10-Q 1 dow-q1x3312014.htm 10-Q DOW-Q1-3.31.2014
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 MARCH 31, 2014

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
 
March 31, 2014
Common Stock, par value $2.50 per share
 
1,204,058,248 shares




The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended March 31, 2014
TABLE OF CONTENTS

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


2


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, the following sections: “Management's Discussion and Analysis,” and “Risk Factors.” These forward-looking statements are generally identified by the words or phrases “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “may,” “opportunity,” “plan,” “project,” “should,” “strategy,” “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 I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2013). 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


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
In millions, except per share amounts (Unaudited)
Mar 31,
2014

 
Mar 31,
2013

Net Sales
$
14,461

 
$
14,383

Cost of sales
11,733

 
11,707

Research and development expenses
391

 
435

Selling, general and administrative expenses
779

 
772

Amortization of intangibles
114

 
115

Equity in earnings of nonconsolidated affiliates
251

 
230

Sundry income (expense) - net
29

 
(32
)
Interest income
13

 
8

Interest expense and amortization of debt discount
246

 
296

Income Before Income Taxes
1,491

 
1,264

Provision for income taxes
425

 
604

Net Income
1,066

 
660

Net income attributable to noncontrolling interests
17

 
25

Net Income Attributable to The Dow Chemical Company
1,049

 
635

Preferred stock dividends
85

 
85

Net Income Available for The Dow Chemical Company Common Stockholders
$
964

 
$
550

 
 
 
 
Per Common Share Data:
 
 
 
Earnings per common share - basic
$
0.80

 
$
0.46

Earnings per common share - diluted
$
0.79

 
$
0.46

 
 
 


Common stock dividends declared per share of common stock
$
0.37

 
$
0.32

Weighted-average common shares outstanding - basic
1,190.6

 
1,181.1

Weighted-average common shares outstanding - diluted
1,207.7

 
1,187.6

 
 
 


Depreciation
$
517

 
$
505

Capital Expenditures
$
672

 
$
346

See Notes to the Consolidated Financial Statements.


4


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
In millions (Unaudited)
Mar 31,
2014

 
Mar 31,
2013

Net Income
$
1,066

 
$
660

Other Comprehensive Income, Net of Tax
 
 
 
Net change in unrealized gains on investments
(11
)
 
5

Translation adjustments
(71
)
 
(352
)
Adjustments to pension and other postretirement benefit plans
81

 
141

Net gains on cash flow hedging derivative instruments
4

 
28

Other comprehensive income (loss)
3

 
(178
)
Comprehensive Income
1,069

 
482

Comprehensive income attributable to noncontrolling interests, net of tax
20

 
15

Comprehensive Income Attributable to The Dow Chemical Company
$
1,049

 
$
467

See Notes to the Consolidated Financial Statements.


5


The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited)
Mar 31,
2014

 
Dec 31,
2013

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2014: $184; 2013: $147)
$
4,385

 
$
5,940

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2014: $134; 2013: $148)
5,524

 
4,935

Other
4,927

 
4,712

Inventories
9,102

 
8,303

Deferred income tax assets - current
762

 
743

Other current assets
362

 
344

Total current assets
25,062

 
24,977

Investments
 
 
 
Investment in nonconsolidated affiliates
4,142

 
4,501

Other investments (investments carried at fair value - 2014: $2,080; 2013: $2,056)
2,549

 
2,541

Noncurrent receivables
403

 
365

Total investments
7,094

 
7,407

Property
 
 
 
Property
55,385

 
55,114

Less accumulated depreciation
37,812

 
37,660

Net property (variable interest entities restricted - 2014: $2,699; 2013: $2,646)
17,573

 
17,454

Other Assets
 
 
 
Goodwill
12,797

 
12,798

Other intangible assets (net of accumulated amortization - 2014: $3,397; 2013: $3,270)
4,224

 
4,314

Deferred income tax assets - noncurrent
1,873

 
1,964

Asbestos-related insurance receivables - noncurrent
78

 
86

Deferred charges and other assets
532

 
501

Total other assets
19,504

 
19,663

Total Assets
$
69,233

 
$
69,501

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
526

 
$
443

Long-term debt due within one year
351

 
697

Accounts payable:
 
 
 
Trade
4,971

 
4,590

Other
2,411

 
2,290

Income taxes payable
660

 
435

Deferred income tax liabilities - current
98

 
133

Dividends payable
524

 
467

Accrued and other current liabilities
2,685

 
2,916

Total current liabilities
12,226

 
11,971

Long-Term Debt (variable interest entities nonrecourse - 2014: $1,388; 2013: $1,360)
16,936

