tdcc1q0910q.htm
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 MARCH 31, 2009
 
 
 
Commission File Number:  1-3433
 
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
38-1285128
(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    o 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).                                                              o Yes    o 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 o
Non-accelerated filer   o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                             o Yes    þ No
 
Class
Common Stock, par value $2.50 per share
Outstanding at March 31, 2009
925,833,122 shares
 
 
 
 
 
The Dow Chemical Company

QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended March 31, 2009

 

 
   
PAGE
 
PART I – FINANCIAL INFORMATION
   
Item 1.
3
 
 
 
3
 
 
 
4
 
 
 
5
 
 
 
6
 
 
 
7
 
 
 
8
 
 
Item 2.
36
 
 
 
36
 
 
 
36
 
 
 
43
 
 
 
46
 
 
Item 3.
49
 
 
Item 4.
50
 
 
PART II – OTHER INFORMATION
 
 
 
Item 1.
51
 
 
Item 1A.
51
 
 
Item 2.
54
 
 
Item 6.
54
 
 
56
 
 
57
 



 
2

 

PART I - FINANCIAL INFORMATION
             
Item 1. Financial Statements.
             
               
  The Dow Chemical Company and Subsidiaries
  Consolidated Statements of Income
     
         Three Months Ended
     
March 31,
   
March 31,
 
In millions, except per share amounts      (Unaudited)
   
2009
   
2008
 
Net Sales
    $ 9,087     $ 14,824  
Cost of sales
      8,165       12,908  
Research and development expenses
      292       331  
Selling, general and administrative expenses
      444       498  
Amortization of intangibles
      22       22  
Restructuring charges
      19       -  
Acquisition-related expenses
      48       -  
Equity in earnings of nonconsolidated affiliates
      65       274  
Sundry income (expense) - net
      (3 )     46  
Interest income
      12       24  
Interest expense and amortization of debt discount
      154       145  
Income before Income Taxes
      17       1,264  
Provision (Credit) for income taxes
      (18 )     299  
Net Income
      35       965  
Net income attributable to noncontrolling interests
      11       24  
Net Income Attributable to The Dow Chemical Company
  $ 24     $ 941  
Share Data
                 
Earnings per common share - basic
    $ 0.03     $ 1.00  
Earnings per common share - diluted
    $ 0.03     $ 0.99  
Common stock dividends declared per share of common stock
  $ 0.15     $ 0.42  
Weighted-average common shares outstanding - basic
    925.4       942.1  
Weighted-average common shares outstanding - diluted
    932.0       951.6  
Depreciation
    $ 455     $ 495  
Capital Expenditures
    $ 234     $ 359  
See Notes to the Consolidated Financial Statements.
                 

3


  The Dow Chemical Company and Subsidiaries
  Consolidated Balance Sheets
   
March 31,
    Dec. 31,  
In millions      (Unaudited)
 
2009
   
2008
 
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 2,956     $ 2,800  
Accounts and notes receivable:
               
     Trade (net of allowance for doubtful receivables - 2009: $141; 2008: $124)
    3,819       3,782  
     Other
    2,714       3,074  
Inventories
    5,916       6,036  
Deferred income tax assets - current
    201       368  
Total current assets
    15,606       16,060  
Investments
               
Investment in nonconsolidated affiliates
    2,627       3,204  
Other investments
    2,165       2,245  
Noncurrent receivables
    336       276  
Total investments
    5,128       5,725  
Property
               
Property
    47,370       48,391  
Less accumulated depreciation
    33,547       34,097  
Net property
    13,823       14,294  
Other Assets
               
Goodwill
    3,392       3,394  
Other intangible assets (net of accumulated amortization - 2009: $853; 2008: $825)
    813       829  
Deferred income tax assets - noncurrent
    3,865       3,900  
Asbestos-related insurance receivables - noncurrent
    657       658  
Deferred charges and other assets
    875       614  
Total other assets
    9,602       9,395  
Total Assets
  $ 44,159     $ 45,474  
                 
Liabilities and Equity
               
Current Liabilities
               
Notes payable
  $ 844     $ 2,360  
Long-term debt due within one year
    1,223       1,454  
Accounts payable:
               
     Trade
    2,885       3,306  
     Other
    1,972       2,227  
Income taxes payable
    305       637  
Deferred income tax liabilities - current
    64       88  
Dividends payable
    141       411  
Accrued and other current liabilities
    2,318       2,625  
Total current liabilities
    9,752       13,108  
Long-Term Debt
    10,897       8,042  
Other Noncurrent Liabilities
               
Deferred income tax liabilities - noncurrent
    613       746  
Pension and other postretirement benefits - noncurrent
    5,420       5,466  
Asbestos-related liabilities - noncurrent
    800       824  
Other noncurrent obligations
    2,998       3,208  
Total other noncurrent liabilities
    9,831       10,244  
Preferred Securities of Subsidiaries
    500       500  
Stockholders' Equity
               
Common stock
    2,453       2,453  
Additional paid-in capital
    825       872  
Retained earnings
    16,896       17,013  
Accumulated other comprehensive loss
    (4,674 )     (4,389 )
Treasury stock at cost
    (2,384 )     (2,438 )
The Dow Chemical Company's stockholders' equity
    13,116       13,511  
Noncontrolling interests
    63       69  
Total equity
    13,179       13,580  
Total Liabilities and Equity
  $ 44,159     $ 45,474  
See Notes to the Consolidated Financial Statements.
               

4


The Dow Chemical Company and Subsidiaries
   
         Three Months Ended
   
March 31,
   
March 31,
 
In millions    (Unaudited)
 
2009
   
2008
 
Operating Activities
           
Net Income
  $ 35     $ 965  
Adjustments to reconcile net income to net cash provided by operating activities:
               
          Depreciation and amortization
    508       574  
          Provision (Credit) for deferred income tax
    (83 )     64  
          Earnings of nonconsolidated affiliates less than dividends received
    496       45  
          Pension contributions
    (51 )     (43 )
          Net loss (gain) on sale of consolidated companies
    10       (18 )
          Net loss (gain) on sales of investments
    2       (18 )
          Net gain on sales of property and businesses
    (10 )     (25 )
          Other net loss
    -       1  
          Restructuring charges
    19       -  
Changes in assets and liabilities:
               
          Accounts and notes receivable
    (23 )     (689 )
          Inventories
    120       (786 )
          Accounts payable
    (614 )     326  
          Other assets and liabilities
    (486 )     51  
Cash provided by (used in) operating activities
    (77 )     447  
Investing Activities
               
Capital expenditures
    (234 )     (359 )
Proceeds from sales of property, businesses and consolidated companies
    33       88  
Acquisitions of businesses
    (5 )     -  
Purchase of previously leased assets
    -       (10 )
Investments in consolidated companies
    (7 )     (31 )
Investments in nonconsolidated affiliates
    (17 )     (27 )
Distributions from nonconsolidated affiliates
    3       2  
Purchases of investments
    (108 )     (285 )
Proceeds from sales and maturities of investments
    159       332  
Cash used in investing activities
    (176 )     (290 )
Financing Activities
               
Changes in short-term notes payable
    (1,564 )     559  
Proceeds from revolving credit facility
    3,000       -  
Payments on long-term debt
    (367 )     (57 )
Proceeds from issuance of long-term debt
    74       5  
Purchases of treasury stock
    (5 )     (411 )
Proceeds from sales of common stock
    -       21  
Payment of deferred financing costs
    (265 )     -  
Distributions to noncontrolling interests
    (23 )     (22 )
Dividends paid to stockholders
    (388 )     (395 )
Cash provided by (used in) financing activities
    462       (300 )
Effect of Exchange Rate Changes on Cash
    (53 )     80  
Summary
               
Increase (Decrease) in cash and cash equivalents
    156       (63 )
Cash and cash equivalents at beginning of year
    2,800       1,736  
Cash and cash equivalents at end of period
  $ 2,956     $ 1,673  
See Notes to the Consolidated Financial Statements.
               

