DOW-Q2-6.30.2011
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2011
Commission File Number: 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)

Delaware
 
38-1285128
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
989-636-1000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ   Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
 
þ
Accelerated filer
 
¨
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨  Yes    þ No

 
 
Outstanding at
Class
 
June 30, 2011
Common Stock, par value $2.50 per share
 
1,181,218,850 shares


Table of Contents

The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 2011
TABLE OF CONTENTS

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


2

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
 
Six Months Ended
In millions, except per share amounts (Unaudited)
Jun 30,
2011

 
Jun 30,
2010

 
Jun 30,
2011

 
Jun 30,
2010

Net Sales
$
16,046

 
$
13,618

 
$
30,779

 
$
27,035

Cost of sales
13,551

 
11,580

 
25,668

 
23,121

Research and development expenses
411

 
407

 
811

 
814

Selling, general and administrative expenses
695

 
648

 
1,395

 
1,310

Amortization of intangibles
125

 
125

 
248

 
253

Restructuring charges

 
13

 

 
29

Acquisition and integration related expenses

 
37

 
31

 
63

Equity in earnings of nonconsolidated affiliates
291

 
244

 
589

 
548

Sundry income (expense) - net
80

 
95

 
(369
)
 
178

Interest income
10

 
10

 
17

 
17

Interest expense and amortization of debt discount
328

 
367

 
705

 
743

Income Before Income Taxes
1,317

 
790

 
2,158

 
1,445

Provision for income taxes
240

 
131

 
360

 
234

Net Income
1,077

 
659

 
1,798

 
1,211

Net income attributable to noncontrolling interests
10

 
8

 
21

 
9

Net Income Attributable to The Dow Chemical Company
1,067

 
651

 
1,777

 
1,202

Preferred stock dividends
85

 
85

 
170

 
170

Net Income Available for The Dow Chemical Company Common Stockholders
$
982

 
$
566

 
$
1,607

 
$
1,032

 
 
 
 
 
 
 
 
Per Common Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.84

 
$
0.50

 
$
1.39

 
$
0.92

Earnings per common share - diluted
$
0.84

 
$
0.50

 
$
1.37

 
$
0.91

 


 
 
 
 
 


Common stock dividends declared per share of common stock
$
0.25

 
$
0.15

 
$
0.40

 
$
0.30

Weighted-average common shares outstanding - basic
1,149.6

 
1,125.4

 
1,144.6

 
1,121.4

Weighted-average common shares outstanding - diluted
1,160.9

 
1,141.6

 
1,156.2

 
1,138.3

 


 
 
 
 
 


Depreciation
$
526

 
$
571

 
$
1,085

 
$
1,162

Capital Expenditures
$
564

 
$
397

 
$
969

 
$
691

See Notes to the Consolidated Financial Statements.


3

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited)
Jun 30,
2011

 
Dec 31,
2010

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2011: $107; 2010: $145)
$
2,223

 
$
7,039

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2011: $135; 2010: $128)
5,601

 
4,616

Other
5,150

 
4,428

Inventories
8,739

 
7,087

Deferred income tax assets - current
573

 
611

Other current assets
413

 
349

Total current assets
22,699

 
24,130

Investments
 
 
 
Investment in nonconsolidated affiliates
3,469

 
3,453

Other investments (investments carried at fair value - 2011: $2,015; 2010: $2,064)
2,480

 
2,542

Noncurrent receivables
341

 
388

Total investments
6,290

 
6,383

Property
 
 
 
Property
53,888

 
51,648

Less accumulated depreciation
35,839

 
33,980

Net property (variable interest entities restricted - 2011: $1,747; 2010: $1,388)
18,049

 
17,668

Other Assets
 
 
 
Goodwill
13,079

 
12,967

Other intangible assets (net of accumulated amortization - 2011: $2,127; 2010: $1,805)
5,389

 
5,530

Deferred income tax assets - noncurrent
2,057

 
2,079

Asbestos-related insurance receivables - noncurrent
217

 
220

Deferred charges and other assets
667

 
611

Total other assets
21,409

 
21,407

Total Assets
$
68,447

 
$
69,588

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
916

 
$
1,467

Long-term debt due within one year
661

 
1,755

Accounts payable:
 
 
 
Trade
4,893

 
4,356

Other
2,305

 
2,249

Income taxes payable
355

 
349

Deferred income tax liabilities - current
115

 
105

Dividends payable
374

 
257

Accrued and other current liabilities
2,810

 
3,358

Total current liabilities
12,429

 
13,896

Long-Term Debt (variable interest entities nonrecourse - 2011: $930; 2010: $167)
18,511

 
20,605

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities - noncurrent
1,238

 
1,295

Pension and other postretirement benefits - noncurrent
7,552

 
7,492

Asbestos-related liabilities - noncurrent
643

 
663

Other noncurrent obligations
3,035

 
2,995

Total other noncurrent liabilities
12,468

 
12,445

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
2,953

 
2,931

Additional paid-in capital
2,450

 
2,286

Retained earnings
18,877

 
17,736

Accumulated other comprehensive loss
(3,647
)
 
(4,399
)
Unearned ESOP shares
(448
)
 
(476
)
Treasury stock at cost

 
(239
)
The Dow Chemical Company’s stockholders’ equity
24,185

 
21,839

Noncontrolling interests
854

 
803

Total equity
25,039

 
22,642

Total Liabilities and Equity
$
68,447

 
$
69,588

See Notes to the Consolidated Financial Statements.

