DOW-Q3-9.30.2012
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 SEPTEMBER 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
 
September 30, 2012
Common Stock, par value $2.50 per share
 
1,199,231,590 shares



Table of Contents

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

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


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Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
 
Nine Months Ended
In millions, except per share amounts (Unaudited)
Sep 30,
2012

 
Sep 30,
2011

 
Sep 30,
2012

 
Sep 30,
2011

Net Sales
$
13,637

 
$
15,109

 
$
42,869

 
$
45,888

Cost of sales
11,368

 
12,928

 
35,853

 
38,596

Research and development expenses
434

 
402

 
1,245

 
1,213

Selling, general and administrative expenses
739

 
691

 
2,120

 
2,086

Amortization of intangibles
117

 
125

 
361

 
373

Restructuring charges

 

 
357

 

Acquisition-related integration expenses

 

 

 
31

Equity in earnings of nonconsolidated affiliates
175

 
375

 
492

 
964

Sundry income (expense) - net
(21
)
 
47

 
23

 
(322
)
Interest income
10

 
9

 
26

 
26

Interest expense and amortization of debt discount
318

 
305

 
959

 
1,010

Income Before Income Taxes
825

 
1,089

 
2,515

 
3,247

Provision for income taxes
234

 
186

 
664

 
546

Net Income
591

 
903

 
1,851

 
2,701

Net income attributable to noncontrolling interests
9

 
3

 
38

 
24

Net Income Attributable to The Dow Chemical Company
582

 
900

 
1,813

 
2,677

Preferred stock dividends
85

 
85

 
255

 
255

Net Income Available for The Dow Chemical Company Common Stockholders
$
497

 
$
815

 
$
1,558

 
$
2,422

 
 
 
 
 
 
 
 
Per Common Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.42

 
$
0.70

 
$
1.32

 
$
2.08

Earnings per common share - diluted
$
0.42

 
$
0.69

 
$
1.31

 
$
2.07

 


 
 
 
 
 


Common stock dividends declared per share of common stock
$
0.32

 
$
0.25

 
$
0.89

 
$
0.65

Weighted-average common shares outstanding - basic
1,172.7

 
1,152.3

 
1,167.8

 
1,147.2

Weighted-average common shares outstanding - diluted
1,179.5

 
1,160.9

 
1,174.9

 
1,157.8

 


 
 
 
 
 


Depreciation
$
514

 
$
539

 
$
1,530

 
$
1,624

Capital Expenditures
$
622

 
$
651

 
$
1,605

 
$
1,620

See Notes to the Consolidated Financial Statements.


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Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
 
Nine Months Ended
In millions (Unaudited)
Sep 30,
2012

 
Sep 30,
2011

 
Sep 30,
2012

 
Sep 30,
2011

Net Income
$
591

 
$
903

 
$
1,851

 
$
2,701

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on investments
31

 
(84
)
 
63

 
(78
)
Translation adjustments
339

 
(631
)
 
165

 
(31
)
Adjustments to pension and other postretirement benefit plans
97

 
68

 
279

 
209

Net gains on cash flow hedging derivative instruments
19

 
4

 
8

 
9

Other comprehensive income (loss)
486

 
(643
)
 
515

 
109

Comprehensive Income
1,077

 
260

 
2,366

 
2,810

Comprehensive income attributable to noncontrolling interests, net of tax
9

 
3

 
38

 
24

Comprehensive Income Attributable to The Dow Chemical Company
$
1,068

 
$
257

 
$
2,328

 
$
2,786

See Notes to the Consolidated Financial Statements.


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Table of Contents

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

 
Dec 31,
2011

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2012: $197; 2011: $170)
$
3,885

 
$
5,444

Marketable securities and interest-bearing deposits

 
2

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2012: $139; 2011: $121)
5,169

 
4,900

Other
4,797

 
4,726

Inventories
8,630

 
7,577

Deferred income tax assets - current
666

 
471

Other current assets
318

 
302

Total current assets
23,465

 
23,422

Investments
 
 
 
Investment in nonconsolidated affiliates
3,374

 
3,405

Other investments (investments carried at fair value - 2012: $2,068; 2011: $2,008)
2,559

 
2,508

Noncurrent receivables
1,238

 
1,144

Total investments
7,171

 
7,057

Property
 
 
 
Property
53,417

 
52,216

Less accumulated depreciation
35,860

 
34,917

Net property (variable interest entities restricted - 2012: $2,452; 2011: $2,169)
17,557