 
16,820

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities - noncurrent
691

 
718

Pension and other postretirement benefits - noncurrent
7,920

 
8,176

Asbestos-related liabilities - noncurrent
400

 
434

Other noncurrent obligations
3,154

 
3,302

Total other noncurrent liabilities
12,165

 
12,630

Redeemable Noncontrolling Interest
183

 
156

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
3,092

 
3,054

Additional paid-in capital
4,407

 
3,928

Retained earnings
21,929

 
21,407

Accumulated other comprehensive loss
(4,824
)
 
(4,827
)
Unearned ESOP shares
(349
)
 
(357
)
Treasury stock at cost
(1,514
)
 
(307
)
The Dow Chemical Company’s stockholders’ equity
26,741

 
26,898

Noncontrolling interests
982

 
1,026

Total equity
27,723

 
27,924

Total Liabilities and Equity
$
69,233

 
$
69,501

See Notes to the Consolidated Financial Statements.

6


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Three Months Ended
In millions (Unaudited)
Mar 31,
2014

 
Mar 31,
2013

Operating Activities
 
 
 
Net Income
$
1,066

 
$
660

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

 

Depreciation and amortization
672

 
668

Provision (credit) for deferred income tax
(93
)
 
83

Earnings of nonconsolidated affiliates less than dividends received
298

 
293

Pension contributions
(315
)
 
(224
)
Net gain on sales of investments
(39
)
 
(24
)
Net (gain) loss on sales of property, businesses and consolidated companies
(1
)
 
5

Other net (gain) loss
25

 
(13
)
Loss on early extinguishment of debt

 
60

Excess tax benefits from share-based payment arrangements
(25
)
 
(7
)
Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(871
)
 
(892
)
Proceeds from interests in trade accounts receivable conduits
150

 
46

Inventories
(798
)
 
(869
)
Accounts payable
391

 
(178
)
Other assets and liabilities
115

 
839

Cash provided by operating activities
575

 
447

Investing Activities
 
 
 
Capital expenditures
(672
)
 
(346
)
Proceeds from sale / leaseback of assets
6

 

Proceeds from sales of property, businesses and consolidated companies, net of cash divested
25

 
37

Investments in consolidated companies, net of cash acquired

 
(11
)
Investments in and loans to nonconsolidated affiliates
(17
)
 
(11
)
Distributions from nonconsolidated affiliates

 
1

Purchases of investments
(220
)
 
(133
)
Proceeds from sales and maturities of investments
224

 
228

Cash used in investing activities
(654
)
 
(235
)
Financing Activities
 
 
 
Changes in short-term notes payable
(48
)
 
45

Proceeds from issuance of long-term debt
138

 
123

Payments on long-term debt
(391
)
 
(1,165
)
Purchases of treasury stock
(1,250
)
 

Proceeds from issuance of common stock
480

 
80

Proceeds from sales of common stock
47

 

Issuance costs on debt and equity securities
(1
)
 
(1
)
Excess tax benefits from share-based payment arrangements
25

 
7

Contributions from noncontrolling interests
29

 
9

Distributions to noncontrolling interests
(11
)
 
(15
)
Purchases of noncontrolling interests
(4
)
 

Dividends paid to stockholders
(466
)
 
(85
)
Cash used in financing activities
(1,452
)
 
(1,002
)
Effect of Exchange Rate Changes on Cash
(24
)
 
(14
)
Summary
 
 
 
Decrease in cash and cash equivalents
(1,555
)
 
(804
)
Cash and cash equivalents at beginning of period
5,940

 
4,318

Cash and cash equivalents at end of period
$
4,385

 
$
3,514

See Notes to the Consolidated Financial Statements.

7


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Three Months Ended
In millions (Unaudited)
Mar 31,
2014

 
Mar 31,
2013

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

 
$
4,000

Common Stock
 
 
 
Balance at beginning of year
3,054

 
3,008

Common stock issued
38

 
16

Balance at end of period
3,092

 
3,024

Additional Paid-in Capital
 
 
 
Balance at beginning of year
3,928

 
3,281

Common stock issued
489

 
64

Stock-based compensation and allocation of ESOP shares
(4
)
 
42

Other
(6
)
 

Balance at end of period
4,407

 
3,387

Retained Earnings
 
 
 
Balance at beginning of year
21,407

 
18,495

Net income available for The Dow Chemical Company common stockholders
964

 
550

Dividends declared on common stock (per share - 2014: $0.37; 2013: $0.32)
(437
)
 
(379
)
Dividend equivalents on participating securities
(5
)
 
