    1,125.4      1,026.1        1,121.4      975.8   

Weighted-average common shares outstanding - diluted

    1,141.6      1,035.5        1,138.3      983.8   
                               

Depreciation

  $ 571    $ 624      $ 1,162    $ 1,079   

Capital Expenditures

  $ 397    $ 325      $ 691    $ 559   

See Notes to the Consolidated Financial Statements.

 

3


Table of Contents

The Dow Chemical Company and Subsidiaries

Consolidated Balance Sheets

 In millions    (Unaudited)

  

June 30,

 

2010

   

Dec. 31, 

 

2009 

 

 Assets

    
 

 Current Assets

    
 

Cash and cash equivalents (variable interest entities restricted - 2010: $107)

   $ 3,068      $ 2,846 
 

Restricted cash (variable interest entities restricted - 2010: $205)

     225       
 

Marketable securities and interest-bearing deposits

     6       
 

Accounts and notes receivable:

    
 

Trade (net of allowance for doubtful receivables - 2010: $132; 2009: $160)

     4,611        5,656 
 

Other

     4,569        3,539 
 

Inventories

     6,933        6,847 
 

Deferred income tax assets - current

     668        654 
   
 

Total current assets

     20,080        19,542 
 

 Investments

    
 

Investment in nonconsolidated affiliates

     3,149        3,224 
 

Other investments (investments carried at fair value - 2010: $2,124; 2009: $2,136)

     2,578        2,561 
 

Noncurrent receivables

     346        210 
   
 

Total investments

     6,073        5,995 
 

 Property

    
 

Property

     49,344        53,567 
 

Accumulated depreciation

     32,371        35,426 
   
 

Net property (variable interest entities restricted - 2010: $933)

     16,973        18,141 
 

 Other Assets

    
 

Goodwill

     12,863        13,213 
 

Other intangible assets (net of accumulated amortization - 2010: $1,478; 2009: $1,302)

     5,608        5,966 
 

Deferred income tax assets - noncurrent

     1,822        2,039 
 

Asbestos-related insurance receivables - noncurrent

     274        330 
 

Deferred charges and other assets

     901        792 
   
 

Total other assets

     21,468        22,340 
 

 Total Assets

   $ 64,594      $ 66,018 
 

 Liabilities and Equity

    
 

 Current Liabilities

    
 

Notes payable

   $ 1,863      $ 2,139 
 

Long-term debt due within one year

     1,472        1,082 
 

Accounts payable:

    
 

Trade

     4,211        4,153 
 

Other

     2,157        2,014 
 

Income taxes payable

     281        176 
 

Deferred income tax liabilities - current

     79        78 
 

Dividends payable

     256        254 
 

Accrued and other current liabilities

     3,028        3,209 
   
 

Total current liabilities

     13,347        13,105 
 

 Long-Term Debt

     18,108        19,152 
 

 Other Noncurrent Liabilities

    
 

Deferred income tax liabilities - noncurrent

     1,262        1,367 
 

Pension and other postretirement benefits - noncurrent

     7,173        7,242 
 

Asbestos-related liabilities - noncurrent

     724        734 
 

Other noncurrent obligations

     2,813        3,294 
   
 

Total other noncurrent liabilities

     11,972        12,637 
 

 Stockholders’ Equity

    
 

Preferred stock, series A ($1.00 par, $1,000 liquidation preference, 4,000,000 shares)

     4,000        4,000 
 

Common stock

     2,917        2,906 
 

Additional paid-in capital

     2,025        1,913 
 

Retained earnings

     17,140        16,704 
 

Accumulated other comprehensive loss

     (4,780     (3,892)
 

Unearned ESOP shares

     (493     (519)
 

Treasury stock at cost

     (319     (557)
   
 

The Dow Chemical Company’s stockholders’ equity

     20,490        20,555 
   
 

Noncontrolling interests

     677        569 
   
 

Total equity

     21,167        21,124 
 

 Total Liabilities and Equity

   $     64,594      $     66,018 
 

See Notes to the Consolidated Financial Statements.

 

4


Table of Contents

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Cash Flows

 

         Six Months Ended

In millions    (Unaudited)

   June 30,
2010
   

June 30, 

2009 

 

Operating Activities

    
 

Net Income (Loss)

   $ 1,211      $ (297)
 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    
 

Depreciation and amortization

     1,491        1,271 
 

Provision (Credit) for deferred income tax

     51        (486)
 

Earnings of nonconsolidated affiliates less than (in excess of) dividends received

     (143     430 
 

Pension contributions

     (133     (127)
 

Net gain on sales of investments

     (34     (8)
 

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

     131        (182)
 

Other net loss

     10        13 
 

Restructuring charges

     29        676 
 

Excess tax benefits from share-based payment arrangements

     (3    
 

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

    
 

Accounts and notes receivable

     (1,336     (949)
 

Proceeds from interests in trade accounts receivable conduits

     867       
 

Inventories

     (598     357 
 

Accounts payable

     395        (552)
 

Other assets and liabilities

     (655     (83)
   
 

Cash provided by operating activities

     1,283        63 
 

Investing Activities

    
 

Capital expenditures

     (691     (559)
 

Proceeds from sales of property, businesses and consolidated companies

     1,651        265 
 

Acquisitions of businesses

     (5    
 

Purchases of previously leased assets

     (45    
 

Investments in consolidated companies, net of cash acquired

     (120     (14,834)
 

Investments in nonconsolidated affiliates

     (76     (41)
 

Distributions from nonconsolidated affiliates

     20       
 

Purchase of unallocated Rohm and Haas ESOP shares

     -        (552)
 

Purchases of investments

     (593     (230)
 

Change in restricted cash

     211       
 

Proceeds from sales and maturities of investments

     585        317 
   
 

Cash provided by (used in) investing activities

     937        (15,629)
 

Financing Activities

    
 

Changes in short-term notes payable

     (298     (1,801)
 

Proceeds from notes payable

     84       
 

Payments on notes payable

     (668    
 

Proceeds from revolving credit facility

     -        3,000 
 

Payments on revolving credit facility

     -        (2,100)
 

Proceeds from Term Loan

     -        9,226 
 

Payments on Term Loan

     -        (5,089)
 

Proceeds from issuance of long-term debt

     325        5,160 
 

Payments on long-term debt

     (1,092     (618)
 

Purchases of treasury stock

     (13     (5)
 

Proceeds from issuance of common stock

     79        966 
 

Proceeds from issuance of preferred stock

     -        7,000 
 

Proceeds from sales of common stock

     69        553 
 

Issuance costs for debt and equity securities

     -        (368)
 

Excess tax benefits from share-based payment arrangements

     3       
 

Distributions to noncontrolling interests

     (5     (24)
 

Dividends paid to stockholders

     (506     (527)
   
 

Cash provided by (used in) financing activities

     (2,022     15,373 
 

Effect of Exchange Rate Changes on Cash

     (22     41
 

Cash Assumed in Initial Consolidation of Variable Interest Entities

     46        -
 

Summary

    
 

Increase (decrease) in cash and cash equivalents

     222        (152)
 

Cash and cash equivalents at beginning of year

     2,846        2,800 
   
 

Cash and cash equivalents at end of period

   $ 3,068      $ 2,648 
 

See Notes to the Consolidated Financial Statements.

 

5


Table of Contents

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Equity

 

         Six Months Ended

In millions    (Unaudited)

   June 30,
2010
    June 30, 
2009 

Preferred Stock

    
 

Balance at beginning of year

   $ 4,000       
 

Preferred stock issued

     -      $ 7,000 
 

Preferred stock repurchased

     -        (2,500)
 

Preferred stock converted to common stock

     -        (500)
   
 

Balance at end of period

     4,000        4,000 
 

Common Stock

    
 

Balance at beginning of year

     2,906      $ 2,453 
 

Common stock issued

     11        453 
   
 

Balance at end of period

     2,917        2,906 
 

Additional Paid-in Capital

    
 

Balance at beginning of year

     1,913        872 
 

Common stock issued

     68        2,655 
 

Sale of shares to ESOP

     -        (1,529)
 

Stock-based compensation and allocation of ESOP shares

     44        12 
   
 

Balance at end of period

     2,025        2,010 
 

Retained Earnings

    
 

Balance at beginning of year

     16,704        17,013 
 

Net income (loss) available for The Dow Chemical Company common stockholders

     1,032        (462)
 

Dividends declared on common stock (Per share: $0.30 in 2010, $0.30 in 2009)

     (337     (305)
 

Other

     (11     (4)
 

Impact of adoption of ASU 2009-17, net of tax

     (248    
   
 

Balance at end of period

     17,140        16,242 
 

Accumulated Other Comprehensive Income (Loss)

    
 

Unrealized Gains (Losses) on Investments at beginning of year

     79        (111)
 

Net change in unrealized gains (losses)

     (19     51 
   
 

Balance at end of period

     60        (60)
   
 

Cumulative Translation Adjustments at beginning of year

     624        221 
 

Translation adjustments

     (1,022     98 
   
 

Balance at end of period

     (398     319 
   
 

Pension and Other Postretirement Benefit Plans at beginning of year

     (4,587     (4,251)
 

Adjustments to pension and other postretirement benefit plans

     149        39 
   
 

Balance at end of period

     (4,438     (4,212)
   
 

Accumulated Derivative Gain (Loss) at beginning of year

     (8     (248)
 

Net hedging results

     (3     (68)
 

Reclassification to earnings

     7        222 
   
 

Balance at end of period

     (4     (94)
   
 

Total accumulated other comprehensive loss

     (4,780     (4,047)
 

Unearned ESOP Shares

    
 

Balance at beginning of year

     (519    
 

Shares acquired

     -        (553)
 

Shares allocated to ESOP participants

     26        12 
   
 

Balance at end of period

     (493     (541)
 

Treasury Stock

    
 

Balance at beginning of year

     (557     (2,438)
 

Purchases

     (13     (5)
 

Sale of shares to ESOP

     -        1,529 
 

Issuance to employees and employee plans

     251        63 
   
 

Balance at end of period

     (319     (851)
 

The Dow Chemical Company’s Stockholders’ Equity

     20,490        19,719 
 

Noncontrolling Interests

    
 

Balance at beginning of year

     569        69 
 

Net income attributable to noncontrolling interests

     9        23 
 

Distributions to noncontrolling interests

     (5     (24)
 

Acquisition of Rohm and Haas Company noncontrolling interests

     -        432 
 

Impact of adoption of ASU 2009-17

     100       
 

Other

     4       
   
 

Balance at end of period

     677        504 
 

Total Equity

   $ 21,167      $ 20,223 
 

See Notes to the Consolidated Financial Statements.

 

6


Table of Contents

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Comprehensive Income

 

         Three Months Ended     Six Months Ended

In millions    (Unaudited)

   June 30,
2010
    June 30,
2009
    June 30,
2010
    June 30, 
2009 
 

Net Income (Loss)

   $ 659      $ (332   $ 1,211      $ (297)
 

Other Comprehensive Income (Loss), Net of Tax

        
 

Net change in unrealized gains (losses) on investments

     (32     75        (19     51 
 

Translation adjustments

     (592     482        (1,022     98 
 

Adjustments to pension and other postretirement benefit plans

     107        34        149        39 
  Net gains (losses) on cash flow hedging derivative instruments      (5     36        4        154 
   
 

Total other comprehensive income (loss)

     (522     627        (888     342 
 

Comprehensive Income

     137        295        323        45 
 
 

Comprehensive income attributable to noncontrolling interests, net of tax

     8        12        9        23 
 

Comprehensive Income Attributable to The Dow Chemical Company

   $ 129      $ 283      $ 314      $ 22 
 

See Notes to the Consolidated Financial Statements.

 

7


Table of Contents

 

   The Dow Chemical Company and Subsidiaries

(Unaudited)

 

   Notes to the Consolidated Financial Statements

Table of Contents

 

Note

      Page
A   

Consolidated Financial Statements

   8
B   

Recent Accounting Guidance

   8
C   

Restructuring

   9
D   

Acquisitions

   11
E   

Divestitures

   12
F   

Restricted Cash

   14
G   

Inventories

   14
H   

Goodwill and Other Intangible Assets

   14
  

Financial Instruments

   15
  

Fair Value Measurements

   23
K   

Commitments and Contingent Liabilities

   25
L   

Transfers of Financial Assets

   32
M   

Variable Interest Entities

   35
N   

Pension Plans and Other Postretirement Benefits

   37
O   

Stock-Based Compensation

   37
P   

Income Taxes

   38
Q   

Earnings Per Share Calculations

   39
R   

Operating Segments and Geographic Areas

   40

NOTE A – CONSOLIDATED FINANCIAL STATEMENTS

The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Certain changes to prior year balance sheet amounts have been made in accordance with the accounting guidance for business combinations to reflect adjustments made during the measurement period to provisional amounts recorded for assets acquired and liabilities assumed from Rohm and Haas Company (“Rohm and Haas”) on April 1, 2009.

NOTE B – RECENT ACCOUNTING GUIDANCE

Recently Adopted Accounting Guidance

On January 1, 2010, the Company adopted Accounting Standards Update (“ASU”) 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets.” This ASU is intended to improve the information provided in financial statements concerning transfers of financial assets, including the effects of transfers on financial position, financial performance and cash flows, and any continuing involvement of the transferor with the transferred financial assets. The Company evaluated the impact of adopting the guidance and the terms and conditions in place at January 1, 2010 and determined that certain sales of accounts receivable would be classified as secured borrowings. Under the Company’s sale of accounts receivable arrangements, $915 million was outstanding at January 1, 2010. The maximum amount of receivables available for participation in these programs was $1,939 million at January 1, 2010. See Note L for additional information about transfers of financial assets.

 

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Table of Contents

On January 1, 2010, the Company adopted ASU 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which amended the consolidation guidance applicable to variable interest entities and required additional disclosures concerning an enterprise’s continuing involvement with variable interest entities. The Company evaluated the impact of this guidance and determined that the adoption resulted in the consolidation of two additional joint ventures, an owner trust and an entity that is used to monetize accounts receivable. At January 1, 2010, $793 million in assets (net of tax, including the impact on “Investment in nonconsolidated affiliates”), $941 million in liabilities, $100 million in noncontrolling interests and a cumulative effect adjustment to retained earnings of $248 million were recorded as a result of the adoption of this guidance. See Note M for additional information about variable interest entities.

On January 1, 2010, the Company adopted ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,” which adds disclosure requirements about transfers in and out of Levels 1 and 2 and separate disclosures about activity relating to Level 3 measurements and clarifies existing disclosure requirements related to the level of disaggregation and input and valuation techniques. See Note J for additional disclosures about fair value measurements.

Accounting Guidance Issued But Not Adopted as of June 30, 2010

In October 2009, the Financial Accounting Standards Board issued ASU 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force,” which amends the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received. This ASU is effective for fiscal years beginning on or after June 15, 2010, which is January 1, 2011 for the Company. The Company is currently evaluating the impact of adopting the guidance.

NOTE C – RESTRUCTURING

2009 Restructuring

On June 30, 2009, the Company’s Board of Directors approved a restructuring plan related to the Company’s acquisition of Rohm and Haas as well as actions to advance the Company’s strategy and to respond to continued weakness in the global economy. The restructuring plan included the elimination of approximately 2,500 positions primarily resulting from synergies to be achieved as a result of the acquisition of Rohm and Haas. In addition, the Company will shut down a number of manufacturing facilities. These actions are expected to be completed primarily by the end of 2011. As a result of the restructuring activities, the Company recorded pretax restructuring charges of $677 million in the second quarter of 2009, consisting of asset write-downs and write-offs of $454 million, costs associated with exit or disposal activities of $68 million and severance costs of $155 million. The impact of the charges was shown as “Restructuring charges” in the consolidated statements of operations.

The severance component of the 2009 restructuring charges of $155 million was for the separation of approximately 2,500 employees under the terms of the Company’s ongoing benefit arrangements, primarily over two years. At December 31, 2009, severance of $72 million had been paid and a currency adjusted liability of $84 million remained for approximately 1,221 employees. In the six-month period ended June 30, 2010, severance of $49 million was paid, leaving a currency adjusted liability of $33 million for approximately 485 employees at June 30, 2010.

In the first quarter of 2010, the Company recorded an additional $8 million charge to adjust the impairment of long-lived assets and other assets related to the divestiture of certain acrylic monomer and specialty latex assets completed in the first quarter of 2010, and an additional $8 million charge related to the shutdown of a small manufacturing facility under the 2009 restructuring plan. The impact of these charges is shown as “Restructuring charges” in the consolidated statements of operations and was reflected in the following operating segments: Electronic and Specialty Materials ($8 million), Coatings and Infrastructure ($5 million) and Performance Products ($3 million).

In the second quarter of 2010, the Company recorded additional restructuring charges of $13 million, which included the write off of other assets of $5 million, additional costs associated with exit or disposal activities of $7 million and additional severance of $1 million related to the divestiture of certain acrylic monomer assets and the hollow sphere particle business that was included in the 2009 restructuring plan. The impact of these charges is shown as “Restructuring charges” in the consolidated statements of operations and was reflected in Performance Products ($12 million) and Corporate ($1 million).

 

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The following table summarizes the 2010 activities related to the Company’s 2009 restructuring reserve:

 

  2010 Activities Related to 2009

  Restructuring

  In millions

   Impairment of
Long-Lived Assets
and Other  Assets
    Costs associated with
Exit or Disposal
Activities
    Severance
Costs
    Total  

  Reserve balance at December 31, 2009

   -      $  68      $  84      $152    

  Adjustment to reserve

   $  21      7      1      29    

  Cash payments

   -      -      (49   (49)   

  Charges against reserve

   (21   (7   -      (28)   

  Foreign currency impact

   -      -      (3   (3)   

  Reserve balance at June 30, 2010

   -      $  68      $  33      $101    

Restructuring Reserve Assumed from Rohm and Haas

Included in liabilities assumed in the April 1, 2009 acquisition of Rohm and Haas was a reserve of $122 million for severance and employee benefits for the separation of 1,255 employees under the terms of Rohm and Haas’ ongoing benefit arrangement. The separations resulted from plant shutdowns, production schedule adjustments, productivity improvements and reductions in support services. Cash payments are expected to be paid primarily by the end of 2011. At December 31, 2009, a currency adjusted liability of $68 million remained for approximately 552 employees.

In the second quarter of 2010, the Company decreased the restructuring reserve $10 million due to the divestiture of the Powder Coatings business and to adjust the reserve to expected future severance payments. The impact of these adjustments is shown as “Cost of sales” in the consolidated statements of operations and was reflected in Corporate. In the six-month period ended June 30, 2010, severance of $18 million was paid, leaving a currency adjusted liability of $40 million for approximately 357 employees at June 30, 2010.

