DOW-Q2-6.30.2013
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, 2013

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, 2013
Common Stock, par value $2.50 per share
 
1,210,213,904 shares



Table of Contents

The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 2013
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

The Dow Chemical Company and Subsidiaries

FORWARD-LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report including, without limitation, “Management's Discussion and Analysis,” and “Risk Factors.” These forward-looking statements are generally identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (see Part II, Item 1A of this Quarterly Report on Form 10-Q; Part II, Item 1A of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2013; and, Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2012). The Dow Chemical Company undertakes no obligation to update or revise publicly any forward-looking statements whether because of new information, future events, or otherwise, except as required by securities and other applicable laws.


3

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,
2013

 
Jun 30,
2012

 
Jun 30,
2013

 
Jun 30,
2012

Net Sales
$
14,577

 
$
14,513

 
$
28,960

 
$
29,232

Cost of sales
12,103

 
12,200

 
23,810

 
24,485

Research and development expenses
417

 
406

 
852

 
811

Selling, general and administrative expenses
716

 
674

 
1,488

 
1,381

Amortization of intangibles
115

 
122

 
230

 
244

Restructuring charges

 

 

 
357

Equity in earnings of nonconsolidated affiliates
228

 
148

 
458

 
317

Sundry income (expense) - net
2,053

 
27

 
2,021

 
44

Interest income
10

 
10

 
18

 
16

Interest expense and amortization of debt discount
279

 
312

 
575

 
641

Income Before Income Taxes
3,238

 
984

 
4,502

 
1,690

Provision for income taxes
795

 
244

 
1,399

 
430

Net Income
2,443

 
740

 
3,103

 
1,260

Net income attributable to noncontrolling interests
18

 
6

 
43

 
29

Net Income Attributable to The Dow Chemical Company
2,425

 
734

 
3,060

 
1,231

Preferred stock dividends
85

 
85

 
170

 
170

Net Income Available for The Dow Chemical Company Common Stockholders
$
2,340

 
$
649

 
$
2,890

 
$
1,061

 
 
 
 
 
 
 
 
Per Common Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
1.96

 
$
0.55

 
$
2.42

 
$
0.90

Earnings per common share - diluted
$
1.87

 
$
0.55

 
$
2.36

 
$
0.90

 


 
 
 
 
 


Common stock dividends declared per share of common stock
$
0.32

 
$
0.32

 
$
0.64

 
$
0.57

Weighted-average common shares outstanding - basic
1,186.1

 
1,169.7

 
1,183.6

 
1,165.3

Weighted-average common shares outstanding - diluted
1,288.2

 
1,176.6

 
1,286.3

 
1,172.7

 


 
 
 
 
 


Depreciation
$
504

 
$
506

 
$
1,009

 
$
1,016

Capital Expenditures
$
506

 
$
581

 
$
852

 
$
983

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
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2013

 
Jun 30,
2012

 
Jun 30,
2013

 
Jun 30,
2012

Net Income
$
2,443

 
$
740

 
$
3,103

 
$
1,260

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on investments
(36
)
 
(25
)
 
(31
)
 
32

Translation adjustments
83

 
(456
)
 
(269
)
 
(174
)
Adjustments to pension and other postretirement benefit plans
142

 
97

 
283

 
182

Net gains (losses) on cash flow hedging derivative instruments
(21
)
 
3

 
7

 
(11
)
Other comprehensive income (loss)
168

 
(381
)
 
(10
)
 
29

Comprehensive Income
2,611

 
359

 
3,093

 
1,289

Comprehensive income (loss) attributable to noncontrolling interests, net of tax
(6
)
 
6

 
9

 
29

Comprehensive Income Attributable to The Dow Chemical Company
$
2,617

 
$
353

 
$
3,084

 
$
1,260

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)
Jun 30,
2013

 
Dec 31,
2012

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2013: $158; 2012: $146)
$
4,883

 
$
4,318

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2013: $128; 2012: $121)
5,619

 
5,074

Other
4,859

 
4,605

Inventories
8,836

 
8,476

Deferred income tax assets - current
735

 
877

Other current assets
395

 
334

Total current assets
25,327

 
23,684

Investments
 
 
 