 
17,299

Other Assets
 
 
 
Goodwill
12,933

 
12,930

Other intangible assets (net of accumulated amortization - 2012: $2,684; 2011: $2,349)
4,849

 
5,061

Deferred income tax assets - noncurrent
2,407

 
2,559

Asbestos-related insurance receivables - noncurrent
156

 
172

Deferred charges and other assets
830

 
724

Total other assets
21,175

 
21,446

Total Assets
$
69,368

 
$
69,224

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
439

 
$
541

Long-term debt due within one year
1,747

 
2,749

Accounts payable:
 
 
 
Trade
4,627

 
4,778

Other
2,338

 
2,216

Income taxes payable
404

 
382

Deferred income tax liabilities - current
97

 
129

Dividends payable
463

 
376

Accrued and other current liabilities
2,680

 
2,463

Total current liabilities
12,795

 
13,634

Long-Term Debt (variable interest entities nonrecourse - 2012: $1,409; 2011: $1,138)
18,216

 
18,310

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities - noncurrent
1,021

 
1,091

Pension and other postretirement benefits - noncurrent
8,590

 
9,034

Asbestos-related liabilities - noncurrent
549

 
608

Other noncurrent obligations
3,089

 
3,109

Total other noncurrent liabilities
13,249

 
13,842

Redeemable Noncontrolling Interest
147

 
147

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
2,998

 
2,961

Additional paid-in capital
3,112

 
2,663

Retained earnings
19,591

 
19,087

Accumulated other comprehensive loss
(5,481
)
 
(5,996
)
Unearned ESOP shares
(390
)
 
(434
)
The Dow Chemical Company’s stockholders’ equity
23,830

 
22,281

Noncontrolling interests
1,131

 
1,010

Total equity
24,961

 
23,291

Total Liabilities and Equity
$
69,368

 
$
69,224

See Notes to the Consolidated Financial Statements.

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

 
Sep 30,
2011

Operating Activities
 
 
 
Net Income
$
1,851

 
$
2,701

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

 

Depreciation and amortization
2,018

 
2,142

Credit for deferred income tax
(170
)
 
(125
)
Earnings of nonconsolidated affiliates less than (in excess of) dividends received
92

 
(221
)
Pension contributions
(836
)
 
(712
)
Net gain on sales of investments
(11
)
 
(39
)
Net gain on sales of property, businesses and consolidated companies
(72
)
 
(23
)
Other net (gain) loss
40

 
(19
)
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
(59
)
 
(14
)
Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(2,399
)
 
(1,965
)
Proceeds from interests in trade accounts receivable conduits
2,190

 
1,444

Inventories
(1,039
)
 
(1,529
)
Accounts payable
(135
)
 
17

Other assets and liabilities
673

 
(220
)
Cash provided by operating activities
2,524

 
1,858

Investing Activities
 
 
 
Capital expenditures
(1,605
)
 
(1,620
)
Construction of assets pending sale / leaseback

 
(113
)
Proceeds from sale / leaseback of assets

 
119

Proceeds from sales of property, businesses and consolidated companies
74

 
149

Acquisitions of businesses

 
(6
)
Purchases of previously leased assets

 
(30
)
Investments in consolidated companies, net of cash acquired
(27
)
 
(218
)
Investments in and loans to nonconsolidated affiliates
(226
)
 
(126
)
Distributions from nonconsolidated affiliates
16

 
250

Proceeds from sale of ownership interests in nonconsolidated affiliates

 
93

Purchases of investments
(393
)
 
(653
)
Proceeds from sales and maturities of investments
417

 
692

Cash used in investing activities
(1,744
)
 
(1,463
)
Financing Activities
 
 
 
Changes in short-term notes payable
(98
)
 
(485
)
Proceeds from issuance of long-term debt
532

 
1,246

Payments on long-term debt
(1,786
)
 
(5,320
)
Purchases of treasury stock

 
(19
)
Proceeds from issuance of common stock
207

 
184

Proceeds from sales of common stock

 
98

Excess tax benefits from share-based payment arrangements
59

 
14

Contribution from noncontrolling interests

 
20

Distributions to noncontrolling interests
(60
)
 
(34
)
Dividends paid to stockholders
(1,211
)
 
(885
)
Cash used in financing activities
(2,357
)
 
(5,181
)
Effect of Exchange Rate Changes on Cash
18

 
(50
)
Cash Assumed in Initial Consolidation of Variable Interest Entities

 
3

Summary
 
 
 
Decrease in cash and cash equivalents
(1,559
)
 
(4,833
)
Cash and cash equivalents at beginning of year
5,444

 
7,039

Cash and cash equivalents at end of period
$
3,885

 
$
2,206

See Notes to the Consolidated Financial Statements.