4

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2011

 
Jun 30,
2010

Operating Activities
 
 
 
Net Income
$
1,798

 
$
1,211

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,428

 
1,491

Provision (Credit) for deferred income tax
(99
)
 
51

Earnings of nonconsolidated affiliates less than (in excess of) dividends received
50

 
(143
)
Pension contributions
(282
)
 
(133
)
Net gain on sales of investments
(35
)
 
(34
)
Net (gain) loss on sales of property, businesses and consolidated companies
(6
)
 
131

Other net loss

 
10

Net gain on sale of ownership interest in nonconsolidated affiliates
(61
)
 

Restructuring charges

 
29

Loss on early extinguishment of debt
482

 

Excess tax benefits from share-based payment arrangements
(14
)
 
(3
)
Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(2,721
)
 
(1,336
)
Proceeds from interests in trade accounts receivable conduits
1,224

 
867

Inventories
(1,651
)
 
(598
)
Accounts payable
653

 
395

Other assets and liabilities
(146
)
 
(655
)
Cash provided by operating activities
620

 
1,283

Investing Activities
 
 
 
Capital expenditures
(969
)
 
(691
)
Construction of assets pending sale / leaseback
(113
)
 

Proceeds from sale / leaseback of assets
80

 

Proceeds from sales of property, businesses and consolidated companies
85

 
1,651

Acquisitions of businesses
(6
)
 
(5
)
Purchases of previously leased assets

 
(45
)
Investments in consolidated companies, net of cash acquired
(120
)
 
(120
)
Investments in nonconsolidated affiliates
(45
)
 
(76
)
Distributions from nonconsolidated affiliates
27

 
20

Proceeds from sale of ownership interests in nonconsolidated affiliates
81

 

Change in restricted cash

 
211

Purchases of investments
(427
)
 
(593
)
Proceeds from sales and maturities of investments
503

 
585

Cash provided by (used in) investing activities
(904
)
 
937

Financing Activities
 
 
 
Changes in short-term notes payable
(557
)
 
(298
)
Proceeds from notes payable

 
84

Payments on notes payable

 
(668
)
Proceeds from issuance of long-term debt
946

 
325

Payments on long-term debt
(4,738
)
 
(1,092
)
Purchases of treasury stock
(19
)
 
(13
)
Proceeds from issuance of common stock
171

 
79

Proceeds from sales of common stock
98

 
69

Excess tax benefits from share-based payment arrangements
14

 
3

Contribution from noncontrolling interests
20

 

Distributions to noncontrolling interests
(22
)
 
(5
)
Dividends paid to stockholders
(512
)
 
(506
)
Cash used in financing activities
(4,599
)
 
(2,022
)
Effect of Exchange Rate Changes on Cash
64

 
(22
)
Cash Assumed in Initial Consolidation of Variable Interest Entities
3

 
46

Summary
 
 
 
Increase (Decrease) in cash and cash equivalents
(4,816
)
 
222

Cash and cash equivalents at beginning of year
7,039

 
2,846

Cash and cash equivalents at end of period
$
2,223

 
$
3,068

See Notes to the Consolidated Financial Statements.

5

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2011

 
Jun 30,
2010

Preferred Stock
 
 
 
Balance at beginning of year and end of period
$
4,000

 
$
4,000

Common Stock
 
 
 
Balance at beginning of year
2,931

 
2,906

Common stock issued
22

 
11

Balance at end of period
2,953

 
2,917

Additional Paid-in Capital
 
 
 
Balance at beginning of year
2,286

 
1,913

Common stock issued
149

 
68

Stock-based compensation and allocation of ESOP shares
15

 
44

Balance at end of period
2,450

 
2,025

Retained Earnings
 
 
 
Balance at beginning of year
17,736

 
16,704

Net income available for The Dow Chemical Company common stockholders
1,607

 
1,032

Dividends declared on common stock (per share: $0.40 in 2011, $0.30 in 2010)
(460
)
 
(337
)
Other
(6
)
 
(11
)
Impact of adoption of ASU 2009-17, net of tax

 
(248
)
Balance at end of period
18,877

 
17,140

Accumulated Other Comprehensive Loss
 
 
 
Unrealized Gains on Investments at beginning of year
111

 
79

Net change in unrealized gains
6

 
(19
)
Balance at end of period
117

 
60

Cumulative Translation Adjustments at beginning of year
367

 
624

Translation adjustments
600

 
(1,022
)
Balance at end of period
967

 
(398
)
Pension and Other Postretirement Benefit Plans at beginning of year
(4,871
)
 
(4,587
)
Adjustments to pension and other postretirement benefit plans
141

 
149

Balance at end of period
(4,730
)
 
(4,438
)
Accumulated Derivative Loss at beginning of year
(6
)
 
(8
)
Net hedging results
(2
)
 