 

Restructuring Reserve Assumed from Rohm and Haas
  In millions    Severance 
Costs 

  Reserve balance at December 31, 2009

   $  68  

  Adjustment to reserve

   (10) 

  Cash payments

   (18) 

  Reserve balance at June 30, 2010

   $  40  

2008 Restructuring

On December 5, 2008, the Company’s Board of Directors approved a restructuring plan as part of a series of actions to advance the Company’s strategy and respond to the severe economic downturn. The restructuring plan included the shutdown of a number of facilities and a global workforce reduction, which are targeted to be completed by the end of 2010. As a result of the shutdowns and global workforce reduction, the Company recorded pretax restructuring charges of $785 million in the fourth quarter of 2008. The charges consisted of asset write-downs and write-offs of $336 million, costs associated with exit or disposal activities of $128 million and severance costs of $321 million.

The severance component of the 2008 restructuring charges of $321 million was for the separation of approximately 3,000 employees under the terms of Dow’s ongoing benefit arrangements, primarily over two years. At December 31, 2009, severance of $289 million had been paid and a currency adjusted liability of $53 million remained for approximately 293 employees. In the six-month period ended June 30, 2010, severance of $25 million was paid, leaving a currency adjusted liability of $25 million for approximately 80 employees at June 30, 2010.

 

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The following table summarizes 2010 activities related to the Company’s 2008 restructuring reserve:

 

  2010 Activities Related to 2008 Restructuring                   

  In millions

   Costs associated with
Exit or Disposal
Activities
    Severance
Costs
    Total  

  Reserve balance at December 31, 2009

   $135      $  53      $188   

  Cash payments

   -      (25   (25 )   

  Foreign currency impact

   (2   (3   (5

  Reserve balance at June 30, 2010

   $133      $  25      $158   

NOTE D – ACQUISITIONS

Acquisition of Rohm and Haas

On April 1, 2009, the Company completed the acquisition of Rohm and Haas. Pursuant to the July 10, 2008 Agreement and Plan of Merger, Ramses Acquisition Corp., a direct wholly owned subsidiary of the Company, merged with and into Rohm and Haas, with Rohm and Haas continuing as the surviving corporation and becoming a direct wholly owned subsidiary of the Company.

The following table summarizes the fair values of the assets acquired and liabilities assumed from Rohm and Haas on April 1, 2009. During the measurement period, which ended on March 31, 2010, net adjustments of $145 million were made to the fair values of the assets acquired and liabilities assumed with a corresponding adjustment to goodwill. These adjustments are summarized in the table presented below. The balance sheet at December 31, 2009 has been retrospectively adjusted to reflect these adjustments as required by the accounting guidance for business combinations. No further adjustments have been made to the assets acquired and liabilities assumed since the end of the measurement period.

 

  Assets Acquired and Liabilities Assumed on April 1, 2009          2009          2010      
  In millions    Initial
Valuation
   Adjustments
to Fair
Value
   Dec. 31,
2009
   Adjustments
to Fair
Value
   March 31,
2010

  Purchase Price

   $15,681    -      $15,681    -      $15,681

  Fair Value of Assets Acquired

              

Current assets

   $  2,710    -      $  2,710    $(18)    $  2,692

Property

   3,930    $(138)    3,792    -      3,792

Other intangible assets (1)

   4,475    830    5,305    -      5,305

Other assets

   1,288    32    1,320    -      1,320

Net assets of the Salt business (2)

   1,475    (167)    1,308    -      1,308

  Total Assets Acquired

   $13,878    $   557    $14,435    $(18)    $14,417

  Fair Value of Liabilities and Noncontrolling Interests Assumed

              

Current liabilities

   $  1,218    $  (11)    $  1,207    $  (1)    $  1,206

Long-term debt

   2,528    13    2,541    -      2,541

Accrued and other liabilities and noncontrolling interests

   702    -      702    -      702

Pension benefits

   1,119    -      1,119    -      1,119

Deferred tax liabilities – noncurrent

   2,482    311    2,793    82    2,875

  Total Liabilities and Noncontrolling Interests Assumed

   $  8,049    $   313    $  8,362    $   81    $  8,443

  Goodwill (1)

   $  9,852    $(244)    $  9,608    $   99    $  9,707

(1) See Note H for additional information.

(2) Morton International, Inc.

 

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The following table summarizes the major classes of assets and liabilities underlying the deferred tax liabilities resulting from the acquisition of Rohm and Haas:

 

  Deferred Tax Liabilities Assumed on April 1, 2009

  In millions

   As Adjusted  

  Intangible assets

   $1,754  

  Property

   526  

  Long-term debt

   191  

  Inventories

   80  

  Other accruals and reserves

   324  

  Total Deferred Tax Liabilities

   $2,875  

The acquisition resulted in the recognition of $9,707 million of goodwill, which is not deductible for tax purposes. See Note H for further information on goodwill, including the allocation by segment.

Rohm and Haas Acquisition and Integration Related Expenses

During the second quarter of 2010, integration expenses totaling $37 million ($63 million during the first six months of 2010) were recorded related to the April 1, 2009 acquisition of Rohm and Haas. During the second quarter of 2009, pretax charges totaling $52 million ($100 million during the first six months of 2009) were recorded for legal expenses and other transaction costs related to the acquisition. These charges, which were expensed in accordance with the accounting guidance for business combinations, were shown in “Acquisition and integration related expenses” and reflected in Corporate. An additional $34 million of acquisition-related retention expenses were incurred during the second quarter of 2009 and recorded in “Cost of sales,” “Research and development expenses,” and “Selling, general and administrative expenses” and reflected in Corporate.

NOTE E – DIVESTITURES

Divestiture of the Styron Business Unit

On March 2, 2010, the Company announced the entry into a definitive agreement to sell the Styron business unit (“Styron”) to an affiliate of Bain Capital Partners. The definitive agreement specified the assets and liabilities related to the businesses and products to be included in the sale. On June 17, 2010, the sale was completed for $1,561 million, net of working capital adjustments and costs to sell, with proceeds subject to customary post-closing adjustments, to be finalized in subsequent periods. The proceeds included a $75 million long-term note receivable. The Company elected to acquire a 7.5 percent equity interest in the resulting privately held, global materials company. Businesses and products sold included: Styrenics – polystyrene, acrylonitrile butadiene styrene, styrene acrylonitrile and expandable polystyrene; Emulsion Polymers; Polycarbonate and Compounds and Blends; Synthetic Rubber; and certain products from Dow Automotive Systems. Also included in the sale were certain styrene monomer assets and the Company’s 50 percent ownership interest in Americas Styrenics LLC, a principal nonconsolidated affiliate. The transaction also resulted in several long-term supply, service and purchase agreements between Dow and Styron.

Styron’s results of operations were not classified as discontinued operations, as the Company will have continuing cash flows as a result of the supply, service and purchase agreements.

 

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The following table presents the major classes of assets and liabilities divested on June 17, 2010 by operating segment:

 

  Styron Assets and Liabilities

  Divested

 

  In millions

   Perf
Systems
   Perf
Products
   Basic
Plastics
   Hydro-
carbons
and
Energy
   Corp.    Total  

Inventories

   $  76    $  96    $152    $144    -    $   468  

Other current assets

   53    238    201    27    $   201    720  

Investment in nonconsolidated affiliate

   -    -    158    -    -    158  

Net property

   140    137    126    8    -    411  

Goodwill

   94    17    30    -    -    141  

Other noncurrent assets

   -    -    -    -    96    96  

  Total assets divested

   $363    $488    $667    $179    $   297    $1,994  

Current liabilities

   -    -    -    -    $   347    $   347  

Other noncurrent liabilities

   -    -    -    -    92    92  

  Total liabilities divested

   -    -    -    -    $   439    $   439  

  Components of accumulated other comprehensive income divested

   -    -    -    -    $     45    $45  

  Net value divested

   $363    $488    $667    $179    $(187)    $1,510  

The Company recognized a pretax gain of $51 million on the sale in the second quarter of 2010, included in “Sundry income – net” and reflected in the following operating segments: Performance Systems ($15 million), Performance Products ($26 million) and Basic Plastics ($10 million).

Divestiture of the Calcium Chloride Business

On June 30, 2009, the Company completed the sale of the Calcium Chloride business for net proceeds of $204 million and recognized a pretax gain of $162 million. The results of the Calcium Chloride business for the first six months of 2009, including the second quarter of 2009 gain on the sale, are reflected as “Income from discontinued operations, net of income taxes” in the consolidated statements of operations.

The following table presents the results of discontinued operations:

 

  Discontinued Operations

 

  In millions

  

Three Months
Ended

June 30, 2009

  

Six Months  
Ended
  

June 30, 2009  

  Net sales

   $24    $70  

  Income before income taxes

   $164    $182  

  Provision for income taxes

   $61    $68  

  Income from discontinued operations, net of income taxes

   $103    $114  

Divestitures Required as a Condition to the Acquisition of Rohm and Haas

As a condition of the United States Federal Trade Commission’s (“FTC’s”) approval of the April 1, 2009 acquisition of Rohm and Haas, the Company was required to divest a portion of its acrylic monomer business, a portion of its specialty latex business and its hollow sphere particle business. The Company recognized an impairment charge of $205 million related to these assets in the second quarter of 2009 restructuring charge.

On July 31, 2009, the Company entered into a definitive agreement that included the sale of the portion of its acrylic monomer business and the portion of its specialty latex business. The sale was completed on January 25, 2010. Additional impairment charges of $8 million related to these assets were recognized in the first quarter of 2010. In the second quarter of 2010, additional severance costs of $1 million and the write off of other assets of $5 million were recognized (see Note C).

The Company completed the sale of its hollow sphere particle business in the second quarter of 2010 and recognized additional costs associated with disposal activities of $7 million, related to contract termination fees (see Note C).

 

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NOTE F – RESTRICTED CASH

The Company’s restricted cash primarily relates to variable interest entities (“VIEs”) used to monetize accounts receivable. With the adoption of ASU 2009-17 on January 1, 2010, $436 million of restricted cash was consolidated related to a VIE used to monetize accounts receivable originated by several European subsidiaries. In June 2010, the Company terminated this arrangement and a new VIE was created, which is also used to monetize accounts receivable originated by several European subsidiaries. At June 30, 2010, the Company had $225 million of restricted cash primarily related to this new VIE (see Note M).

NOTE G – INVENTORIES

The following table provides a breakdown of inventories:

 

  Inventories    June 30,    Dec. 31,  
  In millions    2010    2009  

  Finished goods

   $4,001    $3,887  

  Work in process

   1,549    1,593  

  Raw materials

   745    671  

  Supplies

   638    696  

  Total inventories

   $6,933    $6,847  

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $872 million at June 30, 2010 and $818 million at December 31, 2009.

NOTE H – GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the carrying amount of goodwill by operating segment:

 

  Goodwill    Electronic     Coatings                                Hydro-      
  In millions    and
Specialty
Materials
    and
Infra-
structure
   

Health

and Ag
Sciences

  

Perf

Systems

   

Perf

Products

   

Basic

Plastics

    carbons
and
Energy
   Total  

  Net goodwill at Dec. 31, 2009

   $5,950      $4,079      $1,546    $962      $548      $65      $63    $13,213   

  Divestiture of Styron

             -    (94   (17   (30   -    (141)  

  Divestiture of the Powder Coatings business

        (4   -                   -    (4)  

  Foreign currency impact

   (83   (92   -    (19   (11        -    (205)  

  Net goodwill at June 30, 2010

   $5,867      $3,983      $1,546    $849      $520      $35      $63    $12,863   

The recording of the April 1, 2009 acquisition of Rohm and Haas (see Note D) resulted in goodwill of $9,707 million, which is not deductible for tax purposes. During the first quarter of 2010, goodwill related to the acquisition of Rohm and Haas increased $99 million for net adjustments made during the measurement period to the fair values of the assets acquired and liabilities assumed. In the table above, these retrospective adjustments are reflected in the net goodwill at December 31, 2009, in accordance with the accounting guidance for business combinations. The retrospective adjustments increased goodwill for the operating segments as follows: Electronic and Specialty Materials ($39 million), Coatings and Infrastructure ($51 million), Health and Agricultural Sciences ($2 million), Performance Systems ($3 million) and Performance Products ($4 million). Accumulated goodwill impairments were $250 million at June 30, 2010 and December 31, 2009.

As a result of the June 17, 2010 divestiture of Styron, $141 million of associated goodwill and $16 million of intangible assets were divested (see Note E). On June 1, 2010, the Company divested its Powder Coatings business, including $4 million of associated goodwill.

 

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

 

  Other Intangible Assets    At June 30, 2010    At December 31, 2009
  In millions    Gross
Carrying
Amount
   Accumulated
Amortization
    Net    Gross
Carrying
Amount
   Accumulated
Amortization
    Net  

  Intangible assets with finite lives:

               

Licenses and intellectual property

   $1,720    $   (379   $1,341    $1,729    $   (320   $1,409  

Patents

   119    (92   27    140    (107   33  

Software

   894    (458   436    875    (439   436  

Trademarks

   691    (136   555    694    (110   584  

Customer related

   3,478    (345   3,133    3,613    (261   3,352  

Other

   121    (68   53    142    (65   77  

  Total other intangible assets, finite lives

   $7,023    $(1,478   $5,545    $7,193    $(1,302   $5,891  

IPR&D (1), indefinite lives

   63    -      63    75    -      75  

  Total other intangible assets

   $7,086    $(1,478   $5,608    $7,268    $(1,302   $5,966  

(1) In-process research and development (“IPR&D”) purchased in a business combination.

The following table provides information regarding amortization expense:

 

  Amortization Expense    Three Months Ended    Six Months Ended

  In millions

   June 30,
2010
   June 30,
2009
   June 30,
2010
   June 30,    
2009
    

  Other intangible assets, excluding software

   $125    $112    $253    $134    

  Software, included in “Cost of sales”

   $22    $19    $43    $33    

Total estimated amortization expense for 2010 and the five succeeding fiscal years is as follows:

 

  Estimated Amortization Expense

  In millions

  2010

   $574  

  2011

   $558  

  2012

   $537  

  2013

   $517  

  2014

   $494  

  2015

   $477  

NOTE I – FINANCIAL INSTRUMENTS

Investments

The Company’s investments in marketable securities are primarily classified as available-for-sale.

 

  Investing Results

 

  In millions

  

Six Months

Ended

June 30, 2010

   

Six Months
Ended

June 30, 2009

 

  Proceeds from sales of available-for-sale securities

   $535      $210   

  Gross realized gains

   $27      $4   

  Gross realized losses

   $(50   $(16 )  

 

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The following table summarizes the contractual maturities of the Company’s investments in debt securities:

 

  Contractual Maturities of Debt Securities

  at June 30, 2010

  In millions    Amortized Cost    Fair Value

  Within one year

   $     65    $     67

  One to five years

   599    646

  Six to ten years

   568    618

  After ten years

   268    293

  Total

   $1,500    $1,624

At June 30, 2010, the Company had $600 million of held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had original maturities of three months or less. At December 31, 2009, the amount held was zero. The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At June 30, 2010, the Company had investments in money market funds of $63 million classified as cash equivalents ($164 million at December 31, 2009).

The net unrealized gain recognized during the six-month period ended June 30, 2010 on trading securities held at June 30, 2010 was $16 million.

The following tables provide the fair value and gross unrealized losses of the Company’s investments that were deemed to be temporarily impaired at June 30, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

  Temporarily Impaired Securities at June 30, 2010
     Less than 12 months    12 months or more    Total
  In millions    Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

  Debt securities:

                 

Corporate bonds

   $  45    $  (2)    $6       $  51    $  (2)

  Equity securities

   344    (35)    2    $(2)    346    (37)

  Total temporarily impaired securities

   $389    $(37)    $8    $(2)    $397    $(39)
 
Temporarily Impaired Securities at December 31, 2009
     Less than 12 months    12 months or more    Total
In millions    Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

  Debt securities:

                 

U.S. Treasury obligations and direct obligations of U.S. government agencies

   $217    $(4)    -    -    $217    $(4)

Corporate bonds

   27    (1)    $13    $(1)    40    (2)

  Total debt securities

   $244    $(5)    $13    $(1)    $257    $(6)

  Equity securities

   40    (2)    7    (1)    47    (3)

  Total temporarily impaired securities

   $284    $(7)    $20    $(2)    $304    $(9)

Portfolio managers regularly review the Company’s holdings to determine if any investments are other-than-temporarily impaired. The analysis includes reviewing the amount of a temporary impairment, as well as the length of time it has been impaired. In addition, specific guidelines for each instrument type are followed to determine if an other-than-temporary impairment has occurred.

 

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For debt securities, the credit rating of the issuer, current credit rating trends, the trends of the issuer’s overall sector, the ability of the issuer to pay expected cash flows and the length of time the security has been in a loss position are considered in determining whether unrealized losses represent an other-than-temporary impairment. The Company did not have any credit-related losses during the six-month period ended June 30, 2010.

For equity securities, the Company’s investments are primarily in Standard & Poor’s (“S&P”) 500 companies; however, the Company’s policies allow investments in companies outside of the S&P 500. The largest holdings are Exchange Traded Funds that represent the S&P 500 index or an S&P 500 sector or subset. The Company considers the evidence to support the recovery of the cost basis of a security including volatility of the stock, the length of time the security has been in a loss position, value and growth expectations, and overall market and sector fundamentals, as well as technical analysis, in determining whether unrealized losses represent an other-than-temporary impairment. In the six-month period ended June 30, 2010, other-than-temporary impairment write-downs on investments still held by the Company were $4 million.

The aggregate cost of the Company’s cost method investments totaled $176 million at June 30, 2010 and $129 million at December 31, 2009. Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed for impairment indicators. In the six-month period ended June 30, 2010, the Company’s impairment analysis identified indicators that resulted in a reduction in the cost basis of these investments of $20 million.

The following table summarizes the fair value of financial instruments at June 30, 2010 and December 31, 2009:

 

  Fair Value of Financial Instruments  
     At June 30, 2010     At December 31, 2009  
  In millions    Cost     Gain    Loss     Fair Value     Cost     Gain    Loss     Fair Value  

  Marketable securities (1):

                  

Debt securities:

                  

U.S. Treasury obligations and direct obligations of U.S. government agencies

   $   663      $  51    -      $   714      $   676      $  25    $(4   $   697   

Corporate bonds

   837      75    $  (2   910      868      56    (2   922   

Total debt securities

   $1,500      $126    $  (2   $1,624      $1,544      $  81    $(6   $1,619   

Equity securities

   503      34    (37   500      455      65    (3   517   

  Total marketable securities

   $2,003      $160    $(39   $2,124      $1,999      $146    $(9   $2,136   

  Long-term debt including debt due within one year (2)

   $(19,580   $105    $(2,135   $(21,610   $(20,234   $126    $(1,794   $(21,902

  Derivatives relating to:

                  

Foreign currency

   -      $59    $(24   $35      -      $81    $(20   $61   

Commodities

   -      $10    $(10   -      -      $5    $(18   $(13

(1) Included in “Other investments” in the consolidated balance sheets.

(2) Cost includes fair value adjustments of $24 million at June 30, 2010 and $25 million at December 31, 2009.

Risk Management

Dow’s business operations give rise to market risk exposure due to changes in interest rates, foreign currency exchange rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as cash flow, fair value or net foreign investment hedges where appropriate. The guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value. A secondary objective is to add value by creating additional nonspecific exposures within established limits and policies; derivatives used for this purpose are not designated as hedges. The potential impact of creating such additional exposures is not material to the Company’s results.