5

 
The Dow Chemical Company and Subsidiaries
   
         Three Months Ended
   
March 31,
   
March 31,
 
In millions      (Unaudited)
 
2009
   
2008
 
Common Stock
           
Balance at beginning of year and end of period
  $ 2,453     $ 2,453  
Additional Paid-in Capital
               
Balance at beginning of year
    872       902  
Stock-based compensation
    (47 )     45  
Balance at end of period
    825       947  
Retained Earnings
               
Balance at beginning of year
    17,013       18,004  
Net income attributable to The Dow Chemical Company
    24       941  
Dividends declared on common stock (Per share: $0.15 in 2009, $0.42 in 2008)
    (139 )     (391 )
Other
    (2 )     (12 )
Balance at end of period
    16,896       18,542  
Accumulated Other Comprehensive Income (Loss), Net of Tax
               
Unrealized Gains (Losses) on Investments at beginning of year
    (111 )     71  
     Unrealized losses
    (24 )     (29 )
     Balance at end of period
    (135 )     42  
Cumulative Translation Adjustments at beginning of year
    221       723  
     Translation adjustments
    (384 )     573  
     Balance at end of period
    (163 )     1,296  
Pension and Other Postretirement Benefit Plans at beginning of year
    (4,251 )     (989 )
     Adjustments to pension and other postretirement benefit plans
    5       14  
     Pension and Other Postretirement Benefit Plans at end of period
    (4,246 )     (975 )
Accumulated Derivative Gain (Loss) at beginning of year
    (248 )     25  
     Net hedging results
    (61 )     22  
     Reclassification to earnings
    179       5  
     Balance at end of period
    (130 )     52  
Total accumulated other comprehensive income (loss)
    (4,674 )     415  
Treasury Stock
               
Balance at beginning of year
    (2,438 )     (1,800 )
Purchases
    (5 )     (411 )
Issuance to employees and employee plans
    59       33  
Balance at end of period
    (2,384 )     (2,178 )
The Dow Chemical Company's Stockholders' Equity
    13,116       20,179  
Noncontrolling Interests
               
Balance at beginning of year
    69       414  
Net income attributable to noncontrolling interests
    11       24  
Other
    (17 )     (8 )
Balance at end of period
    63       430  
Total Equity
  $ 13,179     $ 20,609  
See Notes to the Consolidated Financial Statements.
               

 
The Dow Chemical Company and Subsidiaries
   
         Three Months Ended
   
March 31,
   
March 31,
 
In millions      (Unaudited)
 
2009
   
2008
 
Net Income
  $ 35     $ 965  
Other Comprehensive Income (Loss), Net of Tax
               
Net unrealized losses on investments
    (24 )     (29 )
Translation adjustments
    (384 )     573  
Adjustments to pension and other postretirement benefit plans
    5       14  
Net gains on cash flow hedging derivative instruments
    118       27  
Total other comprehensive income (loss)
    (285 )     585  
Comprehensive Income (Loss)
    (250 )     1,550  
Comprehensive income attributable to noncontrolling interests, net of tax
    11       24  
Comprehensive Income (Loss) Attributable to The Dow Chemical Company
  $ (261 )   $ 1,526  
See Notes to the Consolidated Financial Statements.
               

 
 
 The Dow Chemical Company and Subsidiaries
 
 
 PART I – FINANCIAL INFORMATION, Item 1. Financial Statements.
 
 (Unaudited)  
 
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 (“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, 2008.


NOTE B – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting for Noncontrolling Interests
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.” The Statement established accounting and reporting standards for noncontrolling interests in a subsidiary and for deconsolidation of a subsidiary. The Statement was effective January 1, 2009 for the Company. The retrospective presentation and disclosure requirements outlined by SFAS No. 160 have been incorporated into this Quarterly Report on Form 10-Q for the interim period ended March 31, 2009.
 
The implementation of SFAS No. 160 revised all previous references to “minority interests” in the consolidated financial statement to “noncontrolling interests,” and resulted in the following changes:
 
·
The Consolidated Statements of Income now present “Net Income,” which includes “Net income attributable to noncontrolling interests” and “Net Income Attributable to The Dow Chemical Company.” “Net Income Attributable to The Dow Chemical Company” is equivalent to the previously reported “Net Income Available for Common Stockholders.” No change was required to the presentation of earnings per share.
 
·
The Consolidated Balance Sheets now present “Noncontrolling interests” as a component of “Total equity.” “Noncontrolling interests” is equivalent to the previously reported “Minority Interest in Subsidiaries.” “The Dow Chemical Company’s stockholders’ equity” is equivalent to the previously reported “Net stockholders’ equity.”
 
·
The Consolidated Statements of Comprehensive Income now present “Comprehensive Income,” which includes “Comprehensive income attributable to noncontrolling interests” and “Comprehensive Income Attributable to The Dow Chemical Company.” “Comprehensive Income Attributable to The Dow Chemical Company” is equivalent to the previously reported “Comprehensive Income.”
 
·
The Consolidated Statements of Cash Flows now begin with “Net Income” instead of “Net Income Available for Common Stockholders.”
 
·
Interim Consolidated Statements of Equity have been added to fulfill the disclosure requirements of SFAS No. 160.

Other Accounting Pronouncements
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS No. 157, “Fair Value Measurements,” for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. On January 1, 2009, the Company adopted SFAS No. 157 for these assets and liabilities. Since the Company’s existing fair value measurements for nonfinancial assets and nonfinancial liabilities are consistent with the guidance of the Statement, the adoption of the Statement did not have a material impact on the Company’s consolidated financial statements.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of SFAS No. 133.” The Statement requires enhanced disclosures about an entity’s derivative and hedging activities. The Statement was effective for fiscal years and interim periods beginning after November 15, 2008, which was January 1, 2009 for the Company. The Company’s enhanced disclosures are included in Note G.
 
In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The FSP affects entities that accrue dividends on share-based payment awards during the awards’ service period when the dividends do not need to be returned if the employees forfeit the award. This FSP was effective for fiscal years beginning after December 15, 2008, which was January 1, 2009 for the Company. The adoption of the FSP did not have a material impact on the Company’s consolidated financial statements.


In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” The FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value per SFAS No. 157, if the acquisition-date fair value can be reasonably determined. If the fair value cannot be reasonably determined, then the asset or liability should be recognized in accordance with SFAS No. 5, “Accounting for Contingencies,” and FASB Interpretation (“FIN”) No. 14, “Reasonable Estimation of the Amount of a Loss - an interpretation of FASB Statement No. 5.” The FSP also requires new disclosures for the assets and liabilities within the scope of the FSP. The Company is applying the guidance of the FSP to business combinations completed on or after January 1, 2009. See Note O for disclosures related to a recent business combination.

Accounting Standards Issued But Not Yet Adopted
In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” The FSP requires new disclosures on investment policies and strategies, categories of plan assets, fair value measurements of plan assets, and significant concentrations of risk, and is effective for fiscal years ending after December 15, 2009, with earlier application permitted. The Company will include the required disclosures in the Company’s Annual Report on Form 10-K for the annual period ending December 31, 2009.
 
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” The FSP amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" and Accounting Principles Board (“APB”) Opinion No. 28, “Interim Financial Reporting,” to require disclosures about the fair value of financial instruments during interim reporting periods. The FSP is effective for interim and annual periods ending after June 15, 2009, which is June 30, 2009 for the Company. The Company will include the required disclosures in the Company’s Quarterly Report on Form 10-Q for the interim period ending June 30, 2009.
 