(3
)
Reclassification to earnings
7

 
7

Balance at end of period
(1
)
 
(4
)
Total accumulated other comprehensive loss
(3,647
)
 
(4,780
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(476
)
 
(519
)
Shares allocated to ESOP participants
28

 
26

Balance at end of period
(448
)
 
(493
)
Treasury Stock
 
 
 
Balance at beginning of year
(239
)
 
(557
)
Purchases
(19
)
 
(13
)
Issuance to employees and employee plans
258

 
251

Balance at end of period

 
(319
)
The Dow Chemical Company’s Stockholders’ Equity
24,185

 
20,490

Noncontrolling Interests
 
 
 
Balance at beginning of year
803

 
569

Net income attributable to noncontrolling interests
21

 
9

Distributions to noncontrolling interests
(22
)
 
(5
)
Capital contributions
20

 

Consolidation of a variable interest entity
31

 

Impact of adoption of ASU 2009-17

 
100

Other
1

 
4

Balance at end of period
854

 
677

Total Equity
$
25,039

 
$
21,167

See Notes to the Consolidated Financial Statements.


6

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2011

 
Jun 30,
2010

 
Jun 30,
2011

 
Jun 30,
2010

Net Income
$
1,077

 
$
659

 
$
1,798

 
$
1,211

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on investments
(8
)
 
(32
)
 
6

 
(19
)
Translation adjustments
159

 
(592
)
 
600

 
(1,022
)
Adjustments to pension and other postretirement benefit plans
69

 
107

 
141

 
149

Net gains (losses) on cash flow hedging derivative instruments
14

 
(5
)
 
5

 
4

Total other comprehensive income (loss)
234

 
(522
)
 
752

 
(888
)
Comprehensive Income
1,311

 
137

 
2,550

 
323

Comprehensive income attributable to noncontrolling interests, net of tax
10

 
8

 
21

 
9

Comprehensive Income Attributable to The Dow Chemical Company
$
1,301

 
$
129

 
$
2,529

 
$
314

See Notes to the Consolidated Financial Statements.


7

Table of Contents

(Unaudited)
 
The Dow Chemical Company and Subsidiaries
PART I – FINANCIAL INFORMATION, Item 1. Financial Statements.
Notes to the Consolidated Financial Statements
Table of Contents

Note
 
Page
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q


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, 2010.
A change to prior year balance sheet amounts has been made to properly classify the current portion of “Deferred charges and other assets” of $349 million to “Other current assets.”


NOTE B – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
On January 1, 2011, the Company adopted Accounting Standard Update (“ASU”) 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force.” This ASU amended the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Accounting Guidance Issued But Not Adopted as of June 30, 2011
In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS," which provides common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards ("IFRS"). This ASU is effective for fiscal years beginning on or after December 15, 2011. The Company is currently evaluating the impact of adopting the guidance.
 
In June 2011, the FASB issued ASU 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income," which improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. This ASU is effective for fiscal years beginning on or after December 15, 2011 and early adoption is permitted. The Company is currently evaluating the impact of adopting the guidance.



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Table of Contents

NOTE C – RESTRUCTURING
2009 Restructuring
On June 30, 2009, the Company’s Board of Directors approved a restructuring plan related to the Company’s acquisition of Rohm and Haas Company (“Rohm and Haas”) as well as actions to advance the Company’s strategy and to respond to continued weakness in the global economy. The restructuring plan included the elimination of approximately 2,500 positions primarily resulting from synergies to be achieved as a result of the acquisition of Rohm and Haas. In addition, the plan included the shutdown of a number of manufacturing facilities. These actions were substantially complete at March 31, 2011. As a result of the restructuring activities, the Company recorded pretax restructuring charges of $677 million in the second quarter of 2009, consisting of asset write-downs and write-offs of $454 million, costs associated with exit or disposal activities of $68 million and severance costs of $155 million.
The severance component of the 2009 restructuring charges of $155 million was for the separation of approximately 2,500 employees under the terms of the Company’s ongoing benefit arrangements, primarily over two years. At December 31, 2010, severance of $149 million had been paid and a currency adjusted liability of $6 million remained for approximately 189 employees. In the first quarter of 2011, the remaining severance of $6 million was paid, bringing the program to a close.
The following table summarizes the 2011 activities related to the Company’s restructuring reserve:
 
2011 Activities Related to 2009
Restructuring

In millions
Costs associated with
Exit or Disposal
Activities

 
Severance
Costs

 
Total  

Reserve balance at December 31, 2010
$
68

 
$
6

 
$
74

Cash payments

 
(6
)
 
(6
)
Reserve balance at March 31, 2011
$
68

 
$

 
$
68


The shutdowns related to the 2009 restructuring plan were substantially completed in the first quarter of 2011, with remaining liabilities primarily related to environmental remediation to be paid over time.
2010 Adjustments to the 2009 Restructuring Plan
In the first quarter of 2010, the Company recorded an additional $8 million charge to adjust the impairment of long-lived assets and other assets related to the United States Federal Trade Commission (“FTC”) required divestitures completed in the first quarter of 2010, and an additional $8 million charge related to the shutdown of a small manufacturing facility under the 2009 restructuring plan. The impact of these charges is shown as “Restructuring charges” in the consolidated statements of income and was reflected in the following operating segments: Electronic and Specialty Materials ($8 million), Coatings and Infrastructure ($5 million) and Performance Products ($3 million).