Investment in nonconsolidated affiliates
4,012

 
4,121

Other investments (investments carried at fair value - 2013: $1,938; 2012: $2,061)
2,424

 
2,565

Noncurrent receivables
278

 
313

Total investments
6,714

 
6,999

Property
 
 
 
Property
54,366

 
54,366

Less accumulated depreciation
37,164

 
36,846

Net property (variable interest entities restricted - 2013: $2,577; 2012: $2,554)
17,202

 
17,520

Other Assets
 
 
 
Goodwill
12,721

 
12,739

Other intangible assets (net of accumulated amortization - 2013: $3,013; 2012: $2,785)
4,454

 
4,711

Deferred income tax assets - noncurrent
3,050

 
3,333

Asbestos-related insurance receivables - noncurrent
163

 
155

Deferred charges and other assets
511

 
464

Total other assets
20,899

 
21,402

Total Assets
$
70,142

 
$
69,605

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
505

 
$
396

Long-term debt due within one year
846

 
672

Accounts payable:
 
 
 
Trade
4,812

 
5,010

Other
2,323

 
2,327

Income taxes payable
903

 
251

Deferred income tax liabilities - current
89

 
95

Dividends payable
465

 
86

Accrued and other current liabilities
2,670

 
2,656

Total current liabilities
12,613

 
11,493

Long-Term Debt (variable interest entities nonrecourse - 2013: $1,423; 2012: $1,406)
17,475

 
19,919

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities - noncurrent
795

 
837

Pension and other postretirement benefits - noncurrent
11,131

 
11,459

Asbestos-related liabilities - noncurrent
497

 
530

Other noncurrent obligations
3,284

 
3,353

Total other noncurrent liabilities
15,707

 
16,179

Redeemable Noncontrolling Interest
147

 
147

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
3,031

 
3,008

Additional paid-in capital
3,537

 
3,281

Retained earnings
20,620

 
18,495

Accumulated other comprehensive loss
(7,526
)
 
(7,516
)
Unearned ESOP shares
(371
)
 
(391
)
Treasury stock at cost
(80
)
 

The Dow Chemical Company’s stockholders’ equity
23,211

 
20,877

Noncontrolling interests
989

 
990

Total equity
24,200

 
21,867

Total Liabilities and Equity
$
70,142

 
$
69,605

See Notes to the Consolidated Financial Statements.

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Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2013

 
Jun 30,
2012

Operating Activities
 
 
 
Net Income
$
3,103

 
$
1,260

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

 

Depreciation and amortization
1,327

 
1,353

Provision (credit) for deferred income tax
173

 
(133
)
Earnings of nonconsolidated affiliates less than dividends received
160

 
191

Pension contributions
(511
)
 
(499
)
Net gain on sales of investments
(37
)
 
(6
)
Net gain on sales of property, businesses and consolidated companies
(3
)
 
(71
)
Other net (gain) loss
(1
)
 
32

Net gain on sale of ownership interest in nonconsolidated affiliates
(2
)
 

Restructuring charges

 
357

Loss on early extinguishment of debt
170

 
24

Excess tax benefits from share-based payment arrangements
(10
)
 
(58
)
Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(1,312
)
 
(2,143
)
Proceeds from interests in trade accounts receivable conduits
436

 
1,972

Inventories
(370
)
 
(790
)
Accounts payable
(128
)
 
(248
)
Other assets and liabilities
1,193

 
180

Cash provided by operating activities
4,188

 
1,421

Investing Activities
 
 
 
Capital expenditures
(852
)
 
(983
)
Proceeds from sales of property, businesses and consolidated companies
61

 
62

Investments in consolidated companies, net of cash acquired
(11
)
 
(27
)
Investments in and loans to nonconsolidated affiliates
(45
)
 
(168
)
Distributions from nonconsolidated affiliates
17

 
13

Proceeds from sale of ownership interests in nonconsolidated affiliates
3

 

Purchases of investments
(266
)
 
(266
)
Proceeds from sales and maturities of investments
381

 
254

Cash used in investing activities
(712
)
 
(1,115
)
Financing Activities
 
 
 