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” The FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The FSP is effective for interim and annual periods ending after June 15, 2009, which is June 30, 2009 for the Company. The FSP is not anticipated to have a material impact on the Company’s consolidated financial statements.
 
In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” The FSP provides additional guidance for estimating fair value when the market activity for an asset or liability has declined significantly. The FSP is effective for interim and annual periods ending after June 15, 2009, which is June 30, 2009 for the Company. The FSP is not anticipated to have a material impact on the Company’s consolidated financial statements.


NOTE C – RESTRUCTURING

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 recent, severe economic downturn. The restructuring plan includes 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 impact of the charges was shown as “Restructuring charges” in the 2008 consolidated statements of income.
 
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, 2008 a liability of $319 million remained for approximately 2,965 employees. During the first quarter of 2009, the Company increased the severance reserve by a net amount of $19 million, including approximately 500 additional employees. In the first quarter of 2009, severance of $123 million was paid to 1,448 employees, leaving a liability of $210 million for 2,033 employees at March 31, 2009.

 
The following table summarizes 2009 activities related to the Company’s 2008 restructuring reserve:

2009 Activities Related to 2008 Restructuring
 
 
In millions
 
Costs associated
 with Exit or
Disposal
Activities
   
Severance
 Costs
   
Total
 
Reserve balance at December 31, 2008
  $ 128     $ 319     $ 447  
Adjustment to reserve
    -       19       19  
Cash payments
    -       (123 )     (123 )
Foreign currency impact
    -       (5 )     (5 )
Reserve balance at March 31, 2009
  $ 128     $ 210     $ 338  

2007 Restructuring
On December 3, 2007, the Company’s Board of Directors approved a restructuring plan that includes the shutdown of a number of assets and organizational changes within targeted support functions to improve the efficiency and cost effectiveness of the Company’s global operations. As a result of these shutdowns and organizational changes, which are scheduled to be completed by the end of 2009, the Company recorded pretax restructuring charges totaling $590 million in the fourth quarter of 2007. The charges consisted of asset write-downs and write-offs of $422 million, costs associated with exit or disposal activities of $82 million and severance costs of $86 million. The impact of the charges was shown as “Restructuring charges” in the 2007 consolidated statements of income.
 
The severance component of the 2007 restructuring charges of $86 million was for the separation of approximately 978 employees under the terms of Dow’s ongoing benefit arrangements, primarily over two years. At December 31, 2008, a liability of $37 million remained for approximately 527 employees. In the first quarter of 2009, severance of $12 million was paid to 102 employees, leaving a liability of $24 million for 425 employees at March 31, 2009.
 
Cash payments of $18 million were made in the first quarter of 2009 related to contract termination fees.
 
The following table summarizes 2009 activities related to the Company’s 2007 restructuring reserve:

2009 Activities Related to 2007 Restructuring
 
 
In millions
 
Costs associated
with Exit or
 Disposal
Activities
   
Severance
Costs
   
Total
 
Reserve balance at December 31, 2008
  $ 93     $ 37     $ 130  
Cash payments
    (18 )     (12 )     (30 )
Foreign currency impact
    1       (1 )     -  
Reserve balance at March 31, 2009
  $ 76     $ 24     $ 100  

2006 Restructuring
On August 29, 2006, the Company’s Board of Directors approved a plan to shut down a number of assets around the world as the Company continues its drive to improve the competitiveness of its global operations. As a consequence of these shutdowns, which were completed in the first quarter of 2009, and other optimization activities, the Company recorded pretax restructuring charges totaling $591 million in 2006. The charges consisted of asset write-downs and write-offs of $346 million, costs associated with exit or disposal activities of $172 million and severance costs of $73 million. The impact of the charges was shown as “Restructuring charges” in the 2006 consolidated statements of income.
 
The severance component of the 2006 restructuring charges of $73 million was for the separation of approximately 810 employees under the terms of Dow’s ongoing benefit arrangements, primarily over two years. At December 31, 2008, a liability of $14 million remained for approximately 215 employees. In the first quarter of 2009, severance of $4 million was paid to 40 employees, leaving a liability of $10 million for 175 employees at March 31, 2009.


The following table summarizes 2009 activities related to the Company’s 2006 restructuring reserve:

2009 Activities Related to 2006 Restructuring
 
 
In millions
 
Costs associated
with Exit or
Disposal
Activities
   
Severance Costs
   
Total
 
Reserve balance at December 31, 2008
  $ 92     $ 14     $ 106  
Cash payments
    (3 )     (4 )     (7 )
Foreign currency impact
    (1 )     -       (1 )
Reserve balance at March 31, 2009
  $ 88     $ 10     $ 98  


NOTE D – ACQUISITIONS

Acquisition-Related Expenses
During the first quarter of 2009, pretax charges totaling $48 million were recorded for legal expense and other transaction costs related to the April 1, 2009 acquisition of Rohm and Haas Company (“Rohm and Haas”); these charges were reflected in Unallocated and Other. These charges were expensed in accordance with Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”).

Subsequent Event
See Note O for information on the acquisition of Rohm and Haas on April 1, 2009.


NOTE E – INVENTORIES

The following table provides a breakdown of inventories:

Inventories
In millions
 
March 31,
2009
   
Dec. 31,
2008
 
Finished goods
  $ 3,239     $ 3,351  
Work in process
    1,215       1,217  
Raw materials
    823       830  
Supplies
    639       638  
Total inventories
  $ 5,916     $ 6,036  

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $381 million at March 31, 2009 and $627 million at December 31, 2008.


NOTE F – GOODWILL AND OTHER INTANGIBLE ASSETS

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

Goodwill
In millions
 
Performance
 Plastics
   
Performance Chemicals
   
Agricultural
Sciences
   
Basic
Plastics
   
Hydrocarbons
and Energy
   
Total
 
Balance at December 31, 2008
  $ 874     $ 1,001     $ 1,391     $ 65     $ 63     $ 3,394  
Adjustment to goodwill related to the 2008 acquisition of Dairyland Seed Co., Inc.
    -       -       (2 )     -       -       (2 )
Balance at March 31, 2009
  $ 874     $ 1,001     $ 1,389     $ 65     $ 63     $ 3,392  



Goodwill Impairments
During the fourth quarter of 2008, the Company recorded an estimated goodwill impairment loss of $209 million for the Dow Automotive reporting unit. As required by SFAS No. 142, “Goodwill and Other Intangible Assets,” the second step of goodwill impairment testing to determine the implied fair value of goodwill for the Dow Automotive reporting unit was finalized in the first quarter of 2009 and no adjustment was required to be made to the estimated impairment loss based on completion of the allocation process.
 
The following table provides information regarding the Company’s other intangible assets:

Other Intangible Assets
 
At March 31, 2009
   
At December 31, 2008
 
In millions
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
   
Gross
Carrying
 Amount
   
Accumulated
Amortization
   
Net
 
Intangible assets with finite lives:
                                   
Licenses and intellectual property
  $ 309     $ (197 )   $ 112     $ 316     $ (192 )   $ 124  
Patents
    139       (101 )     38       139       (100 )     39  
Software
    719       (373 )     346       700       (363 )     337  
Trademarks
    174       (63 )     111       169       (61 )     108  
Other
    325       (119 )     206       330       (109 )     221  
Total
  $ 1,666     $ (853 )   $ 813     $ 1,654     $ (825 )   $ 829  

The following table provides information regarding amortization expense:

Amortization Expense
                           Three Months Ended
In millions
March 31,
2009
March 31,
2008
Other intangible assets, excluding software
$22
$22
Software, included in “Cost of sales”
$14
$11

Total estimated amortization expense for 2009 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2009
$140
2010
$143
2011
$132
2012
$114
2013
$93
2014
$85


NOTE G – FINANCIAL INSTRUMENTS

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 per SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted, where appropriate. SFAS No. 133 requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. 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 per SFAS No. 133. The potential impact of creating such additional exposures is not material to the Company's results.