 

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The Company’s risk management program for interest rate, foreign currency and commodity risks is based on fundamental, mathematical and technical models that take into account the implicit cost of hedging. Risks created by derivative instruments and the mark-to-market valuations of positions are strictly monitored at all times, using value at risk and stress tests. Credit risk arising from these contracts is not significant because the Company minimizes counterparty concentration, deals primarily with major financial institutions of solid credit quality, and the majority of its hedging transactions mature in less than three months. In addition, the Company minimizes concentrations of credit risk through its global orientation in diverse businesses with a large number of diverse customers and suppliers. It is the Company’s policy not to have credit-risk-related contingent features in its derivative instruments. The Company does not anticipate losses from credit risk, and the net cash requirements arising from risk management activities are not expected to be material in 2010. No significant concentration of credit risk existed at June 30, 2010.

The Company reviews its overall financial strategies and the impacts from using derivatives in its risk management program with the Company’s Board of Directors and revises its strategies as market conditions dictate.

Interest Rate Risk Management

The Company enters into various interest rate contracts with the objective of lowering funding costs or altering interest rate exposures related to fixed and variable rate obligations. In these contracts, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed-upon notional principal amount. At June 30, 2010, the Company had open interest rate swaps with maturity dates no later than 2012.

Foreign Currency Risk Management

The Company’s global operations require active participation in foreign exchange markets. The Company enters into foreign exchange forward contracts and options, and cross-currency swaps to hedge various currency exposures or create desired exposures. Exposures primarily relate to assets, liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to operating activities. The primary business objective of the activity is to optimize the U.S. dollar value of the Company’s assets, liabilities and future cash flows with respect to exchange rate fluctuations. Assets and liabilities denominated in the same foreign currency are netted, and only the net exposure is hedged. At June 30, 2010, the Company had forward contracts, options and cross-currency swaps to buy, sell or exchange foreign currencies. These contracts had various expiration dates, primarily in the third quarter of 2010.

Commodity Risk Management

The Company has exposure to the prices of commodities in its procurement of certain raw materials. The primary purpose of commodity hedging activities is to manage the price volatility associated with these forecasted inventory purchases. At June 30, 2010, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements had various expiration dates through 2011.

Accounting for Derivative Instruments and Hedging Activities

Cash Flow Hedges

For derivatives that are designated and qualify as cash flow hedging instruments, the effective portion of the gain or loss on the derivative is recorded in “Accumulated other comprehensive income (loss)” (“AOCI”); it is reclassified to “Cost of sales” in the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCI fluctuate based on changes in the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCI and net income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market conditions during any period. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period income.

The net loss from previously terminated interest rate cash flow hedges included in AOCI was $2 million after tax at June 30, 2010 and December 31, 2009. The Company had open interest rate derivatives with a notional U.S. dollar equivalent of $29 million at June 30, 2010 ($30 million at December 31, 2009).

 

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Current open foreign currency forward contracts hedge forecasted transactions until February 2011. The effective portion of the mark-to-market effects of the foreign currency forward contracts is recorded in AOCI; it is reclassified to income in the same period or periods that the underlying feedstock purchase affects income. The net gain from the foreign currency hedges included in AOCI at June 30, 2010 was $17 million after tax (net loss of $5 million after tax at December 31, 2009). At June 30, 2010, the Company had open forward contracts with various expiration dates to buy, sell or exchange foreign currencies with a notional U.S. dollar equivalent of $1,699 million ($645 million at December 31, 2009).

Commodity swaps, futures and option contracts with maturities of not more than 36 months are utilized and designated as cash flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until December 2011. The effective portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCI; it is reclassified to income in the same period or periods that the underlying commodity purchase affects income. The net loss from commodity hedges included in AOCI was $14 million at June 30, 2010 and zero at December 31, 2009. At June 30, 2010 and December 31, 2009, the Company had the following aggregate notionals of outstanding commodity forward contracts to hedge forecasted purchases:

 

  Commodity    June 30,
2010
   Dec. 31,
2009
   Notional Volume Unit

  Crude Oil

   1.0    0.7    million barrels

  Ethane

   2.1    -    million barrels

  Naphtha

   40    50    kilotons

  Natural Gas

   0.4    2.0    million million British thermal units

Fair Value Hedges

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current period income and reflected as “Interest expense and amortization of debt discount” in the consolidated statements of operations. The short-cut method is used when the criteria are met. The Company had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations at June 30, 2010 and December 31, 2009.

Net Foreign Investment Hedges

For derivative instruments that are designated and qualify as net foreign investment hedges, the effective portion of the gain or loss on the derivative is included in “Cumulative Translation Adjustments” in AOCI. The results of hedges of the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCI was a net gain of $132 million after tax at June 30, 2010 (net loss of $56 million after tax at December 31, 2009). At June 30, 2010, the Company had open forward contracts or outstanding options to buy, sell or exchange foreign currencies that were designated as net foreign investment hedges with third quarter 2010 expiration dates and a notional U.S. dollar equivalent of $61 million (zero at December 31, 2009). At June 30, 2010, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $1,241 million ($1,879 million at December 31, 2009).

Other Derivative Instruments

The Company utilizes futures, options and swap instruments that are effective as economic hedges of commodity price exposures, but do not meet the hedge accounting criteria in the accounting guidance for derivatives and hedging. At June 30, 2010 and December 31, 2009, the Company had the following aggregate notionals of outstanding commodity contracts:

 

  Commodity    June 30,
2010
   Dec. 31,
2009
   Notional Volume Unit

  Ethane

   3.7    0.9    million barrels

  Ethylene

   0.2    -    million pounds

  Natural Gas

   10.3    2.8    million million British thermal units

The Company also uses foreign exchange forward contracts, options, and cross-currency swaps that are not designated as hedging instruments primarily to manage foreign currency and interest rate exposure. The Company had open foreign exchange contracts with various expiration dates to buy, sell or exchange foreign currencies and a notional U.S. dollar equivalent of $14,790 million at June 30, 2010 ($15,312 million at December 31, 2009).

 

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The following table provides the fair value and gross balance sheet classification of derivative instruments at June 30, 2010 and December 31, 2009:

 

  Fair Value of Derivative Instruments    June 30,    Dec. 31,
  In millions    Balance Sheet Classification    2010    2009

  Asset Derivatives

        

  Derivatives designated as hedges:

        

Foreign currency

   Accounts and notes receivable – Other    $  52    $    4  

Commodities

   Accounts and notes receivable – Other    4    4  

Total derivatives designated as hedges

        $  56    $    8  

  Derivatives not designated as hedges:

        

Foreign currency

   Accounts and notes receivable – Other    $  65    $125  

Commodities

   Accounts and notes receivable – Other    18    28  

Total derivatives not designated as hedges

        $  83    $153  

  Total asset derivatives

        $139    $161  

  Liability Derivatives

        

  Derivatives designated as hedges:

        

Foreign currency

   Accounts payable – Other    $  36    $    3  

Commodities

   Accounts payable – Other    16    -  

Total derivatives designated as hedges

        $  52    $    3  

  Derivatives not designated as hedges:

        

Foreign currency

   Accounts payable – Other    $  46    $  65  

Commodities

   Accounts payable – Other    18    42  

Total derivatives not designated as hedges

        $  64    $107  

  Total liability derivatives

        $116    $110  

 

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  Effect of Derivative Instruments for

  the three months ended June 30, 2010

 

  In millions

   Change in
Unrealized
Gain (Loss)
in AOCI  (1,2)
  

Income Statement

Classification

   Gain (Loss)
Reclassified
from AOCI
to Income  (3)
  

Additional

Gain (Loss)
Recognized in
Income (3,4)

  Derivatives designated as hedges:

           

Fair value:

           

Interest rates

   $(1)    Interest expense (5)       $  (1) 

Cash flow:

           

Commodities

   (14)    Cost of sales    $(2)    -  

Foreign currency

   10     Cost of sales       -  

Net foreign investment:

           

Foreign currency

   (17)    n/a   
   -  

  Total derivatives designated as hedges

   $(22)         $   1    $  (1) 

  Derivatives not designated as hedges:

           

Foreign currency (6)

      Sundry income – net       $14  

Commodities

      Cost of sales       (3) 

  Total derivatives not designated as hedges

              $11  

  Total derivatives

   $(22)         $   1    $10  
                     

  Effect of Derivative Instruments for the

  three months ended June 30, 2009

 

  In millions

   Change in
Unrealized
Loss in AOCI
(1,2)
   Income Statement
Classification
   Gain (Loss)
Reclassified
from AOCI
to Income (3)
  

Additional Gain  

Recognized in  
Income (3,4)  

  Derivatives designated as hedges:

           

Cash flow:

           

Interest rates

      Cost of sales    $  (3)    -  

Commodities

   $(1)    Cost of sales    (46)    -  

Foreign currency

      Cost of sales       -  

Net foreign investment:

           

Foreign currency

   (1)    n/a       -  

  Total derivatives designated as hedges

   $(2)         $(43)    -  

  Derivatives not designated as hedges:

           

Foreign currency (6)

      Sundry income – net    -    $63  

  Total derivatives

   $(2)         $(43)    $63  
(1) Accumulated other comprehensive income (loss) (“AOCI”).
(2) Net unrealized gains/losses from hedges related to interest rates and commodities are included in “Accumulated Derivative Gain (Loss) – Net hedging results” in the consolidated statements of equity; net unrealized gains/losses from hedges related to foreign currency (net of tax) are included in “Cumulative Translation Adjustments – Translation adjustments” in the consolidated statements of equity.
(3) Pretax amounts.
(4) Amounts impacting income not related to AOCI reclassification; also includes immaterial amounts of hedge ineffectiveness.
(5) Interest expense and amortization of debt discount.
(6) Foreign currency derivatives not designated as hedges are offset by foreign exchange gains/losses resulting from the underlying exposures of foreign currency denominated assets and liabilities.

 

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  Effect of Derivative Instruments for the

  six months ended June 30, 2010

 

  In millions

  Change in
Unrealized
Gain (Loss)
in AOCI 
(1,2)
  Income Statement Classification   Loss
Reclassified
from AOCI to
Income 
(3)
 

Additional  

Gain (Loss)  
Recognized in  
Income 
(3,4)  

  Derivatives designated as hedges:

       

Fair value:

       

Interest rates

  $  (1)     Interest expense (5)     $  (1)   

Cash flow:

       

Commodities

  (18)     Cost of sales   $(4)    -    

Foreign currency

  20      Cost of sales   (3)    -    

Net foreign investment:

       

Foreign currency

  (20)     n/a   -     -    

  Total derivatives designated as hedges

  $(19)         $(7)    $  (1)   

  Derivatives not designated as hedges:

       

Foreign currency (6)

  -       Sundry income – net   -     $113    

Commodities

  -       Cost of sales   -     (4)   

  Total derivatives not designated as hedges

  -           -     $109    

  Total derivatives

  $(19)         $(7)    $108    
       

  Effect of Derivative Instruments for the

  six months ended June 30, 2009

 

  In millions

 

Change in

Unrealized

Loss in AOCI

(1,2)

  Income Statement Classification  

Gain (Loss)

Reclassified

from AOCI to

Income (3)

 

Additional Loss

Recognized in

Income (3,4)

  Derivatives designated as hedges:

       

Cash flow:

       

Interest rates

  -       Cost of sales   $    (6)    -    

Commodities

  $(6)     Cost of sales   (233)    $  (1)   

Foreign currency

  (10)     Cost of sales   17     -    

Net foreign investment:

       

Foreign currency

  (4)     n/a   -     -    

  Total derivatives designated as hedges

  $(20)         $(222)    $  (1)   

  Derivatives not designated as hedges:

       

Foreign currency (6)

  -       Sundry income – net   -     $(31)   

Commodities

  -       Cost of sales   -     (1)   

  Total derivatives not designated as hedges

  -         -     $(32)   

  Total derivatives

  $(20)         $(222)    $(33)   
(1) Accumulated other comprehensive income (loss) (“AOCI”)
(2) Net unrealized gains/losses from hedges related to interest rates and commodities are included in “Accumulated Derivative Gain (Loss) – Net hedging results” in the consolidated statements of equity; net unrealized gains/losses from hedges related to foreign currency (net of tax) are included in “Cumulative Translation Adjustments – Translation adjustments” in the consolidated statements of equity.
(3) Pretax amounts.
(4) Amounts impacting income not related to AOCI reclassification; also includes immaterial amounts of hedge ineffectiveness.
(5) Interest expense and amortization of debt discount.
(6) Foreign currency derivatives not designated as hedges are offset by foreign exchange gains/losses resulting from the underlying exposures of foreign currency denominated assets and liabilities.

The net after-tax amounts to be reclassified from AOCI to income within the next 12 months are a $2 million loss for interest rate contracts, a $12 million loss for commodity contracts and a $17 million gain for foreign currency contracts.

 

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NOTE J – FAIR VALUE MEASUREMENTS

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the consolidated balance sheets:

 

  Basis of Fair Value Measurements

  on a Recurring Basis

  at June 30, 2010

 

  In millions

  

Quoted Prices
in Active
Markets for
Identical Items

(Level 1)

  

Significant
Other
Observable
Inputs

(Level 2)

  

Significant
Unobservable
Inputs

(Level 3)

   Counterparty
and Cash
Collateral
Netting (1)
   Total  

  Assets at fair value:

              

Accounts and notes receivable – Other (2)

   -    -    $1,206    -    $1,206  

Equity securities (3)

   $468    $     32    -    -    500  

Debt securities: (3)

              

U.S. Treasury obligations and direct obligations of U.S. government agencies

   -    714    -    -    714  

Corporate bonds

   -    910    -    -    910  

Derivatives relating to: (4)

              

Foreign currency

   -    117    -    $(58)    59  

Commodities

   5    17    -    (12)    10  

  Total assets at fair value

   $473    $1,790    $1,206    $(70)    $3,399  

  Liabilities at fair value:

                        

Derivatives relating to: (4)

              

Foreign currency

   -    $     82    -    $(58)    $     24  

Commodities

   $  10    24    -    (24)    10  

  Total liabilities at fair value

   $  10    $   106    -    $(82)    $     34  
                          

  Basis of Fair Value Measurements

  on a Recurring Basis

  at December 31, 2009

 

  In millions

  

Quoted Prices
in Active
Markets for
Identical Items

(Level 1)

  

Significant
Other
Observable
Inputs

(Level 2)

   Counterparty
and Cash
Collateral
Netting (1)
   Total       

  Assets at fair value:

              

Equity securities (3)

   $483    $     34    -    $   517     

Debt securities (3)

              

U.S. Treasury obligations and direct obligations of U.S. government agencies

   -    697    -    697     

Corporate bonds

   -    922    -    922     

Derivatives relating to: (4)

              

Foreign currency

   -    129    $(48)    81     

Commodities

   28    4    (27)    5     

  Total assets at fair value

   $511    $1,786    $(75)    $2,222     

  Liabilities at fair value:

              

Derivatives relating to: (4)

              

Foreign currency

   -    $     68    $(48)    $     20     

Commodities

   $  24    18    (24)    18     

  Total liabilities at fair value

   $  24    $     86    $(72)    $     38     
(1) Cash collateral is classified as “Accounts and notes receivable – Other” in the consolidated balance sheets. Amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.
(2) See Note L for additional information on transfers of financial assets.
(3) The Company’s investments in equity and debt securities are primarily classified as available-for-sale and are included in “Other investments” in the consolidated balance sheets.
(4) See Note I for the classification of derivatives in the consolidated balance sheets.

 

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For assets and liabilities classified as Level 1 measurements (measured using quoted prices in active markets), the total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange in which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.

For assets and liabilities classified as Level 2 measurements, the fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability. Market inputs are obtained from well established and recognized vendors of market data and subjected to tolerance/quality checks. For derivative assets and liabilities, the fair value is calculated using standard industry models used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources.

For all other assets and liabilities for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models. See Note I for further information on the types of instruments used by the Company for risk management.

There were no significant transfers between Levels 1 and 2 in 2010.

For assets classified as Level 3 measurements, the fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity. The fair value of the Company’s interests held in trade receivable conduits is determined by calculating the expected amount of cash to be received using the key input of anticipated credit losses in the portfolio of receivables sold that have not yet been collected (1.44 percent for North America and zero for Europe at June 30, 2010). Given the short-term nature of the underlying receivables, discount rate and prepayments are not factors in determining the fair value of the interests. See Note L for further information on assets classified as Level 3 measurements.

The following table summarizes the changes in fair value measurements using Level 3 inputs for the three and six months ended June 30, 2010:

 

  Fair Value Measurements Using Level 3 Inputs

  Interests Held in Trade Receivable Conduits (1)

  In millions

  Three Months Ended
June 30, 2010
  Six Months Ended  
June 30, 2010  

  Balance at beginning of period

  $1,224    -  

  Gain included in earnings

    $       9  

  Purchases, sales and settlements – North America

  (171)   1,053  

  Purchases, sales and settlements - Europe

  144    144  

  Balance at June 30, 2010

  $1,206    $1,206  
(1) Included in “Accounts and notes receivable – Other” in the consolidated balance sheets.

Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are netted with corresponding assets and liabilities. The Company posted cash collateral of $12 million at June 30, 2010, classified as “Accounts and notes receivable – Other” in the consolidated balance sheets.

 

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The following table summarizes the bases used to measure certain assets and liabilities at fair value on a nonrecurring basis in the consolidated balance sheets:

 

  Basis of Fair Value Measurements

  on a Nonrecurring Basis at June 30,

  2009

 

  In millions

  

Significant
Other
Observable
Inputs

(Level 2)

  

Significant
Other
Unobservable
Inputs

(Level 3)

   Total    Total  
Losses  

  Assets at fair value:

           

Long-lived assets

   -       $26    $    26      $(399)   

As part of the restructuring plan that was approved on June 30, 2009, the Company will shut down a number of manufacturing facilities by the end of 2011. In the second quarter of 2009, long-lived assets with a carrying value of $425 million were written down to the fair value of $26 million, resulting in an impairment charge of $399 million, which was included in the second quarter of 2009 restructuring charge (see Note C). The long-lived assets were valued based on bids received from third parties and using discounted cash flow analysis based on assumptions that market participants would use. Key inputs included anticipated revenues, associated manufacturing costs, capital expenditures and discount, growth and tax rates.

NOTE K – COMMITMENTS AND CONTINGENT LIABILITIES

Litigation

Breast Implant Matters

On May 15, 1995, Dow Corning Corporation (“Dow Corning”), in which the Company is a 50 percent shareholder, voluntarily filed for protection under Chapter 11 of the Bankruptcy Code to resolve litigation related to Dow Corning’s breast implant and other silicone medical products. On June 1, 2004, Dow Corning’s Joint Plan of Reorganization (the “Joint Plan”) became effective and Dow Corning emerged from bankruptcy. The Joint Plan contains release and injunction provisions resolving all tort claims brought against various entities, including the Company, involving Dow Corning’s breast implant and other silicone medical products.