(4
)
Balance at end of period
21,929

 
18,662

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(4,827
)
 
(7,516
)
Other comprehensive income (loss)
3

 
(178
)
Balance at end of period
(4,824
)
 
(7,694
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(357
)
 
(391
)
Shares allocated to ESOP participants
8

 
10

Balance at end of period
(349
)
 
(381
)
Treasury Stock
 
 
 
Balance at beginning of year
(307
)
 

Purchases
(1,250
)
 

Issuance to employees and employee plans
43

 

Balance at end of period
(1,514
)
 

The Dow Chemical Company’s Stockholders’ Equity
26,741

 
20,998

Noncontrolling Interests
 
 
 
Balance at beginning of year
1,026

 
990

Net income attributable to noncontrolling interests
17

 
25

Distributions to noncontrolling interests
(12
)
 
(15
)
Capital contributions
29

 
9

Purchases of noncontrolling interests
(54
)
 

Transfers to redeemable noncontrolling interests
(27
)
 

Cumulative translation adjustments
2

 
(6
)
Other
1

 
(5
)
Balance at end of period
982

 
998

Total Equity
$
27,723

 
$
21,996

See Notes to the Consolidated Financial Statements.


8


(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 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, 2013.

Certain changes to prior year cash flow amounts have been made to reflect changes made in the second quarter of 2013. The changes relate to the presentation of adjustments to uncertain tax positions and resulted in a reclassification between "Provision (credit) for deferred income tax" and "Other assets and liabilities" within the operating activities section of the consolidated statements of cash flows. The change had no impact to the total for "Cash provided by operating activities."

A change was also made to a prior year amount in the consolidated statements of comprehensive income. The change was made to properly include translation adjustments and net losses on cash flow hedging derivative instruments in "Comprehensive income attributable to noncontrolling interests, net of tax."


NOTE 2 – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
During the first quarter of 2014, the Company adopted Accounting Standards Update ("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. The adoption of this standard did not have a material impact on the consolidated financial statements.

During the first quarter of 2014, the Company adopted 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

9


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. The adoption of this standard did not have a material impact on the consolidated financial statements.

During the first quarter of 2014, the Company adopted ASU 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which defines the presentation requirements of an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements, impacting the classification of unrecognized tax benefits between "Deferred income taxes" and "Income taxes payable" in the consolidated balance sheets. The adoption of this standard did not have a material impact on the consolidated financial statements.

Accounting Guidance Issued But Not Yet Adopted
In April 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This ASU is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in the financial statements previously issued or available for issuance. The Company is currently evaluating the impact of adopting this guidance.

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. In the fourth quarter of 2013, the Company reduced the reserve for costs associated with exit or disposal activities by $6 million. The impact of these charges was shown as "Restructuring charges (credits)" in the consolidated statements of income.

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, 2013, severance of $236 million was paid and a liability of $139 million remained for 759 employees. In the first three months of 2014, severance of $43 million was paid, leaving a liability of $96 million for approximately 570 employees at March 31, 2014.

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, 2013
$
19

 
$
139

 
$
158

Cash payments
(1
)
 
(43
)
 
(44
)
Reserve balance at March 31, 2014
$
18

 
$
96

 
$
114


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

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-

10


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
Mar 31, 2014

 
Dec 31, 2013

Finished goods
$
5,145

 
$
4,717

Work in process
2,280

 
1,948

Raw materials
780

 
760

Supplies
897

 
878

Total inventories
$
9,102

 
$
8,303

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $887 million at March 31, 2014 and $854 million at December 31, 2013.


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, 2013
$
4,963

 
$
4,076

 
$
1,563

 
$
738

 
$
1,395

 
$
63

 
$
12,798

Foreign currency impact

 
(1
)
 

 

 

 

 
(1
)
Net goodwill at Mar 31, 2014
$
4,963

 
$
4,075

 
$
1,563

 
$
738

 
$
1,395

 
$
63

 
$
12,797


The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At March 31, 2014
 
At December 31, 2013
In millions
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net  

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Licenses and intellectual property
$
1,775

 
$
(947
)
 
$
828

 
$
1,774

 
$
(908
)
 
$
866

Patents
124

 
(109
)
 
15

 
125

 
(109
)
 
16

Software
1,229

 
(607
)
 
622

 
1,186

 
(591
)
 
595

Trademarks
685

 
(360
)
 
325

 
686

 
(345
)
 
341

Customer related
3,617

 
(1,235
)
 
2,382

 
3,622

 
(1,181
)
 
2,441

Other
154

 
(139
)
 
15

 
154

 
(136
)
 