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 2009. No significant concentration of credit risk existed at March 31, 2009.
 
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.

Foreign Currency Risk Management
The Company’s global operations require active participation in foreign exchange markets. The Company enters into foreign exchange forward contracts, 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 March 31, 2009, 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 second quarter of 2009.

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 March 31, 2009, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements had various expiration dates primarily in 2009.

Accounting for Derivative Instruments and Hedging Activities
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, 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 at March 31, 2009 was $7 million after tax ($9 million after tax at December 31, 2008). The Company had open interest rate derivatives with a U.S. dollar equivalent of $14 million at March 31, 2009.
 
At March 31, 2009, the Company had open foreign currency forward contracts in a net gain position of $2 million (net gain position of $9 million at December 31, 2008) designated as cash flow hedges of underlying forecasted purchases of feedstocks. Current open contracts hedge forecasted transactions until December 2009. 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 March 31, 2009 was $5 million after tax ($15 million after tax at December 31, 2008). At March 31, 2009, the Company had open forward contracts with various expiration dates to buy, sell or exchange foreign currencies with a U.S. dollar equivalent of $2,957 million.

 
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 March 2010. The effective portion of the mark-to-market effects of the cash flow hedge instruments 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 at March 31, 2009 was $114 million after tax (net loss of $239 million after tax at December 31, 2008). At March 31, 2009, the Company had an aggregate of 0.8 million barrels of outstanding notional volume of crude oil on commodity forward contracts to hedge forecasted purchases.

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 income. The short-cut method under SFAS No. 133 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 March 31, 2009 and December 31, 2008.

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 $46 million after tax at March 31, 2009 (net gain of $36 million after tax at December 31, 2008). At March 31, 2009, the Company had open forward contracts or outstanding options to buy, sell or exchange foreign currencies with April 2009 expiration dates with a U.S. dollar equivalent of $198 million. At March 31, 2009, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $1,190 million.

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 of SFAS No. 133. At March 31, 2009, the Company had net derivative assets of $8 million and net derivative liabilities of $7 million related to these instruments, with the related mark-to-market effects included in “Cost of sales” in the consolidated statements of income. At December 31, 2008, the Company had net derivative assets of $19 million and net derivative liabilities of $17 million related to these instruments. The Company had no outstanding commodity forward contracts at March 31, 2009.
 
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. At March 31, 2009, the Company had net derivative assets of $68 million ($111 million at December 31, 2008) and net derivative liabilities of $110 million ($160 million at December 31, 2008) related to these instruments. The Company had open forward contracts, options and cross-currency swaps with various expiration dates to buy, sell or exchange foreign currencies with a U.S. dollar equivalent of $9,677 million at March 31, 2009.


The following table provides the fair value and gross balance sheet classification of derivative instruments at March 31, 2009 and December 31, 2008:

Fair Value of Derivative Instruments
In millions
Balance Sheet Classification
 
March 31,
2009
   
Dec. 31,
2008
 
Asset Derivatives
             
Derivatives designated as hedges:
             
Foreign currency
Accounts and notes receivable – Other
  $ 44     $ 77  
Commodities
Accounts and notes receivable – Other
    79       68  
Total derivatives designated as hedges
    $ 123     $ 145  
Derivatives not designated as hedges:
                 
Foreign currency
Accounts and notes receivable – Other
  $ 114     $ 235  
Commodities
Accounts and notes receivable – Other
    37       63  
Total derivatives not designated as hedges
    $ 151     $ 298  
Total asset derivatives
    $ 274     $ 443  
Liability Derivatives
                 
Derivatives designated as hedges:
                 
Foreign currency
Accounts payable – Other
  $ 47     $ 69  
Commodities
Accounts payable – Other
    171       262  
Commodities
Other noncurrent obligations
    -       22  
Total derivatives designated as hedges
    $ 218     $ 353  
Derivatives not designated as hedges:
                 
Foreign currency
Accounts payable – Other
  $ 156     $ 284  
Commodities
Accounts payable – Other
    36       61  
Total derivatives not designated as hedges
    $ 192     $ 345  
Total liability derivatives
    $ 410     $ 698  


Effect of Derivative Instruments for the three months ended March 31, 2009
 
In millions
 
Change in
Unrealized
Gain (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
    $ (3 )     -  
Commodities
  $ (5 )  
Cost of sales
      (187 )   $ (1 )
Foreign currency
    (10 )  
Cost of sales
      11       -  
Net foreign investment:
                             
Foreign currency
    (3 )    n/a
 
    -       -  
Total derivatives designated as hedges
  $ (18 )           $ (179 )   $ (1 )
Derivatives not designated as hedges:
                               
Foreign currency (5)
    -    
Sundry income – net
      -     $ (94 )
Commodities
    -    
Cost of sales
      -       (1 )
Total derivatives not designated as hedges
    -               -     $ (95 )
Total derivatives
  $ (18 )           $ (179 )   $ (96 )
(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)
Foreign currency derivatives not designated as hedges under SFAS No. 133 are offset by foreign exchange gains of $93 million resulting from the underlying exposures of foreign currency denominated assets and liabilities per SFAS No. 52, “Foreign Currency Translation.”

The net after-tax amounts to be reclassified from AOCI to income within the next 12 months are a $6 million loss for interest rate contracts, a $108 million loss for commodity contracts and a $5 million gain for foreign currency contracts.



NOTE H – 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 at March 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 (2)
  $ 321     $ 21       -     $ 342  
Debt securities (2)
    -       1,430       -       1,430  
Derivatives relating to: (3)
                               
Foreign currency
    -       158     $ (84 )     74  
Commodities
    -       116       (67 )     49  
Total assets at fair value
  $ 321     $ 1,725     $ (151 )   $ 1,895  
Liabilities at fair value:
                               
Derivatives relating to: (3)
                               
Foreign currency
    -     $ 203     $ (84 )   $ 119  
Commodities
    -       207       (67 )     140  
Total liabilities at fair value
    -     $ 410     $ (151 )   $ 259  
(1)
Cash collateral is classified as “Accounts and notes receivable – Other” in the consolidated balance sheets. Amounts represent the effect of legally enforceable 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)
The Company’s investments in equity and debt securities are classified as available-for-sale, and are included in “Other investments” in the consolidated balance sheets.
(3) 
See Note G for the classification of derivatives in the consolidated balance sheets.

For assets and liabilities classified as Level 1 (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 Level 2 assets and liabilities, 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 placed through tolerance/quality checks. For long-term debt as well as 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 G for further information on the types of instruments used by the Company for risk management.
 
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. Per the guidance of FSP FIN No. 39-1, “Amendment of FASB Interpretation No. 39,” collateral accounts are netted with corresponding assets and liabilities. The Company had no cash collateral at March 31, 2009.



NOTE I – 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 have agreed to provide a credit facility to Dow Corning in an aggregate amount of $300 million. The Company’s share of the credit facility is $150 million and is subject to the terms and conditions stated in the Joint Plan. At March 31, 2009, 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.

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 March 31, 2009, the Company had accrued obligations of $308 million for environmental remediation and restoration costs, including $21 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. 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, 2008, the Company had accrued obligations of $312 million for environmental remediation and restoration costs, including $22 million for the remediation of Superfund sites.