Changes in short-term notes payable
10

 
(63
)
Proceeds from issuance of long-term debt
558

 
446

Payments on long-term debt
(2,948
)
 
(1,431
)
Purchases of treasury stock
(80
)
 

Proceeds from issuance of common stock
149

 
190

Issuance costs on debt and equity securities
(2
)
 

Excess tax benefits from share-based payment arrangements
10

 
58

Contributions from noncontrolling interests
17

 

Distributions to noncontrolling interests
(26
)
 
(58
)
Dividends paid to stockholders
(549
)
 
(751
)
Cash used in financing activities
(2,861
)
 
(1,609
)
Effect of Exchange Rate Changes on Cash
(50
)
 
(13
)
Summary
 
 
 
Increase (decrease) in cash and cash equivalents
565

 
(1,316
)
Cash and cash equivalents at beginning of year
4,318

 
5,444

Cash and cash equivalents at end of period
$
4,883

 
$
4,128

See Notes to the Consolidated Financial Statements.

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Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2013

 
Jun 30,
2012

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

 
$
4,000

Common Stock
 
 
 
Balance at beginning of year
3,008

 
2,961

Common stock issued
23

 
35

Balance at end of period
3,031

 
2,996

Additional Paid-in Capital
 
 
 
Balance at beginning of year
3,281

 
2,663

Common stock issued
126

 
155

Stock-based compensation and allocation of ESOP shares
130

 
200

Balance at end of period
3,537

 
3,018

Retained Earnings
 
 
 
Balance at beginning of year
18,495

 
19,087

Net income available for The Dow Chemical Company common stockholders
2,890

 
1,061

Dividends declared on common stock (per share: $0.64 in 2013, $0.57 in 2012)
(759
)
 
(667
)
Other
(6
)
 
(8
)
Balance at end of period
20,620

 
19,473

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(7,516
)
 
(5,996
)
Other comprehensive income (loss)
(10
)
 
29

Balance at end of period
(7,526
)
 
(5,967
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(391
)
 
(434
)
Shares allocated to ESOP participants
20

 
35

Balance at end of period
(371
)
 
(399
)
Treasury Stock
 
 
 
Balance at beginning of year

 

Purchases
(80
)
 

Balance at end of period
(80
)
 

The Dow Chemical Company’s Stockholders’ Equity
23,211

 
23,121

Noncontrolling Interests
 
 
 
Balance at beginning of year
990

 
1,010

Net income attributable to noncontrolling interests
43

 
29

Distributions to noncontrolling interests
(26
)
 
(58
)
Capital contributions (noncash capital contributions 2013: $0; 2012: $95)
17

 
95

Consolidation of a variable interest entity

 
37

Cumulative translation adjustments
(31
)
 
(6
)
Other
(4
)
 
(4
)
Balance at end of period
989

 
1,103

Total Equity
$
24,200

 
$
24,224

See Notes to the Consolidated Financial Statements.


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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
1
2
3
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15
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17


NOTE 1 – CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.


NOTE 2 – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
During the first quarter of 2013, the Company adopted Accounting Standards Update ("ASU") 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 and ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Asset and Liabilities," which clarifies the scope of the offsetting disclosures of ASU 2011-11. 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 International Financial Reporting Standards. The adoption of this standard was immaterial to the consolidated financial statements.

During the first quarter of 2013, the Company adopted ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income, by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. See Note 16 for the disclosures related to this adoption.


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Accounting Guidance Issued But Not Adopted as of June 30, 2013
In February 2013, the Financial Accounting Standards Board ("FASB") issued ASU 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date," which defines how entities measure obligations from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date and for which no guidance exists, except for obligations addressed within existing guidance in U.S. GAAP. The guidance also requires entities to disclose the nature and amount of the obligation as well as other information about those obligations. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective presentation for all comparative periods presented is required and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

In March 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity," which defines the treatment of the release of cumulative translation adjustments upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted and prior periods should not be adjusted. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.


NOTE 3 – RESTRUCTURING
4Q12 Restructuring
On October 23, 2012, the Company's Board of Directors 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 2,850 positions and result in the shutdown of approximately 20 manufacturing facilities. These actions are expected to be completed primarily by March 31, 2015. As a result of the 4Q12 Restructuring activities, the Company recorded pretax restructuring charges of $990 million in the fourth quarter of 2012 consisting of costs associated with exit or disposal activities of $39 million, severance costs of $375 million and asset write-downs and write-offs of $576 million.