To the extent not previously resolved in state court actions, cases involving Dow Corning’s breast implant and other silicone medical products filed against the Company were transferred to the U.S. District Court for the Eastern District of Michigan (the “District Court”) for resolution in the context of the Joint Plan. On October 6, 2005, all such cases then pending in the District Court against the Company were dismissed. Should cases involving Dow Corning’s breast implant and other silicone medical products be filed against the Company in the future, they will be accorded similar treatment. It is the opinion of the Company’s management that the possibility is remote that a resolution of all future cases will have a material adverse impact on the Company’s consolidated financial statements.

As part of the Joint Plan, Dow and Corning Incorporated agreed to provide a credit facility to Dow Corning in an aggregate amount of $300 million, which was reduced to $200 million effective June 1, 2010. The Company’s share of the credit facility was originally $150 million, but was reduced to $100 million effective June 1, 2010, and is subject to the terms and conditions stated in the Joint Plan. At June 30, 2010, no draws had been taken against the credit facility.

DBCP Matters

Numerous lawsuits have been brought against the Company and other chemical companies, both inside and outside of the United States, alleging that the manufacture, distribution or use of pesticides containing dibromochloropropane (“DBCP”) has caused personal injury and property damage, including contamination of groundwater. It is the opinion of the Company’s management that the possibility is remote that the resolution of such lawsuits will have a material adverse impact on the Company’s consolidated financial statements.

 

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Environmental Matters

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. At June 30, 2010, the Company had accrued obligations of $600 million for environmental remediation and restoration costs, including $72 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to approximately twice that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material adverse impact on the Company’s results of operations, financial condition and cash flows. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material adverse impact on the Company’s results of operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. At December 31, 2009, the Company had accrued obligations of $619 million for environmental remediation and restoration costs, including $80 million for the remediation of Superfund sites.

Midland Off-Site Environmental Matters

On June 12, 2003, the Michigan Department of Natural Resources and Environment (“MDNRE,” formerly the Michigan Department of Environmental Quality or MDEQ) issued a Hazardous Waste Operating License (the “License”) to the Company’s Midland, Michigan manufacturing site (the “Midland site”), which included provisions requiring the Company to conduct an investigation to determine the nature and extent of off-site contamination in the City of Midland soils; the Tittabawassee River and Saginaw River sediment and floodplain soils; and the Saginaw Bay; and, if necessary, undertake remedial action.

City of Midland

Matters related to the City of Midland remain under the primary oversight of the State of Michigan (the “State”) under the License, and the Company and the State are in ongoing discussions regarding the implementation of the requirements of the License.

Tittabawassee and Saginaw Rivers, Saginaw Bay

The Company, the U.S. Environmental Protection Agency (“EPA”) and the State entered into an administrative order on consent (“AOC”), effective January 21, 2010, that requires the Company to conduct a remedial investigation, a feasibility study and a remedial design for the Tittabawassee River, the Saginaw River and the Saginaw Bay, and pay the oversight costs of the EPA and the State under the authority of the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). These actions, to be conducted under the lead oversight of the EPA, will build upon the investigative work completed under the State Resource Conservation Recovery Act (“RCRA”) program from 2005 through 2009. The Tittabawassee River, beginning at the Midland Site and extending down to the first six miles of the Saginaw River, are designated as the first Operable Unit for purposes of conducting the remedial investigation, feasibility study and remedial design work. This work will be performed in a largely upriver to downriver sequence for eight geographic segments of the Tittabawassee and upper Saginaw Rivers. The remainder of the Saginaw River and the Saginaw Bay are designated as a second Operable Unit and the work associated with that unit may also be geographically segmented. The AOC does not obligate the Company to perform removal or remedial action; that action can only be required by a separate order.

Alternative Dispute Resolution Process

The Company; the EPA; the U.S. Department of Justice; and the natural resource damage trustees (the Michigan Office of the Attorney General; the MDNRE; the U.S. Fish and Wildlife Service; the U.S. Bureau of Indian Affairs and the Saginaw-Chippewa tribe), have been engaged in negotiations to seek to resolve potential governmental claims against the Company related to historical off-site contamination associated with the City of Midland, the Tittabawassee and Saginaw Rivers and the Saginaw Bay. The Company and the governmental parties started meeting in the fall of 2005 and entered into a Confidentiality Agreement in December 2005. The Company continues to conduct negotiations under the Federal Alternative Dispute Resolution Act with all of the governmental parties, except the EPA which withdrew from the alternative dispute resolution process on September 12, 2007.

 

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On September 28, 2007, the Company and the natural resource damage trustees entered into a Funding and Participation Agreement that addressed the Company’s payment of past costs incurred by the natural resource damage trustees, payment of the costs of a trustee coordinator and a process to review additional cooperative studies that the Company might agree to fund or conduct with the natural resource damage trustees. On March 18, 2008, the Company and the natural resource damage trustees entered into a Memorandum of Understanding to provide a mechanism for the Company to fund cooperative studies related to the assessment of natural resource damages. On April 7, 2008, the natural resource damage trustees released their “Natural Resource Damage Assessment Plan for the Tittabawassee River System Assessment Area.”

At June 30, 2010, the accrual for these off-site matters was $26 million (included in the total accrued obligation of $600 million at June 30, 2010). At December 31, 2009, the Company had an accrual for these off-site matters of $25 million (included in the total accrued obligation of $619 million).

Asbestos-Related Matters of Union Carbide Corporation

Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.

Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at which plaintiffs filed asbestos-related suits against various companies, including Union Carbide and Amchem, increased in 2001, 2002 and the first half of 2003. Since then, the rate of filing has significantly abated. Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.

Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, Union Carbide increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, Union Carbide has compared current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, Union Carbide has requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study.

In November 2008, Union Carbide requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity and determine the appropriateness of updating its then most recent study completed in December 2006. In response to that request, ARPC reviewed and analyzed data through October 31, 2008. The resulting study, completed by ARPC in December 2008, stated that the undiscounted cost of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, through 2023 was estimated to be between $952 million and $1.2 billion. As in its earlier studies, ARPC provided estimates for a longer period of time in its December 2008 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.

In December 2008, based on ARPC’s December 2008 study and Union Carbide’s own review of the asbestos claim and resolution activity, Union Carbide decreased its asbestos-related liability for pending and future claims to $952 million, which covered the 15-year period ending 2023, excluding future defense and processing costs. The reduction was $54 million and was shown as “Asbestos-related credit” in the consolidated statements of income. At December 31, 2008, the asbestos-related liability for pending and future claims was $934 million.

 

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In November 2009, Union Carbide requested ARPC to review Union Carbide’s 2009 asbestos claim and resolution activity and determine the appropriateness of updating its December 2008 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2009. In December 2009, ARPC stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on Union Carbide’s own review of the asbestos claim and resolution activity and ARPC’s response, Union Carbide determined that no change to the accrual was required. At December 31, 2009, Union Carbide’s asbestos-related liability for pending and future claims was $839 million. At December 31, 2009, approximately 23 percent of the recorded liability related to pending claims and approximately 77 percent related to future claims.

Based on Union Carbide’s review of 2010 activity, Union Carbide determined that no adjustment to the accrual was required at June 30, 2010. Union Carbide’s asbestos-related liability for pending and future claims was $814 million at June 30, 2010. Approximately 22 percent of the recorded liability related to pending claims and approximately 78 percent related to future claims.

At December 31, 2002, Union Carbide increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. The insurance receivable related to the asbestos liability was determined by Union Carbide after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which Union Carbide and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. The Wellington Agreement and other agreements with insurers are designed to facilitate an orderly resolution and collection of Union Carbide’s insurance policies and to resolve issues that the insurance carriers may raise.

In September 2003, Union Carbide filed a comprehensive insurance coverage case, now proceeding in the Supreme Court of the State of New York, County of New York, seeking to confirm its rights to insurance for various asbestos claims and to facilitate an orderly and timely collection of insurance proceeds (the “Insurance Litigation”). The Insurance Litigation was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with Union Carbide regarding their asbestos-related insurance coverage, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Since the filing of the case, Union Carbide has reached settlements with several of the carriers involved in the Insurance Litigation, including settlements reached with two significant carriers in the fourth quarter of 2009. The Insurance Litigation is ongoing.

Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $84 million at June 30, 2010 and December 31, 2009. At June 30, 2010 and December 31, 2009, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.

In addition to the receivable for insurance recoveries related to its asbestos liability, Union Carbide had receivables for defense and resolution costs submitted to insurance carriers that have settlement agreements in place regarding their asbestos-related insurance coverage.

The following table summarizes Union Carbide’s receivables related to its asbestos-related liability:

 

  Receivables for Asbestos-Related Costs

  In millions

   June 30,
2010
   Dec. 31,  
2009  

  Receivables for defense costs – carriers with settlement agreements

   $  13    $  91  

  Receivables for resolution costs – carriers with settlement agreements

   273    357  

  Receivables for insurance recoveries – carriers without settlement agreements

   84    84  

  Total

   $370    $532  

Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $22 million in the second quarter of 2010 ($9 million in the second quarter of 2009) and $36 million in the first six months of 2010 ($20 million in the first six months of 2009), and was reflected in “Cost of sales.”

 

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After a review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, after taking into account the solvency and historical payment experience of various insurance carriers; existing insurance settlements; and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies, Union Carbide continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.

The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for Union Carbide to be higher or lower than those projected or those recorded.

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

It is the opinion of Dow’s management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense costs, could have a material adverse impact on the Company’s results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

Synthetic Rubber Industry Matters

In 2003, the U.S., Canadian and European competition authorities initiated separate investigations into alleged anticompetitive behavior by certain participants in the synthetic rubber industry. Certain subsidiaries of the Company (but as to the investigation in Europe only) have responded to requests for documents and are otherwise cooperating in the investigations.

On June 10, 2005, the Company received a Statement of Objections from the European Commission (the “EC”) stating that it believed that the Company and certain subsidiaries of the Company (the “Dow Entities”), together with other participants in the synthetic rubber industry, engaged in conduct in violation of European competition laws with respect to the butadiene rubber and emulsion styrene butadiene rubber businesses. In connection therewith, on November 29, 2006, the EC issued its decision alleging infringement of Article 81 of the Treaty of Rome and imposed a fine of Euro 64.575 million (approximately $85 million at that time) on the Dow Entities; several other companies were also named and fined. As a result, the Company recognized a loss contingency of $85 million related to the fine in the fourth quarter of 2006. The Company has appealed the EC’s decision. On October 13, 2009, the Court of First Instance held a hearing on the appeal of all parties. Subsequent to the imposition of the fine, the Company and/or certain subsidiaries of the Company became named parties in various related U.S., United Kingdom and Italian civil actions. The U.S. matter was settled in March 2010 through a confidential settlement agreement which had an immaterial impact on the Company's consolidated financial statements.

Additionally, on March 10, 2007, the Company received a Statement of Objections from the EC stating that it believed that DuPont Dow Elastomers L.L.C. (“DDE”), a former 50:50 joint venture with E.I. du Pont de Nemours and Company (“DuPont”), together with other participants in the synthetic rubber industry, engaged in conduct in violation of European competition laws with respect to the polychloroprene business. This Statement of Objections specifically names the Company, in its capacity as a former joint venture owner of DDE. On December 5, 2007, the EC announced its decision to impose a fine on the Company, among others, in the amount of Euro 48.675 million (approximately $60 million). The Company previously transferred its joint venture ownership interest in DDE to DuPont in 2005, and DDE then changed its name to DuPont Performance Elastomers L.L.C. (“DPE”). In February 2008, DuPont, DPE and the Company each filed an appeal of the December 5, 2007 decision of the EC. Based on the Company’s allocation agreement with DuPont, the Company’s share of this fine, regardless of the outcome of the appeals, will not have a material adverse impact on the Company’s consolidated financial statements.

 

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Rohm and Haas Pension Plan Matters

In December 2005, a federal judge in the U.S. District Court for the Southern District of Indiana (the “District Court”) issued a decision granting a class of participants in the Rohm and Haas Pension Plan (the “Rohm and Haas Plan”) who had retired from Rohm and Haas, now a wholly owned subsidiary of the Company, and who elected to receive a lump sum benefit from the Rohm and Haas Plan, the right to a cost-of-living adjustment (“COLA”) as part of their retirement benefit. In August 2007, the Seventh Circuit Court of Appeals affirmed the District Court’s decision, and in March 2008, the U.S. Supreme Court denied the Rohm and Haas Plan’s petition to review the Seventh Circuit’s decision. The case was returned to the District Court for further proceedings. In October 2008 and February 2009, the District Court issued rulings that have the effect of including in the class all Rohm and Haas retirees who received a lump sum distribution without a COLA from the Rohm and Haas Plan since January 1976. These rulings are subject to appeal, and the District Court has not yet determined the amount of the COLA benefits that may be due to the class participants. The Rohm and Haas Plan and the plaintiffs entered into a settlement agreement which was preliminarily approved by the District Court on November 24, 2009. In addition to settling the litigation with respect to the Rohm and Haas retirees, the settlement agreement provides for the amendment of the complaint and amendment to the Rohm and Haas Plan to include active employees. Notices of the proposed settlement were provided to class members, and a hearing was held on March 12, 2010, to determine whether the settlement will be finally approved by the District Court. On April 12, 2010, the District Court issued a final order approving the settlement. An appeal of the final order by objectors to the settlement has been filed.

A pension liability associated with this matter of $185 million was recognized as part of the acquisition of Rohm and Haas on April 1, 2009. The liability, which was determined in accordance with the accounting guidance for contingencies, recognized the estimated impact of the above described judicial decisions on the long-term Rohm and Haas Plan obligations owed to the applicable Rohm and Haas retirees and active employees. At June 30, 2010 and December 31, 2009, the Company had a liability of $183 million associated with this matter.

Other Litigation Matters

In addition to breast implant, DBCP, environmental and synthetic rubber industry matters, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, governmental regulation and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. Dow has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies provide coverage that will be utilized to minimize the impact, if any, of the contingencies described above.

Summary

Except for the possible effect of Union Carbide’s asbestos-related liability described above, it is the opinion of the Company’s management that the possibility is remote that the aggregate of all claims and lawsuits will have a material adverse impact on the results of operations, financial condition and cash flows of the Company.

Purchase Commitments

The Company has numerous agreements for the purchase of ethylene-related products globally. The purchase prices are determined primarily on a cost-plus basis. Total purchases under these agreements were $784 million in 2009, $1,502 million in 2008 and $1,624 million in 2007. The Company’s take-or-pay commitments associated with these agreements at December 31, 2009 are included in the table below.

 

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The Company also has various commitments for take-or-pay and throughput agreements. Such commitments are at prices not in excess of current market prices. The terms of all but two of these agreements extend from one to 25 years. One agreement has terms extending to 35 years and another has terms extending to 80 years. The determinable future commitments for these agreements are included for 10 years in the following table which presents the fixed and determinable portion of obligations under the Company’s purchase commitments at December 31, 2009:

 

  Fixed and Determinable Portion of Take-or-Pay and

  Throughput Obligations at December 31, 2009

  In millions

  2010

   $ 2,845    

  2011

     2,655    

  2012

     1,716    

  2013

     1,088    

  2014

     944    

  2015 and beyond

     5,969    

  Total

   $ 15,217    

In addition, in the second quarter of 2010, the Company entered into two new five-year contracts for the purchase of ethylene-related products beginning in 2010. At June 30, 2010, the fixed and determinable portion of the take-or-pay commitment associated with these new contracts was $140 million in 2010, $240 million in 2011, $256 million in 2012, $273 million in 2013 and $293 million in 2014.

In addition to the take-or-pay obligations at December 31, 2009, the Company had outstanding commitments which ranged from one to seven years for steam, electrical power, materials, property and other items used in the normal course of business of approximately $48 million. Such commitments were at prices not in excess of current market prices.

Guarantees

The Company provides a variety of guarantees as described more fully in the following sections.

Guarantees

Guarantees arise during the ordinary course of business from relationships with customers and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others (via delivery of cash or other assets) if specified triggering events occur. With guarantees, such as commercial or financial contracts, non-performance by the guaranteed party triggers the obligation of the Company to make payments to the beneficiary of the guarantee. The majority of the Company’s guarantees relate to debt of nonconsolidated affiliates, which have expiration dates ranging from less than one year to ten years, and trade financing transactions in Latin America, which typically expire within one year of their inception. The Company’s current expectation is that future payment or performance related to the non-performance of others is considered unlikely.

Residual Value Guarantees

The Company provides guarantees related to leased assets specifying the residual value that will be available to the lessor at lease termination through sale of the assets to the lessee or third parties.

 

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The following tables provide a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for each type of guarantee:

 

  Guarantees at June 30, 2010

  In millions

   Final
Expiration
   Maximum Future
Payments
   Recorded  
Liability  

  Guarantees

   2020      $195      $31   

  Residual value guarantees (1)

   2017      334      5   

  Total guarantees

        $529      $36   
(1) Does not include residual value guarantees of the Company’s variable interest in an owner trust which was consolidated in the first quarter of 2010, with the adoption of ASU 2009-17 (see Notes B and M).

 

  Guarantees at December 31, 2009

  In millions

   Final
Expiration
   Maximum Future
Payments
   Recorded  
Liability  

  Guarantees

   2020      $   358      $52   

  Residual value guarantees

   2014      695      5   

  Total guarantees

        $1,053      $57   

Asset Retirement Obligations

The Company has recognized asset retirement obligations for the following activities: demolition and remediation activities at manufacturing sites in the United States, Canada, Brazil and Europe; capping activities at landfill sites in the United States, Canada, Brazil and Europe; and asbestos encapsulation as a result of planned demolition and remediation activities at manufacturing and administrative sites in the United States, Canada, Brazil and Europe.

The aggregate carrying amount of asset retirement obligations recognized by the Company was $98 million at June 30, 2010 and $101 million at December 31, 2009. The discount rate used to calculate the Company’s asset retirement obligation was 2.45 percent. These obligations are included in the consolidated balance sheets as “Other noncurrent obligations.”

The Company has not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in its consolidated financial statements. It is the opinion of the Company’s management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material adverse impact on the Company’s consolidated financial statements based on current costs.

NOTE L – TRANSFERS OF FINANCIAL ASSETS

On January 1, 2010, the Company adopted ASU 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets.” This ASU is intended to improve the information provided in financial statements concerning transfers of financial assets, including the effects of transfers on financial position, financial performance and cash flows, and any continuing involvement of the transferor with the transferred financial assets. The Company evaluated the impact of adopting the guidance and the terms and conditions in place at January 1, 2010 and determined that certain sales of accounts receivables would be classified as secured borrowings. Under the Company’s sale of accounts receivables arrangements, $915 million was outstanding at January 1, 2010. The maximum amount of receivables available for participation in these programs was $1,939 million at January 1, 2010.

In January 2010, the Company terminated the North American arrangement and replaced it with a new arrangement that qualified for treatment as a sale under ASU 2009-16. The arrangement related to $294 million of the $915 million outstanding at January 1, 2010 and $1,100 million of the $1,939 million maximum participation.

In June 2010, the Company terminated the European arrangement and replaced it with a new arrangement that qualified for treatment as a sale under ASU 2009-16. The arrangement related to $584 million of the $915 million outstanding at January 1, 2010 and $721 million of the $1,939 million maximum participation.