Midland Site Environmental Matters
On June 12, 2003, the Michigan Department of Environmental Quality (“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 Midland area soils; Tittabawassee and Saginaw River sediment and floodplain soils; and Saginaw Bay. The License required the Company, by August 11, 2003, to propose a detailed Scope of Work for the off-site investigation for the City of Midland and the Tittabawassee River and floodplain for review and approval by the MDEQ. Revised Scopes of Work were approved by the MDEQ on October 18, 2005. The Company was required to submit a Scope of Work for the investigation of the Saginaw River and Saginaw Bay by August 11, 2007. The Company submitted the Scope of Work for the Saginaw River and Saginaw Bay on July 13, 2007. The Company received a Notice of Deficiency dated August 29, 2007, from the MDEQ with respect to the Scope of Work for the Saginaw River and Saginaw Bay. The Company submitted a revised Scope of Work for the Saginaw River and Saginaw Bay to the MDEQ on October 15, 2007. On February 1, 2008, the Company received an approval with modification for the Saginaw River and Saginaw Bay Scope of Work. The Company appealed the MDEQ’s approval with modification action in Midland Circuit Court on February 21, 2008 and then by filing a Contested Case Petition with the Michigan Office of Administrative Hearings and Rules on March 28, 2008. Following subsequent discussions between the Company and the MDEQ, a Remedial Investigation Work Plan along with a revised Scope of Work for the Saginaw River was submitted to the MDEQ on June 10, 2008. The Midland Circuit Court matter has been stayed by agreement of the parties.


Discussions between the Company and the MDEQ that occurred in 2004 and early 2005 regarding how to proceed with off-site corrective action under the License resulted in the execution of the Framework for an Agreement Between the State of Michigan and The Dow Chemical Company (the “Framework”) on January 20, 2005. The Framework committed the Company to propose a remedial investigation work plan by the end of 2005, conduct certain studies, and take certain immediate interim remedial actions in the City of Midland and along the Tittabawassee River.

Remedial Investigation Work Plans
The Company submitted Remedial Investigation Work Plans for the City of Midland and for the Tittabawassee River on December 29, 2005. By letters dated March 2, 2006 and April 13, 2006, the MDEQ provided two Notices of Deficiency (“Notices”) to the Company regarding the Remedial Investigation Work Plans. The Company responded, as required, to some of the items in the Notices on May 1, 2006, and as required responded to the balance of the items and submitted revised Remedial Investigation Work Plans on December 1, 2006. In response to subsequent discussions with the MDEQ, the Company submitted further revised Remedial Investigation Work Plans on September 17, 2007, for the Tittabawassee River and on October 15, 2007, for the City of Midland. On June 10, 2008, the Company submitted revised Human Health Risk Assessment and Ecological Risk Assessment Work Plans for the Tittabawassee River in addition to a Work Plan for the collection of fish for analysis in support of the Human Health Risk Assessment Work Plan. Also on June 10, 2008, the Company submitted the Remedial Investigation Work Plan for the Saginaw River and the Saginaw Bay. The Company has not received comments on these plans.

Studies Conducted
On July 12, 2006, the MDEQ approved the sampling for the first six miles of the Tittabawassee River. On December 1, 2006, the MDEQ approved the Sampling and Analysis Plan in Support of Bioavailability Study for Midland (the “Plan”). The results of the Plan were provided to the MDEQ on March 22, 2007. On May 3, 2007, the MDEQ approved the GeoMorph® Pilot Site Characterization Report for the first six miles and approved this approach for the balance of the Tittabawassee River with some qualifications. On July 12, 2007, the MDEQ approved, with qualifications, the sampling for the next 11 miles of the Tittabawassee River. On March 1, 2008 the Company submitted to the MDEQ the Tittabawassee River Site Characterization Report that incorporated the data obtained from the 2006 and 2007 field investigations. On June 30, 2008, the Company submitted the Lower Tittabawassee River Sampling and Analysis Plan to the MDEQ. The Sampling and Analysis Plan was approved by the MDEQ by letters dated July 10, 2008 and August 15, 2008. The sampling work has been completed and the results are due to be submitted in a report to MDEQ by June 1, 2009.

Interim Remedial Actions
The Company has been working with the MDEQ to implement Interim Response Activities and Pilot Corrective Action Plans in specific areas in and along the Tittabawassee River, where elevated levels of dioxins and furans were found during the investigation of the first six miles of the river. In September 2008, the Company and the MDEQ reached agreement to implement pilot projects to evaluate their applicability to future actions.

Removal Actions
On June 27, 2007, the U.S. Environmental Protection Agency (“EPA”) sent a letter to the Company demanding that the Company enter into consent orders under Section 106 of the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) for three areas identified during investigation of the first six miles of the Tittabawassee River as areas for interim remedial actions under MDEQ oversight. The EPA sought a commitment that the Company immediately engage in remedial actions to remove soils and sediments. Three removal orders were negotiated and were signed on July 12, 2007, and the soil and sediment removal work required by these orders has been completed. On November 15, 2007, the Company and the EPA entered into a CERCLA removal order requiring the Company to remove sediment in the Saginaw River where elevated concentrations were identified during investigative work conducted on the Saginaw River. The sediment removal work was completed in December 2007. On July 11, 2008, the Company and the EPA entered into a removal order under which the Company is required to remove soil, pave a road and driveways, and clean homes along a strip of land approximately 150 feet by 1,000 feet along the lower part of the Tittabawassee River. The work required under this removal order was completed in December 2008. On February 27, 2009, the Company and the EPA entered into a removal order under which the Company is required to remove soil, pave a parking lot at a township park, and further assess and cover or remove some soil on residential properties that border the park. The work required under this order is expected to be completed in mid-2009.

 
The Framework also contemplates that the Company, the State of Michigan and other federal and tribal governmental entities will negotiate the terms of an agreement or agreements to resolve potential governmental claims against the Company related to historical off-site contamination associated with the Midland site. The Company and the governmental parties began to meet in the fall of 2005 and entered into a Confidentiality Agreement in December 2005. The Company continues to conduct negotiations with the governmental parties under the Federal Alternative Dispute Resolution Act.
 
On September 12, 2007, the EPA issued a press release reporting that they were withdrawing from the alternative dispute resolution process. On September 28, 2007, the Company entered into a Funding and Participation Agreement with the natural resource damage trustees that addressed the Company’s payment of past costs incurred by the 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 October 10, 2007, the EPA presented a Special Notice Letter to the Company offering to enter into negotiations for an administrative order on consent for the Company to conduct or fund a remedial investigation, a feasibility study, interim remedial actions and a remedial design for the Tittabawassee River, Saginaw River, and Saginaw Bay. The Company agreed to enter into negotiations and submitted its Good Faith Offer to the EPA on December 10, 2007. On January 4, 2008, the EPA terminated negotiations under the Special Notice Letter.
 
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 for public review and comment their “Natural Resource Damage Assessment Plan for the Tittabawassee River System Assessment Area.”
 
On October 31, 2008, the EPA informed the Company that the Company would receive a Special Notice Letter (“Letter”) on or about December 15, 2008 offering to enter into negotiations for an administrative order on consent for the Company to conduct or fund a remedial investigation, a feasibility study and a remedial design for the Tittabawassee River, Saginaw River and Saginaw Bay. On November 18, 2008, the Company entered into a Confidentiality Agreement with the EPA and the MDEQ regarding the Letter negotiations. On December 15, 2008, the Company received the Letter from the EPA, proposing that the Company enter into negotiations on an administrative order on consent to perform a remedial investigation, a feasibility study, an engineering evaluation, a cost analysis and a remedial design for the Tittabawassee River, Saginaw River and Saginaw Bay. The December 15, 2008 Letter also included a demand for $1.8 million for the EPA’s response costs through October 31, 2008. On December 22, 2008, the Company indicated it was willing to enter into negotiations, which have since commenced. On February 13, 2009, the Company made a proposal to the EPA to perform the work. Following the Company’s proposal, the EPA suspended discussions and sent representatives to the mid-Michigan area to speak with the Company, MDEQ and community stakeholders to discuss the situation and the process to date. The Company is awaiting notification of if and when negotiations will resume.
 