The severance component of the 4Q12 Restructuring charge of $375 million was for the separation of approximately 2,850 employees under the terms of the Company's ongoing benefit arrangements, primarily by March 31, 2015. At December 31, 2012, severance of $8 million had been paid and a liability of $367 million remained for 2,767 employees. In the first six months of 2013, severance of $128 million was paid, leaving a liability of $239 million for approximately 1,550 employees at June 30, 2013.

The following table summarizes the activities related to the Company's 4Q12 Restructuring reserve:

4Q12 Restructuring Activities
Costs Associated with Exit or Disposal Activities

 
Severance Costs

 
Total

In millions
Reserve balance at December 31, 2012
$
30

 
$
367

 
$
397

Cash payments
(1
)
 
(69
)
 
(70
)
Reserve balance at March 31, 2013
$
29

 
$
298

 
$
327

Cash payments
(1
)
 
(59
)
 
(60
)
Reserve balance at June 30, 2013
$
28

 
$
239

 
$
267


The reserve balance is included in the consolidated balance sheets as "Accrued and other current liabilities" and "Other noncurrent obligations."


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Table of Contents

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. The 1Q12 Restructuring plan included the shutdown of a number of manufacturing facilities and the elimination of approximately 900 positions. 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 was shown as "Restructuring charges" in the consolidated statements of income.

The severance component of the 1Q12 Restructuring charge of $113 million was for the separation of approximately 900 employees under the terms of the Company's ongoing benefit arrangements, primarily by December 31, 2013. At December 31, 2012, severance of $82 million had been paid and a liability of $31 million remained for 248 employees. In the first six months of 2013, severance of $25 million was paid, leaving a liability of $6 million for approximately 80 employees at June 30, 2013.

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

1Q12 Restructuring Activities
Costs Associated with Exit or Disposal Activities

 
 
 
 



In millions
Severance Costs

Total

Reserve balance at December 31, 2012
$
56

 
$
31

 
$
87

Cash payments
(4
)
 
(20
)
 
(24
)
Noncash settlements
(7
)
 

 
(7
)
Foreign currency impact
(1
)
 

 
(1
)
Reserve balance at March 31, 2013
$
44

 
$
11

 
$
55

Cash payments
(4
)
 
(5
)
 
(9
)
Noncash settlements
(1
)
 

 
(1
)
Reserve balance at June 30, 2013
$
39

 
$
6

 
$
45


The reserve balance is included in the consolidated balance sheets as "Accrued and other current liabilities."

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 and restructuring plan implementation costs; these costs 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 4 – INVENTORIES
The following table provides a breakdown of inventories:
 
Inventories
In millions
Jun 30, 2013

 
Dec 31, 2012

Finished goods
$
4,921

 
$
4,880

Work in process
2,108

 
1,910

Raw materials
949

 
866

Supplies
858

 
820

Total inventories
$
8,836

 
$
8,476

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $823 million at June 30, 2013 and $842 million at December 31, 2012.



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Table of Contents

NOTE 5 – 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, 2012
$
4,945

 
$
4,052

 
$
1,558

 
$
740

 
$
1,381

 
$
63

 
$
12,739

Sale of a Plastics Additives product line

 

 

 
(3
)
 

 

 
(3
)
Foreign currency impact
(5
)
 
(6
)
 

 

 
(4
)
 

 
(15
)
Net goodwill at Jun 30, 2013
$
4,940

 
$
4,046

 
$
1,558

 
$
737

 
$
1,377

 
$
63

 
$
12,721


The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At June 30, 2013
 
At December 31, 2012
In millions
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net  

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Licenses and intellectual property
$
1,768

 
$
(826
)
 
$
942

 
$
1,729

 
$
(747
)
 
$
982

Patents
120

 
(101
)
 
19

 
120

 
(100
)
 
20

Software
1,107

 
(580
)
 
527

 
1,047

 
(548
)
 
499

Trademarks
685

 
(313
)
 