18

Total other intangible assets, finite lives
$
7,584

 
$
(3,397
)
 
$
4,187

 
$
7,547

 
$
(3,270
)
 
$
4,277

IPR&D (1), indefinite lives
37

 

 
37

 
37

 

 
37

Total other intangible assets
$
7,621

 
$
(3,397
)
 
$
4,224

 
$
7,584

 
$
(3,270
)
 
$
4,314

(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
In millions
Mar 31, 2014

 
Mar 31, 2013

Other intangible assets, excluding software
$
114

 
$
115

Software, included in “Cost of sales”
$
16

 
$
16


11


Total estimated amortization expense for 2014 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2014
$
509

2015
$
491

2016
$
481

2017
$
447

2018
$
429

2019
$
371



NOTE 6 – FINANCIAL INSTRUMENTS
A summary of the Company's financial instruments, risk management policies, derivative instruments and hedging activities can be found in Note 10 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. If applicable, updates have been included in the respective section below.

The following table summarizes the fair value of financial instruments at March 31, 2014 and December 31, 2013:
 
Fair Value of Financial Instruments
 
At March 31, 2014
 
At December 31, 2013
In millions
Cost

 
Gain

 
Loss

 
Fair
Value

 
Cost

 
Gain

 
Loss

 
Fair
Value

Marketable securities: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt (2)
$
534

 
$
29

 
$
(4
)
 
$
559

 
$
544

 
$
28

 
$
(8
)
 
$
564

Corporate bonds
655

 
46

 
(3
)
 
698

 
659

 
43

 
(7
)
 
695

Total debt securities
$
1,189

 
$
75

 
$
(7
)
 
$
1,257

 
$
1,203

 
$
71

 
$
(15
)
 
$
1,259

Equity securities
661

 
169

 
(7
)
 
823

 
605

 
196

 
(4
)
 
797

Total marketable securities
$
1,850

 
$
244

 
$
(14
)
 
$
2,080

 
$
1,808

 
$
267

 
$
(19
)
 
$
2,056

Long-term debt including debt due within one year (3)
$
(17,287
)
 
$
170

 
$
(2,232
)
 
$
(19,349
)
 
$
(17,517
)
 
$
296

 
$
(2,246
)
 
$
(19,467
)
Derivatives relating to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rates
$

 
$

 
$
(6
)
 
$
(6
)
 
$

 
$

 
$
(5
)
 
$
(5
)
Commodities (4)
$

 
$
13

 
$
(5
)
 
$
8

 
$

 
$
11

 
$
(2
)
 
$
9

Foreign currency
$

 
$
13

 
$
(29
)
 
$
(16
)
 
$

 
$
45

 
$
(13
)
 
$
32

(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)
The cost basis includes fair value hedge adjustments of $22 million at March 31, 2014 and $22 million at December 31, 2013.
(4)
Presented net of cash collateral, as disclosed in Note 7.

Investments
The Company’s investments in marketable securities are primarily classified as available-for-sale.
 
Investing Results
Three Months Ended
In millions
Mar 31,
2014

 
Mar 31,
2013

Proceeds from sales of available-for-sale securities
$
208

 
$
214

Gross realized gains
$
46

 
$
36

Gross realized losses
$
(1
)
 
$
(9
)

12


The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities
at March 31, 2014
In millions
Amortized Cost

 
Fair Value

Within one year
$
10

 
$
10

One to five years
601

 
635

Six to ten years
451

 
464

After ten years
127

 
148

Total
$
1,189

 
$
1,257


At March 31, 2014, the Company had $1,250 million ($1,581 million at December 31, 2013) 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 March 31, 2014, the Company had investments in money market funds of $384 million classified as cash equivalents ($1,331 million at December 31, 2013).

The aggregate cost of the Company’s cost method investments totaled $177 million at March 31, 2014 ($185 million at December 31, 2013). Due to the nature of these investments, either the cost basis approximates fair value or fair value is not readily determinable. These investments are reviewed quarterly for impairment indicators. The Company's impairment analysis resulted in a $5 million reduction in the cost basis of these investments for the three-month period ended March 31, 2014 (no reduction in the three-month period ended March 31, 2013).
Accounting for Derivative Instruments and Hedging Activities
The following table provides the fair value and gross balance sheet classification of derivative instruments at March 31, 2014 and December 31, 2013:
 
Fair Value of Derivative Instruments
In millions
Balance Sheet Classification
 
Mar 31,
2014

 
Dec 31,
2013

Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Commodities
Other current assets
 