 

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Sale of Trade Accounts Receivable in North America

In January 2010, the Company terminated its previous facilities used in North America for the transfers of trade accounts receivable by entering into an agreement to repurchase the outstanding receivables for $264 million and replacing it with a new arrangement. During the six-month period ended June 30, 2010, under the new arrangement, the Company sold the trade accounts receivable of select North America entities on a revolving basis to certain multi-seller commercial paper conduit entities. The Company maintains servicing responsibilities and the related costs are insignificant. The proceeds received are comprised of cash and interests in specified assets (the receivables sold by the Company) of the conduits that entitle the Company to the residual cash flows of such specified assets in the conduits after the commercial paper has been repaid. Neither the conduits nor the investors in those entities have recourse to other assets of the Company in the event of nonpayment by the debtors.

During the three-month period ended June 30, 2010, the Company recognized a loss of $5 million on the sale of these receivables ($9 million for the six-month period ended June 30, 2010), which is classified as “Interest expense and amortization of debt discount” in the consolidated statements of operations. The Company classifies its interests in the conduits as “Accounts and notes receivable – Other” on the consolidated balance sheets and those interests are carried at fair value. Fair value of the interests is determined by calculating the expected amount of cash to be received and is based on unobservable inputs (a Level 3 measurement). The key input in the valuation is percentage of anticipated credit losses, which was 1.44 percent, in the portfolio of receivables sold that have not yet been collected. Given the short-term nature of the underlying receivables, discount rates and prepayments are not factors in determining the fair value of the interests. At June 30, 2010, the carrying value of the interests held was $1,062 million, which is the Company’s maximum exposure to loss related to the receivables sold.

The sensitivity of the fair value of the interests held to hypothetical adverse changes in the key valuation assumption are as follows (amounts shown are the corresponding hypothetical decreases in the carrying value of the interests):

 

  Impact to Carrying Value

  (in millions)

     

  10% adverse change

   $ 2  

  20% adverse change

   $ 4  

Following is an analysis of certain cash flows between the Company and the North American conduits:

 

  Cash Proceeds

  (in millions)

  

Six Months Ended  

June 30, 2010  

  Sale of receivables

   $264  

  Collections reinvested in revolving receivables

   $7,718  

  Interests in conduits (1)

   $867  
(1) Presented in operating activities in the consolidated statements of cash flows.

Delinquencies on the sold receivables that were still outstanding at June 30, 2010 were $135 million. Trade accounts receivable outstanding and derecognized from the Company’s consolidated balance sheets at June 30, 2010 were $1,882 million. Credit losses, net of any recoveries, on receivables sold during the six-month period ended June 30, 2010 were $1 million.

Sale of Trade Accounts Receivable in Europe

In June 2010, the Company terminated its previous facility used in Europe for the transfers of trade accounts receivable by entering into an agreement to repurchase the outstanding receivables for $11 million and replacing it with a new arrangement. During June 2010, under the new arrangement, the Company sold qualifying trade accounts receivable of select European entities on a revolving basis to certain multi-seller commercial paper conduit entities. The Company maintains servicing responsibilities and the related costs are insignificant. The proceeds received are comprised of cash and interests in specified assets (the receivables sold by the Company) of the conduits that entitle the Company to the residual cash flows of such specified assets in the conduits after the commercial paper has been repaid. Neither the conduits nor the investors in those entities have recourse to other assets of the Company in the event of nonpayment by the debtors.

 

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During June 2010, the Company recognized a loss of less than $1 million on the sale of these receivables, which is classified as “Interest expense and amortization of debt discount” in the consolidated statements of operations. The Company classifies its interests in the conduits as “Accounts and notes receivable – Other” on the consolidated balance sheets and those interests are carried at fair value. Fair value of the interests is determined by calculating the expected amount of cash to be received and is based on unobservable inputs (a Level 3 measurement). The key input in the valuation is percentage of anticipated credit losses, which was zero, in the portfolio of receivables sold that have not yet been collected. Given the short-term nature of the underlying receivables, discount rates and prepayments are not factors in determining the fair value of the interests. At June 30, 2010, the carrying value of the interests held was $144 million, which is the Company’s maximum exposure to loss related to the receivables sold.

Following is an analysis of certain cash flows between the Company and the European conduits:

 

  Cash Proceeds

  (in millions)

  

Six Months Ended  

June 30, 2010  

  Sale of receivables

   $512  

  Collections reinvested in revolving receivables

   $167  

Delinquencies on the sold receivables still outstanding at June 30, 2010 were $12 million. Trade accounts receivable outstanding and derecognized from the Company’s consolidated balance sheet at June 30, 2010 were $375 million. There were no credit losses on receivables sold during June 2010.

Sale of Trade Accounts Receivable in Asia Pacific

During the six-month period ended June 30, 2010, the Company sold a participating interest in trade accounts receivable of select Asia Pacific entities for which the Company maintains servicing responsibilities and the related costs are insignificant. The third-party holders of the participating interests do not have recourse to the Company’s assets in the event of nonpayment by the debtors.

During the three- and six-month periods ended June 30, 2010, the Company recognized a loss of less than $1 million on the sale of the participating interests in the receivables. The Company receives cash upon the sale of the participating interests in the receivables.

Following is an analysis of certain cash flows between the Company and the third-party holders of the participating interests:

 

  Cash Proceeds

  (in millions)

  

Six Months Ended  

June 30, 2010  

  Sale of participating interests

   $102  

  Collections reinvested in revolving receivables

   $96  

Following is additional information related to the sale of participating interests in the receivables under this facility:

 

  Trade Accounts Receivable

  (in millions)

   June 30, 2010  

  Derecognized from the consolidated balance sheet

   $27  

  Outstanding in the consolidated balance sheet

   224  

  Total accounts receivable in select Asia Pacific entities

   $251  

Credit losses, net of any recoveries, on receivables relating to the participating interests sold during the six-month period ended June 30, 2010 and delinquencies on the outstanding receivables at June 30, 2010 related to the participating interests sold were zero.

 

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NOTE M – VARIABLE INTEREST ENTITIES

On January 1, 2010, the Company adopted ASU 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 amends the consolidation guidance applicable to variable interest entities (“VIEs”) and requires additional disclosures concerning an enterprise’s continuing involvement with VIEs. The Company evaluated the impact of this guidance and determined that the adoption resulted in the January 1, 2010 consolidation of two additional joint ventures, an owner trust and an entity that is used to monetize accounts receivable. The Company elected prospective application of this guidance at adoption.

The following table summarizes the carrying amount of the assets and liabilities of the two additional joint ventures and the owner trust entity included in the Company’s consolidated balance sheets at January 1, 2010.

 

  Assets and Liabilities of Newly Consolidated VIEs Included in the

  Consolidated Balance Sheet

  In millions

   Jan. 1, 2010  

  Current assets

   $  37  

  Property

   209  

  Other noncurrent assets

   3  

  Total assets

   $249  

  Current liabilities

   $  76  

  Long-term debt

   346  

  Total liabilities

   $422  

The carrying amounts of assets and liabilities pertaining to the entity used to monetize accounts receivables, included in the Company’s consolidated balance sheet at January 1, 2010, were current assets of $817 million (including $436 million of restricted cash) and current liabilities of $589 million.

Consolidated Variable Interest Entities

The Company holds a variable interest in four joint ventures for which the Company is the primary beneficiary. Three of the joint ventures are development stage enterprises, which will produce propylene oxide and hydrogen peroxide and provide terminal services in Thailand. The Company’s variable interest in these joint ventures relates to cost-plus arrangements between the joint venture and the Company, involving the majority of the output on take-or-pay terms and ensuring a guaranteed return to the joint ventures. At June 30, 2010, the Company provided guarantees with a maximum exposure of $736 million on the construction-related debt of these joint ventures.

The other joint venture was acquired through the acquisition of Rohm and Haas on April 1, 2009. This joint venture manufactures products in Japan for the semiconductor industry. Each joint venture partner holds several equivalent variable interests, with the exception of a royalty agreement held exclusively between the joint venture and the Company. In addition, the entire output of the joint venture is sold to the Company for resale to third-party customers.

The Company holds a variable interest in an owner trust, for which the Company is the primary beneficiary. The owner trust leases an ethylene facility in The Netherlands to the Company, whereby substantially all of the rights and obligations of ownership are transferred to the Company. The Company’s variable interest in the owner trust relates to a residual value guarantee provided to the owner trust. Upon expiration of the lease, which matures in 2014, the Company may purchase the facility for an amount based on a fair market value determination. At June 30, 2010, the Company had provided to the owner trust a residual value guarantee of $363 million, which represents the Company’s maximum exposure to loss under the lease.

 

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As the primary beneficiary of these VIEs, the entities’ assets, liabilities and results of operations are included in the Company’s consolidated financial statements. The other equity holders’ interests are reflected in “Net income attributable to noncontrolling interests” in the consolidated statements of operations and “Noncontrolling interests” in the consolidated balance sheets. The following table summarizes the carrying amounts of the entities’ assets and liabilities included in the Company’s consolidated balance sheets at June 30, 2010 and December 31, 2009:

 

  Assets and Liabilities of Consolidated VIEs

  In millions

  

June 30,  

2010  

  

Dec. 31,  

2009  

  Current assets (restricted 2010: $174)

   $   174    $102  

  Property (restricted 2010: $933)

   933    455  

  Other noncurrent assets (restricted 2010: $115)

   115    81  

  Total assets

   $1,222    $638  

  Current liabilities (nonrecourse 2010: $142)

   $   557    $183  

  Long-term debt (nonrecourse 2010: $129)

   476    125  

  Other noncurrent liabilities (nonrecourse 2010: $60)

   60    43  

  Total liabilities

   $1,093    $351  

The Company holds a variable interest in an entity created in June 2010, used to monetize accounts receivable originated by several European subsidiaries. The Company is the primary beneficiary of this entity as a result of holding subordinated notes while maintaining servicing responsibilities for the accounts receivable. The carrying amounts of assets and liabilities pertaining to this entity, included in the Company’s consolidated balance sheet at June 30, 2010, were current assets of $350 million ($205 million restricted) and current liabilities of $208 million ($208 million nonrecourse). Prior to the creation of this entity, the Company held a variable interest in another entity that was also used to monetize accounts receivable originated by several European subsidiaries. That arrangement was terminated in June 2010. No gain or loss was recognized as a result of terminating the arrangement.

Amounts presented in the consolidated balance sheet and the table above as restricted assets or nonrecourse obligations relating to consolidated VIEs at June 30, 2010 are adjusted for intercompany eliminations, parental guarantees and residual value guarantees.

Nonconsolidated Variable Interest Entity

The Company holds a variable interest in a joint venture accounted for under the equity method of accounting, acquired through the acquisition of Rohm and Haas on April 1, 2009. The joint venture manufactures crude acrylic acid in the United States and Germany on behalf of the Company and the other joint venture partner. The variable interest relates to a cost-plus arrangement between the joint venture and each joint venture partner. The Company is not the primary beneficiary, as a majority of the joint venture’s output is sold to the other joint venture partner, and therefore the entity is not consolidated. At June 30, 2010, the Company’s investment in the joint venture was $123 million, classified as “Investment in nonconsolidated affiliates” in the consolidated balance sheets, representing the Company’s maximum exposure to loss.

 

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NOTE N – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

 

  Net Periodic Benefit Cost for All Significant Plans    Three Months Ended    Six Months Ended
  In millions   

June 30,

2010

  

June 30,

2009

  

June 30,

2010

  

June 30,  

2009  

  Defined Benefit Pension Plans:

           

  Service cost

   $     77     $     70     $ 156     $ 128   

  Interest cost

   273     280     549     518   

  Expected return on plan assets

   (302)    (321)    (606)    (609)  

  Amortization of prior service cost

         14     16   

  Amortization of net loss

   67     26     134     52   

  Curtailment cost

            -   

  Net periodic benefit cost

   $   130     $     63     $ 255     $ 105   

  Other Postretirement Benefits:

           

  Service cost

   $     4     $     5     $  8     $  9   

  Interest cost

   28     36     56     65   

  Expected return on plan assets

   (3)    (4)    (6)    (8)  

  Amortization of prior service credit

      (1)       (2)  

  Curtailment cost

           

  Net periodic benefit cost

   $   32     $   36     $  61     $  64   

As a result of the divestiture of the Styron business unit on June 17, 2010, the Company recognized a curtailment loss of $11 million and improved the funded status (plan assets less benefit obligations) by $99 million due to settlements, remeasurements and curtailments (see Note E).

NOTE O – STOCK-BASED COMPENSATION

The Company grants stock-based compensation to employees under the Employees’ Stock Purchase Plan (“ESPP”) and the 1988 Award and Option Plan (the “1988 Plan”) and to non-employee directors under the 2003 Non-Employee Directors’ Stock Incentive Plan. Most of the Company’s stock-based compensation awards are granted in the first quarter of each year. Details for awards granted in the first quarter of 2010 are included in the following paragraphs. There was minimal grant activity in the second quarter of 2010.

During the first quarter of 2010, employees subscribed to the right to purchase 13.8 million shares with a weighted-average exercise price of $18.09 per share and a weighted-average fair value of $11.90 per share under the ESPP.

During the first quarter of 2010, the Company granted the following stock-based compensation awards to employees under the 1988 Plan:

 

   

8.5 million stock options with a weighted-average exercise price of $27.79 per share and a weighted-average fair value of $9.17 per share;

 

   

4.3 million shares of deferred stock with a weighted-average fair value of $27.81 per share; and

 

   

0.9 million shares of performance deferred stock with a weighted-average fair value of $27.79 per share.

During the first quarter of 2010, the Company granted the following stock-based compensation awards to non-employee directors under the 2003 Non-Employee Directors’ Stock Incentive Plan:

 

   

38,940 shares of restricted stock with a weighted-average fair value of $30.00 per share.

 

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Total unrecognized compensation cost at June 30, 2010, including unrecognized cost related to the first quarter of 2010 activity, is provided in the following table:

 

  Total Unrecognized Compensation Cost at June 30, 2010
  In millions   

Unrecognized  

Compensation  

Cost  

  

Weighted-average  

Recognition  

Period  

  ESPP purchase rights

   $37      4.5 months  

  Unvested stock options

   $63      0.72 year  

  Deferred stock awards

   $137      0.90 year  

  Performance deferred stock awards

   $50      0.67 year  

NOTE P – INCOME TAXES

At June 30, 2010, the total amount of unrecognized tax benefits was $313 million ($650 million at December 31, 2009), of which $291 million ($610 million at December 31, 2009) would impact the effective tax rate, if recognized. The reduction in 2010 was primarily due to settlements of uncertain tax positions with tax authorities.

The Company is currently under examination in a number of tax jurisdictions. It is reasonably possible that these examinations may be resolved within the next twelve months. As a result, it is reasonably possible that the total gross unrecognized tax benefits of the Company at June 30, 2010 will be reduced by approximately $51 million. The amount of settlement remains uncertain and it is reasonably possible that before settlement, the amount of gross unrecognized tax benefits may increase or decrease by approximately $30 million. The impact on the Company’s results of operations is not expected to be material.

 

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NOTE Q – EARNINGS PER SHARE CALCULATIONS

 

  Net Income    Three Months Ended    Six Months Ended
  In millions   

June 30,

2010

  

June 30,

2009

  

June 30,

2010

  

June 30,

2009

  Income (Loss) from continuing operations

   $659     $(435)    $1,211     $(411)

  Income from discontinued operations, net of income taxes

      103        114 

  Net income attributable to noncontrolling interests

   (8)    (12)    (9)    (23)

  Net income (loss) attributable to The Dow Chemical Company

   $651     $(344)    $1,202     $(320)

  Preferred stock dividends

   (85)    (142)    (170)    (142)

  Net income (loss) available for common stockholders

   $566     $(486)    $1,032     $(462)
           
  Earnings Per Share Calculations - Basic    Three Months Ended    Six Months Ended
  Dollars per share   

June 30,

2010

  

June 30,

2009

  

June 30,

2010

  

June 30,

2009

  Income (Loss) from continuing operations

   $0.59     $(0.42)    $1.08     $(0.42)

  Income from discontinued operations, net of income taxes

      0.10        0.12 

  Net income attributable to noncontrolling interests

   (0.01)    (0.01)    (0.01)    (0.02)

  Net income (loss) attributable to The Dow Chemical Company

   $0.58     $(0.33)    $1.07     $(0.32)

  Preferred stock dividends

   (0.08)    (0.14)    (0.15)    (0.15)

  Net income (loss) available for common stockholders

   $0.50     $(0.47)    $0.92     $(0.47)
           
  Earnings Per Share Calculations - Diluted    Three Months Ended    Six Months Ended
  Dollars per share   

June 30,

2010

  

June 30,

2009

  

June 30,

2010

  

June 30,

2009

  Income (Loss) from continuing operations

   $0.58     $(0.42)    $1.07     $(0.42)

  Income from discontinued operations, net of income taxes

      0.1        0.12 

  Net income attributable to noncontrolling interests

   (0.01)    (0.01)    (0.01)    (0.02)

  Net income (loss) attributable to The Dow Chemical Company

   $0.57     $(0.33)    $1.06     $(0.32)

  Preferred stock dividends (1)

   (0.07)    (0.14)    (0.15)    (0.15)

  Net income (loss) available for common stockholders

   $0.50     $(0.47)    $0.91     $(0.47)
  Shares in millions                        

  Weighted-average common shares - basic

   1,125.4    1,026.1    1,121.4    975.8

  Plus dilutive effect of stock options and awards

   16.2    9.4    16.9    8.0

  Weighted-average common shares - diluted

   1,141.6    1,035.5    1,138.3    983.8

  Stock options and deferred stock awards excluded from EPS calculations (2)

   49.1    62.2    47.3    64.0

  Conversion of preferred stock excluded from EPS calculations (3)

   96.8    120.3    96.8    60.2
(1) Preferred stock dividends were not added back in the calculation of diluted earnings per share because the effect of adding them back would have been anti-dilutive.
(2) 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 anti-dilutive.
(3) Conversion of the Cumulative Convertible Perpetual Preferred Stock, Series A into shares of the Company’s common stock was excluded from the calculation of diluted earnings per share because the effect of including them would have been anti-dilutive.

 

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NOTE R – OPERATING SEGMENTS AND GEOGRAPHIC AREAS

Corporate Profile

Dow combines the power of science and technology with the “Human Element” to passionately innovate what is essential to human progress. The Company connects chemistry and innovation with the principles of sustainability to help address many of the world’s most challenging problems such as the need for clean water, renewable energy generation and conservation, and increasing agricultural productivity. Dow’s diversified industry-leading portfolio of specialty chemical, advanced materials, agrosciences and plastics businesses deliver a broad range of technology-based products and solutions to customers in approximately 160 countries and in high growth sectors such as electronics, water, energy, coatings and agriculture. In 2009, Dow had annual sales of $44.9 billion and employed approximately 52,000 people worldwide. The Company’s more than 5,000 products are manufactured at 214 sites in 37 countries across the globe. The following descriptions of the Company’s eight operating segments include a representative listing of products for each business.