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Table of Contents

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

 
Sep 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
37

 
23

Balance at end of period
2,998

 
2,954

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

 
2,286

Common stock issued
170

 
161

Stock-based compensation and allocation of ESOP shares
279

 
79

Balance at end of period
3,112

 
2,526

Retained Earnings
 
 
 
Balance at beginning of year
19,087

 
17,736

Net income available for The Dow Chemical Company common stockholders
1,558

 
2,422

Dividends declared on common stock (per share: $0.89 in 2012, $0.65 in 2011)
(1,042
)
 
(748
)
Other
(12
)
 
(10
)
Balance at end of period
19,591

 
19,400

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(5,996
)
 
(4,399
)
Other comprehensive income
515

 
109

Balance at end of period
(5,481
)
 
(4,290
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(434
)
 
(476
)
Shares allocated to ESOP participants
44

 
38

Balance at end of period
(390
)
 
(438
)
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
23,830

 
24,152

Noncontrolling Interests
 
 
 
Balance at beginning of year
1,010

 
803

Net income attributable to noncontrolling interests
38

 
24

Distributions to noncontrolling interests
(60
)
 
(34
)
Capital contributions (noncash capital contributions - 2012: $97; 2011: $0)
97

 
20

Consolidation of a variable interest entity
37

 
31

Conversion of note payable to preferred shares of a subsidiary

 
158

Other
9

 
(13
)
Balance at end of period
1,131

 
989

Total Equity
$
24,961

 
$
25,141

See Notes to the Consolidated Financial Statements.


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(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 September 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,

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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.


NOTE C – RESTRUCTURING
1Q12 Restructuring
On March 27, 2012, the Company's Board of Directors approved a restructuring plan ("1Q12 Restructuring") 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 1Q12 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 by December 31, 2013.

As a result of the 1Q12 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.

1Q12 Restructuring Charges by Operating Segment
Costs Associated with Exit or Disposal Activities

 
Severance Costs

 
Impairment of Long-Lived Assets and Other Assets

 
 
In millions
 
 
 
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 1Q12 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 September 30, 2012, severance of $71 million had been paid and a liability of $42 million remained for 345 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 was 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

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quarter of 2012 against the Performance Materials segment. The manufacturing assets in Texas were shutdown in the second quarter of 2012. The German manufacturing assets will be shutdown by year-end 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.

The following table summarizes the activities related to the Company's 1Q12 Restructuring reserve:

1Q12 Restructuring Activities
Costs Associated with Exit or Disposal Activities

 
 
 
 Impairment of Long-Lived Assets and Other Assets

 
 



In millions
 
Severance Costs

 
 
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

Cash payments
(2
)
 
(54
)
 

 
(56
)
Noncash settlements
(16
)
 

 

 
(16
)
Foreign currency impact

 

 

 

Reserve balance at September 30, 2012
$
77

 
$
42

 
$

 
$
119


Dow expects to incur additional costs in the future 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.

Subsequent Event
On October 23, 2012, the Board of Directors of the Company approved a restructuring plan ("4Q12 Restructuring") to advance the next stage of the Company's transformation and to address macroeconomic uncertainties. The 4Q12 Restructuring plan accelerates the Company's structural cost reduction program and will affect approximately 3,000 positions. The 4Q12 Restructuring plan also includes asset impairments related to the shutdown of approximately 20 manufacturing facilities, the write-off of certain capital project spending and an impairment charge related to the write-down of Dow Kokam LLC's long-lived assets. As a result of these activities, the Company will record a pre-tax charge in the fourth quarter of 2012 ranging from $900 million to $1.1 billion. These actions are expected to be completed primarily over the next two years.