$
21

 
$
13

Total derivatives designated as hedges
 
 
$
21

 
$
13

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

 
$
1

Foreign currency
Accounts and notes receivable – Other
 
27

 
65

Total derivatives not designated as hedges
 
 
$
28

 
$
66

Total asset derivatives
 
 
$
49

 
$
79

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

 
$
5

Commodities
Accounts payable – Other
 
14

 
5

Foreign currency
Accounts payable – Other
 
4

 
9

Total derivatives designated as hedges
 
 
$
24

 
$
19

Derivatives not designated as hedges:
 
 
 
 
 
Commodities
Accounts payable – Other
 
$
1

 
$
1

Foreign currency
Accounts payable – Other
 
39

 
24

Total derivatives not designated as hedges
 
 
$
40

 
$
25

Total liability derivatives
 
 
$
64

 
$
44


Foreign currency derivatives not designated as hedges are used to offset foreign exchange gains/losses resulting from the underlying exposures of foreign currency denominated assets and liabilities.

The net after-tax amounts to be reclassified from "Accumulated other comprehensive income (loss)" to income within the next 12 months are a $4 million loss for interest rate contracts, a $7 million gain for commodity contracts and a $6 million loss for foreign currency contracts.


13


NOTE 7 – FAIR VALUE MEASUREMENTS
A summary of the Company's recurring and nonrecurring fair value measurements can be found in Note 11 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. If applicable, updates have been included in the respective section below.

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 March 31, 2014

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)
$

 
$
1,634

 
$

 
$

 
$
1,634

Interests in trade accounts receivable conduits (3)

 

 
1,339

 

 
1,339

Equity securities (4)
787

 
36

 

 

 
823

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
559

 

 

 
559

Corporate bonds

 
698

 

 

 
698

Derivatives relating to: (6)

 

 

 

 
 
Commodities
3

 
19

 

 
(9
)
 
13

Foreign currency

 
27

 

 
(14
)
 
13

Total assets at fair value
$
790

 
$
2,973

 
$
1,339

 
$
(23
)
 
$
5,079

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

 
$
19,349

 
$

 
$

 
$
19,349

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
6

 

 

 
6

Commodities
4

 
11

 

 
(10
)
 
5

Foreign currency

 
43

 

 
(14
)
 
29

Total liabilities at fair value
$
4

 
$
19,409

 
$

 
$
(24
)

$
19,389

(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)
Treasury Bills and money market funds 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 measurements of long-term debt.

14


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

 
$
2,912

 
$

 
$

 
$
2,912

Interests in trade accounts receivable conduits (3)

 

 
1,227

 

 
1,227

Equity securities (4)
760

 
37

 

 

 
797

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
564

 

 

 
564

Corporate bonds

 
695

 

 

 
695

Derivatives relating to: (6)

 

 

 

 
 
Commodities
3

 
11

 

 
(3
)
 
11

Foreign currency

 
65

 

 
(20
)
 
45

Total assets at fair value
$
763

 
$
4,284

 
$
1,227

 
$
(23
)
 
$
6,251

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

 
$
19,467

 
$

 
$

 
$
19,467

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
5

 

 

 
5

Commodities
4

 
2

 

 
(4
)
 
2

Foreign currency

 
33

 

 
(20
)
 
13

Total liabilities at fair value
$
4

 
$
19,507

 
$

 
$
(24
)
 
$
19,487

(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)
Treasury Bills and money market funds 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 measurements of long-term debt.
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 $4 million at March 31, 2014 ($5 million at December 31, 2013).
The following table summarizes the changes in fair value measurements using Level 3 inputs for the three-month periods ended March 31, 2014 and March 31, 2013:

Fair Value Measurements Using Level 3 Inputs
Three Months Ended
Interests Held in Trade Receivable Conduits (1)
In millions
Mar 31,
2014

 
Mar 31,
2013

Balance at beginning of period
$
1,227

 
$
1,057

Loss included in earnings (2)
(1
)
 
(1
)
Purchases
263

 
329

Settlements
(150
)
 
(46
)
Balance at end of period
$
1,339

 
$
1,339

(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.



