DOW-Q2-6.30.2012
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2012

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________to__________

Commission File Number: 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)
Registrant's telephone number, including area code: 989-636-1000

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, 2012
Common Stock, par value $2.50 per share
 
1,198,107,132 shares



Table of Contents

The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 2012
TABLE OF CONTENTS

 
 
PAGE
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
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,
2012

 
Jun 30,
2011

 
Jun 30,
2012

 
Jun 30,
2011

Net Sales
$
14,513

 
$
16,046

 
$
29,232

 
$
30,779

Cost of sales
12,200

 
13,551

 
24,485

 
25,668

Research and development expenses
406

 
411

 
811

 
811

Selling, general and administrative expenses
674

 
695

 
1,381

 
1,395

Amortization of intangibles
122

 
125

 
244

 
248

Restructuring charges

 

 
357

 

Acquisition-related integration expenses

 

 

 
31

Equity in earnings of nonconsolidated affiliates
148

 
291

 
317

 
589

Sundry income (expense) - net
27

 
80

 
44

 
(369
)
Interest income
10

 
10

 
16

 
17

Interest expense and amortization of debt discount
312

 
328

 
641

 
705

Income Before Income Taxes
984

 
1,317

 
1,690

 
2,158

Provision for income taxes
244

 
240

 
430

 
360

Net Income
740

 
1,077

 
1,260

 
1,798

Net income attributable to noncontrolling interests
6

 
10

 
29

 
21

Net Income Attributable to The Dow Chemical Company
734

 
1,067

 
1,231

 
1,777

Preferred stock dividends
85

 
85

 
170

 
170

Net Income Available for The Dow Chemical Company Common Stockholders
$
649

 
$
982

 
$
1,061

 
$
1,607

 
 
 
 
 
 
 
 
Per Common Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.55

 
$
0.84

 
$
0.90

 
$
1.39

Earnings per common share - diluted
$
0.55

 
$
0.84

 
$
0.90

 
$
1.37

 


 
 
 
 
 


Common stock dividends declared per share of common stock
$
0.32

 
$
0.25

 
$
0.57

 
$
0.40

Weighted-average common shares outstanding - basic
1,169.7

 
1,149.6

 
1,165.3

 
1,144.6

Weighted-average common shares outstanding - diluted
1,176.6

 
1,160.9

 
1,172.7

 
1,156.2

 


 
 
 
 
 


Depreciation
$
506

 
$
526

 
$
1,016

 
$
1,085

Capital Expenditures
$
581

 
$
564

 
$
983

 
$
969

See Notes to the Consolidated Financial Statements.


3

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,
2012

 
Jun 30,
2011

 
Jun 30,
2012

 
Jun 30,
2011

Net Income
$
740

 
$
1,077

 
$
1,260

 
$
1,798

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on investments
(25
)
 
(8
)
 
32

 
6

Translation adjustments
(456
)
 
159

 
(174
)
 
600

Adjustments to pension and other postretirement benefit plans
97

 
69

 
182

 
141

Net gains (losses) on cash flow hedging derivative instruments
3

 
14

 
(11
)
 
5

Other comprehensive income (loss)
(381
)
 
234

 
29

 
752

Comprehensive Income
359

 
1,311

 
1,289

 
2,550

Comprehensive income attributable to noncontrolling interests, net of tax
6

 
10

 
29

 
21

Comprehensive Income Attributable to The Dow Chemical Company
$
353

 
$
1,301

 
$
1,260

 
$
2,529

See Notes to the Consolidated Financial Statements.


4

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited)
Jun 30,
2012

 
Dec 31,
2011

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2012: $174; 2011: $170)
$
4,128

 
$
5,444

Marketable securities and interest-bearing deposits
2

 
2

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2012: $134; 2011: $121)
5,251

 
4,900

Other
4,636

 
4,726

Inventories
8,380

 
7,577

Deferred income tax assets - current
462

 
471

Other current assets
339

 
302

Total current assets
23,198

 
23,422

Investments
 
 
 
Investment in nonconsolidated affiliates
3,190

 
3,405

Other investments (investments carried at fair value - 2012: $2,063; 2011: $2,008)
2,554

 
2,508

Noncurrent receivables
1,229

 
1,144

Total investments
6,973

 
7,057

Property
 
 
 
Property
52,924

 
52,216

Less accumulated depreciation
35,571

 
34,917

Net property (variable interest entities restricted - 2012: $2,324; 2011: $2,169)
17,353

 
17,299

Other Assets
 
 
 
Goodwill
12,896

 
12,930

Other intangible assets (net of accumulated amortization - 2012: $2,605; 2011: $2,349)
4,898

 
5,061

Deferred income tax assets - noncurrent
2,582

 
2,559

Asbestos-related insurance receivables - noncurrent
167

 
172

Deferred charges and other assets
775

 
724

Total other assets
21,318

 
21,446

Total Assets
$
68,842

 
$
69,224

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
473

 
$
541

Long-term debt due within one year
1,880

 
2,749

Accounts payable:
 
 
 