372

 
691

 
(285
)
 
406

Customer related
3,575

 
(1,055
)
 
2,520

 
3,688

 
(974
)
 
2,714

Other
158

 
(138
)
 
20

 
158

 
(131
)
 
27

Total other intangible assets, finite lives
$
7,413

 
$
(3,013
)
 
$
4,400

 
$
7,433

 
$
(2,785
)
 
$
4,648

IPR&D (1), indefinite lives
54

 

 
54

 
63

 

 
63

Total other intangible assets
$
7,467

 
$
(3,013
)
 
$
4,454

 
$
7,496

 
$
(2,785
)
 
$
4,711

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

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

Amortization Expense
Three Months Ended
 
Six Months Ended
In millions
Jun 30, 2013

 
Jun 30, 2012

 
Jun 30, 2013

 
Jun 30, 2012

Other intangible assets, excluding software
$
115

 
$
122

 
$
230

 
$
244

Software, included in “Cost of sales”
$
17

 
$
16

 
$
33

 
$
31


Total estimated amortization expense for 2013 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2013
$
525

2014
$
503

2015
$
484

2016
$
473

2017
$
438

2018
$
421




12

Table of Contents

NOTE 6 – 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,
2013

 
Jun 30,
2012

Proceeds from sales of available-for-sale securities
$
352

 
$
236

Gross realized gains
$
56

 
$
9

Gross realized losses
$
(11
)
 
$
(5
)
The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities
at June 30, 2013
In millions
Amortized Cost

 
Fair Value

Within one year
$
32

 
$
32

One to five years
416

 
450

Six to ten years
567

 
584

After ten years
150

 
170

Total
$
1,165

 
$
1,236


At June 30, 2013, the Company had $1,875 million ($1,701 million at December 31, 2012) of held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had original maturities of three months or less at the time of purchase. The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At June 30, 2013, the Company had investments in money market funds of $248 million classified as cash equivalents ($252 million at December 31, 2012).

The net unrealized loss from mark-to-market adjustments recognized in earnings during the three-month period ended June 30, 2013 on trading securities held at June 30, 2013 was $8 million ($4 million gain during the three-month period ended June 30, 2012). The net unrealized loss from mark-to-market adjustments recognized in earnings during the six-month period ended June 30, 2013 on trading securities held at June 30, 2013 was $10 million ($2 million gain during the six-month period ended June 30, 2012).

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, 2013 and December 31, 2012, aggregated by investment category:
Temporarily Impaired Securities Less than 12 Months (1)
 
At June 30, 2013
 
At December 31, 2012
In millions
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

Debt securities:
 
 
 
 
 
 
 
Government debt (2)
$
100

 
$
(4
)
 
$

 
$

Corporate bonds
165

 
(6
)
 
22

 
(1
)
Total debt securities
$
265

 
$
(10
)
 
$
22

 
$
(1
)
Equity securities
160

 
(16
)
 
30

 
(2
)
Total temporarily impaired securities
$
425

 
$
(26
)
 
$
52

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

Portfolio managers regularly review the Company’s holdings to determine if any investments are other-than-temporarily impaired. The analysis includes reviewing the amount of 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.

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Table of Contents

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, 2013 or June 30, 2012.
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, 2013, other-than-temporary impairment write-downs on investments still held by the Company were $2 million ($5 million in the six-month period ended June 30, 2012).

The aggregate cost of the Company’s cost method investments totaled $172 million at June 30, 2013 ($176 million at December 31, 2012). Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed quarterly for impairment indicators. The Company's impairment analysis resulted in a $3 million reduction in the cost basis of these investments for the six-month period ended June 30, 2013 (no reduction in the six-month period ended June 30, 2012).