NOTE D – ACQUISITIONS AND DIVESTITURES
Divestiture of Polypropylene Business
On July 27, 2011, the Company entered into a definitive agreement to sell its global Polypropylene business (a Performance Plastics business) to Braskem SA. The definitive agreement specified the assets and liabilities related to the business to be included in the sale: the Company's polypropylene manufacturing facilities at Schkopau and Wesseling, Germany, and Freeport and Seadrift, Texas; railcars; inventory; receivables; business know-how; certain product and process technology; and customer contracts and lists. On September 30, 2011, the sale was completed for $459 million, net of working capital adjustments and costs to sell, with proceeds subject to customary post-closing adjustments to be finalized in subsequent periods. The proceeds included a $474 million receivable that was paid to the Company on October 3, 2011. Dow's Polypropylene Licensing and Catalyst business and related catalyst facilities were excluded from this sale. The transaction resulted in several long-term supply, service and purchase agreements between Dow and Braskem SA, which are expected to generate significant ongoing cash flows. As a result, the divestiture of this business was not reported as discontinued operations.

Reclassification of Cumulative Translation Adjustments Resulting From the Sale of German Entities
On July 15, 2011, the Company sold assets and liabilities related to two legal entities in Germany. This asset sale qualified as a complete liquidation of an investment in a foreign entity. As a result of this asset sale, the Company transferred a $39 million

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cumulative translation adjustment gain from "Accumulated other comprehensive loss" into income during the third quarter of 2011. Including this gain, the sale resulted in a net immaterial loss, which was included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in Corporate.

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 September 30, 2012.


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

 
Dec 31, 2011

Finished goods
$
4,858

 
$
4,327

Work in process
2,001

 
1,716

Raw materials
979

 
765

Supplies
792

 
769

Total inventories
$
8,630

 
$
7,577

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $875 million at September 30, 2012 and $1,105 million at December 31, 2011.


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

 

 

 

 

 

 

Net goodwill at Sep 30, 2012
$
4,937

 
$
4,041

 
$
1,558

 
$
959

 
$
1,375

 
$
63

 
$
12,933



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Table of Contents

The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At September 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
$
1,703

 
$
(709
)
 
$
994

 
$
1,693

 
$
(594
)
 
$
1,099

Patents
130

 
(99
)
 
31

 
119

 
(97
)
 
22

Software
1,059

 
(566
)
 
493

 
1,049

 
(596
)
 
453

Trademarks
691

 
(269
)
 
422

 
695

 
(224
)
 
471

Customer related
3,714

 
(920
)
 
2,794

 
3,652

 
(730
)
 
2,922

Other
157

 
(121
)
 
36

 
150

 
(108
)
 
42

Total other intangible assets, finite lives
$
7,454

 
$
(2,684
)
 
$
4,770

 
$
7,358

 
$
(2,349
)
 
$
5,009

IPR&D (1), indefinite lives
79

 

 
79

 
52

 

 
52

Total other intangible assets
$
7,533

 
$
(2,684
)
 
$
4,849

 
$
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
 
Nine Months Ended
In millions
Sep 30,
2012

 
Sep 30,
2011

 
Sep 30,
2012

 
Sep 30,
2011

Other intangible assets, excluding software
$
117

 
$
125

 
$
361

 
$
373

Software, included in “Cost of sales”
$
15

 
$
23

 
$
46

 
$
68


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

Estimated Amortization Expense
In millions
2012
$
552

2013
$
533

2014
$
511

2015
$
494

2016
$
482

2017
$
448



NOTE G – FINANCIAL INSTRUMENTS
Investments
The Company’s investments in marketable securities are primarily classified as available-for-sale.
 
Investing Results
Nine Months Ended
In millions
Sep 30,
2012

 
Sep 30,
2011

Proceeds from sales of available-for-sale securities
$
401

 
$
631

Gross realized gains
$
30

 
$
39

Gross realized losses
$
(10
)
 
$
(13
)

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The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities
at September 30, 2012
In millions
Amortized Cost

 
Fair Value

Within one year
$
27

 
$
28

One to five years
471

 
522

Six to ten years
498

 
553

After ten years
207

 
250

Total
$
1,203

 
$
1,353


At September 30, 2012, the Company had $1,050 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 September 30, 2012, the Company had investments in money market funds of $455 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 September 30, 2012 on trading securities held at September 30, 2012 was $1 million ($11 million during the three-month period ended September 30, 2011). The net unrealized gain from mark-to-market adjustments recognized in earnings during the nine-month period ended September 30, 2012 on trading securities held at September 30, 2012 was $29 million ($25 million during the nine-month period ended September 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 September 30, 2012 and December 31, 2011, aggregated by investment category:
Temporarily Impaired Securities Less than 12 Months (1)
 