Trade
4,586

 
4,778

Other
2,262

 
2,216

Income taxes payable
375

 
382

Deferred income tax liabilities - current
117

 
129

Dividends payable
462

 
376

Accrued and other current liabilities
2,474

 
2,463

Total current liabilities
12,629

 
13,634

Long-Term Debt (variable interest entities nonrecourse - 2012: $1,308; 2011: $1,138)
18,304

 
18,310

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities - noncurrent
1,009

 
1,091

Pension and other postretirement benefits - noncurrent
8,775

 
9,034

Asbestos-related liabilities - noncurrent
581

 
608

Other noncurrent obligations
3,173

 
3,109

Total other noncurrent liabilities
13,538

 
13,842

Redeemable Noncontrolling Interest
147

 
147

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
2,996

 
2,961

Additional paid-in capital
3,018

 
2,663

Retained earnings
19,473

 
19,087

Accumulated other comprehensive loss
(5,967
)
 
(5,996
)
Unearned ESOP shares
(399
)
 
(434
)
The Dow Chemical Company’s stockholders’ equity
23,121

 
22,281

Noncontrolling interests
1,103

 
1,010

Total equity
24,224

 
23,291

Total Liabilities and Equity
$
68,842

 
$
69,224

See Notes to the Consolidated Financial Statements.

5

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2012

 
Jun 30,
2011

Operating Activities
 
 
 
Net Income
$
1,260

 
$
1,798

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization
1,353

 
1,428

Credit for deferred income tax
(133
)
 
(99
)
Earnings of nonconsolidated affiliates less than dividends received
191

 
50

Pension contributions
(499
)
 
(282
)
Net gain on sales of investments
(6
)
 
(35
)
Net gain on sales of property, businesses and consolidated companies
(71
)
 
(6
)
Other net loss
32

 

Net gain on sale of ownership interest in nonconsolidated affiliates

 
(61
)
Restructuring charges
357

 

Loss on early extinguishment of debt
24

 
482

Excess tax benefits from share-based payment arrangements
(58
)
 
(14
)
Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(2,143
)
 
(2,721
)
Proceeds from interests in trade accounts receivable conduits
1,972

 
1,224

Inventories
(790
)
 
(1,651
)
Accounts payable
(248
)
 
653

Other assets and liabilities
180

 
(146
)
Cash provided by operating activities
1,421

 
620

Investing Activities
 
 
 
Capital expenditures
(983
)
 
(969
)
Construction of assets pending sale / leaseback

 
(113
)
Proceeds from sale / leaseback of assets

 
80

Proceeds from sales of property, businesses and consolidated companies
62

 
85

Acquisitions of businesses

 
(6
)
Investments in consolidated companies, net of cash acquired
(27
)
 
(120
)
Investments in and loans to nonconsolidated affiliates
(168
)
 
(45
)
Distributions from nonconsolidated affiliates
13

 
27

Proceeds from sale of ownership interests in nonconsolidated affiliates

 
81

Purchases of investments
(266
)
 
(427
)
Proceeds from sales and maturities of investments
254

 
503

Cash used in investing activities
(1,115
)
 
(904
)
Financing Activities
 
 
 
Changes in short-term notes payable
(63
)
 
(557
)
Proceeds from issuance of long-term debt
446

 
946

Payments on long-term debt
(1,431
)
 
(4,738
)
Purchases of treasury stock

 
(19
)
Proceeds from issuance of common stock
190

 
171

Proceeds from sales of common stock

 
98

Excess tax benefits from share-based payment arrangements
58

 
14

Contribution from noncontrolling interests

 
20

Distributions to noncontrolling interests
(58
)
 
(22
)
Dividends paid to stockholders
(751
)
 
(512
)
Cash used in financing activities
(1,609
)
 
(4,599
)
Effect of Exchange Rate Changes on Cash
(13
)
 
64

Cash Assumed in Initial Consolidation of Variable Interest Entities

 
3

Summary
 
 
 
Decrease in cash and cash equivalents
(1,316
)
 
(4,816
)
Cash and cash equivalents at beginning of year
5,444

 
7,039

Cash and cash equivalents at end of period
$
4,128

 
$
2,223

See Notes to the Consolidated Financial Statements.

6

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2012

 
Jun 30,
2011

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

 
$
4,000

Common Stock
 
 
 
Balance at beginning of year
2,961

 
2,931

Common stock issued
35

 
22

Balance at end of period
2,996

 
2,953

Additional Paid-in Capital
 
 
 
Balance at beginning of year
2,663

 
2,286

Common stock issued
155

 
149

Stock-based compensation and allocation of ESOP shares
200

 
15

Balance at end of period
3,018

 
2,450

Retained Earnings
 
 
 
Balance at beginning of year
19,087

 
17,736

Net income available for The Dow Chemical Company common stockholders
1,061

 
1,607

Dividends declared on common stock (per share: $0.57 in 2012, $0.40 in 2011)
(667
)
 
(460
)
Other
(8
)
 
(6
)
Balance at end of period
19,473

 
18,877

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(5,996
)
 
(4,399
)
Other comprehensive income
29

 
752

Balance at end of period
(5,967
)
 
(3,647
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(434
)
 
(476
)
Shares allocated to ESOP participants
35

 
28

Balance at end of period
(399
)
 
(448
)
Treasury Stock
 
 
 
Balance at beginning of year

 
(239
)
Purchases

 
(19
)
Issuance to employees and employee plans

 
258

Balance at end of period

 

The Dow Chemical Company’s Stockholders’ Equity
23,121

 
24,185

Noncontrolling Interests
 
 
 
Balance at beginning of year
1,010

 
803

Net income attributable to noncontrolling interests
29

 
21

Distributions to noncontrolling interests
(58
)
 
(22
)
Capital contributions (noncash capital contributions - 2012: $95; 2011: $0)
95

 
20

Consolidation of a variable interest entity
37

 
31

Other
(10
)
 
1

Balance at end of period
1,103

 
854

Total Equity
$
24,224

 
$
25,039

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, 2011.