The following table summarizes the fair value of financial instruments at June 30, 2013 and December 31, 2012:
 
Fair Value of Financial Instruments
 
At June 30, 2013
 
At December 31, 2012
In millions
Cost

 
Gain

 
Loss

 
Fair
Value

 
Cost

 
Gain

 
Loss

 
Fair
Value

Marketable securities: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt (2)
$
522

 
$
35

 
$
(4
)
 
$
553

 
$
506

 
$
59

 
$

 
$
565

Corporate bonds
643

 
47

 
(7
)
 
683

 
676

 
81

 
(1
)
 
756

Total debt securities
$
1,165

 
$
82

 
$
(11
)
 
$
1,236

 
$
1,182

 
$
140

 
$
(1
)
 
$
1,321

Equity securities
590

 
128

 
(16
)
 
702

 
634

 
109

 
(3
)
 
740

Total marketable securities
$
1,755

 
$
210

 
$
(27
)
 
$
1,938

 
$
1,816

 
$
249

 
$
(4
)
 
$
2,061

Long-term debt incl. debt due within one year (3)
$
(18,321
)
 
$
224

 
$
(2,163
)
 
$
(20,260
)
 
$
(20,591
)
 
$
24

 
$
(3,195
)
 
$
(23,762
)
Derivatives relating to:
 
 
 
 
 
 

 
 
 
 
 
 
 

Interest rates
$

 
$
1

 
$
(4
)
 
$
(3
)
 
$

 
$
1

 
$
(6
)
 
$
(5
)
Commodities (4)
$

 
$
18

 
$
(6
)
 
$
12

 
$

 
$
26

 
$
(7
)
 
$
19

Foreign currency
$

 
$
35

 
$
(24
)
 
$
11

 
$

 
$
34

 
$
(20
)
 
$
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, 2013 and $23 million at December 31, 2012.
(4)
Presented net of cash collateral, as disclosed in Note 7.

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

14

Table of Contents

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 June 30, 2013. 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 2013.
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, 2013, the Company had open interest rate swaps with maturity dates that extend to 2021.
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, 2013, 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 2013.
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, 2013, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements had various expiration dates through the 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.
The Company had open interest rate derivatives designated as cash flow hedges at June 30, 2013 with a net loss of $2 million after tax and a notional U.S. dollar equivalent of $404 million (net loss of $3 million after tax and a notional U.S. dollar equivalent of $433 million December 31, 2012).
Current open foreign currency forward contracts hedge the currency risk of forecasted feedstock purchase transactions until January 2014. 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, 2013 was $1 million after tax (net loss of $14 million after tax at December 31, 2012). At June 30, 2013, 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 $743 million ($366 million at December 31, 2012).

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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 December 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 June 30, 2013 was $15 million after tax (net gain of $24 million after tax at December 31, 2012). At June 30, 2013 and December 31, 2012, the Company had the following gross aggregate notionals of outstanding commodity forward and futures contracts to hedge forecasted purchases:
 
Commodity
Jun 30,
2013

 
Dec 31,
2012

 
Notional Volume Unit
Corn
6.2

 
1.9

 
million bushels
Crude Oil
0.4

 
0.4

 
million barrels
Ethane
1.6

 
1.8

 
million barrels
Naphtha

 
90.0

 
kilotons
Natural Gas
140.6

 
186.0

 
million million British thermal units
Soybeans
2.0

 
1.3

 
million bushels

The net after-tax amounts to be reclassified from AOCI to income within the next 12 months are a $15 million gain for commodity contracts and a $1 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, 2013 or December 31, 2012.
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, 2013 and December 31, 2012, 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, 2013, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $202 million ($233 million at December 31, 2012). 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 $19 million after tax at June 30, 2013 (net gain of $22 million after tax at December 31, 2012). See Note 16 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, 2013 and December 31, 2012, the Company had the following gross aggregate notionals of outstanding commodity contracts:
 
Commodity
Jun 30,
2013

 
Dec 31,
2012

 
Notional Volume Unit
Ethane
0.6

 
1.0

 
million barrels
Naphtha
15.0

 

 
kilotons
Natural Gas
16.8

 
33.0

 
million million British thermal units

The Company also uses foreign exchange forward contracts, options, and cross-currency swaps that are not designated as hedging instruments primarily to manage foreign currency exposure. The Company had open foreign exchange contracts with various expiration dates to buy, sell or exchange foreign currencies with a gross notional U.S. dollar equivalent of $14,731 million at June 30, 2013 ($17,637 million at December 31, 2012) and open interest rate swaps with a gross notional U.S. dollar equivalent of $497 million at June 30, 2013 ($472 million at December 31, 2012).