At the end of 2008, the Company had an accrual for off-site corrective action of $8 million (included in the total accrued obligation of $312 million at December 31, 2008) based on the range of activities that the Company proposed and discussed implementing with the MDEQ and which is set forth in the Framework. At March 31, 2009, the accrual for off-site corrective action was $9 million (included in the total accrued obligation of $308 million at March 31, 2009).

Environmental Matters Summary
It is the opinion of the Company’s management that the possibility is remote that costs in excess of those disclosed will have a material adverse impact on the Company’s consolidated financial statements.

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.
 
Based on ARPC’s December 2006 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 for the 15-year period ending in 2021 to $1.2 billion at December 31, 2006.
 
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 December 2006 study. 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 UCC 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 the asbestos-related liability for pending and future claims by $54 million to $952 million, which covered the 15-year period ending in 2023, excluding future defense and processing costs. At December 31, 2008, the asbestos-related liability for pending and future claims was $934 million. At December 31, 2008, approximately 21 percent of the recorded liability related to pending claims and approximately 79 percent related to future claims.
 
Based on Union Carbide’s review of 2009 activity, Union Carbide determined that no adjustment to the accrual was required at March 31, 2009. Union Carbide’s asbestos-related liability for pending and future claims was $910 million at March 31, 2009. 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. This lawsuit 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. Although the lawsuit is continuing, through the end of the first quarter of 2009, Union Carbide had reached settlements with several of the carriers involved in this litigation.
 
Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $403 million at March 31, 2009 and December 31, 2008. At March 31, 2009 and December 31, 2008, 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 the asbestos-related liability, Union Carbide had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:

Receivables for Costs Submitted to Insurance Carriers
 
In millions
 
March 31,
2009
   
Dec. 31,
2008
 
Receivables for defense costs
  $ 26     $ 28  
Receivables for resolution costs
    245       244  
Total
  $ 271     $ 272  

Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $11 million in the first quarter of 2009 and $14 million in the first quarter of 2008 and was reflected in “Cost of sales.”
 
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) on the Dow Entities. Several other companies were also named and fined. In the fourth quarter of 2006, the Company recognized a loss contingency of $85 million related to the fine. The Company has appealed the EC’s decision. 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.
 
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 $70 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.

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 Company’s consolidated financial statements.

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 $1,502 million in 2008, $1,624 million in 2007 and $1,356 million in 2006. The Company’s take-or-pay commitments associated with these agreements at December 31, 2008 are included in the table below.
 
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 36 years and another has terms extending to 80 years. The determinable future commitment 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, 2008:

Fixed and Determinable Portion of Take-or-Pay and
Throughput Obligations at December 31, 2008
In millions
 
2009
  $ 2,023  
2010
    1,708  
2011
    1,798  
2012
    1,392  
2013
    895  
2014 and beyond
    5,969  
Total
  $ 13,785  

In addition to the take-or-pay obligations at December 31, 2008, the Company had outstanding commitments which ranged from one to nine years for steam, electrical power, materials, property and other items used in the normal course of business of approximately $327 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 seven years, and trade financing transactions in Latin America and Asia Pacific, 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.
 
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 March 31, 2009
In millions
Final
Expiration
 
Maximum Future Payments
   
Recorded
Liability
 
Guarantees
2014
  $ 452     $ 16  
Residual value guarantees
2015
    974       5  
Total guarantees
    $ 1,426     $ 21  


Guarantees at December 31, 2008
In millions
Final Expiration
 
Maximum Future Payments
   
Recorded Liability
 
Guarantees
2014
  $ 330     $ 23  
Residual value guarantees
2015
    985       4  
Total guarantees
    $ 1,315     $ 27  

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 and Europe; capping activities at landfill sites in the United States, Canada, Italy and Brazil; and asbestos encapsulation as a result of planned demolition and remediation activities at manufacturing and administrative sites in the United States, Canada and Europe.
 
The aggregate carrying amount of asset retirement obligations recognized by the Company was $104 million at March 31, 2009 and $106 million at December 31, 2008. The discount rate used to calculate the Company’s asset retirement obligation was 7.13 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 J – LONG-TERM DEBT

On March 9, 2009 the Company borrowed $3 billion under its Five Year Competitive Advance and Revolving Credit Facility Agreement, dated April 24, 2006. The funds are due in April 2011 and bear interest at a variable LIBOR-plus rate. The Company is using the funds to finance day-to-day operations, to repay indebtedness maturing in the ordinary course of business and for other general corporate purposes.

Annual Installments on Long-Term Debt
for Next Five Years
In millions
2009
$1,148
2010
$1,027
2011
$4,472
2012
$1,008
2013
$611
2014
$135

Subsequent Event
See Note O for information on borrowing related to the acquisition of Rohm and Haas on April 1, 2009.


NOTE K – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Net Periodic Benefit Cost for All Significant Plans
 
Three Months Ended
 
In millions
 
March 31,
2009
   
March 31,
2008
 
Defined Benefit Pension Plans:
           
Service cost
  $ 58     $ 67  
Interest cost
    238       241  
Expected return on plan assets
    (288 )     (310 )
Amortization of prior service cost
    8       8  
Amortization of net loss
    26       11  
Net periodic benefit cost
  $ 42     $ 17  
                 
Other Postretirement Benefits:
               
Service cost
  $ 4     $ 4  
Interest cost
    29       30  
Expected return on plan assets
    (4 )     (7 )
Amortization of prior service credit
    (1 )     (1 )
Net periodic benefit cost
  $ 28     $ 26  


NOTE L – STOCK-BASED COMPENSATION

The Company grants stock-based compensation to employees under the Employees’ Stock Purchase Plans (“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.
 
During the first quarter of 2009, employees subscribed to the right to purchase 10.5 million shares with a weighted-average exercise price of $20.81 per share and a weighted-average fair value of $1.00 per share under the ESPP.
 
During the first quarter of 2009, the Company granted the following stock-based compensation awards to employees under the 1988 Plan:
 
 
·
11.4 million stock options with a weighted-average exercise price of $9.53 per share and a weighted-average fair value of $2.60 per share.
 
 
·
5.2 million shares of deferred stock with a weighted-average fair value of $9.50 per share.
 
During the first quarter of 2009, the Company granted the following stock-based compensation awards to non-employee directors under the 2003 Non-Employee Directors’ Stock Incentive Plan:
 
 
·
53,600 shares of restricted stock with a weighted-average fair value of $6.47 per share.
 
Total unrecognized compensation cost at March 31, 2009, including unrecognized cost related to the first quarter of 2009 activity, is provided in the following table:

Total Unrecognized Compensation Cost at March 31, 2009
In millions
Unrecognized Compensation
Cost
Weighted-average Recognition
Period
ESPP purchase rights
$8
6.5 months
Unvested stock options
$54
0.76 year
Deferred stock awards
$117
1.01 years
Performance deferred stock awards
$8
0.58 year



NOTE M – EARNINGS PER SHARE CALCULATIONS

Earnings Per Share Calculations
Three Months Ended
March 31, 2009
Three Months Ended
March 31, 2008
In millions, except per share amounts
Basic
Diluted
Basic
Diluted
Net Income Attributable to The Dow Chemical Company
    $24
$24
$941
$941
Weighted-average common shares outstanding
925.4
925.4
942.1
942.1
Add dilutive effect of stock options and awards
-
6.6
-
9.5
Weighted-average common shares for EPS calculations
925.4
932.0
942.1
951.6
Earnings per common share
$0.03
$0.03
$1.00
$0.99
Stock options and deferred stock awards excluded from EPS calculations (1)
 
65.8
 
34.0
(1)
Outstanding options to purchase shares of common stock and deferred stock awards that were not included in the calculation of diluted earnings per share because the effect of including them would have been anti-dilutive.