NOTE B – RECENT ACCOUNTING GUIDANCE
On January 1, 2012, the Company adopted Accounting Standards Update ("ASU") 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income," as amended by ASU 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." This standard improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. See the Consolidated Statements of Comprehensive Income and Note P for additional information.

On January 1, 2012, the Company adopted 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"). See Note H for additional information about fair value measurements.
Accounting Guidance Issued But Not Adopted as of June 30, 2012
In December 2011, the Financial Accounting Standards Board ("FASB") issued ASU 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities," which requires entities to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement. The objective of the disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. Retrospective presentation for all comparative periods presented is required. The Company is currently evaluating the impact of adopting this guidance.

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Table of Contents

NOTE C – RESTRUCTURING
2012 Restructuring
On March 27, 2012, the Company's Board of Directors approved a restructuring plan to optimize its portfolio, respond to changing and volatile economic conditions, particularly in Western Europe, and to advance the Company's Efficiency for Growth program, which was initiated by the Company in the second quarter of 2011. The restructuring plan includes the elimination of approximately 900 positions. In addition, the Company will shut down a number of manufacturing facilities. These actions are expected to be completed primarily over the next two years.

As a result of the restructuring activities, the Company recorded pretax restructuring charges of $357 million in the first quarter of 2012 consisting of costs associated with exit or disposal activities of $150 million, severance costs of $113 million and asset write-downs and write-offs of $94 million. The impact of these charges is shown as "Restructuring charges" in the consolidated statements of income and reflected in the Company's segment results as shown in the following table.

2012 Restructuring Charges by Operating Segment


In millions
Costs Associated with Exit or Disposal Activities

 
Severance Costs

 
Impairment of Long-Lived Assets and Other Assets

 
Total

Electronic and Functional Materials
$

 
$

 
$
17

 
$
17

Coatings and Infrastructure Solutions
4

 

 
37

 
41

Performance Materials
146

 

 
40

 
186

Corporate

 
113

 

 
113

Total
$
150

 
$
113

 
$
94

 
$
357


Details regarding the components of the 2012 restructuring charges are discussed below:

Costs Associated with Exit or Disposal Activities
The restructuring charges for costs associated with exit or disposal activities totaled $150 million in the first quarter of 2012 and included contract cancellation fees of $149 million, impacting Performance Materials ($146 million) and Coatings and Infrastructure Solutions ($3 million), and asbestos abatement costs of $1 million impacting Coatings and Infrastructure Solutions.

Severance Costs
The restructuring charges in the first quarter of 2012 included severance of $113 million for the separation of approximately 900 employees under the terms of the Company's ongoing benefit arrangements, primarily over the next two years. These costs were charged against Corporate. At June 30, 2012, severance of $17 million had been paid and a liability of $96 million remained for 747 employees.

Impairment of Long-Lived Assets and Other Assets
The restructuring charges related to the write-down and write-off of assets in the first quarter of 2012 totaled $94 million. Details regarding the write-downs and write-offs are as follows:

The Company evaluated its facilities that manufacture STYROFOAM™ brand insulation and as a result, the decision was made to shut down facilities in Balatonfuzfo, Hungary; Estarreja, Portugal; and Charleston, Illinois. In addition, a facility in Terneuzen, The Netherlands will be idled and impaired. Write-downs associated with these facilities of $37 million were recorded in the first quarter of 2012 against the Coatings and Infrastructure Solutions segment. The Netherlands facility was shut down at the end of the second quarter of 2012. The remaining facilities will be shut down by year-end 2012.

The decision was made to shut down and/or consolidate certain manufacturing assets in the Polyurethanes and Epoxy businesses in Texas and Germany. Write-downs associated with these assets of $15 million were recorded in the first quarter of 2012 against the Performance Materials segment. These assets are expected to be shut down by the end of the third quarter of 2012.

Certain capital projects were canceled resulting in the write-off of project spending of $42 million against the Performance Materials ($25 million) and Electronic and Functional Materials ($17 million) segments.