In the second quarter of 2010, the Company recorded additional restructuring charges of $13 million which included the write-off of other assets of $5 million, additional costs associated with exit or disposal activities of $7 million and additional severance of $1 million related to the FTC required divestitures that were included in the 2009 restructuring plan. The impact of these charges is shown as “Restructuring charges” in the consolidated statements of income and was reflected in Performance Products ($12 million) and Corporate ($1 million).


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Table of Contents

Restructuring Reserve Assumed from Rohm and Haas
Included in liabilities assumed in the April 1, 2009 acquisition of Rohm and Haas was a reserve for severance and employee benefits for the separation of employees under the terms of Rohm and Haas’ ongoing benefit arrangement. The separations resulted from plant shutdowns, production schedule adjustments, productivity improvements and reductions in support services. A currency adjusted liability of $12 million remained at December 31, 2010; $5 million for employees who had left the Company and would continue to receive annuity payments in early 2011, and $7 million for approximately 44 employees. In the first quarter of 2011, the Company decreased the restructuring reserve $6 million to adjust the reserve to the expected future severance payments. The impact of this adjustment is shown as “Cost of sales” in the consolidated statements of income and was reflected in Corporate. Severance payments of $7 million were made in the six-month period ended June 30, 2011, bringing the program to a close.
Restructuring Reserve Assumed from Rohm and Haas
In millions
Severance
Costs

Reserve balance at December 31, 2010
$
12

Cash payments
(7
)
Adjustments to reserve
(6
)
Foreign currency impact
1

Reserve balance at June 30, 2011
$



NOTE D – ACQUISITIONS AND DIVESTITURES

Rohm and Haas Acquisition and Integration Related Expenses
During the first quarter of 2011, pretax charges totaling $31 million were recorded for integration costs related to the April 1, 2009 acquisition of Rohm and Haas, which was substantially completed in the first quarter of 2011. During the second quarter of 2010, pretax charges totaling $37 million ($63 million during the first six months of 2010) were recorded for integration costs related to the acquisition. These charges were recorded in “Acquisition and integration related expenses” and reflected in Corporate.

Divestitures Required as a Condition to the Acquisition of Rohm and Haas
As a condition of the FTC's approval of the April 1, 2009 acquisition of Rohm and Haas, the Company was required to divest a portion of its acrylic monomer business, a portion of its specialty latex business and its hollow sphere particle business. On July 31, 2009, the Company entered into a definitive agreement that included the sale of the portion of its acrylic monomer business and the portion of its specialty latex business. The sale was completed on January 25, 2010. Additional impairment charges of $8 million related to these assets were recognized in the first quarter of 2010. In the second quarter of 2010, additional severance costs of $1 million and the write-off of other assets of $5 million were recognized (see Note C).

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

Divestiture of the Styron Business Unit
On March 2, 2010, the Company announced the entry into a definitive agreement to sell the Styron business unit (“Styron”) to an affiliate of Bain Capital Partners. The definitive agreement specified the assets and liabilities related to the businesses and products to be included in the sale. On June 17, 2010, the sale was completed for $1,561 million, net of working capital adjustments and costs to sell, with proceeds subject to customary post-closing adjustments. Post-closing adjustments were finalized in the fourth quarter of 2010. The proceeds included a $75 million long-term note receivable. In addition, the Company elected to acquire a 7.5 percent equity interest in the resulting privately held, global materials company.

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

On February 3, 2011, Styron repaid the $75 million long-term note receivable, plus interest. In the first quarter of 2011, the Company received dividend income of $25 million, recorded in “Sundry income (expense) - net” in the consolidated statements of income and reflected in Corporate. The Company continued to hold a 6.5 percent equity interest at June 30, 2011.


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Table of Contents

Subsequent Event
On July 27, 2011, the Company entered into a definitive agreement under which the Company's global Polypropylene business will be divested to Braskem SA for a total enterprise value of approximately $340 million. The transaction is expected to close by the end of the third quarter 2011, pending regulatory approval, and the Company expects to report a gain on this divestiture. The divestiture will include the Company's polypropylene manufacturing facilities at Schkopau and Wesseling, Germany, and Freeport and Seadrift, Texas. Also included are inventory, business know-how, certain product and process technology, and customer contracts and lists. Dow's Polypropylene Licensing and Catalyst business and related catalyst facilities are excluded from the scope of the transaction.

NOTE E – INVENTORIES
The following table provides a breakdown of inventories:
 
Inventories
In millions
Jun 30, 2011

 
Dec 31, 2010

Finished goods
$
5,034

 
$
4,289

Work in process
2,021

 
1,498

Raw materials
924

 
644

Supplies
760

 
656

Total inventories
$
8,739

 
$
7,087

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $1,396 million at June 30, 2011 and $1,003 million at December 31, 2010.