At September 30, 2012
 
At December 31, 2011
In millions
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

Debt securities:
 
 
 
 
 
 
 
Corporate bonds
$
22

 
$
(1
)
 
$
44

 
$
(2
)
Total debt securities
$
22

 
$
(1
)
 
$
44

 
$
(2
)
Equity securities
157

 
(10
)
 
190

 
(36
)
Total temporarily impaired securities
$
179

 
$
(11
)
 
$
234

 
$
(38
)
(1)
Unrealized losses of 12 months or more were approximately $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 nine-month periods ended September 30, 2012 or September 30, 2011.
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 nine-month period ended September 30, 2012, other-than-temporary impairment write-downs on investments still held by the Company were $5 million ($6 million in the nine-month period ended September 30, 2011).


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The aggregate cost of the Company’s cost method investments totaled $171 million at September 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 nine-month period ended September 30, 2012, the Company's impairment analysis resulted in a $3 million reduction in the cost basis of these investments (no reduction in the nine-month period ended September 30, 2011).

The following table summarizes the fair value of financial instruments at September 30, 2012 and December 31, 2011:
 
Fair Value of Financial Instruments
 
At September 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

 
$
64

 
$

 
$
584

 
$
556

 
$
62

 
$

 
$
618

Corporate bonds
683

 
87

 
(1
)
 
769

 
652

 
73

 
(2
)
 
723

Total debt securities
$
1,203

 
$
151

 
$
(1
)
 
$
1,353

 
$
1,208

 
$
135

 
$
(2
)
 
$
1,341

Equity securities
623

 
103

 
(11
)
 
715

 
646

 
57

 
(36
)
 
667

Total marketable securities
$
1,826

 
$
254

 
$
(12
)
 
$
2,068

 
$
1,854

 
$
192

 
$
(38
)
 
$
2,008

Long-term debt incl. debt due within one year (3)
$
(19,963
)
 
$
29

 
$
(3,285
)
 
$
(23,219
)
 
$
(21,059
)
 
$
6

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

 
 
 
 
 
 
 

Interest rates
$

 
$

 
$
(7
)
 
$
(7
)
 
$

 
$

 
$

 
$

Commodities (4)
$

 
$
34

 
$
(2
)
 
$
32

 
$

 
$
16

 
$
(1
)
 
$
15

Foreign currency
$

 
$
23

 
$
(49
)
 
$
(26
)
 
$

 
$
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 September 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
not have credit-risk-related contingent features in its derivative instruments. No significant concentration of counterparty credit risk existed at September 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,

14

Table of Contents

at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed-upon notional principal amount. At September 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 September 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 fourth 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 September 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 derivatives 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 September 30, 2012 ($1 million after tax at December 31, 2011). The Company had open interest rate derivatives designated as cash flow hedges at September 30, 2012 with a net loss of $3 million after tax and a notional U.S. dollar equivalent of $328 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 April 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 loss from the foreign currency hedges included in AOCI at September 30, 2012 was $11 million after tax (net gain of $2 million after tax at December 31, 2011). At September 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 $512 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 gain from commodity hedges included in AOCI at September 30, 2012 was $14 million after tax (net loss of $7 million after tax at December 31, 2011). At September 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
Sep 30,
2012

 
Dec 31,
2011

 
Notional Volume Unit
Corn
1.8

 
0.6

 
million bushels
Crude Oil
0.1

 
0.2

 
million barrels
Ethane
2.6

 
1.6

 
million barrels
Naphtha
30.0

 
90.0

 
kilotons
Natural Gas
111.9

 
7.4

 
million million British thermal units
Ethane / Propane Mix
0.1

 
0.2

 
million barrels
Soybeans
1.3

 
0.3

 
million bushels

The net after-tax amounts to be reclassified from AOCI to income within the next 12 months are an $8 million gain for commodity contracts and an $11 million loss 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 September 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 September 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 September 30, 2012, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $258 million ($585 million at December 31, 2011). The result of hedges of the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCI was a net gain of $7 million after tax at September 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 September 30, 2012 and December 31, 2011, the Company had the following aggregate notionals of outstanding commodity contracts:
 
Commodity
Sep 30,
2012

 
Dec 31,
2011

 
Notional Volume Unit
Ethane
1.2

 
2.1

 
million barrels
Naphtha
15.0

 
82.5

 
kilotons
Natural Gas
0.7

 
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 $13,890 million at September 30, 2012 ($14,002 million at December 31, 2011) and open interest rate swaps with a notional U.S. dollar equivalent of $538 million at September 30, 2012 (no open interest rate swaps at December 31, 2011).