9

Table of Contents

The following table summarizes the activities related to the Company's restructuring reserve:

2012 Restructuring Activities



In millions
Costs Associated with Exit or Disposal Activities

 
Severance Costs

 
 Impairment of Long-Lived Assets and Other Assets

 
Total

Restructuring charges recognized in the first quarter of 2012
$
150

 
$
113

 
$
94

 
$
357

Charges against the reserve

 

 
(94
)
 
(94
)
Reserve balance at March 31, 2012
$
150

 
$
113

 
$

 
$
263

Cash payments
(41
)
 
(17
)
 

 
(58
)
Noncash settlements
(12
)
 

 

 
(12
)
Foreign currency impact
(2
)
 

 

 
(2
)
Reserve balance at June 30, 2012
$
95

 
$
96

 
$

 
$
191


Dow expects to incur future costs related to its restructuring activities, as the Company continually looks for ways to enhance the efficiency and cost effectiveness of its operations, and to ensure competitiveness across its businesses and across geographic areas. Future costs are expected to include demolition costs related to closed facilities; these will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.


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 Company ("Rohm and Haas"), which was completed in the first quarter of 2011. These charges were recorded in “Acquisition-related integration expenses” in the consolidated statements of income and reflected in Corporate.

Divestiture of the Styron Business Unit
On June 17, 2010, the Company sold the Styron business unit ("Styron") to an affiliate of Bain Capital Partners. The proceeds received on the sale 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.

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, 2012.


NOTE E – INVENTORIES
The following table provides a breakdown of inventories:
 
Inventories
In millions
Jun 30, 2012

 
Dec 31, 2011

Finished goods
$
4,672

 
$
4,327

Work in process
1,931

 
1,716

Raw materials
993

 
765

Supplies
784

 
769

Total inventories
$
8,380

 
$
7,577

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $788 million at June 30, 2012 and $1,105 million at December 31, 2011.



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Table of Contents

NOTE F – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the carrying amount of goodwill by operating segment:

Goodwill
Electronic
and
Functional
Materials

 
Coatings
and Infra-
structure
Solutions

 
Ag
Sciences

 
Perf
Materials

 
Perf
Plastics

 
Feedstocks
and Energy

 
Total  

In millions
 
 
 
 
 
 
Net goodwill at Dec 31, 2011
$
4,934

 
$
4,041

 
$
1,558

 
$
959

 
$
1,375

 
$
63

 
$
12,930

Goodwill related to 2012 acquisition of:
 
 
 
 
 
 
 
 
 
 
 
 
 
Lightscape Materials, Inc.
3

 

 

 

 

 

 
3

Foreign currency impact
(11
)
 
(16
)
 

 
(1
)
 
(9
)
 

 
(37
)
Net goodwill at Jun 30, 2012
$
4,926

 
$
4,025

 
$
1,558

 
$
958

 
$
1,366

 
$
63

 
$
12,896


The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At June 30, 2012
 
At December 31, 2011
In millions
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net  

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Licenses and intellectual property
$
1,701

 
$
(670
)
 
$
1,031

 
$
1,693

 
$
(594
)
 
$
1,099

Patents
130

 
(98
)
 
32

 
119

 
(97
)
 
22

Software
1,094

 
(629
)
 
465

 
1,049

 
(596
)
 
453

Trademarks
691

 
(257
)
 
434

 
695

 
(224
)
 
471

Customer related
3,652

 
(837
)
 
2,815

 
3,652

 
(730
)
 
2,922

Other
157

 
(114
)
 
43

 
150

 
(108
)
 
42

Total other intangible assets, finite lives
$
7,425

 
$
(2,605
)
 
$
4,820

 
$
7,358

 
$
(2,349
)
 
$
5,009

IPR&D (1), indefinite lives
78

 

 
78

 
52

 

 
52

Total other intangible assets
$
7,503

 
$
(2,605
)
 
$
4,898

 
$
7,410

 
$
(2,349
)
 
$
5,061

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

The following table provides information regarding amortization expense related to intangible assets:

Amortization Expense
Three Months Ended
 
Six Months Ended
In millions
Jun 30,
2012

 
Jun 30,
2011

 
Jun 30,
2012

 
Jun 30,
2011

Other intangible assets, excluding software
$
122

 
$
125

 
$
244

 
$
248

Software, included in “Cost of sales”
$
16

 
$
22

 
$
31

 
$
45


Total estimated amortization expense for 2012 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2012
$
554

2013
$
535

2014
$
513

2015
$
496

2016
$
485

2017
$
450




11

Table of Contents

NOTE G – 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,
2012

 
Jun 30,
2011

Proceeds from sales of available-for-sale securities
$
236

 
$
460

Gross realized gains
$
9

 
$
26

Gross realized losses
$
(5
)
 
$
(7
)
The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities
at June 30, 2012
In millions
Amortized Cost

 
Fair Value

Within one year
$
38

 
$
39

One to five years
422

 
464

Six to ten years
551

 
605

After ten years
209

 
251

Total
$
1,220

 
$
1,359


At June 30, 2012, the Company had $1,450 million held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had original maturities of three months or less ($1,836 million at December 31, 2011). The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At June 30, 2012, the Company had investments in money market funds of $76 million classified as cash equivalents ($1,090 million at December 31, 2011).
The net unrealized gain from mark-to-market adjustments recognized in earnings during the three-month period ended June 30, 2012 on trading securities held at June 30, 2012 was $4 million ($2 million during the three-month period ended June 30, 2011). The net unrealized gain from mark-to-market adjustments recognized in earnings during the six-month period ended June 30, 2012 on trading securities held at June 30, 2012 was $28 million ($13 million during the six-month period ended June 30, 2011).
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, 2012 and December 31, 2011, aggregated by investment category:
Temporarily Impaired Securities Less than 12 Months (1)
 