NOTE F – NONCONSOLIDATED AFFILIATES
The table below presents summarized financial information for Dow Corning Corporation, a significant nonconsolidated affiliate (at 100 percent):

Summarized Income Statement Information
Three Months Ended
Six Months Ended
for Dow Corning Corporation
In millions
Jun 30,
2011

 
Jun 30,
2010

Jun 30,
2011

 
Jun 30,
2010

Sales
$
1,668

 
$
1,545

$
3,247

 
$
2,898

Gross profit
$
533

 
$
554

$
1,072

 
$
1,060

Net income attributable to Dow Corning Corporation
$
191

 
$
221

$
370

 
$
439



NOTE G – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the carrying amount of goodwill by operating segment:
 
Goodwill
Electronic
and
Specialty
Materials

 
Coatings
and
Infra-
structure

 
Health
and Ag
Sciences

 
Perf
Systems

 
Perf
Products

 
Plastics

 
Hydro-
carbons

 
Total  

In millions
 
 
 
 
 
 
 
Net goodwill at Dec. 31, 2010
$
5,747

 
$
4,191

 
$
1,546

 
$
859

 
$
526

 
$
35

 
$
63

 
$
12,967

Foreign currency impact
45

 
51

 

 
10

 
6

 

 

 
112

Net goodwill at June 30, 2011
$
5,792

 
$
4,242

 
$
1,546

 
$
869

 
$
532

 
$
35

 
$
63

 
$
13,079



11

Table of Contents

The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At June 30, 2011
 
At December 31, 2010
In millions
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net  

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Licenses and intellectual property
$
1,715

 
$
(536
)
 
$
1,179

 
$
1,733

 
$
(466
)
 
$
1,267

Patents
123

 
(99
)
 
24

 
121

 
(95
)
 
26

Software
1,034

 
(557
)
 
477

 
965

 
(506
)
 
459

Trademarks
694

 
(199
)
 
495

 
693

 
(168
)
 
525

Customer related
3,750

 
(635
)
 
3,115

 
3,647

 
(492
)
 
3,155

Other
145

 
(101
)
 
44

 
122

 
(78
)
 
44

Total other intangible assets, finite lives
$
7,461

 
$
(2,127
)
 
$
5,334

 
$
7,281

 
$
(1,805
)
 
$
5,476

IPR&D (1), indefinite lives
55

 

 
55

 
54

 

 
54

Total other intangible assets
$
7,516

 
$
(2,127
)
 
$
5,389

 
$
7,335

 
$
(1,805
)
 
$
5,530

(1) Purchased in-process research and development (“IPR&D”).

The following table provides information regarding amortization expense related to intangible assets:
 
Amortization Expense
Three Months Ended
 
Six Months Ended
In millions
Jun 30,
2011

 
Jun 30,
2010

 
Jun 30,
2011

 
Jun 30,
2010

Other intangible assets, excluding software
$
125

 
$
125

 
$
248

 
$
253

Software, included in “Cost of sales”
$
22

 
$
22

 
$
45

 
$
43


Total estimated amortization expense related to intangible assets for 2011 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2011
$
620

2012
$
561

2013
$
537

2014
$
514

2015
$
496

2016
$
486



NOTE H – FINANCIAL INSTRUMENTS
Investments
The Company’s investments in marketable securities are primarily classified as available-for-sale.
 
Investing Results
Six Months Ended
In millions
Jun 30,
2011

 
Jun 30,
2010

Proceeds from sales of available-for-sale securities
$
460

 
$
535

Gross realized gains
$
26

 
$
27

Gross realized losses
$
(7
)
 
$
(50
)

12

Table of Contents

The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities
at June 30, 2011
In millions
Amortized Cost

 
Fair Value

Within one year
$
23

 
$
23

One to five years
534

 
582

Six to ten years
467

 
498

After ten years
213

 
235

Total
$
1,237

 
$
1,338


At June 30, 2011, the Company had $330 million of held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had original maturities of three months or less ($3.2 billion at December 31, 2010). The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At June 30, 2011, the Company had investments in money market funds of $122 million classified as cash equivalents ($35 million at December 31, 2010).
The net unrealized gain recognized during the six-month period ended June 30, 2011 on trading securities held at June 30, 2011 was $13 million ($16 million during the six-month period ended June 30, 2010).
The following table provides the fair value and gross unrealized losses of the Company’s investments that were deemed to be temporarily impaired at June 30, 2011 and December 31, 2010, aggregated by investment category:
Temporarily Impaired Securities Less than 12 Months (1)
 
At June 30, 2011
 
At December 31, 2010
In millions
Fair
Value
 
Unrealized
Losses

 
Fair
Value
 
Unrealized
Losses

Debt securities:
 
 
 
 
 
 
 
Government debt (2,3)
$

 
$

 
$
62

 
$
(2
)
Corporate bonds
32

 
(1
)
 
43

 
(1
)
Total debt securities
$
32

 
$
(1
)
 
$
105

 
$
(3
)
Equity securities
96

 
(8
)
 
52

 
(3
)
Total temporarily impaired securities
$
128

 
$
(9
)
 
$
157

 
$
(6
)
(1)
Unrealized losses of 12 months or more were less than $1 million.
(2)
Unrealized losses of less than 12 months were less than $1 million at June 30, 2011.
(3)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.