15


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 March 31, 2014, 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 March 31, 2014, the Company had accrued obligations of $739 million for probable environmental remediation and restoration costs, including $78 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, 2013, the Company had accrued obligations of $722 million for probable environmental remediation and restoration costs, including $73 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
On March 6, 2012, the Company submitted an Interim Response Activity Plan Designed to Meet Criteria ("Work Plan") to the MDEQ that involved the sampling of soil at residential properties near the Midland site for the presence of dioxins to determine where clean-up may be required and then conducting remediation for properties that sample above the remediation criteria. The MDEQ approved the Work Plan on June 1, 2012 and implementation of the Work Plan began on June 4, 2012. During 2012 and 2013, the Company submitted and had approved by the MDEQ, amendments to the Work Plan to sample properties in 2012 and 2013 that were originally scheduled for sampling in 2014 through 2017. At December 31, 2013, remediation was complete on all 98 properties identified through analysis as being above the remediation criteria. On March 14, 2014, the Company submitted a plan for properties to be sampled during 2014 ("2014 Plan"), as required by the approved Work Plan. Approval of the 2014 Plan is expected in May 2014. At March 31, 2014, an additional 25 properties have been identified as being above the remediation criteria.

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 Tittabawasee 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

16


the EPA have entered into three separate orders to perform limited remedial actions to implement early actions. In addition, the Company and the EPA have entered into two separate orders to address remedial actions in two of the nine geographic segments in the first Operable Unit.

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

On September 28, 2007, the Company and the natural resource damage trustees entered into a Funding and Participation Agreement that addressed the Company’s payment of past costs incurred by the natural resource damage trustees, payment of the costs of a trustee coordinator and a process to review additional cooperative studies that the Company might agree to fund or conduct with the natural resource damage trustees. On March 18, 2008, the Company and the natural resource damage trustees entered into a Memorandum of Understanding ("MOU") to provide a mechanism for the Company to fund cooperative studies related to the assessment of natural resource damages. This MOU was amended and funding of cooperative studies was 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 March 31, 2014, the accrual for these off-site matters was $49 million (included in the total accrued obligation of $739 million at March 31, 2014). At December 31, 2013, the Company had an accrual for these off-site matters of $47 million (included in the total accrued obligation of $722 million at December 31, 2013).

Environmental Matters Summary
It is the opinion of the Company's management that the possibility is remote that costs in excess of those disclosed will have a material impact on the Company's results of operations, financial condition or cash flows.

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

17


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 October 2012, Union Carbide requested ARPC to review its historical 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 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.

In October 2013, Union Carbide requested ARPC to review its historical asbestos claim and resolution activity and determine the appropriateness of updating its December 2012 study. In response to that request, ARPC reviewed and analyzed data through September 30, 2013. In December 2013, 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 2012 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, 2013, the asbestos-related liability for pending and future claims was $501 million and approximately 19 percent of the recorded liability related to pending claims and approximately 81 percent related to future claims.

Based on Union Carbide’s review of 2014 activity, Union Carbide determined that no adjustment to the accrual was required at March 31, 2014. Union Carbide’s asbestos-related liability for pending and future claims was $485 million at March 31, 2014. Approximately 20 percent of the recorded liability related to pending claims and approximately 80 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 orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Since the filing of the case, Union Carbide has reached settlements with several of the carriers involved in the Insurance Litigation and continues to pursue settlements with the remaining carriers. Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $25 million at March 31, 2014 and $25 million at December 31, 2013.

In addition to the receivable for insurance recoveries related to its asbestos liability, Union Carbide had receivables for defense and resolution costs submitted to insurance carriers that have settlement agreements in place regarding their asbestos-related insurance coverage. The following table summarizes Union Carbide’s receivables related to its asbestos-related liability:
 
Receivables for Asbestos-Related Costs
In millions
Mar 31,
2014

 
Dec 31,
2013

Receivables for defense and resolution costs – carriers with settlement agreements
$
63

 
$
66

Receivables for insurance recoveries – carriers without settlement agreements
25

 
25

Total
$
88

 
$
91


Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs was $25 million in the first quarter of 2014 ($22 million in the first quarter of 2013) and was reflected in "Cost of sales" in the consolidated statements of income.


18


After a review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, after taking into account the solvency and historical payment experience of various insurance carriers; existing insurance settlements; and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies, Union Carbide continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.

Summary
The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for Union Carbide to be higher or lower than those projected or those recorded.

Because of the uncertainties described above, Union Carbide’s management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing Union Carbide and Amchem. Union Carbide’s management believes that it is reasonably possible that the cost of disposing of Union Carbide’s asbestos-related claims, including future defense costs, could have a material impact on Union Carbide’s results of operations and cash flows for a particular period and on the consolidated financial position of Union Carbide.

It is the opinion of Dow’s management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense costs, could have a material impact on the Company’s results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

Synthetic Rubber Industry Matters
In 2003, the U.S., Canadian and European competition authorities initiated separate investigations into alleged anticompetitive behavior by certain participants in the synthetic rubber industry. Certain subsidiaries of the Company (but as to the investigation in Europe only) responded to requests for documents and otherwise cooperated in the investigations.