At June 30, 2012
 
At December 31, 2011
In millions
Fair
Value
 
Unrealized
Losses

 
Fair
Value
 
Unrealized
Losses

Debt securities:
 
 
 
 
 
 
 
Corporate bonds
40

 
(1
)
 
44

 
(2
)
Total debt securities
$
40

 
$
(1
)
 
$
44

 
$
(2
)
Equity securities
195

 
(27
)
 
190

 
(36
)
Total temporarily impaired securities
$
235

 
$
(28
)
 
$
234

 
$
(38
)
(1)
Unrealized losses of 12 months or more were less than $1 million.

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 the 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 during the six-month periods ended June 30, 2012 or June 30, 2011.

12

Table of Contents

For equity securities, the Company’s investments are primarily in Standard & Poor’s (“S&P”) 500 companies; however, the Company’s policies allow investments in companies outside of the S&P 500. The largest holdings are Exchange Traded Funds that represent the S&P 500 index or an S&P 500 sector or subset; the Company also has holdings in Exchange Traded Funds that represent emerging markets. 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, 2012, other-than-temporary impairment write-downs on investments still held by the Company were $5 million ($3 million in the six-month period ended June 30, 2011).
The aggregate cost of the Company’s cost method investments totaled $167 million at June 30, 2012 and $179 million at December 31, 2011. Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed quarterly for impairment indicators. In the six-month period ended June 30, 2012, the Company's impairment analysis resulted in no reduction in the cost basis of these investments (no reduction in the six-month period ended June 30, 2011).
The following table summarizes the fair value of financial instruments at June 30, 2012 and December 31, 2011:
 
Fair Value of Financial Instruments
 
At June 30, 2012
 
At December 31, 2011
In millions
Cost

 
Gain

 
Loss

 
Fair
Value

 
Cost

 
Gain

 
Loss

 
Fair
Value

Marketable securities: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt (2)
$
520

 
$
62

 
$

 
$
582

 
$
556

 
$
62

 
$

 
$
618

Corporate bonds
700

 
78

 
(1
)
 
777

 
652

 
73

 
(2
)
 
723

Total debt securities
$
1,220

 
$
140

 
$
(1
)
 
$
1,359

 
$
1,208

 
$
135

 
$
(2
)
 
$
1,341

Equity securities
647

 
84

 
(27
)
 
704

 
646

 
57

 
(36
)
 
667

Total marketable securities
$
1,867

 
$
224

 
$
(28
)
 
$
2,063

 
$
1,854

 
$
192

 
$
(38
)
 
$
2,008

Long-term debt incl. debt due within one year (3)
$
(20,184
)
 
$
39

 
$
(3,163
)
 
$
(23,308
)
 
$
(21,059
)
 
$
6

 
$
(2,736
)
 
$
(23,789
)
Derivatives relating to:
 
 
 
 
 
 

 
 
 
 
 
 
 

Interest rates
$

 
$

 
$
(6
)
 
$
(6
)
 
$

 
$

 
$

 
$

Commodities (4)
$

 
$
22

 
$
(11
)
 
$
11

 
$

 
$
16

 
$
(1
)
 
$
15

Foreign currency
$

 
$
23

 
$
(28
)
 
$
(5
)
 
$

 
$
31

 
$
(17
)
 
$
14

(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 $23 million at June 30, 2012 and $23 million at December 31, 2011.
(4) Presented net of cash collateral, as disclosed in Note H.

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. Accounting 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 to



13

Table of Contents

not have credit-risk-related contingent features in its derivative instruments. No significant concentration of counterparty credit risk existed at June 30, 2012. 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 2012.
The Company revises its strategies as market conditions dictate and management reviews its overall financial strategies and the impacts from using derivatives in its risk management program with the Company’s Board of Directors.
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, 2012, the Company had open interest rate swaps with maturity dates that extend to 2019.
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, 2012, 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 2012.
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, 2012, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements had various expiration dates through fourth quarter of 2015.
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.
There was a net loss of less than $1 million after tax from previously terminated interest rate cash flow hedges included in AOCI at June 30, 2012 ($1 million after tax at December 31, 2011). The Company had open interest rate derivatives designated as cash flow hedges at June 30, 2012 with a net loss of $4 million after tax and a notional U.S. dollar equivalent of $320 million (no open interest rate derivatives designated as cash flow hedges at December 31, 2011).
Current open foreign currency forward contracts hedge the currency risk of forecasted feedstock purchase transactions until January 2013. The effective portion of the mark-to-market effects of the foreign currency forward contracts is recorded in AOCI; it is reclassified to income in the same period or periods that the underlying feedstock purchase affects income. The net gain from the foreign currency hedges included in AOCI at June 30, 2012 was $6 million after tax (net gain of $2 million after tax at December 31, 2011). At June 30, 2012, 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 $396 million ($432 million at December 31, 2011).