Portfolio managers regularly review the Company’s holdings to determine if any investments are other-than-temporarily impaired. The analysis includes reviewing the amount of a temporary impairment, as well as the length of time it has been impaired. In addition, specific guidelines for each instrument type are followed to determine if an other-than-temporary impairment has occurred.
For debt securities, the credit rating of the issuer, current credit rating trends, the trends of the issuer’s overall sector, the ability of the issuer to pay expected cash flows and the length of time the security has been in a loss position are considered in determining whether unrealized losses represent an other-than-temporary impairment. The Company did not have any credit-related losses on debt securities during the six-month periods ended June 30, 2011 or June 30, 2010.
For equity securities, the Company’s investments are primarily in Standard & Poor’s (“S&P”) 500 companies; however, the Company’s policies allow investments in companies outside of the S&P 500. The largest holdings are Exchange Traded Funds that represent the S&P 500 index or an S&P sector or subset. The Company considers the evidence to support the recovery of the cost basis of a security including volatility of the stock, the length of time the security has been in a loss position, value and growth expectations, and overall market and sector fundamentals, as well as technical analysis, in determining whether unrealized losses represent an other-than-temporary impairment. In the six-month period ended June 30, 2011, other-than-temporary impairment write-downs on investments still held by the Company were $3 million ($4 million in the six-month period ended June 30, 2010).

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Table of Contents

The aggregate cost of the Company’s cost method investments totaled $171 million at June 30, 2011 and $171 million at December 31, 2010. Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed for impairment indicators. In the six-month period ended June 30, 2011, the Company's impairment analysis identified indicators that resulted in no reduction in the cost basis of these investments ($20 million reduction in the six-month period ended June 30, 2010).
The following table summarizes the fair value of financial instruments at June 30, 2011 and December 31, 2010:
 
Fair Value of Financial Instruments
 
At June 30, 2011
 
At December 31, 2010
In millions
Cost

 
Gain

 
Loss

 
Fair
Value

 
Cost

 
Gain

 
Loss

 
Fair
Value

Marketable securities: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt (2)
$
560

 
$
40

 
$

 
$
600

 
$
603

 
$
40

 
$
(2
)
 
$
641

Corporate bonds
677

 
62

 
(1
)
 
738

 
760

 
72

 
(1
)
 
831

Total debt securities
$
1,237

 
$
102

 
$
(1
)
 
$
1,338

 
$
1,363

 
$
112

 
$
(3
)
 
$
1,472

Equity securities
585

 
100

 
(8
)
 
677

 
501

 
94

 
(3
)
 
592

Total marketable securities
$
1,822

 
$
202

 
$
(9
)
 
$
2,015

 
$
1,864

 
$
206

 
$
(6
)
 
$
2,064

Long-term debt incl. debt due within one year (3)
$
(19,172
)
 
$
79

 
$
(2,419
)
 
$
(21,512
)
 
$
(22,360
)
 
$
175

 
$
(2,530
)
 
$
(24,715
)
Derivatives relating to:
 
 
 
 
 
 

 
 
 
 
 
 
 

Foreign currency
$

 
$
22

 
$
(32
)
 
$
(10
)
 
$

 
$
40

 
$
(38
)
 
$
2

Commodities
$

 
$
16

 
$
(4
)
 
$
12

 
$

 
$
14

 
$
(4
)
 
$
10

(1) Included in “Other investments” in the consolidated balance sheets.
(2) U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(3) Cost includes fair value adjustments of $22 million at June 30, 2011 and $23 million at December 31, 2010.

Risk Management
Dow’s business operations give rise to market risk exposure due to changes in interest rates, foreign currency exchange rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as cash flow, fair value or net foreign investment hedges where appropriate. The guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value. A secondary objective is to add value by creating additional nonspecific exposures within established limits and policies; derivatives used for this purpose are not designated as hedges. The potential impact of creating such additional exposures is not material to the Company’s results.
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. Counterparty 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 by transacting with large, internationally diversified financial counterparties. 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 counterparty risk associated with risk management activities are not expected to be material in 2011. No significant concentration of counterparty credit risk existed at June 30, 2011.
The Company reviews its overall financial strategies and the impacts from using derivatives in its risk management program with the Company’s Board of Directors and revises its strategies as market conditions dictate.
Interest Rate Risk Management
The Company enters into various interest rate contracts with the objective of lowering funding costs or altering interest rate exposures related to fixed and variable rate obligations. In these contracts, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed-upon notional principal amount. At June 30, 2011, the Company had no open interest rate swaps.