16

Table of Contents

The following table provides the fair value and gross balance sheet classification of derivative instruments at June 30, 2013 and December 31, 2012:

Fair Value of Derivative Instruments

In millions
Balance Sheet Classification
 
Jun 30,
2013

 
Dec 31,
2012

Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Other current assets
 
$
1

 
$
1

Commodities
Other current assets
 
20

 
28

Foreign currency
Accounts and notes receivable – Other
 
4

 
3

Total derivatives designated as hedges
 
 
$
25

 
$
32

Derivatives not designated as hedges:
 
 
 
 
 
Commodities
Other current assets
 
$
1

 
$
3

Foreign currency
Accounts and notes receivable – Other
 
46

 
52

Total derivatives not designated as hedges
 
 
$
47

 
$
55

Total asset derivatives
 
 
$
72

 
$
87

Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Accounts payable – Other
 
$
4

 
$
5

Commodities
Accounts payable – Other
 
17

 
21

Foreign currency
Accounts payable – Other
 
4

 
14

Total derivatives designated as hedges
 
 
$
25

 
$
40

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

 
$
1

Commodities
Accounts payable – Other
 
2

 
6

Foreign currency
Accounts payable – Other
 
35

 
27

Total derivatives not designated as hedges
 
 
$
37

 
$
34

Total liability derivatives
 
 
$
62

 
$
74




17

Table of Contents

NOTE 7 – 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, 2013

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:
 
 
 
 
 
 
 
 
 
Cash equivalents (2)
$

 
$
2,123

 
$

 
$

 
$
2,123

Interests in trade accounts receivable conduits (3)

 

 
1,291

 

 
1,291

Equity securities (4)
668

 
34

 

 

 
702

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
553

 

 

 
553

Corporate bonds

 
683

 

 

 
683

Derivatives relating to: (6)

 

 

 

 
 
Interest rates

 
1

 

 

 
1

Commodities
7

 
14

 

 
(3
)
 
18

Foreign currency

 
50

 

 
(15
)
 
35

Total assets at fair value
$
675

 
$
3,458

 
$
1,291

 
$
(18
)
 
$
5,406

Liabilities at fair value:
 
 
 
 
 
 
 
 
 
Long-term debt (7)
$

 
$
20,260

 
$

 
$

 
$
20,260

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
4

 

 

 
4

Commodities
13

 
6

 

 
(13
)
 
6

Foreign currency

 
39

 

 
(15
)
 
24

Total liabilities at fair value
$
13

 
$
20,309

 
$

 
$
(28
)

$
20,294

(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)
Primarily Treasury Bills included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value.
(3)
Included in “Accounts and notes receivable – Other” in the consolidated balance sheets. See Note 9 for additional information on transfers of financial assets.
(4)
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.
(5)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(6)
See Note 6 for the classification of derivatives in the consolidated balance sheets.
(7)
See Note 6 for information on fair value adjustments to long-term debt, included at cost in the consolidated balance sheets.


18

Table of Contents

Basis of Fair Value Measurements
on a Recurring Basis
at December 31, 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:
 
 
 
 
 
 
 
 
 
Cash equivalents (2)
$

 
$
1,953

 
$

 
$

 
$
1,953

Interests in trade accounts receivable conduits (3)

 

 
1,057

 

 
1,057

Equity securities (4)
702

 
38

 

 

 
740

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
565

 

 

 
565

Corporate bonds

 
756

 

 

 
756

Derivatives relating to: (6)

 

 

 

 
 
Interest rates

 
1

 

 

 
1

Commodities
9

 
22

 

 
(5
)
 
26

Foreign currency

 
55

 

 
(21
)
 
34

Total assets at fair value
$
711

 
$
3,390

 
$
1,057

 
$
(26
)
 
$
5,132

Liabilities at fair value:
 
 
 
 
 
 
 
 
 
Long-term debt (7)
$

 
$
23,762

 
$

 
$

 
$
23,762

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
6

 

 

 
6

Commodities
16

 
11

 

 
(20
)
 
7

Foreign currency

 
41

 

 
(21
)
 