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Table of Contents

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 June 2014. The effective portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCI; it is reclassified to income in the same period or periods that the underlying commodity purchase affects income. The net loss from commodity hedges included in AOCI at June 30, 2012 was $20 million after tax ($7 million after tax at December 31, 2011). At June 30, 2012 and December 31, 2011, the Company had the following aggregate notionals of outstanding commodity forward and futures contracts to hedge forecasted purchases:
 
Commodity
Jun 30,
2012

 
Dec 31,
2011

 
Notional Volume Unit
Corn
3.2

 
0.6

 
million bushels
Crude Oil
0.6

 
0.2

 
million barrels
Ethane
2.6

 
1.6

 
million barrels
Naphtha

 
90.0

 
kilotons
Natural Gas
119.2

 
7.4

 
million million British thermal units
Ethane / Propane Mix
0.1

 
0.2

 
million barrels
Soybeans
1.8

 
0.3

 
million bushels

The net after-tax amounts to be reclassified from AOCI to income within the next 12 months are a $20 million loss for commodity contracts and a $6 million gain for foreign currency contracts.

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, 2012 or December 31, 2011.
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. At June 30, 2012 and December 31, 2011, the Company had no open forward contracts or outstanding options to buy, sell or exchange foreign currencies designated as net foreign investment hedges. At June 30, 2012, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $569 million ($585 million at December 31, 2011). 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 $10 million after tax at June 30, 2012 (net loss of $48 million after tax at December 31, 2011). See Note P for further detail on changes in AOCI.
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 for derivatives and hedging. At June 30, 2012 and December 31, 2011, the Company had the following aggregate notionals of outstanding commodity contracts:
 
Commodity
Jun 30,
2012

 
Dec 31,
2011

 
Notional Volume Unit
Ethane
1.5

 
2.1

 
million barrels
Naphtha
45.0

 
82.5

 
kilotons
Natural Gas
1.0

 
4.6

 
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 $14,659 million at June 30, 2012 ($14,002 million at December 31, 2011) and open interest rate swaps with a notional U.S. dollar equivalent of $335 million at June 30, 2012 (no open interest rate swaps at December 31, 2011).

15

Table of Contents

The following table provides the fair value and gross balance sheet classification of derivative instruments at June 30, 2012 and December 31, 2011:

Fair Value of Derivative Instruments
In millions
Balance Sheet Classification
 
Jun 30,
2012

 
Dec 31,
2011

Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Other current assets
 
$

 
$

Commodities
Other current assets
 
11

 
5

Foreign currency
Accounts and notes receivable – Other
 
4

 
9

Total derivatives designated as hedges
 
 
$
15

 
$
14

Derivatives not designated as hedges:
 
 
 
 
 
Interest rates
Other current assets
 
$

 
$

Commodities
Other current assets
 
14

 
19

Foreign currency
Accounts and notes receivable – Other
 
37

 
66

Total derivatives not designated as hedges
 
 
$
51

 
$
85

Total asset derivatives
 
 
$
66

 
$
99

Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Accounts payable – Other
 
$
6

 
$

Commodities
Accounts payable – Other
 
33

 
11

Foreign currency
Accounts payable – Other
 
1

 
8

Total derivatives designated as hedges
 
 
$
40

 
$
19

Derivatives not designated as hedges:
 
 
 
 
 
Interest rates
Accounts payable – Other
 
$

 
$

Commodities
Accounts payable – Other
 
11

 
9

Foreign currency
Accounts payable – Other
 
45

 
53

Total derivatives not designated as hedges
 
 
$
56

 
$
62

Total liability derivatives
 
 
$
96

 
$
81






16

Table of Contents

NOTE H – FAIR VALUE MEASUREMENTS
Fair Value Measurements on a Recurring Basis
The following tables summarize the bases used to measure certain assets and liabilities at fair value on a recurring basis:
Basis of Fair Value Measurements
on a Recurring Basis
at June 30, 2012

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)
$

 
$

 
$
1,220

 
$

 
$
1,220

Equity securities (3)
671

 
33

 

 

 
704

Debt securities: (3)

 

 

 

 
 
Government debt (4)

 
582

 

 

 
582

Corporate bonds

 
777

 

 

 
777

Derivatives relating to: (5)

 

 

 

 
 
Commodities
11

 
14

 

 
(3
)
 
22

Foreign currency

 
41

 

 
(18
)
 
23

Total assets at fair value
$
682

 
$
1,447

 
$
1,220

 
$
(21
)
 
$
3,328

Liabilities at fair value:
 
 
 
 
 
 
 
 
 
Long-term debt (6)
$

 
$
23,308

 
$

 
$

 
$
23,308

Derivatives relating to: (5)
 
 
 
 
 
 
 
 
 
Interest rates

 
6

 

 

 
6

Commodities
27

 
17

 

 
(33
)
 
11

Foreign currency

 
46

 

 
(18
)
 
28

Total liabilities at fair value
$
27

 
$
23,377

 
$

 
$
(51
)

$
23,353


Basis of Fair Value Measurements
on a Recurring Basis
at December 31, 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)
$

 
$

 
$
1,141

 
$

 
$
1,141

Equity securities (3)
634

 
33

 