14

Table of Contents

Foreign Currency Risk Management
The Company’s global operations require active participation in foreign exchange markets. The Company enters into foreign exchange forward contracts and options, and cross-currency swaps to hedge various currency exposures or create desired exposures. Exposures primarily relate to assets, liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to operating activities. The primary business objective of the activity is to optimize the U.S. dollar value of the Company’s assets, liabilities and future cash flows with respect to exchange rate fluctuations. Assets and liabilities denominated in the same foreign currency are netted, and only the net exposure is hedged. At June 30, 2011, the Company had forward contracts, options and cross-currency swaps to buy, sell or exchange foreign currencies. These contracts had various expiration dates, primarily in the third quarter of 2011.
Commodity Risk Management
The Company has exposure to the prices of commodities in its procurement of certain raw materials. The primary purpose of commodity hedging activities is to manage the price volatility associated with these forecasted inventory purchases. At June 30, 2011, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements had various expiration dates through 2012.
Accounting for Derivative Instruments and Hedging Activities
Cash Flow Hedges
For derivatives that are designated and qualify as cash flow hedging instruments, the effective portion of the gain or loss on the derivative is recorded in “Accumulated other comprehensive income (loss)” (“AOCI”); it is reclassified to “Cost of sales” in the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCI fluctuate based on changes in the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCI and net income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market conditions during any period. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period income.
The net loss from previously terminated interest rate cash flow hedges included in AOCI at June 30, 2011 was $1 million after tax ($2 million after tax at December 31, 2010). The Company had no open interest rate derivatives designated as cash flow hedges at June 30, 2011 or December 31, 2010.
Current open foreign currency forward contracts hedge the currency risk of forecasted feedstock purchase transactions until September 2011. The effective portion of the mark-to-market effects of the foreign currency forward contracts is recorded in AOCI; it is reclassified to income in the same period or periods that the underlying feedstock purchase affects income. The net loss from the foreign currency hedges included in AOCI at June 30, 2011 was $5 million after tax ($4 million after tax at December 31, 2010). At June 30, 2011, the Company had open forward contracts with various expiration dates to buy, sell or exchange foreign currencies with a notional U.S. dollar equivalent of $203 million ($827 million at December 31, 2010).
Commodity swaps, futures and option contracts with maturities of not more than 36 months are utilized and designated as cash flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until December 2011. The effective portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCI; it is reclassified to income in the same period or periods that the underlying commodity purchase affects income. The net gain from commodity hedges included in AOCI at June 30, 2011 was $6 million after tax ($3 million after tax at December 31, 2010). At June 30, 2011 and December 31, 2010, the Company had the following aggregate notionals of outstanding commodity forward contracts to hedge forecasted purchases:
 
Commodity
Jun 30,
2011

 
Dec 31,
2010

 
Notional Volume Unit
Crude Oil
0.5

 
0.1

 
million barrels
Ethane
0.6

 
1.6

 
million barrels
Natural Gas
1.0

 
2.7

 
million million British thermal units


15

Table of Contents

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 is used when the criteria are met. The Company had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations at June 30, 2011 or December 31, 2010.
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 loss of $67 million after tax at June 30, 2011 (net gain of $70 million after tax at December 31, 2010). At June 30, 2011 and December 31, 2010, the Company had no open forward contracts or outstanding options to buy, sell or exchange foreign currencies that were designated as net foreign investment hedges. At June 30, 2011, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $614 million ($1,250 million at December 31, 2010).
Other Derivative Instruments
The Company utilizes futures, options and swap instruments that are effective as economic hedges of commodity price exposures, but do not meet the hedge accounting criteria in the accounting guidance for derivatives and hedging. At June 30, 2011 and December 31, 2010, the Company had the following aggregate notionals of outstanding commodity contracts:
 
Commodity
Jun 30,
2011

 
Dec 31,
2010

 
Notional Volume Unit
Crude Oil
0.3

 

 
million barrels
Ethane
3.0

 
3.8

 
million barrels
Naphtha
60.0

 

 
kilotons
Natural Gas
9.1

 
12.0

 
million million British thermal units

The Company also uses foreign exchange forward contracts, options, and cross-currency swaps that are not designated as hedging instruments primarily to manage foreign currency exposure. The Company had open foreign exchange contracts with various expiration dates to buy, sell or exchange foreign currencies with a notional U.S. dollar equivalent of $12,925 million at June 30, 2011 ($13,944 million at December 31, 2010).

16

Table of Contents

The following table provides the fair value and gross balance sheet classification of derivative instruments at June 30, 2011 and December 31, 2010:

Fair Value of Derivative Instruments
In millions
Balance Sheet Classification
 
Jun 30,
2011

 
Dec 31,
2010

Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Foreign currency
Accounts and notes receivable – Other
 
$

 
$
9

Commodities
Other current assets (1)
 
5

 
7

Total derivatives designated as hedges
 
 
$
5

 
$
16

Derivatives not designated as hedges:
 
 
 
 
 
Foreign currency
Accounts and notes receivable – Other
 
$
37

 
$
77

Commodities
Other current assets (1)
 
33

 
23

Total derivatives not designated as hedges
 
 
$
70

 
$
100

Total asset derivatives
 
 
$
75

 
$
116

Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Foreign currency
Accounts payable – Other
 
$
3

 
$
20

Commodities
Accounts payable – Other
 
1

 
8

Total derivatives designated as hedges
 
 
$
4

 
$
28

Derivatives not designated as hedges:
 
 
 
 
 
Foreign currency
Accounts payable – Other
 
$
44

 
$
64

Commodities
Accounts payable – Other
 
20

 
16

Total derivatives not designated as hedges
 
 
$
64

 
$
80

Total liability derivatives
 
 
$
68

 
$
108

(1) Included in “Accounts and notes receivable – Other” in the consolidated balance sheet at December 31, 2010.