ELECTRONIC AND SPECIALTY MATERIALS

Applications: chemical mechanical planarization (CMP) pads and slurries • chemical processing and intermediates • electronic displays • food and pharmaceutical processing and ingredients • printed circuit board materials • semiconductor packaging, connectors and industrial finishing • water purification

Dow Electronic Materials is a leading global supplier of materials for chemical mechanical planarization; materials used in the production of electronic displays; products and technologies that drive leading edge semiconductor design; materials used in the fabrication of printed circuit boards; and integrated metallization processes critical for interconnection, corrosion resistance, metal finishing and decorative applications. These enabling materials are found in applications such as consumer electronics, flat panel displays and telecommunications.

 

   

Products: ACuPLANE™ CMP slurries; AR™ antireflective coatings; AUROLECTROLESS™ immersion gold process; COPPER GLEAM™ acid copper plating products; DURAPOSIT™ electroless nickel process; ENLIGHT™ products for photovoltaic manufacturers; EPIC™ immersion photoresists; INTERVIA™ photodielectrics for advanced packaging; LITHOJET™ digital imaging processes; OPTOGRADE™ metalorganic precursors; VISIONPAD™ CMP pads

Specialty Materials is a portfolio of businesses characterized by a vast global footprint, a broad array of unique chemistries, multi-functional ingredients and technology capabilities, combined with key positions in the pharmaceuticals, food, home and personal care, water and energy production, and industrial specialty industries. These technology capabilities and market platforms enable the businesses to develop innovative solutions that address modern societal needs for sufficient and clean water, air and energy, material preservation and improved health care, disease prevention, nutrition and wellness. The businesses’ global footprint and geographic reach provide multiple opportunities for value growth. Specialty Materials consists of five global businesses: Dow Water and Process Solutions, Dow Home and Personal Care, Dow Microbial Control, Dow Wolff Cellulosics and Performance Materials.

 

   

Products and Services: Acrolein derivatives; ACUDYNE™ hair fixatives; ACULYN™ rheology modifiers; ACUMER™ scale inhibitors and dispersants; AMBERLITE™ ion exchange resins; AUTOMATE™ liquid dyes; Basic nitroparaffins and nitroparaffin-based specialty chemicals; BOROL™ bleaching solution; CANGUARD™ BIT preservatives; CELLOSIZE™ hydroxyethyl cellulose; Chiral compounds and biocatalysts; CLEAR+STABLE™ carboxymethyl cellulose; CORRGUARD™ amino alcohol; CYCLOTENE™ advanced electronics resins; DOW™ electrodeionization; DOW™ latex powders; DOW™ ultrafiltration; DOWEX™ ion exchange resins; DOWICIDE™ antimicrobial bactericides and fungicides; DURAPLUS™ floor care polymers; ECOSURF™ biodegradable surfactants; EVOCAR™ vinyl acetate ethylene; FILMTEC™ elements; FORTEFIBER™ soluble dietary fiber; FOUNDATIONS™ latex; Hydrocarbon resins; Industrial biocides; METHOCEL™ cellulose ethers; MORTRACE™ marking technologies; NEOCAR™ branched vinyl ester latexes; OPULYN™ opacifiers; POLYOX™ water-soluble resins; PRIMENE™ amines; Quaternaries; Reverse osmosis, electrodeionization and ultrafiltration modules; SATINFX™ delivery system; SATISFIT™ Weight Care Technology; SILK™ semiconductor dielectric resins; SOLTERRA™ Boost ultraviolet protection-boosting polymers; SOLTEX™ waterproofing polymer; SUNSPHERES™ SPF boosters; UCAR™ all-acrylic, styrene-acrylic and vinyl-acrylic latexes; UCAR™ POLYPHOBE™ rheology modifiers; UCARE™ polymers; UCARHIDE™ opacifier; WALOCEL™ cellulose polymers; WALSRODER™ nitrocellulose

 

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The Electronic and Specialty Materials segment also includes the Company’s share of the results of Dow Corning Corporation, a joint venture of the Company.

COATINGS AND INFRASTRUCTURE

Applications: building and construction, insulation and weatherization, roofing membrane systems, adhesives and sealants • construction materials (vinyl siding, vinyl windows, vinyl fencing) • flexible and rigid packaging • general mortars and concrete, cement modifiers and plasters, tile adhesives and grouts • house and traffic paints • leather, textile, graphic arts and paper • metal coatings • processing aids for plastic production • tapes and labels

Dow Adhesives and Functional Polymers is a portfolio of businesses that primarily manufacture sticking and bonding solutions for a wide range of applications, including adhesive tapes and paper labels, flexible packaging and leather, textile and imaging. These products are supported with market recognized best-in-class technical support and end-use application knowledge. Many of the businesses’ water-borne technologies are well-positioned to support more environmentally preferred applications.

 

   

Products: ADCOTE™ and AQUA-LAM™ laminating adhesives; MOR-FREE™ solventless adhesives; ROBOND™ acrylic adhesives; SERFENE™ barrier coatings; Solvent-based polyurethanes and polyesters; TYMOR™ tie resins

Dow Building and Construction is comprised of two global businesses – Dow Building Solutions and Dow Construction Chemicals – which offer extensive lines of industry-leading insulation, housewrap, sealant and adhesive products and systems, as well as construction chemical solutions. Through its strong sales support, customer service and technical expertise, Dow Building Solutions provides meaningful solutions for improving the energy efficiency in homes and buildings today, while also addressing the industry’s emerging needs and demands. Additionally, Dow Construction Chemicals provides solutions for increased durability, greater water resistance and lower systems costs. As a leader in insulation solutions, the businesses’ products help curb escalating utility bills, reduce a building’s carbon footprint and provide a more comfortable indoor environment.

 

   

Products: AQUASET™ acrylic thermosetting resins; CELLOSIZE™ hydroxyethyl cellulose; FROTH-PAK™ polyurethane spray foam; GREAT STUFF™ polyurethane foam sealant; INSTA-STIK™ roof insulation adhesive; POWERHOUSE™ solar shingle; RHOPLEX™ aqueous acrylic polymer emulsions; STYROFOAM™ brand insulation products (including extruded polystyrene and polyisocyanurate rigid foam sheathing products); THERMAX™ insulation; TILE BOND™ roof tile adhesive; WEATHERMATE™ weather barrier solutions (housewraps, sill pans, flashings and tapes)

Dow Coating Materials is the largest coatings supplier in the world and a premier supplier of raw materials for architectural paints and industrial coatings. The business manufactures and delivers solutions that leverage high quality, technologically advanced product offerings for paint and coatings. The business also offers technologies used in industrial coatings, including packaging, pipelines, wood, automotive, marine, maintenance and protective industries. The business is also the leader in the conversion of solvent to water-based technologies, which enable customers to offer more environmentally friendly products, including low volatile organic compound (VOC) paints and other sustainable coatings.

 

   

Products: ACRYSOL™ rheology modifiers; AVANSE™, ELASTENE™, PRIMAL™ and RHOPLEX™ acrylics; CELLOSOLVE™ and the CARBITOL™ and DOWANOL™ series of oxygenated solvents; D.E.H.™ curing agent and intermediates; D.E.R.™ and D.E.N.™ liquid and epoxy resins; FORTEGRA™ Epoxy Tougheners; OROTAN™ and TAMOL™ dispersants; ROPAQUE™ opaque polymers; TRITON™, TERGITOL™, DOWFAX™ and ECOSURF™ SA surfactants

 

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HEALTH AND AGRICULTURAL SCIENCES

Applications: agricultural seeds, traits (genes) and oils • control of weeds, insects and plant diseases for agriculture and pest management

Dow AgroSciences is a global leader in providing agricultural and plant biotechnology products, pest management solutions and healthy oils. The business invents, develops, manufactures and markets products for use in agriculture, industrial and commercial pest management, and food service.

 

   

Products: AGROMEN™ seeds; BRODBECK™ seed; CLINCHER™ herbicide; DAIRYLAND™ seed; DELEGATE™ insecticide; DITHANE™ fungicide; FORTRESS™ fungicide; GARLON™ herbicide; GLYPHOMAX™ herbicide; GRANITE™ herbicide; HERCULEX™ I, HERCULEX™ RW and HERCULEX™ XTRA insect protection; KEYSTONE™ herbicides; LAREDO™ fungicide; LONTREL™ herbicide; LORSBAN™ insecticides; MILESTONE™ herbicide; MUSTANG™ herbicide; MYCOGEN™ seeds; NEXERA™ canola and sunflower seeds; PHYTOGEN™ cottonseeds; PROFUME™ gas fumigant; RENZE™ seed; SENTRICON™ termite colony elimination system; SIMPLICITY™ herbicide; STARANE™ herbicide; TELONE™ soil fumigant; TORDON™ herbicide; TRACER™ NATURALYTE™ insect control; TRIUMPH™ seed; VIKANE™ structural fumigant; WIDESTRIKE™ insect protection

The Health and Agricultural Sciences segment also includes the results of the AgroFresh business, providing a portfolio of products used for maintaining the freshness of fruits, vegetables and flowers.

PERFORMANCE SYSTEMS

Applications: automotive interiors, exteriors, under-the-hood and body engineered systems • bedding • caps and closures • food and specialty packaging • footwear • furniture • gaskets and sealing components • manufactured housing and modular construction • medical equipment • mining • pipe treatment • pressure sensitive adhesives • transportation • vinyl exteriors • waterproofing membranes • wire and cable insulation and jacketing materials for power utility and telecommunications

Dow Automotive Systems is a leading global provider of technology-driven solutions that meet consumer demand for vehicles that are safer, stronger, quieter, lighter, more comfortable and stylish. The business provides plastics, adhesives, glass bonding systems, emissions control technology, films, fluids, structural enhancement and acoustical management solutions to original equipment manufacturers, tier, aftermarket and commercial transportation customers. With offices and application development centers around the world, Automotive Systems provides materials science expertise and comprehensive technical capabilities to its customers worldwide.

 

   

Products: AERIFY™ diesel particulate filters; BETAFOAM™ NVH acoustical foams; BETAMATE™ structural adhesives; BETASEAL™ glass bonding systems; DOW™ polyethylene resins; IMPAXX™ energy management foam; INSPIRE™ performance polymers; INTEGRAL™ adhesive films; ISONATE™ pure and modified methylene diphenyl diisocyanate (MDI) products; MAGNUM™ ABS resins; PELLETHANE™ thermoplastic polyurethane elastomers; Premium brake fluids and lubricants; PULSE™ engineering resins; SPECFLEX™ semi-flexible polyurethane foam systems

Dow Elastomers offers a unique set of elastomers, specialty films and plastic additive products for customers worldwide. The business is focused on delivering innovative solutions that allow for differentiated participation in multiple industries and applications. The business offers a broad range of performance elastomers and plastomers, specialty copolymers, synthetic rubber, specialty resins, and films and plastic additives. Key applications include adhesives, transportation, building and construction, packaging and consumer durables.

 

   

Products: ADVASTAB™ thermal stabilizer; AFFINITY™ polyolefin plastomers (POPs); AMPLIFY™ functional polymers; DOW™ Adhesive Film; DOW™ Backing Layer Film; DOW™ Medical Device Film; DOW™ Medical Packaging Film; DOW™ very low density polyethylene; ENGAGE™ polyolefin elastomers; INFUSE™ olefin block copolymers; INTEGRAL™ adhesive films; NORDEL™ hydrocarbon rubber; NYLOPAK™ nylon barrier films; OPTICITE™ films; PARALOID™ EXL impact modifier;

 

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PRIMACOR™ copolymers; PROCITE™ window envelope films; PULSE™ engineering resins; SARAN™ barrier resins; SARANEX™ barrier films; TRENCHCOAT™ protective films; TRYCITE™ polystyrene film; TYBRITE™ clear packaging film; TYRIN™ chlorinated polyethylene; VERSIFY™ plastomers and elastomers

Dow Wire and Cable is the world’s leading provider of polymers, additives and specialty oil technology-based solutions for electrical and telecommunication applications. Through its suite of polyolefin ENDURANCE™ products, the business sets industry standards for assurance of longevity, efficiency, ease of installation and protection in the transmission, distribution and consumption of power, voice and data. In addition to world-class power, telecommunications and flame retardant/specialty cable applications, the business supports its product offerings with solid research, product development, engineering and market validation expertise.

 

   

Products: ENGAGE™ polyolefin elastomers; NORDEL™ hydrocarbon rubber; SI-LINK™ and REDI-LINK™ moisture crosslinkable polyethylene-based wire and cable insulation compounds; TYRIN™ chlorinated polyethylene; UNIGARD™ flame retardant compound for specialty wire and cable applications

Dow Formulated Systems manufactures and markets custom formulated, rigid and semi-rigid, flexible, integral skin and microcellular polyurethane foams and systems and tailor-made epoxy solutions and systems. These products are used in a broad range of applications including appliances, athletic equipment, automotive, bedding, construction, decorative molding, furniture, shoe soles and wind turbines.

 

   

Products: AIRSTONE™ epoxy systems; Encapsulants and chemical compositions; ENFORCER™ Technology and ENHANCER™ Technology for polyurethane carpet and turf backing; HYPERKOTE™, TRAFFIDECK™ and VERDISEAL™ waterproofing systems; HYPOL™ hydrophilic polyurethane prepolymers; RENUVA™ Renewable Resource Technology; SPECFIL™ urethane components; SPECFLEX™ copolymer polyols; SPECTRIM™ reaction moldable products; VORACOR™ and VORALAST™ polyurethane systems and VORALAST™ R renewable content system; VORAMER™ industrial adhesives and binders; VORASTAR™ polymers; XITRACK™ polyurethane rail ballast stabilization systems

The Performance Systems segment also includes the results of Dow Fiber Solutions, providing differentiated fibers and process improvements to the textile industry, and Dow Oil and Gas, providing products for use in exploration and production, refining and gas processing, transportation, and fuel and lubricant performance.

On March 2, 2010, Dow announced the entry into a definitive agreement to sell Styron to an affiliate of Bain Capital Partners; the transaction closed on June 17, 2010. Businesses and products sold included Synthetic Rubber and certain products from Dow Automotive Systems, which were reported in the Performance Systems segment through the date of the divestiture (see Note E).

PERFORMANCE PRODUCTS

Applications: adhesives • aircraft and runway deicing fluids • appliances • carpeting • chelating agents • chemical intermediates • civil engineering • cleaning products • coated paper and paperboard • composites • construction • corrosion inhibitors • detergents, cleaners and fabric softeners • electrical castings, potting and encapsulation and tooling • electrical laminates • electronics • flavors and fragrances • flooring • footwear • gas treatment • heat transfer fluids • home and office furnishings • industrial coatings • mattresses • metalworking fluids • packaging • sealants • surfactants

The Amines business is the world’s largest producer of ethanolamines, ethyleneamines and isopropanolamines used in a wide variety of applications, including gas treatment, heavy-duty liquid detergents, herbicide formulations for the agricultural industry and personal care products.

 

   

Products: Alkyl alkanolamines; Ethanolamines; Ethyleneamines; Isopropanolamines; Piperazine; VERSENE™ chelating agents

 

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The Emulsion Polymers business provides a broad line of styrene-butadiene products supporting customers in paper and paperboard applications, as well as carpet and artificial turf backings.

 

   

Products: Styrene-butadiene latex

The Epoxy business is the world’s largest producer of epoxy resins and intermediates. The business is the most feedstock-integrated supplier in the world. Epoxies provide good adhesion and coating protection over a range of environmental conditions, making them ideal for applications such as transportation, marine and civil engineering.

 

   

Products: D.E.H.™ epoxy curing agents or hardeners; D.E.N.™ epoxy novolac resins; D.E.R.™ epoxy resins (liquids, solids and solutions); Epoxy intermediates (acetone, allyl chloride, epichlorohydrin and phenol); Epoxy resin waterborne emulsions and dispersions; FORTEGRA™ epoxy tougheners; Glycidyl methacrylate (GMA)

The Oxygenated Solvents business offers a full range of acetone derivatives, alcohols, esters, and ethylene- and propylene-based glycol ether products. The business is the industry leader in solvent products used in cleaning products, inks, electronics, mining, paints and coatings, personal care and other applications.

 

   

Products: Acetic esters; Acetone derivatives; Alcohols; Aldehydes; Butyl CARBITOL™ and Butyl CELLOSOLVE™ solvents; Carboxylic acids; DOWANOL™ glycol ethers; ECOSOFT™ IK solvent; PROGLYDE™ DMM solvent; UCAR™ propionates

The Polyglycols, Surfactants and Fluids business is one of the world’s leading suppliers of polyglycols and surfactants, with a broad range of products and technology and a proven record of performance and economy. The business also produces a broad line of lubricants, hydraulic fluids, aircraft deicing fluids and thermal fluids, with some of the most recognized brand names in the industry. Product applications include chemical processing, cleaning, heating, cooling, food and beverage processing, fuel additives, paints and coatings, pharmaceuticals and silicone surfactants.

 

   

Products: AMBITROL™ and NORKOOL™ coolants; CARBOWAX™ and CARBOWAX SENTRY™ polyethylene glycols and methoxypolyethylene glycols; DOW™ polypropylene glycols; DOW™ SYMBIO base fluid; DOWFAX™, TERGITOL™ and TRITON™ surfactants; DOWFROST™ and DOWTHERM™ heat transfer fluids; ECOSURF™ biodegradable surfactants; SYNALOX™ lubricants; UCAR™ deicing fluids; UCON™ fluids

The Performance Monomers business produces specialty monomer products that are sold externally as well as consumed internally as building blocks used in downstream polymer businesses. The business’ products are used in several applications, including cleaning materials, personal care products, paints, coatings and inks.

 

   

Products: Acrylic acid/acrylic esters; ACUMER™, ACUSOL™, DURAMAX™, OPTIDOSE™, ROMAX™ and TAMOL™ dispersants; Methyl methacrylate

The Polyurethanes business is a leading global producer of polyurethane raw materials. Dow’s polyurethane products are used in a broad range of applications including appliance, athletic equipment, automotive, bedding, construction, decorative molding, furniture and shoe soles.

 

   

Products: ECHELON™ polyurethane prepolymer; ISONATE™ methylene diphenyl diisocyanate (MDI); MONOTHANE™ single component polyurethane elastomers; PAPI™ polymeric MDI; Propylene glycol; Propylene oxide; RENUVA™ Renewable Resource Technology; VORANATE™ isocyanate; VORANOL™ VORACTIV™ polyether and copolymer polyols

 

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The Performance Products segment also includes the results of Dow Haltermann, a provider of world-class contract manufacturing services to companies in the fine and specialty chemicals and polymers industries, and SAFECHEM, a wholly owned subsidiary that manufactures closed-loop systems to manage the risks associated with chlorinated solvents. The segment also includes a portion of the results of the OPTIMAL Group of Companies (through the September 30, 2009 divestiture of this group of joint ventures) and the SCG-Dow Group, joint ventures of the Company.