 

 
667

Debt securities: (3)

 

 

 

 
 
Government debt (4)

 
618

 

 

 
618

Corporate bonds

 
723

 

 

 
723

Derivatives relating to: (5)

 

 

 

 
 
Commodities
10

 
14

 

 
(8
)
 
16

Foreign currency

 
75

 

 
(44
)
 
31

Total assets at fair value
$
644

 
$
1,463

 
$
1,141

 
$
(52
)
 
$
3,196

Liabilities at fair value:
 
 
 
 
 
 
 
 
 
Long-term debt (6)
$

 
$
23,789

 
$

 
$

 
$
23,789

Derivatives relating to: (5)
 
 
 
 
 
 
 
 
 
Commodities
13

 
7

 

 
(19
)
 
1

Foreign currency

 
61

 

 
(44
)
 
17

Total liabilities at fair value
$
13

 
$
23,857

 
$

 
$
(63
)
 
$
23,807

(1)
Cash collateral is classified as “Accounts and notes receivable – Other” in the consolidated balance sheets. Amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.
(2)
Included in “Accounts and notes receivable – Other” in the consolidated balance sheets. See Note J for additional information on transfers of financial assets.
(3)
The Company’s investments in equity and debt securities are primarily classified as available-for-sale and are included in “Other investments” in the consolidated balance sheets.
(4)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(5)
See Note G for the classification of derivatives in the consolidated balance sheets.
(6)
See Note G for information on fair value adjustments to long-term debt, included at cost in the consolidated balance sheets.

17

Table of Contents

Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are netted with corresponding assets and liabilities. The Company posted cash collateral of $30 million at June 30, 2012 ($11 million at December 31, 2011) classified as “Accounts and notes receivable – Other” in the consolidated balance sheets.
For assets and liabilities classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange in which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For assets and liabilities classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, 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, or by using observable market data points of similar, more liquid securities to imply the price. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.
For derivative assets and liabilities, standard industry models are 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. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.
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.
There were no transfers between Levels 1 and 2 in the six-month period ended June 30, 2012 or the year ended December 31, 2011.
For assets classified as Level 3 measurements, the fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity. The fair value of the Company’s interests held in trade receivable conduits is determined by calculating the expected amount of cash to be received using the key input of anticipated credit losses in the portfolio of receivables sold that have not yet been collected. Given the short-term nature of the underlying receivables, discount rate and prepayments are not factors in determining the fair value of the interests. See Note J for further information on assets classified as Level 3 measurements.
The following table summarizes the changes in fair value measurements using Level 3 inputs for the three and six-month periods ended June 30, 2012 and 2011:

Fair Value Measurements Using Level 3 Inputs
Three Months Ended
 
Six Months Ended
Interests Held in Trade Receivable Conduits (1)
In millions
Jun 30,
2012

 
Jun 30,
2011

 
Jun 30,
2012

 
Jun 30,
2011

Balance at beginning of period
$
1,429

 
$
1,343

 
$
1,141

 
$
1,267

Gain (Loss) included in earnings (2)
1

 
3

 
(2
)
 
(5
)
Purchases
100

 
277

 
2,053

 
1,351

Settlements
(310
)
 
(234
)
 
(1,972
)
 
(1,224
)
Balance at June 30
$
1,220

 
$
1,389

 
$
1,220

 
$
1,389

(1)
Included in “Accounts and notes receivable – Other” in the consolidated balance sheets.
(2)
Included in “Selling, general and administrative expenses” in the consolidated statements of income.


18

Table of Contents

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

Basis of Fair Value Measurements
on a Nonrecurring Basis
at June 30, 2012
 
Significant
Other
Unobservable
Inputs

 
Total
Losses

In millions
 
(Level 3)

 
2012

Assets at fair value:
 
 
 
 
Long-lived assets and other assets
 
$

 
$
(94
)

As part of the restructuring plan that was approved on March 27, 2012, the Company will shut down a number of manufacturing facilities during the next two years. The manufacturing assets and facilities associated with this plan were written down to zero in the first quarter of 2012 and a $94 million impairment charge was included in "Restructuring charges" in the consolidated statements of income. See Note C for additional information.


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 impact on the Company’s consolidated financial statements.

As part of the Joint Plan, Dow and Corning Incorporated agreed to provide a credit facility to Dow Corning in an aggregate amount of $300 million; the aggregate amount was reduced to $100 million effective June 1, 2012. The Company’s share of the credit facility was originally $150 million, but was reduced to $50 million effective June 1, 2012, and is subject to the terms and conditions stated in the Joint Plan. At June 30, 2012, 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 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 June 30, 2012, the Company had accrued obligations of $744 million for probable environmental remediation and restoration costs, including $69 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 it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately twice that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s results of

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operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. At December 31, 2011, the Company had accrued obligations of $733 million for probable environmental remediation and restoration costs, including $69 million for the remediation of Superfund sites.

Midland Off-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 the City of Midland soils, the Tittabawassee River and Saginaw River sediment and floodplain soils, and the Saginaw Bay, and, if necessary, undertake remedial action.