On June 10, 2005, the Company received a Statement of Objections from the European Commission (the “EC”) stating that it believed that the Company and certain subsidiaries of the Company (the “Dow Entities”), together with other participants in the synthetic rubber industry, engaged in conduct in violation of European competition laws with respect to the butadiene rubber and emulsion styrene butadiene rubber businesses. In connection therewith, on November 29, 2006, the EC issued its decision alleging infringement of Article 81 of the Treaty of Rome and imposed a fine of Euro 64.575 million (approximately $85 million at that time) on the Dow Entities; several other companies were also named and fined. As a result, the Company recognized a loss contingency of $85 million related to the fine in the fourth quarter of 2006. The Company appealed the EC’s decision and a hearing was held before the Court of First Instance on October 13, 2009. On July 13, 2011, the General Court issued a decision that partly affirmed the EC's decision with regard to the amount of the fine and the liability of the parent company, but rejected the EC's decision regarding the length of the conspiracy and determined that it was of a shorter duration. The Dow Entities filed an appeal of this decision to the Court of Justice of the European Union. This appeal was denied on July 18, 2013. The Dow Entities paid the fine, including accrued interest, on August 12, 2013. This proceeding is now considered resolved. Subsequent to the imposition of the fine in 2006, the Company and/or certain subsidiaries of the Company became named parties in various related U.S., United Kingdom and Italian civil actions. The U.S. matter was settled in March 2010 through a confidential settlement agreement, with an immaterial impact on the Company’s consolidated financial statements. The Italian civil actions are still pending. The United Kingdom matter is expected to go to trial in May 2014.

Urethane Matters
On February 16, 2006, the Company, among others, received a subpoena from the U.S. Department of Justice ("DOJ") as part of a previously announced antitrust investigation of manufacturers of polyurethane chemicals, including methylene diphenyl diisocyanate, toluene diisocyanate, polyether polyols and system house products. The Company cooperated with the DOJ and, following an extensive investigation, on December 10, 2007, the Company received notice from the DOJ that it had closed its investigation of potential antitrust violations involving these products without indictments or pleas.

In 2005, the Company, among others, was named as a defendant in multiple civil class action lawsuits alleging a conspiracy to fix the price of various urethane chemical products, namely the products that were the subject of the above described DOJ antitrust investigation. These lawsuits were consolidated in the U.S. District Court for the District of Kansas (the “District Court”) or have been tolled. On July 29, 2008, the District Court certified a class of purchasers of the products for the six-year period from 1999 through 2004. Shortly thereafter, a series of “opt-out” cases were filed by a number of large volume purchasers; these cases are substantively identical to the class action lawsuit, but expanded the time period to include 1994 through 1998. In January 2013, the class action lawsuit went to trial in the District Court with the Company as the sole

19


remaining defendant, the other defendants having previously settled. On February 20, 2013, the jury in the matter returned a damages verdict of approximately $400 million against the Company, which ultimately was trebled by the District Court under applicable antitrust laws - less offsets from other settling defendants - resulting in a judgment entered in July 2013 in the amount of $1.06 billion. The Company is appealing this judgment on numerous grounds.

In addition to the matters described above, there are two separate but inter-related matters in Ontario and Quebec, Canada, both of which are pending a decision on class certification.

The Company has concluded it is not probable that a loss will occur and, therefore, a liability has not been recorded with respect to these matters.

Other Litigation Matters
In addition to the specific matters described above, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, governmental regulation and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. Dow has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies often provide coverage that will be utilized to minimize the financial impact, if any, of the contingencies described above.

Summary
Except for the possible effect of Union Carbide’s Asbestos-Related Matters and the Urethane Matters described above, it is the opinion of the Company’s management that the possibility is remote that the aggregate of all claims and lawsuits will have a material adverse impact on the results of operations, financial condition and cash flows of the Company.

Purchase Commitments
The Company has numerous agreements for the purchase of ethylene-related products globally. The purchase prices are determined primarily on a cost-plus basis. Total purchases under these agreements were $405 million in 2013, $304 million in 2012 and $552 million in 2011. The Company’s take-or-pay commitments associated with these agreements at March 31, 2014 are included in the table below.