On March 2, 2010, Dow announced the entry into a definitive agreement to sell Styron to an affiliate of Bain Capital Partners; the transaction closed on June 17, 2010. Businesses and products sold included Emulsion Polymers (styrene-butadiene latex), which was reported in the Performance Products segment through the date of the divestiture (see Note E).

BASIC PLASTICS

Applications: adhesives • appliances and appliance housings • agricultural films • automotive parts and trim • beverage bottles • bins, crates, pails and pallets • building and construction • coatings • consumer and durable goods • consumer electronics • disposable diaper liners • fibers and nonwovens • films, bags and packaging for food and consumer products • hoses and tubing • household and industrial bottles • housewares • hygiene and medical films • industrial and consumer films and foams • information technology • oil tanks and road equipment • plastic pipe • textiles • toys, playground equipment and recreational products • wire and cable compounds

The Polyethylene business is the world’s leading supplier of polyethylene-based solutions through sustainable product differentiation. With multiple catalyst and process technologies, the business offers customers one of the industry’s broadest ranges of polyethylene resins.

 

   

Products: ASPUN™ fiber grade resins; ATTANE™ ultra low density polyethylene (ULDPE) resins; CONTINUUM™ bimodal polyethylene resins; DOW™ high density polyethylene (HDPE) resins; DOW™ low density polyethylene (LDPE) resins; DOWLEX™ polyethylene resins; ELITE™ enhanced polyethylene (EPE) resins; TUFLIN™ linear low density polyethylene (LLDPE) resins; UNIVAL™ HDPE resins

The Polypropylene business, a major global polypropylene supplier, provides a broad range of products and solutions tailored to customer needs by leveraging Dow’s leading manufacturing and application technology, research and product development expertise, extensive market knowledge and strong customer relationships.

 

   

Products: DOW™ homopolymer polypropylene resins; DOW™ impact copolymer polypropylene resins; DOW™ random copolymer polypropylene resins; INSPIRE™ performance polymers; UNIPOL™ PP process technology; SHAC™ and SHAC™ ADT catalyst systems

The Styrenics business, the global leader in the production of polystyrene resins, is uniquely positioned with geographic breadth and participation in a diversified portfolio of applications. Through market and technical leadership and low cost capability, the business continues to improve product performance and meet customer needs.

 

   

Products: Licensing and supply of related catalysts, process control software and services for the Mass ABS process technology; STYRON A-TECH™ and C-TECH™ advanced technology polystyrene resins and a full line of STYRON™ general purpose polystyrene resins; STYRON™ high-impact polystyrene resins

The Basic Plastics segment also includes the results of the Basic Plastics Licensing and Catalyst business and the Polycarbonate and Compounds and Blends business. It also includes the results of Equipolymers, Americas Styrenics LLC and Univation Technologies (which licenses the UNIPOL™ polyethylene process and sells related catalysts, including metallocene catalysts), as well as a portion of the results of EQUATE Petrochemical Company K.S.C., The Kuwait Olefins Company K.S.C. and the SCG-Dow Group, all joint ventures of the Company.

 

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On March 2, 2010, Dow announced the entry into a definitive agreement to sell Styron to an affiliate of Bain Capital Partners; the transaction closed on June 17, 2010. Businesses and products sold included Styrenics (polystyrene, acrylonitrile butadiene styrene, styrene acrylonitrile and expandable polystyrene), Polycarbonate and Compounds and Blends, as well as the Company’s 50 percent ownership interest in Americas Styrenics LLC, a principal nonconsolidated affiliate; all of which were reported in the Basic Plastics segment through the date of the divestiture (see Note E).

BASIC CHEMICALS

Applications: agricultural products • alumina • automotive antifreeze and coolant systems • carpet and textiles • chemical processing • dry cleaning • household cleaners and plastic products • inks • metal cleaning • packaging, food and beverage containers • paints, coatings and adhesives • personal care products • petroleum refining • pharmaceuticals • plastic pipe • protective packaging • pulp and paper manufacturing • soaps and detergents • water treatment

The Chlor-Alkali/Chlor-Vinyl business focuses on the production of chlorine for consumption by downstream Dow derivatives, as well as production, marketing and supply of ethylene dichloride, vinyl chloride monomer and caustic soda. These products are used for applications such as alumina production, pulp and paper manufacturing, soaps and detergents and building and construction. Dow is the world’s largest producer of both chlorine and caustic soda.

 

   

Products: Caustic soda; Chlorine; Ethylene dichloride (EDC); Hydrochloric acid; Vinyl chloride monomer (VCM)

The Ethylene Oxide/Ethylene Glycol business is the world’s largest producer of purified ethylene oxide, principally used in Dow’s downstream performance derivatives. Dow is also a key supplier of ethylene glycol to MEGlobal, a 50:50 joint venture and a world leader in the manufacture and marketing of merchant monoethylene glycol and diethylene glycol. Ethylene glycol is used in polyester fiber, polyethylene terephthalate (PET) for food and beverage container applications, polyester film, and aircraft and runway deicers.

 

   

Products: Ethylene oxide (EO); Ethylene glycol (EG); METEOR™ EO/EG process technology and catalysts

The Basic Chemicals segment also includes the results of the Chlorinated Organics business. Also included in the Basic Chemicals segment are the results of MEGlobal and a portion of the results of EQUATE Petrochemical Company K.S.C., The Kuwait Olefins Company K.S.C. and the OPTIMAL Group of Companies (through the September 30, 2009 divestiture of this group of joint ventures), all joint ventures of the Company.

HYDROCARBONS AND ENERGY

Applications: polymer and chemical production • power

The Hydrocarbons and Energy business encompasses the procurement of fuels, natural gas liquids and crude oil-based raw materials, as well as the supply of monomers, power and steam principally for use in Dow’s global operations. The business regularly sells its by-products and buys and sells products in order to balance regional production capabilities and derivative requirements. The business also sells products to certain Dow joint ventures. Dow is the world leader in the production of olefins and aromatics.

 

   

Products: Benzene; Butadiene; Butylene; Cumene; Ethylene; Propylene; Styrene; Power, steam and other utilities

The Hydrocarbons and Energy segment also includes the results of Compañía Mega S.A. and a portion of the results of The Kuwait Olefins Company K.S.C. and the SCG-Dow Group, joint ventures of the Company.

 

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On March 2, 2010, Dow announced the entry into a definitive agreement to sell Styron to an affiliate of Bain Capital Partners; the transaction closed on June 17, 2010. Businesses and products sold included certain styrene monomer assets, which were reported in the Hydrocarbons and Energy segment through the date of the divestiture (see Note E).

Corporate includes the results of Ventures (which includes new business incubation platforms focused on identifying and pursuing new commercial opportunities); Venture Capital; non-business aligned technology licensing and catalyst activities; the Company’s insurance operations and environmental operations; and certain corporate overhead costs and cost recovery variances not allocated to the operating segments. Corporate also includes the results of the Salt business, which the Company acquired with the April 1, 2009 acquisition of Rohm and Haas and sold to K+S Aktiengesellschaft on October 1, 2009.

Transfers of products between operating segments are generally valued at cost. However, transfers of products to Health and Agricultural Sciences from other segments are generally valued at market-based prices; the revenues generated by these transfers in the first six months of 2010 and 2009 were immaterial and eliminated in consolidation.

Total assets divested with the sale of Styron on June 17, 2010 are presented by operating segment in Note E.

 

  Geographic Areas

     Three Months Ended      Six Months Ended    

  In millions

     June 30,

2010

     June 30,

2009

     June 30,

2010

     June 30,    

2009    

  Sales by geographic area

                   

United States

     $  4,484      $  3,649      $  8,845      $  6,567    

Europe, Middle East and Africa (1)

     4,721      3,885      9,468      7,334    

Rest of World

     4,413      3,788      8,722      6,462    

Total

     $13,618      $11,322      $27,035      $20,363    
(1) Sales to customers in the Middle East and Africa, previously reported with Rest of World, are now aligned with Europe, Middle East and Africa; prior period sales have been adjusted to reflect this realignment.

 

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  Operating Segments

     Three Months Ended      Six Months Ended

  In millions

     June 30,
2010
     June 30,
2009
     June 30,
2010
     June 30,
2009

  Sales by operating segment

                   

Electronic and Specialty Materials

     $  1,387       $  1,164       $  2,652       $  1,640   

Coatings and Infrastructure

     1,347       1,242       2,547       1,648   

Health and Agricultural Sciences

     1,276       1,204       2,645       2,650   

Performance Systems

     1,790       1,458       3,449       2,629   

Performance Products

     2,753       2,085       5,557       3,972   

Basic Plastics

     2,993       2,371       6,015       4,400   

Basic Chemicals

     732       586       1,446       1,171   

Hydrocarbons and Energy

     1,266       910       2,556       1,898   

Corporate

     74       302       168       355   

Total

     $13,618       $11,322       $27,035       $20,363   

  EBITDA(1) by operating segment

                   

Electronic and Specialty Materials

     $   453       $   158       $   834       $   237   

Coatings and Infrastructure

     207       25       323       46   

Health and Agricultural Sciences

     196       140       580       499   

Performance Systems

     223       212       427       314   

Performance Products

     328       212       618       402   

Basic Plastics

     696       405       1,414       527   

Basic Chemicals

     100       (107)      220       (112)  

Hydrocarbons and Energy

     (1)      (65)      (1)      (65)  

Corporate

     (321)      (384)      (753)      (603)  

Total

     $1,881       $  596       $3,662       $1,245   

  Equity in earnings (losses) of nonconsolidated affiliates by operating segment (included in EBITDA)

Electronic and Specialty Materials

     $112       $  58       $225       $  63   

Coatings and Infrastructure

                    2   

Health and Agricultural Sciences

     (1)                1   

Performance Systems

                    3   

Performance Products

                    8   

Basic Plastics

     59       35       124       58   

Basic Chemicals

     54            152       49   

Hydrocarbons and Energy

     20            44       4   

Corporate

     (5)           (11)      (1)  

Total

     $244       $122       $548       $187   
(1) The Company uses EBITDA (which Dow defines as earnings (loss) before interest, income taxes, depreciation and amortization) as its measure of profit/loss for segment reporting purposes. EBITDA by operating segment includes all operating items relating to the businesses; items that principally apply to the Company as a whole are assigned to Corporate. A reconciliation of EBITDA to “Income (Loss) from Continuing Operations Before Income Taxes” is provided below.

 

  Reconciliation of EBITDA to “Income (Loss) from

   Three Months Ended    Six Months Ended

  Continuing Operations Before Income Taxes”

  In millions

   June 30,
2010
   June 30,
2009
   June 30,
2010
   June 30,
2009

  EBITDA

   $1,881    $  596     $3,662    $1,245 

  - Depreciation and amortization

   734    763     1,491    1,271 

  + Interest income

   10       17    21 

  - Interest expense and amortization of debt discount

   367    525     743    679 

  Income (Loss) from Continuing Operations Before Income Taxes

   $   790    $(683)    $1,445    $(684)

 

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The Dow Chemical Company and Subsidiaries

PART I – FINANCIAL INFORMATION, Item 2. Management’s Discussion and

Analysis of Financial Condition and Results of Operations.

 

DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”). This section covers the current performance and outlook of the Company and each of its operating segments. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Company’s operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission (“SEC”). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Company’s expectations will be realized. The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

OVERVIEW

 

The Company reported net sales in the second quarter of 2010 of $13.6 billion, up 20 percent from $11.3 billion in the second quarter of 2009. Price was up 18 percent, with significant increases across all geographic areas, largely driven by to higher feedstock and raw material costs. Volume was up 2 percent, driven by the Performance segments. Excluding prior period divestitures and seed acquisitions,(1) volume was up 7 percent, reflecting continued global economic recovery.

 

 

Purchased feedstock and energy costs, which account for more than one third of Dow’s total costs, increased 45 percent or $1.6 billion compared with the second quarter of 2009.

 

 

Research and development expenses were up 7 percent from the second quarter of last year as Dow continued to invest in its Performance businesses. Selling, general and administrative expenses declined 2 percent due to the Company’s cost cutting initiatives and acquisition-related synergies.

 

 

Equity earnings were $244 million in the second quarter of 2010, double the $122 million earned in the second quarter of 2009.

 

 

On June 17, 2010, the Company completed the sale of the Styron business unit (“Styron”) to an affiliate of Bain Capital Partners for $1.6 billion. Net proceeds were used to reduce debt. At June 30, 2010, total debt had been reduced $1.8 billion from March 31, 2010. See Note E to the Consolidated Financial Statements for additional information on this divestiture.

 

(1) Excludes sales of the Salt business of Rohm and Haas Company divested on October 1, 2009, sales related to TRN divested on September 1, 2009, and sales of the acrylic monomer business and a portion of the specialty latex business divested on January 25, 2010; as well as the sales of two recent Dow AgroSciences seed acquisitions.

 

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  Selected Financial Data

     Three Months Ended      Six Months Ended

  In millions, except per share amounts

     June 30,

2010

     June 30,

2009

     June 30,

2010

     June 30,  

2009  

  Net sales

     $13,618      $11,322      $27,035      $20,363  

  Cost of sales

     $11,580      $9,764      $23,121      $17,902  

  Percent of net sales

     85.0%      86.2%      85.5%      87.9%  

  Research and development expenses

     $407      $381      $814      $673  

  Percent of net sales

     3.0%      3.4%      3.0%      3.3%  

  Selling, general and administrative expenses

     $648      $663      $1,310      $1,106  

  Percent of net sales

     4.8%      5.9%      4.8%      5.4%  

  Effective tax rate

     16.6%      36.3%      16.2%      39.9%  

  Net income (loss) available for common stockholders

     $566      $(486)      $1,032      $(462)  

  Earnings (loss) per common share – basic

     $0.50      $(0.47)      $0.92      $(0.47)  

  Earnings (loss) per common share – diluted

     $0.50      $(0.47)      $0.91      $(0.47)  

  Operating rate percentage

     80%      75%      82%      71%  

RESULTS OF OPERATIONS

Results of Rohm and Haas Company (“Rohm and Haas”) are included in the Company’s consolidated results from the April 1, 2009 acquisition date forward. In order to provide the most meaningful comparison of results of operations, some of the comparisons presented are to pro forma( 2) amounts. The unaudited pro forma historical information reflects the combination of Dow and Rohm and Haas assuming the acquisition of Rohm and Haas had been consummated on January 1, 2008.

Net sales for the second quarter of 2010 were $13.6 billion, up 20 percent from $11.3 billion reported in the second quarter of last year, with double-digit increases in all operating segments (except Coatings and Infrastructure, up 8 percent, and Health and Agricultural Sciences, up 6 percent) and all geographic areas. Compared with the same quarter of 2009, price increased 18 percent, with double-digit price increases in all segments, except Electronic and Specialty Materials (down 1 percent) and Health and Agricultural Sciences (down 5 percent), and in all geographic areas. Price increases were most pronounced in the Basic segments, with Hydrocarbons and Energy up 48 percent, Basic Plastics up 33 percent and Basic Chemicals up 22 percent, driven by a $1.6 billion increase in purchased feedstock and energy costs versus the second quarter of 2009. Volume increased 2 percent compared with the second quarter of 2009, with volume improvement most pronounced in the combined Performance segments (Electronic and Specialty Materials, Coatings and Infrastructure, Health and Agricultural Sciences, Performance Systems and Performance Products), up 10 percent, and an overall volume decline in the combined Basic segments (Basic Plastics, Basic Chemicals and Hydrocarbons and Energy), down 6 percent. Excluding prior period divestitures and seed acquisitions, volume was up 7 percent, reflecting improvement in global economic conditions.

 

(2) The unaudited pro forma historical segment information is based on the historical consolidated financial statements and accompanying notes of both Dow and Rohm and Haas and has been prepared to illustrate the effects of the Company’s acquisition of Rohm and Haas, assuming the acquisition of Rohm and Haas had been consummated on January 1, 2008, and the treatment of Dow’s Calcium Chloride business as discontinued operations due to the sale of the business on June 30, 2009.

 

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Reported net sales for the first six months of 2010 were $27.0 billion, up 33 percent from $20.4 billion in the same period last year. Compared with the first half of 2009 on a pro forma basis, net sales for the first six months of 2010 were up 22 percent from $22.1 billion in the same period last year, with double-digit sales increases in all operating segments, except Health and Agricultural Sciences (down 1 percent), and in all geographic areas. Compared with the first half of 2009 on a pro forma basis, prices were up 18 percent and volume increased 4 percent. Double-digit price increases were reported in Performance Products and the Basic segments, and in all geographic areas. Price increases were most pronounced in the Basic segments with a combined 38 percent increase, driven by a $3.7 billion increase in purchased feedstock and energy costs versus year-to-date 2009. Volume increased 4 percent compared with the first six months of 2009. Volume increases were most pronounced in the Performance segments, up a combined 13 percent, while volume declined in the combined Basic segments 4 percent. Volume increases were most pronounced in Asia Pacific with an 18 percent increase. Excluding prior period divestitures and seed acquisitions, volume was up 11 percent, reflecting improvement in global economic conditions. For additional details regarding the change in net sales, see the Sales Volume and Price tables at the end of the section entitled “Segment Results.”

Gross margin was $2,038 million for the second quarter of 2010, up from $1,558 million in the second quarter of last year. Gross margin increased primarily due to the impact of higher selling prices, which more than offset the increase in purchased feedstock and energy costs, the increase in sales volume, and improved operating rates. In addition, gross margin in the second quarter of 2009 was reduced by a one-time increase in cost of sales of $209 million related to the fair value step-up of inventories acquired from Rohm and Haas on April 1, 2009, and sold in the second quarter of 2009. The increase was included in “Cost of sales” in the consolidated statements of operations and reflected in the operating segments as follows: $75 million in Electronic and Specialty Materials, $82 million in Coatings and Infrastructure, $30 million in Performance Systems and $22 million in Performance Products. Year to date, gross margin was $3,914 million, compared with $2,461 million in the first six months of 2009, reflecting the acquisition of Rohm and Haas.

The Company’s global plant operating rate (for its chemicals and plastics businesses) was 80 percent in the second quarter of 2010, up from 75 percent in the second quarter of 2009. Excluding planned turnarounds, Dow’s operating rate was 86 percent, compared with 78 percent in the second quarter of last year. For the first half of 2010, Dow’s global plant operating rate was 82 percent, up from 71 percent in the same period of 2009 due to increased demand.

Personnel count was 49,055 at June 30, 2010, down from 52,195 at December 31, 2009 and 57,903 at June 30, 2009. Headcount decreased from year-end 2009 primarily due to the impact of divestitures including Styron, Powder Coatings and a portion of the Company’s acrylic monomer and specialty latex businesses, as well as actions taken related to the integration of Rohm and Haas and previously announced restructuring plans.

Research and development (“R&D”) expenses totaled $407 million in the second quarter of 2010, up $26 million (7 percent) from $381 million in the second quarter of last year, primarily due to strategic growth initiatives in the Health and Agricultural Sciences segment. For the first half of 2010, R&D expenses totaled $814 million, up $141 million (21 percent) from $673 million in the first half of 2009 due to the April 1, 2009 acquisition of Rohm and Haas, and strategic growth initiatives in core research and development and in the Health and Agricultural Sciences segment.