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Table of Contents

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

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

 
Dec 31,
2011

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

 
$

Commodities
Other current assets
 
29

 
5

Foreign currency
Accounts and notes receivable – Other
 
1

 
9

Total derivatives designated as hedges
 
 
$
30

 
$
14

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

 
$

Commodities
Other current assets
 
10

 
19

Foreign currency
Accounts and notes receivable – Other
 
45

 
66

Total derivatives not designated as hedges
 
 
$
55

 
$
85

Total asset derivatives
 
 
$
85

 
$
99

Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Accounts payable – Other
 
$
5

 
$

Commodities
Accounts payable – Other
 
13

 
11

Foreign currency
Accounts payable – Other
 
13

 
8

Total derivatives designated as hedges
 
 
$
31

 
$
19

Derivatives not designated as hedges:
 
 
 
 
 
Interest rates
Accounts payable – Other
 
$
2

 
$

Commodities
Accounts payable – Other
 
6

 
9

Foreign currency
Accounts payable – Other
 
59

 
53

Total derivatives not designated as hedges
 
 
$
67

 
$
62

Total liability derivatives
 
 
$
98

 
$
81





17

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 September 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)
$

 
$

 
$
1,343

 
$

 
$
1,343

Equity securities (3)
679

 
36

 

 

 
715

Debt securities: (3)

 

 

 

 
 
Government debt (4)

 
584

 

 

 
584

Corporate bonds

 
769

 

 

 
769

Derivatives relating to: (5)

 

 

 

 
 
Commodities
13

 
26

 

 
(5
)
 
34

Foreign currency

 
46

 

 
(23
)
 
23

Total assets at fair value
$
692

 
$
1,461

 
$
1,343

 
$
(28
)
 
$
3,468

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

 
$
23,219

 
$

 
$

 
$
23,219

Derivatives relating to: (5)
 
 
 
 
 
 
 
 
 
Interest rates

 
7

 

 

 
7

Commodities
14

 
5

 

 
(17
)
 
2

Foreign currency

 
72

 

 
(23
)
 
49

Total liabilities at fair value
$
14

 
$
23,303

 
$

 
$
(40
)

$
23,277


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 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.

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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 liabilities. The Company posted cash collateral of $12 million at September 30, 2012 ($11 million at December 31, 2011).
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 nine-month period ended September 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 nine-month periods ended September 30, 2012 and 2011:

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

 
Sep 30,
2011

 
Sep 30,
2012

 
Sep 30,
2011

Balance at beginning of period
$
1,220

 
$
1,389

 
$
1,141

 
$
1,267

Loss included in earnings (2)
(2
)
 
(1
)
 
(4
)
 
(6
)
Purchases
343

 
149

 
2,396

 
1,500

Settlements
(218
)
 
(292
)
 
(2,190
)
 
(1,516
)
Balance at September 30
$
1,343

 
$
1,245

 
$
1,343

 
$
1,245

(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.


19

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 September 30, 2012
 
Significant
Other
Unobservable
Inputs

 
Total
Losses

In millions
 
(Level 3)

 
2012

Assets at fair value:
 
 
 
 
Long-lived assets and other assets
 
$
10

 
$
(123
)

As part of the 1Q12 Restructuring plan that was approved on March 27, 2012, the Company will shut down a number of manufacturing facilities by December 31, 2012. 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. In addition, a $29 million asset impairment charge was recognized in the Performance Materials segment in the third quarter of 2012. The assets, classified as Level 3 measurements, are valued using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets.


NOTE I – COMMITMENTS AND CONTINGENT LIABILITIES
Credit Facility for Dow Corning Corporation
The Company is a 50 percent shareholder in Dow Corning Corporation ("Dow Corning"). On June 1, 2004, the Company agreed to provide a credit facility to Dow Corning as part of Dow Corning's Joint Plan of Reorganization. The aggregate amount of the facility was originally $300 million; it was reduced to $100 million effective June 1, 2012, of which the Company's share is $50 million. At September 30, 2012, no draws had been taken against the credit facility.

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 September 30, 2012, the Company had accrued obligations of $759 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 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<