NOTE N – OPERATING SEGMENTS AND GEOGRAPHIC AREAS

Corporate Profile
Dow is a diversified chemical company that combines the power of science and technology with the “Human Element” to constantly improve what is essential to human progress. The Company delivers a broad range of products and services to customers in approximately 160 countries, connecting chemistry and innovation with the principles of sustainability to help provide everything from fresh water, food and pharmaceuticals to paints, packaging and personal care products. In 2008, Dow had annual sales of $57.5 billion and employed approximately 46,000 people worldwide. The Company has 150 manufacturing sites in 35 countries and produces approximately 3,300 products. The following descriptions of the Company’s operating segments include a representative listing of products for each business.

PERFORMANCE PLASTICS
Applications: automotive interiors, exteriors, under-the-hood and body engineered systems • building and construction, thermal and acoustic insulation, roofing • communications technology, telecommunication cables, electrical and electronic connectors • footwear • home and office furnishings:  kitchen appliances, power tools, floor care products, mattresses, carpeting, flooring, furniture padding, office furniture • information technology equipment and consumer electronics • packaging, food and beverage containers, protective packaging • sports and recreation equipment • wire and cable insulation and jacketing materials for power utility and telecommunications

Dow Automotive is a leading global provider of technology-driven solutions that meet consumer demands for vehicles that are safer, stronger, quieter, lighter, cleaner, 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, Dow Automotive provides materials science expertise and comprehensive technical capabilities to its customers worldwide.
 
 
·
Products: BETAFOAM™ NVH and structural 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; VORACTIV™ polyether and copolymer polyols

Dow Building Solutions manufactures and markets an extensive line of insulation, weather barrier, and oriented composite building solutions and adhesives. The business is the recognized leader in extruded polystyrene (XPS) insulation, known industry-wide by its distinctive Blue color and the Dow STYROFOAM™ brand for more than 60 years.
 
 
·
Products: FROTH-PAK™ polyurethane spray foam; GREAT STUFF™ polyurethane foam sealant; INSTA-STIK™ roof insulation adhesive; SARAN™ vapor retarder film and tape; STYROFOAM™ brand insulation products (including XPS and polyisocyanurate rigid foam sheathing products); THERMAX™ brand insulation; TILE BOND™ roof tile adhesive; WEATHERMATE™ weather barrier solutions (housewraps, sill pans, flashings and tapes)


 
Dow Epoxy is a leading global producer of epoxy resins, intermediates and specialty resins and epoxy systems for a wide range of industries and applications such as coatings, electrical laminates, civil engineering, wind energy, adhesives and composites. With plants strategically located across four continents, the business is focused on providing customers around the world with differentiated solution-based epoxy products and innovative technologies and services.
 
 
·
Products: AIRSTONE™ epoxy systems; D.E.H.™ epoxy curing agents or hardeners; D.E.N.™ epoxy novolac resins; D.E.R.™ epoxy resins (liquids, solids and solutions); Epoxy resin waterborne emulsions and dispersions; Epoxy intermediates (acetone, allyl chloride, bisphenol A, epichlorohydrin, and phenol); FORTEGRA™ epoxy tougheners; Glycidyl methacrylate (GMA); UCAR™ solution vinyl resins

The Polyurethanes and Polyurethane Systems business is a leading global producer of polyurethane raw materials and polyurethane systems. Dow’s polyurethane products and fully formulated polyurethane systems are used for a broad range of applications including construction, automotive, appliance, furniture, bedding, shoe soles, decorative molding, athletic equipment and more.
 
 
·
Products: ECHELON™ polyurethane prepolymer; ENFORCER™ and ENHANCER™ for polyurethane carpet and turf backing; HYPOL™ prepolymers; ISONATE™ MDI; MONOTHANE™ single component polyurethane elastomers; PAPI™ polymeric MDI; Propylene glycol; Propylene oxide; RENUVA™ Renewable Resource Technology; SPECFLEX™ copolymer polyols; TRAFFIDECK™ and VERDISEAL™ waterproofing systems; VORACOR™ and VORALAST™ polyurethane systems and VORALAST™ R renewable content system; VORALUX™ and VORAMER™ MR series; VORANATE™ isocyanate; VORANOL™ VORACTIV™ polyether and copolymer polyols; VORASTAR™ polyurethane systems; XITRACK™ polyurethane rail ballast stabilization systems

Specialty Plastics and Elastomers includes a broad range of engineering plastics and compounds, performance elastomers and plastomers, monomers, specialty copolymers, synthetic rubber, polyvinylidene chloride resins and films (PVDC), and specialty film substrates. Key applications include automotive, adhesives, civil construction, wire and cable, building and construction, consumer electronics and appliances, food and specialty packaging, textiles, and footwear.
 
 
·
Products: AFFINITY™ polyolefin plastomers (POPs); AMPLIFY™ functional polymers; CALIBRE™ polycarbonate resins; DOW XLA™ elastic fiber; EMERGE™ advanced resins; ENGAGE™ polyolefin elastomers; FLEXOMER™ very low density polyethylene (VLDPE) resins; INTEGRAL™ adhesive films; ISOPLAST™ engineering thermoplastic polyurethane resins; MAGNUM™ ABS resins; NORDEL™ hydrocarbon rubber; PELLETHANE™ thermoplastic polyurethane elastomers; PRIMACOR™ copolymers; PROCITE™ window envelope films; PULSE™ engineering resins; REDI-LINK™ polyethylene-based wire & cable insulation compounds; SARAN™ PVDC resin and SARAN™ PVDC film; SARANEX™ barrier films; SI-LINK™ polyethylene-based low voltage insulation compounds; TRENCHCOAT™ protective films; TYRIL™ SAN resins; TYRIN™ chlorinated polyethylene; UNIGARD™ HP high-performance flame-retardant compounds; UNIGARD™ RE reduced emissions flame-retardant compounds; UNIPURGE™ purging compound; VERSIFY™ plastomers and elastomers
 
The Technology Licensing and Catalyst business includes licensing and supply of related catalysts, process control software and services for the UNIPOL™ polypropylene process, the METEOR™ process for ethylene oxide (EO) and ethylene glycol (EG), the LP OXO™ process for oxo alcohols, the Mass ABS process technology and Dow’s proprietary technology for production of purified terephthalic acid (PTA). Licensing of the UNIPOL™ polyethylene process and sale of related catalysts, including metallocene catalysts, are handled through Univation Technologies, LLC, a 50:50 joint venture of Union Carbide.
 
 
·
Products: LP OXO™ SELECTOR™ technology and NORMAX™ catalysts; METEOR™ EO/EG process technology and catalysts; PTA process technology; UNIPOL™ PP process technology and SHAC™ and SHAC™ ADT catalyst systems

PERFORMANCE CHEMICALS
Applications: agricultural and pharmaceutical products and processing • building materials • chemical processing and intermediates • electronics • food processing and ingredients • gas treating solvents • household products • metal degreasing and dry cleaning • oil and gas treatment • paints, coatings, inks, adhesives, lubricants • personal care products • pulp and paper manufacturing, coated paper and paperboard • textiles and carpet • water purification

 
Designed Polymers is a business portfolio of products and systems characterized by unique chemistry, specialty functionalities, and people with deep expertise in regulated industries. Within Designed Polymers, Dow Water Solutions offers technology-based solutions for desalination, water purification, trace contaminant removal and water recycling. Also in Designed Polymers, businesses such as Dow Wolff Cellulosics, Dow Biocides and ANGUS Chemical Company (a wholly owned subsidiary of Dow), develop and market a range of products that enhance or enable key physical and sensory properties of end-use products in applications such as food, pharmaceuticals, oil and gas, paints and coatings, personal care, and building and construction.
 