Selling, general and administrative (“SG&A”) expenses totaled $648 million in the second quarter of 2010, down $15 million (2 percent) from $663 million in the second quarter of last year, primarily due to cost savings initiatives. For the first half of 2010, SG&A expenses totaled $1,310 million, up $204 million (18 percent) from $1,106 million in the first half of 2009 due to the April 1, 2009 acquisition of Rohm and Haas, and strategic growth initiatives in the Health and Agricultural Sciences segment, partially offset by cost saving initiatives.

Amortization of intangibles was $125 million in the second quarter of 2010, up from $112 million in the second quarter of last year. For the first half of 2010, amortization of intangibles was $253 million, compared with $134 million for the same period last year. The increase in amortization of intangibles reflected the amortization of the fair value of intangible assets acquired from Rohm and Haas. See Notes D and H to the Consolidated Financial Statements for additional information concerning the acquisition of Rohm and Haas and intangible assets.

 

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In June 2009, Dow’s Board of Directors approved a restructuring plan that incorporated actions related to the Company’s acquisition of Rohm and Haas as well as additional actions to advance the Company’s strategy and to respond to continued weakness in the global economy. The restructuring plan included the shutdown of a number of facilities and a global workforce reduction. As a result, the Company recorded pretax restructuring charges totaling $677 million in the second quarter of 2009, which included asset write-downs and write-offs, severance costs and costs associated with exit or disposal activities. The impact of the charges was shown as “Restructuring charges” in the consolidated statements of operations and was reflected in the Company’s segment results as follows: $68 million in Electronic and Specialty Materials, $171 million in Coatings and Infrastructure, $73 million in Performance Products, $1 million in Basic Plastics, $75 million in Basic Chemicals, $65 million in Hydrocarbons and Energy and $224 million in Corporate. In the second quarter of 2009, the Company also recorded a $15 million reduction in the 2007 restructuring reserve, reflected in the Health and Agricultural Sciences segment. In the first quarter of 2010, the Company recorded pretax adjustments of $16 million to the 2009 restructuring charge for additional asset impairment costs, which were reflected in the Company’s segments as follows: $8 million in Electronic and Specialty Materials, $5 million in Coatings and Infrastructure and $3 million in Performance Products. In the second quarter of 2010, the Company recorded pretax adjustments of $13 million to the 2009 restructuring charge for additional exit or disposal activities, which were reflected in Performance Products ($12 million) and Corporate ($1 million).

In December 2008, the Company’s Board of Directors approved a restructuring plan as part of a series of actions to advance the Company’s strategy and respond to the severe economic downturn. The restructuring plan includes the shutdown of a number of facilities and a global workforce reduction, which are targeted for completion by the end of 2010. In the first quarter of 2009, the Company recorded a pretax adjustment of $19 million to the 2008 restructuring charge for additional severance, which was reflected in Corporate. See Note C to the Consolidated Financial Statements for details on the restructuring charges.

In the second quarter of 2010, pretax charges totaling $37 million ($63 million for the first six months of 2010) were recorded for integration costs related to the acquisition of Rohm and Haas. In the second quarter of 2009, pretax charges totaling $52 million ($100 million for the first six months of 2009) were recorded for legal expenses and other transaction costs related to the acquisition; these charges were reflected in Corporate. An additional $34 million of acquisition-related retention expenses were incurred during the second quarter of 2009. These costs were recorded in “Cost of sales,” “Research and development expenses,” and “Selling, general and administrative expenses” and reflected in Corporate.

Dow’s share of the earnings of nonconsolidated affiliates was $244 million in the second quarter of 2010, up from $122 million in the second quarter of last year. Compared with the same quarter of last year, earnings increased at Dow Corning Corporation (“Dow Corning”), EQUATE Petrochemical Company K.S.C. (“EQUATE”), MEGlobal, The Kuwait Olefins Company K.S.C. and The Kuwait Styrene Company K.S.C. For the first six months of 2010, Dow’s share of the earnings of nonconsolidated affiliates was $548 million, up significantly from $187 million for the same period last year, with the same joint ventures driving the increase in earnings. Equity earnings in the first half of 2009 were negatively impacted by $29 million for the Company’s share of a restructuring charge recognized by Dow Corning.

Sundry income – net includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, and gains and losses on sales of investments and assets. Sundry income – net for the second quarter of 2010 was $95 million, compared with $23 million in the same quarter of 2009. The second quarter of 2010 included a $51 million gain on the divestiture of Styron. Year to date, sundry income – net was $178 million, compared with $20 million in the first half of 2009, reflecting gains on several small divestitures in 2010 as well as the gain on Styron.

 

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On March 2, 2010, Dow announced that it had signed a definitive agreement for the sale of Styron to an affiliate of Bain Capital Partners. On June 17, 2010, the sale was completed for $1,561 million, net of working capital adjustments and costs to sell, with proceeds subject to customary post-closing adjustments. The Company recognized a pretax gain of $51 million on the sale in the second quarter of 2010, included in “Sundry income – net” and reflected in the following operating segments: Performance Systems ($15 million), Performance Products ($26 million) and Basic Plastics ($10 million). Because goodwill related to the divestiture is not tax deductible, the transaction resulted in an after-tax loss of $16 million. The Company elected to acquire a 7.5 percent equity interest in the resulting privately held, global materials company. Businesses and products sold included: Styrenics – polystyrene, acrylonitrile butadiene styrene, styrene acrylonitrile and expandable polystyrene; Emulsion Polymers; Polycarbonate and Compounds and Blends; Synthetic Rubber; and certain products from Dow Automotive Systems. Also included in the sale were certain styrene monomer assets and the Company’s 50 percent ownership interest in Americas Styrenics LLC, a principal nonconsolidated affiliate. The transaction also resulted in several long-term supply, service and purchase agreements between Dow and Styron. Styron is expected to have approximately $3.7 billion in revenue (based on 2009 data), with manufacturing facilities at 20 locations in 13 countries, and employ approximately 2,000 employees. See Note E to the Consolidated Financial Statements.

Net interest expense (interest expense less capitalized interest and interest income) was $357 million in the second quarter of 2010, compared with $516 million in the second quarter of last year. Net interest expense for the second quarter of 2009 reflected costs of the initial debt financing for the April 1, 2009 acquisition of Rohm and Haas. Year to date, net interest expense was $726 million, compared with $658 million in the first six months of 2009. The increase in year-to-date interest expense was due to debt financing for the acquisition of Rohm and Haas. Interest income was up $1 million in the second quarter of 2010 compared with the second quarter of 2009, and down $4 million for the first six months of 2010 compared with the first six months of 2009.

The effective tax rate for the second quarter of 2010 was 16.6 percent compared with a tax benefit of 36.3 percent for the second quarter of 2009. For the first six months of 2010 the effective tax rate was 16.2 percent compared with a tax benefit of 39.9 percent for the first six months of 2009. The Company’s effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to available tax credits. The second quarter of 2010 tax rate was favorably impacted by audit settlements and the closure of tax years. The year-to-date tax rate for 2010 was also favorably impacted by strong equity earnings and improved results in Europe. The Patient Protection and Affordable Care Act, signed on March 23, 2010, eliminated the tax deduction related to the Medicare Part D subsidy. The impact of this legislation was immaterial to the Company.

On June 30, 2009, the Company sold the Calcium Chloride business and recognized a $162 million pretax gain. The results of operations related to the Calcium Chloride business prior to the divestiture were reclassified and reported as income from discontinued operations. Income from discontinued operations (net of income taxes) was $103 million ($0.10 per share) for the second quarter of 2009 and $114 million ($0.12 per share) for the first six months of 2009.

Net income attributable to noncontrolling interests was $8 million in the second quarter of 2010 compared with $12 million in the second quarter of 2009. Net income attributable to noncontrolling interests was $9 million in the first six months of 2010 compared with $23 million in the first six months of 2009. Prior year amounts included the income attributable to Tornado Finance V.O.F. preferred partnership units, which were redeemed in July 2009.

Preferred stock dividends of $85 million were recognized in the second quarter of 2010 ($170 million for the first six months of 2010) related to the Company’s Cumulative Convertible Perpetual Preferred Stock, Series A, which was issued on April 1, 2009. Preferred stock dividends of $142 million were recognized in the second quarter of 2009, including $85 million related to Cumulative Convertible Perpetual Preferred Stock, Series A. The remaining $57 million of dividends related to Cumulative Perpetual Preferred Stock, Series B and Cumulative Convertible Perpetual Preferred Stock, Series C, both of which were subsequently retired in the second quarter of 2009.

Net income (loss) available for common stockholders was income of $566 million or $0.50 per share for the second quarter of 2010, compared with a loss of $486 million or $0.47 per share for the second quarter of 2009. Net income (loss) available for common stockholders for the first six months of 2010 was income of $1,032 million or $0.91 per share, compared with a loss of $462 million or $0.47 per share for the same period of 2009.

 

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The following tables summarize the impact of certain items recorded in the three-month and six-month periods ended June 30, 2010 and June 30, 2009, and previously described in this section:

 

  Certain Items Impacting Results

     Pretax

Impact (1)

            Impact on

Net Income (2)

            Impact on

EPS (3)

     Three Months Ended           Three Months Ended           Three Months Ended

  In millions, except per share amounts

     June 30, 
2010 
     June 30, 
2009 
            June 30, 
2010 
     June 30, 
2009 
            June 30, 
2010 
     June 30, 
2009 

  One-time increase in cost of sales related to fair valuation of Rohm and Haas inventories

     -         $(209)            -         $(132)            -         $(0.13) 

  Restructuring charges

     $(13)       (662)            $  (8)       (445)            $(0.01)       (0.43) 

  Transaction, integration and other acquisition costs

     (37)       (86)            (24)       (61)            (0.02)       (0.06) 

  Gain (Loss) on divestiture of Styron

     51        -                (16)       -                (0.01)       -   

  Total

     $    1        $(957)              $(48)       $(638)              $(0.04)       $(0.62) 
                                       

  Certain Items Impacting Results

     Pretax

Impact (1)

            Impact on

Net Income (2)

            Impact on

EPS (3)

     Six Months Ended           Six Months Ended           Six Months Ended

  In millions, except per share amounts

     June 30, 
2010 
     June 30,
2009
            June 30, 
2010 
     June 30, 
2009 
            June 30, 
2010 
     June 30, 
2009 

  One-time increase in cost of sales related to fair valuation of Rohm and Haas inventories

     -         $  (209)            -         $(132)            -         $(0.13) 

  Restructuring charges

     $(29)       (681)            $(16)       (462)            $(0.02)       (0.45) 

  Transaction, integration and other acquisition costs

     (63)       (134)            (41)       (102)            (0.03)       (0.10) 

  Dow Corning restructuring

     -         (29)            -         (27)            -         (0.03)

  Gain (Loss) on divestiture of Styron

     51        -                (16)       -                (0.01)       -   

  Total

     $(41)      $(1,053)             $(73)       $(723)              $(0.06)       $(0.71) 
(1) Impact on “Income (Loss) from Continuing Operations Before Income Taxes”
(2) Impact on “Net Income (Loss) Attributable to The Dow Chemical Company”
(3) Impact on “Earnings (Loss) per common share – diluted”

 

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SEGMENT RESULTS

The reported results by operating segment, including sales, EBITDA (which Dow defines as earnings before interest, income taxes, depreciation and amortization) and equity in earnings of nonconsolidated affiliates, can be found in Note R to the Consolidated Financial Statements. The Company uses EBITDA as its measure of profit/loss for segment reporting purposes. EBITDA by operating segment includes all operating items relating to the businesses, except depreciation and amortization; items that principally apply to the Company as a whole are assigned to Corporate. Note R to the Consolidated Financial Statements also includes a reconciliation of EBITDA to “Income (Loss) from Continuing Operations Before Income Taxes.”

In order to provide the most meaningful comparison of results by reportable segment, the following discussion and analysis compares year-to-date actual results for 2010 to actual results for the second quarter of 2009 plus pro forma historical results for the first quarter of 2009. The unaudited pro forma historical segment information is based on the historical consolidated financial statements and accompanying notes of both Dow and Rohm and Haas and was prepared to illustrate the effects of the Company’s acquisition of Rohm and Haas, assuming the acquisition of Rohm and Haas had been consummated on January 1, 2008.

The unaudited pro forma historical segment information is not necessarily indicative of the results of operations that would have actually occurred had the acquisition been completed as of the date indicated, nor is it indicative of the future operating results of the combined company. The unaudited pro forma historical segment information does not reflect future events that may occur after the acquisition of Rohm and Haas, including the potential realization of operating cost savings (synergies) or restructuring activities or other costs related to the planned integration of Rohm and Haas, and does not consider potential impacts of current market conditions on revenues, expense efficiencies or asset dispositions (with the exception of the sale of Dow’s Calcium Chloride business).

The following table, which summarizes the pretax impact of certain items recorded by Rohm and Haas prior to the acquisition, is provided for pro forma comparison purposes.

 

  Certain Items Impacting Rohm and Haas

  Results Prior to the Acquisition

  In millions

   Three months  
ended  
March 31, 2009  

  Impact of Hurricanes Gustav and Ike

   $  (2)    

  Restructuring charges

   (2)    

  Transaction and other acquisition costs

   (80)    

  Total Rohm and Haas Certain Items

   $(84)    

ELECTRONIC AND SPECIALTY MATERIALS

The Electronic and Specialty Materials segment consists of two businesses – Dow Electronic Materials and Specialty Materials – and includes the Company’s share of the results of Dow Corning Corporation, a joint venture of the Company. Dow Electronic Materials is a leading global supplier of materials for chemical mechanical planarization; materials used in the production of electronic displays; products and technologies that drive leading edge semiconductor design; materials used in the fabrication of printed circuit boards; and integrated metallization processes critical for interconnection, corrosion resistance, metal finishing and decorative applications. These materials are found in applications such as consumer electronics, flat panel displays and telecommunications. Specialty Materials is a portfolio of five global businesses – Dow Water and Process Solutions; Dow Home and Personal Care; Dow Microbial Control; Dow Wolff Cellulosics; and Performance Materials – characterized by a vast global footprint, a broad array of unique chemistries, multi-functional ingredients and technology capabilities, combined with key positions in the pharmaceuticals, food, home and personal care, water and energy production, and industrial specialty industries.

 

  Electronic and Specialty Materials

         Three Months Ended        Six Months Ended

  Actual Results

  In millions

     June 30,

2010

     June 30,

2009

     June 30,

2010

     June 30,  

2009   

  Sales

     $1,387      $1,164      $2,652      $1,640   

  EBITDA

     $453      $158      $834      $237   

 

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  Electronic and Specialty Materials

       Three Months Ended        Six Months Ended

  2010 Actual Versus 2009 Pro Forma

  In millions

     June 30,  
2010  
     June 30,  
2009  
     June 30,  

2010  

     June 30,  

2009   

  Sales

     $1,387         $1,164        $2,652          $2,135   

Price change from comparative period

     (1)%      N/A        (1)%      N/A   

Volume change from comparative period

     20%       N/A        25%       N/A   

  Equity earnings

     $112         $58        $225          $63   

  EBITDA

     $453         $158        $834          $251   

  Certain items impacting EBITDA

     -         $(143)      $(8)         $(172)  

Electronic and Specialty Materials sales were $1,387 million in the second quarter of 2010, up 19 percent from $1,164 million in the second quarter of 2009. The 20 percent increase in volume was broad-based, with increases in all geographic areas and all major business units due to improved economic conditions in the electronics, housing and construction industries. EBITDA in the second quarter of 2010 was $453 million, up significantly from $158 million in the second quarter of 2009. EBITDA improved from last year due to higher volume, higher equity earnings from Dow Corning, and lower operating costs and SG&A expenses. EBITDA for the second quarter of 2009 was negatively impacted by $68 million of restructuring charges (see Note C to the Consolidated Financial Statements) and by $75 million increase in cost of sales related to the Rohm and Haas inventory fair valuation.

Dow Electronic Materials sales in the second quarter of 2010 were up 28 percent from the same quarter last year, driven by higher volume, especially in Asia Pacific, due to a robust demand recovery for chemical planarization pads and for materials used in printed circuit boards. Factory utilization rates for semiconductors improved versus the same quarter last year and were in excess of 90 percent. Demand for materials used in display panels also increased, as panel makers in Korea and Taiwan operated at full capacity. The Company successfully introduced new passivation technology for liquid crystal displays with a Korean-based original equipment manufacturer. This new technology uses less energy and provides a brighter display in televisions and in small handheld devices. In May 2010, the Company announced the addition of a new research and development center in South Korea to support growth in that region.

Specialty Materials sales in the second quarter of 2010 were up 15 percent from the second quarter of 2009 due to volume growth. Double-digit volume growth was reported in all geographic areas driven by economic recovery across several industries. Demand for ion exchange resins and reverse osmosis membranes was strong, especially in Asia Pacific and Latin America, due to increased water treatment projects. Demand for specialty biocides and cellulosics used in food and personal care applications was higher, and improved consumer confidence helped drive higher demand for raw materials used in household cleaning products.

Electronic and Specialty Materials sales were $2,652 million for the first six months of 2010, up 24 percent from $2,135 million in the first six months of 2009. Compared with the first six months of 2009, volume increased 25 percent and prices dropped 1 percent. EBITDA for the first six months of 2010 was $834 million, a significant increase from $251 million for the first six months of 2009 due to higher volume, higher equity earnings from Dow Corning, and lower SG&A expenses. Results in the first six months of 2010 were negatively impacted by an $8 million adjustment to the 2009 restructuring charge related to the closure of a small manufacturing facility. Results in the first six months of 2009 were negatively impacted by the restructuring charges and the increase in cost of sales related to the Rohm and Haas inventory fair valuation mentioned above and the Company’s $29 million share of restructuring charges recognized by Dow Corning.

 

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COATINGS AND INFRASTRUCTURE

The Coatings and Infrastructure segment consists of the following businesses: Dow Adhesives and Functional Polymers; Dow Building and Construction; and Dow Coating Materials. These businesses produce a wide variety of products with a broad range of applications – sticking and bonding solutions, construction materials (insulation and vinyl applications) and raw materials for architectural paints and industrial coatings.

 

  Coatings and Infrastructure    Three Months Ended      Six Months Ended      

  Actual Results

  In millions

   June 30,

2010  

  

  

  June 30,

2009  

  

  

  June 30,

2010  

  

  

  June 30,  

2009    

  Sales

   $1,347      $1,242      $2,547      $1,648  

  EBITDA

   $207      $25      $323      $46  
                        
  Coatings and Infrastructure    Three Months Ended      Six Months Ended      

  2010 Actual Versus 2009 Pro Forma

  In millions

   June 30,

2010  

  

  

  June 30,

2009  

  

  

  June 30,

2010  

  

  

  June 30,  

2009    

  Sales

   $1,347      $1,242      $2,547      $2,280  

Price change from comparative period

   10   N/A      9   N/A  

Volume change from comparative period

   (2)   N/A      3   N/A  

  Equity earnings

   $1      $1      $2      $2  

  EBITDA

   $207      $25      $323      $146  

  Certain items impacting EBITDA