City of Midland
The MDEQ, as a result of ongoing discussions with the Company regarding the implementation of the requirements of the License, announced on February 16, 2012, a proposed plan to resolve the issue of dioxin contamination in residential soils in Midland. As part of the proposed plan, the Company will sample soil at residential properties near the Midland site for the presence of dioxins to determine where clean-up may be required. On March 6, 2012, the Company submitted an Interim Response Activity Plan Designed to Meet Criteria ("Work Plan") to the MDEQ. On May 25, 2012, the Company submitted a revision to the Work Plan to the MDEQ to address agency and public comments. The MDEQ approved the Work Plan on June 1, 2012. Implementation of the Work Plan began on June 4, 2012.

Tittabawassee and Saginaw Rivers, Saginaw Bay
The Company, the U.S. Environmental Protection Agency ("EPA") and the State of Michigan ("State") entered into an administrative order on consent ("AOC"), effective January 21, 2010, that requires the Company to conduct a remedial investigation, a feasibility study and a remedial design for the Tittabawassee River, the Saginaw River and the Saginaw Bay, and pay the oversight costs of the EPA and the State under the authority of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). These actions, to be conducted under the lead oversight of the EPA, will build upon the investigative work completed under the State Resource Conservation Recovery Act ("RCRA") program from 2005 through 2009. The Tittabawassee River, beginning at the Midland site and extending down to the first six miles of the Saginaw River, are designated as the first Operable Unit for purposes of conducting the remedial investigation, feasibility study and remedial design work. This work will be performed in a largely upriver to downriver sequence for eight geographic segments of the Tittabawassee and upper Saginaw Rivers. In the first quarter of 2012, the EPA requested the Company address the Tittabawassee River floodplain as an additional segment. The remainder of the Saginaw River and the Saginaw Bay are designated as a second Operable Unit and the work associated with that unit may also be geographically segmented. The AOC does not obligate the Company to perform removal or remedial action; that action can only be required by a separate order. The Company and the EPA will be negotiating orders separate from the AOC that will obligate the Company to perform remedial actions under the scope of work of the AOC. The Company and the EPA have entered into two separate orders to perform limited remedial actions to implement early actions. In addition, the Company and the EPA have entered into the first order to address remedial actions in the first of the nine geographic segments in the first Operable Unit.

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

On September 28, 2007, the Company and the natural resource damage trustees entered into a Funding and Participation Agreement that addressed the Company’s payment of past costs incurred by the natural resource damage trustees, payment of the costs of a trustee coordinator and a process to review additional cooperative studies that the Company might agree to fund or conduct with the natural resource damage trustees. On March 18, 2008, the Company and the natural resource damage trustees entered into a Memorandum of Understanding to provide a mechanism for the Company to fund cooperative studies related to the assessment of natural resource damages. This Memorandum of Understanding has been amended and extended until March 2013. On April 7, 2008, the natural resource damage trustees released their "Natural Resource Damage Assessment Plan for the Tittabawassee River System Assessment Area."

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At June 30, 2012, the accrual for these off-site matters was $41 million (included in the total accrued obligation of $744 million at June 30, 2012). At December 31, 2011, the Company had an accrual for these off-site matters of $40 million (included in the total accrued obligation of $733 million at December 31, 2011).

Asbestos-Related Matters of Union Carbide Corporation
Introduction
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.

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

In November 2010, Union Carbide requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity and determine the appropriateness of updating its then most recent study completed in December 2008. In response to that request, ARPC reviewed and analyzed data through October 31, 2010. The resulting study, completed by ARPC in December 2010, stated that the undiscounted cost of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, through 2025 was estimated to be between $744 million and $835 million. As in its earlier studies, ARPC provided estimates for a longer period of time in its December 2010 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 2010, based on ARPC’s December 2010 study and Union Carbide’s own review of the asbestos claim and resolution activity, Union Carbide decreased its asbestos-related liability for pending and future claims to $744 million, which covered the 15-year period ending 2025, excluding future defense and processing costs. The reduction was $54 million and was shown as “Asbestos-related credit” in the consolidated statements of income and reflected in Corporate. At December 31, 2010, the asbestos-related liability for pending and future claims was $728 million.

In November 2011, Union Carbide requested ARPC to review Union Carbide's 2011 asbestos claim and resolution activity and determine the appropriateness of updating its December 2010 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2011. In January 2012, ARPC stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in its December 2010 study and, therefore, the estimate in that study remained applicable. Based on Union Carbide's own review of the asbestos claim and resolution activity and ARPC's response, Union Carbide determined that no change to the accrual was required. At December 31, 2011, the asbestos-related liability for pending and future claims was $668 million. At December 31, 2011, approximately 18 percent of the recorded liability related to pending claims and approximately 82 percent related to future claims.

Based on Union Carbide’s review of 2012 activity, Union Carbide determined that no adjustment to the accrual was required at June 30, 2012. Union Carbide’s asbestos-related liability for pending and future claims was $636 million at June 30, 2012. Approximately 20 percent of the recorded liability related to pending claims and approximately 80 percent related to future claims.

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

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

Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $40 million at June 30, 2012 and $40 million at December 31, 2011. At June 30, 2012 and December 31, 2011, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.

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