 
·
Products and Services: Acrolein derivatives; Basic nitroparaffins and nitroparaffin-based specialty chemicals; CANGUARD™ BIT preservatives; CELLOSIZE™ hydroxyethyl cellulose; Chiral compounds and biocatalysts; CLEAR+STABLE™ carboxymethyl cellulose; CYCLOTENE™ advanced electronics resins; DOW™ electrodeionization; DOW™ latex powders; DOW™ ultrafiltration; DOWEX™ ion exchange resins; DOWICIDE™ antimicrobial bactericides and fungicides; FILMTEC™ elements; FORTEFIBER™ soluble dietary fiber; Hydrocarbon resins; Industrial biocides; METHOCEL™ cellulose ethers; POLYOX™ water-soluble resins; Quaternaries; Reverse osmosis, electrodeionization and ultrafiltration modules; SATINFX™ delivery system; SATISFIT™ Weight Care Technology; SILK™ semiconductor dielectric resins; SOLTERRA™ boost; UCARE™ polymers; WALOCEL™ cellulose polymers; WALSRODER™ nitrocellulose

The Dow Latex business provides the broadest line of styrene-butadiene products supporting customers in paper and paperboard applications, as well as carpet and artificial turf backings. UCAR Emulsion Systems manufactures and sells latexes for use in architectural and industrial coatings, adhesives, construction products and traffic paint.
 
 
·
Products: EVOCAR™ vinyl acetate ethylene; FOUNDATIONS™ latex; NEOCAR™ branched vinyl ester latexes; Styrene-acrylic latex; Styrene-butadiene latex; UCAR™ all-acrylic, styrene-acrylic and vinyl-acrylic latexes; UCAR™ POLYPHOBE™ rheology modifiers; UCARHIDE™ opacifier

The Specialty Chemicals business provides products and services used in a diverse range of applications, such as agricultural and pharmaceutical products and processing, building and construction, chemical processing and intermediates, electronics, food processing and ingredients, gas treating solvents, fuels and lubricants, oil and gas, household and institutional cleaners, coatings and paints, pulp and paper manufacturing, metal degreasing and dry cleaning, and transportation.
 
 
·
Products: Acrylic acid/Acrylic esters; AMBITROL™ and NORKOOL™ industrial coolants; Butyl CARBITOL™ and Butyl CELLOSOLVE™ solvents; CARBOWAX™ and CARBOWAX™ SENTRY™ polyethylene glycols and methoxypolyethylene glycols; DOW™ polypropylene glycols; DOWANOL™ glycol ethers; DOWCAL™, DOWFROST™ and DOWTHERM™ heat transfer fluids; DOWFAX™, TERGITOL™ and TRITON™ surfactants; Dow Haltermann Custom Processing and Haltermann Products; Ethanolamines; Ethyleneamines; SAFE-TAINER™ closed-loop delivery system; SYNALOX™ lubricants; UCAR™ deicing fluids; UCARSOL™ formulated solvents; UCON™ fluids and VERSENE™ chelating agents

The Performance Chemicals segment also includes the results of Dow Corning Corporation, and a portion of the results of the OPTIMAL Group of Companies and the SCG-Dow Group, all joint ventures of the Company.

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

Dow AgroSciences is a global leader in providing pest management, agricultural and crop biotechnology products and solutions. The business develops, manufactures and markets products for crop production; weed, insect and plant disease management; and industrial and commercial pest management. Dow AgroSciences is building a leading biotechnology business in agricultural seeds, traits and healthy oils.
 
 
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Products: AGROMEN™ seeds; BRODBECK™ seed; CLINCHER™ herbicide; DAIRYLAND™ seed; DELEGATE™ insecticide; DITHANE™ fungicide; EXZACT™ precision traits; 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™ brand 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

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. Through the use of multiple catalyst and process technologies, the business offers customers one of the industry’s broadest ranges of polyethylene resins via a strong global network of local experts focused on partnering for long-term success.
 
 
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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.
 
 
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Products: DOW™ homopolymer polypropylene resins; DOW™ impact copolymer polypropylene resins; DOW™ random copolymer polypropylene resins; INSPIRE™ performance polymers

The Polystyrene 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.
 
 
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Products: 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 Equipolymers and Americas Styrenics LLC, as well as a portion of the results of EQUATE Petrochemical Company K.S.C. and the SCG-Dow Group, all joint ventures of the Company.

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

The Core Chemicals business is a leading global producer of each of its basic chemical products, which are sold to many industries worldwide, and also serve as key raw materials in the production of a variety of Dow’s performance and plastics products.
 
 
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Products: Acids; Alcohols; Aldehydes; Caustic soda; Chlorine; Chloroform; COMBOTHERM™ blended deicer; DOWFLAKE™ calcium chloride; DOWPER™ dry cleaning solvent; Esters; Ethylene dichloride (EDC); LIQUIDOW™ liquid calcium chloride; MAXICHECK™ procedure for testing the strength of reagents; MAXISTAB™ stabilizers for chlorinated solvents; Methyl chloride; Methylene chloride; Monochloroacetic acid (MCAA); Oxo products; PELADOW™ calcium chloride pellets;


        Perchloroethylene; Trichloroethylene; Vinyl acetate monomer (VAM); Vinyl chloride monomer (VCM); Vinylidene chloride (VDC)

The Ethylene Oxide/Ethylene Glycol business is 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. Dow also supplies ethylene oxide to internal derivatives businesses. Ethylene glycol is used in polyester fiber, polyethylene terephthalate (PET) for food and beverage container applications, polyester film and antifreeze.
 
 
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Products: Ethylene glycol (EG); Ethylene oxide (EO)

The Basic Chemicals segment also includes the results of MEGlobal and a portion of the results of EQUATE Petrochemical Company K.S.C. and the OPTIMAL Group of Companies, 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; the business also 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.
 
 
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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 SCG-Dow Group, both joint ventures of the Company.

Unallocated and Other includes the results of New Ventures (which includes new business incubation platforms focused on identifying and pursuing new commercial opportunities); Venture Capital; the Company’s insurance operations and environmental operations; and certain overhead and other cost recovery variances not allocated to the operating segments.

Transfers of products between operating segments are generally valued at cost. However, transfers of products to Agricultural Sciences from other segments are generally valued at market-based prices; the revenues generated by these transfers in the first three months of 2009 and 2008 were immaterial and eliminated in consolidation.
 
Following the April 1, 2009 acquisition of Rohm and Haas, the Company announced a new management organization. As such, in the second quarter of 2009, the Company will reevaluate the reportable operating segments. The Company also plans to reevaluate its measure of profit or loss for segment reporting.

 
Operating Segments
 
Three Months Ended
In millions
 
March 31,
2009
   
March 31,
2008
 
Sales by operating segment
           
Performance Plastics
  $ 2,435     $ 3,963  
Performance Chemicals
    1,517       2,323  
Agricultural Sciences
    1,446       1,314  
Basic Plastics
    1,847       3,492  
Basic Chemicals
    801       1,559  
Hydrocarbons and Energy
    988       2,165  
Unallocated and Other
    53       8  
Total
  $ 9,087     $ 14,824  
EBIT (1) by operating segment
               
Performance Plastics
  $ 30     $ 329  
Performance Chemicals
    115       271  
Agricultural Sciences
    338       331  
Basic Plastics
    4       427  
Basic Chemicals
    (92 )     159  
Hydrocarbons and Energy
    -       -  
Unallocated and Other
    (236 )     (132 )
Total
  $ 159     $ 1,385  
Equity in earnings (losses) of nonconsolidated affiliates by operating segment (included in EBIT)
 
Performance Plastics
  $ 2     $ 18  
Performance Chemicals
    11       95  
Agricultural Sciences
    1       1  
Basic Plastics
    13       42  
Basic Chemicals
    40       97  
Hydrocarbons and Energy
    (2 )     22  
Unallocated and Other
    -       (1 )
Total
  $ 65     $