20

Total liabilities at fair value
$
16

 
$
23,820

 
$

 
$
(41
)
 
$
23,795

(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)
Primarily Treasury Bills included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value.
(3)
Included in “Accounts and notes receivable – Other” in the consolidated balance sheets. See Note 9 for additional information on transfers of financial assets.
(4)
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.
(5)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(6)
See Note 6 for the classification of derivatives in the consolidated balance sheets.
(7)
See Note 6 for information on fair value adjustments to long-term debt, included at cost in the consolidated balance sheets.
Assets and liabilities related to forward contracts, interest rate swaps, currency swaps, options and other conditional or exchange contracts executed with the same counterparty under a master netting arrangement are netted. Collateral accounts are netted with corresponding liabilities. The Company posted cash collateral of $27 million at June 30, 2013 ($20 million at December 31, 2012).
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.

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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 6 for further information on the types of instruments used by the Company for risk management.

During the six-month period ended June 30, 2013, the Company transferred from Level 1 to Level 2 certain over-the-counter equity securities valued at $4 million, as these securities trade in less active markets. There were no transfers between Levels 1 and 2 in the year ended December 31, 2012.
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 9 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, 2013 and 2012:

Fair Value Measurements Using Level 3 Inputs
Three Months Ended
 
Six Months Ended
Interests Held in Trade Receivable Conduits (1)

In millions
Jun 30,
2013

 
Jun 30,
2012

 
Jun 30,
2013

 
Jun 30,
2012

Balance at beginning of period
$
1,339

 
$
1,429

 
$
1,057

 
$
1,141

Gain (Loss) included in earnings (2)
(1
)
 
1

 
(2
)
 
(2
)
Purchases
343

 
100

 
672

 
2,053

Settlements
(390
)
 
(310
)
 
(436
)
 
(1,972
)
Balance at June 30
$
1,291

 
$
1,220

 
$
1,291

 
$
1,220

(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.

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 at June 30, 2012:

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 1Q12 Restructuring plan that was approved on March 27, 2012, the Company shut down a number of manufacturing facilities during 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 3 for additional information on the Company's restructuring activities.


NOTE 8 – COMMITMENTS AND CONTINGENT LIABILITIES
Dow Corning Credit Facility
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 $50 million effective June 1, 2013, of which the Company's share is $25 million. At June 30, 2013, no draws had been taken against the credit facility.


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Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. At June 30, 2013, the Company had accrued obligations of $725 million for probable environmental remediation and restoration costs, including $70 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 two and a half times 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, 2012, the Company had accrued obligations of $754 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. The Company submitted amendments to the Work Plan to increase the number of properties to be sampled in 2012. The amendments were approved by the MDEQ on July 23, 2012 and September 13, 2012. On February 15, 2013, the Company submitted a plan for properties to be sampled during 2013 ("2013 Plan"), as required by the approved Work Plan. Approval of the 2013 Plan was granted, as anticipated, in May 2013.

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

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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 2014. On April 7, 2008, the natural resource damage trustees released their "Natural Resource Damage Assessment Plan for the Tittabawassee River System Assessment Area."

At June 30, 2013, the accrual for these off-site matters was $42 million (included in the total accrued obligation of $725 million at June 30, 2013). At December 31, 2012, the Company had an accrual for these off-site matters of $42 million (included in the total accrued obligation of $754 million at December 31, 2012).

Litigation
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.

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.

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 year since 2004 to determine the appropriateness of updating the most recent ARPC study.

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 then most recent study completed in December 2010. 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.


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In October 2012, Union Carbide requested ARPC to review its historical 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 September 30, 2012. In December 2012, based upon ARPC's December 2012 study and Union Carbide's own review of the asbestos claim and resolution activity for 2012, it was determined that no adjustment to the accrual was required at December 31, 2012. Union Carbide's asbestos-related liability for pending and future claims was $602 million at December 31, 2012. At December 31, 2012, 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 2013 activity, Union Carbide determined that no adjustment to the accrual was required at June 30, 2013. Union Carbide’s asbestos-related liability for pending and future claims was $568 million at June 30, 2013. Approximately 17 percent of the recorded liability related to pending claims and approximately 83 percent related to future claims.

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 ord