17

Table of Contents

Effect of Derivative Instruments for the three months ended June 30, 2011

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

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

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

Derivatives designated as hedges:
 
 
 
 
 
 
 
Fair value:
 
 
 
 
 
 
 
Interest rates
$

 
Interest expense (5)
 
$
(1
)
 
$

Cash flow:
 
 
 
 
 
 
 
Commodities
5

 
Cost of sales
 
6

 

Foreign currency
(5
)
 
Cost of sales
 
(19
)
 

Total derivatives designated as hedges
$

 
 
 
$
(14
)
 
$

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency (6)
$

 
Sundry income (expense) – net
 
$

 
$
42

Commodities

 
Cost of sales
 

 
(14
)
Total derivatives not designated as hedges
$

 
 
 
$

 
$
28

Total derivatives
$

 
 
 
$
(14
)
 
$
28

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Derivative Instruments for the
three months ended June 30, 2010

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

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

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

Derivatives designated as hedges:
 
 
 
 
 
 
 
Fair value:
 
 
 
 
 
 
 
Interest rates
$
(1
)
 
Interest expense (5)
 
$

 
$
(1
)
Cash flow:
 
 
 
 
 
 
 
Commodities
(14
)
 
Cost of sales
 
(2
)
 

Foreign currency
10

 
Cost of sales
 
3

 

Net foreign investment:
 
 
 
 
 
 
 
Foreign currency
(17
)
 
n/a
 

 

Total derivatives designated as hedges
$
(22
)
 
 
 
$
1

 
$
(1
)
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency (6)
$

 
Sundry income (expense) – net
 
$

 
$
14

Commodities

 
Cost of sales
 

 
(3
)
Total derivatives not designated as hedges
$

 
 
 
$

 
$
11

Total derivatives
$
(22
)
 
 
 
$
1

 
$
10

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



18

Table of Contents

Effect of Derivative Instruments for the six months ended June 30, 2011

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

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

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

Derivatives designated as hedges:
 
 
 
 
 
 
 
Fair value:
 
 
 
 
 
 
 
Interest rates
$

 
Interest expense (5)
 
$
(1
)
 
$
(1
)
Cash flow:
 
 
 
 
 
 
 
Commodities
10

 
Cost of sales
 
11

 

Foreign currency
(16
)
 
Cost of sales
 
(17
)
 

Total derivatives designated as hedges
$
(6
)
 
 
 
$
(7
)
 
$
(1
)
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency (6)
$

 
Sundry income (expense) – net
 
$

 
$
41

Commodities

 
Cost of sales
 

 
(13
)
Total derivatives not designated as hedges
$

 
 
 
$

 
$
28

Total derivatives
$
(6
)
 
 
 
$
(7
)
 
$
27

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of Derivative Instruments for the six months ended June 30, 2010

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

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

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

Derivatives designated as hedges:
 
 
 
 
 
 
 
Fair value:
 
 
 
 
 
 
 
Interest rates
$
(1
)
 
Interest expense (5)
 
$

 
$
(1
)
Cash flow:
 
 
 
 
 
 
 
Commodities
(18
)
 
Cost of sales
 
(4
)
 

Foreign currency
20

 
Cost of sales
 
(3
)
 

Net foreign investment:
 
 
 
 
 
 
 
Foreign currency
(20
)
 
n/a
 

 

Total derivatives designated as hedges
$
(19
)
 
 
 
$
(7
)
 
$
(1
)
Derivatives not designated as hedges:
 
 
 
 
 
 
 
Foreign currency (6)
$

 
Sundry income (expense) – net
 
$

 
$
113

Commodities

 
Cost of sales
 

 
(4
)
Total derivatives not designated as hedges
$

 
 
 
$

 
$
109

Total derivatives
$
(19
)
 
 
 
$
(7
)
 
$
108

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

The net after-tax amounts to be reclassified from AOCI to income within the next 12 months are a $1 million loss for interest rate contracts, a $6 million gain for commodity contracts and a $5 million loss for foreign currency contracts.

19

Table of Contents

NOTE I – FAIR VALUE MEASUREMENTS
The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the consolidated balance sheets:
Basis of Fair Value Measurements
on a Recurring Basis
at June 30, 2011


In millions
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)

 
Significant
Other
Observable
Inputs
(Level 2)

 
Significant
Unobservable
Inputs
(Level 3)

 
Counterparty
and Cash
Collateral
Netting (1)

 
Total  

Assets at fair value:

 

 

 

 
 
Interests in trade accounts receivable conduits (2)
$

 
$

1,343

$
1,389

 
$

 
$
1,389

Equity securities (3)
639

 
38



 

 
677

Debt securities: (3)

 

 

 

 
 
Government debt (4)

 
600



 

 
600

Corporate bonds

 
738



 

 
738

Derivatives relating to: (5)

 

 

 

 
 
Foreign currency

 
37



 
(15
)
 
22

Commodities
16

 
22



 
(22
)
 
16

Total assets at fair value
$
655