The Company also has various commitments for take-or-pay and throughput agreements. These commitments are at prices not in excess of current market prices. The remaining terms for all but one of these agreements extend from one to 32 years. One agreement has a remaining term of 64 years. The determinable future commitments for this specific agreement for a period of 10 years are included in the following table along with the fixed and determinable portion of all other obligations under the Company’s purchase commitments and have been updated as of March 31, 2014:

Annual Fixed and Determinable Portion of
Take-or-Pay and Throughput Obligations
In millions
2014
$
3,315

2015
2,958

2016
2,625

2017
2,215

2018
1,962

2019 and beyond
7,259

Total
$
20,334


In addition to the take-or-pay obligations at March 31, 2014 the Company had outstanding commitments which ranged from one to seven years for materials, services and other items used in the normal course of business of approximately $295 million. Such commitments were at prices not in excess of current market prices.

Guarantees
The Company provides a variety of guarantees as described more fully in the following sections.

Guarantees
Guarantees arise during the ordinary course of business from relationships with customers and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others (via delivery of cash or other assets) if specified triggering events occur. With guarantees, such as commercial or financial contracts, non-performance by the guaranteed party

20


triggers the obligation of the Company to make payments to the beneficiary of the guarantee. The majority of the Company’s guarantees relate to debt of nonconsolidated affiliates, which have expiration dates ranging from less than one year to seven years, and trade financing transactions in Latin America, which typically expire within one year of inception. The Company’s current expectation is that future payment or performance related to the non-performance of others is considered unlikely.

Residual Value Guarantees
The Company provides guarantees related to leased assets specifying the residual value that will be available to the lessor at lease termination through sale of the assets to the lessee or third parties.

The following tables provide a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for each type of guarantee:

Guarantees at March 31, 2014
In millions
Final
Expiration
 
Maximum Future
Payments

 
Recorded  
Liability  

Guarantees
2021
 
$
5,118

 
$
151

Residual value guarantees
2021
 
748

 
26

Total guarantees
 
 
$
5,866

 
$
177


Guarantees at December 31, 2013
In millions
Final
Expiration
 
Maximum Future
Payments

 
Recorded  
Liability  

Guarantees
2021
 
$
5,074

 
$
137

Residual value guarantees
2021
 
708

 
27

Total guarantees
 
 
$
5,782

 
$
164


During 2013, the Company entered into guarantee agreements (“Guarantees”) related to project financing for Sadara Chemical Company (“Sadara”), a nonconsolidated affiliate. The total of an Islamic bond and Additional Project Financing (collectively “Total Project Financing”) obtained by Sadara is approximately $12.5 billion. Sadara had $7.3 billion of Total Project Financing outstanding at March 31, 2014 ($5.8 billion at December 31, 2013). The Company's guarantee of the Total Project Financing is in proportion to the Company's 35 percent ownership interest in Sadara, or up to approximately $4.4 billion when the project financing is fully drawn. The Guarantees will be released upon completion of construction of the Sadara complex and satisfactory fulfillment of certain other conditions, including passage of an extensive operational testing program, which is currently anticipated by the end of 2017.

Asset Retirement Obligations
The Company has recognized asset retirement obligations for the following activities: demolition and remediation activities at manufacturing sites in the United States, Canada, Brazil, China, Argentina, Australia, Japan, India and Europe; and capping activities at landfill sites in the United States, Canada, Brazil and Italy. The Company has also recognized conditional asset retirement obligations related to asbestos encapsulation as a result of planned demolition and remediation activities at manufacturing and administrative sites in the United States, Canada, Brazil, China, Argentina, Australia, Japan, India and Europe.

The aggregate carrying amount of asset retirement obligations recognized by the Company was $86 million at March 31, 2014 and $89 million at December 31, 2013. The discount rate used to calculate the Company’s asset retirement obligations was 0.88 percent at March 31, 2014 and at December 31, 2013. These obligations are included in the consolidated balance sheets as "Accrued and other current liabilities" and "Other noncurrent obligations."

The Company has not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in its consolidated financial statements. It is the opinion of the Company’s management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material impact on the Company’s consolidated financial statements based on current costs.



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NOTE 9 – TRANSFERS OF FINANCIAL ASSETS
The Company sells trade accounts receivable of select North America entities and qualifying trade accounts receivable of select European entities on a revolving basis to certain multi-seller commercial paper conduit entities ("conduits"). The proceeds received are comprised of cash and interests in specified assets of the conduits (the receivables sold by the Company) that entitle the Company to the residual cash flows of such specified assets in the conduits after the commercial paper has been repaid. Neither the conduits nor the investors in those entities have recourse to other assets of the Company in the event of nonpayment by the debtors.
The following table summarizes the carrying value of interests held, which represents the Company's maximum exposure to loss related to the receivables sold, and the percentage of anticipated credit losses related to the trade accounts receivable sold. Also provided is the sensitivity of the fair value of the interests held to hypothetical adverse changes in the anticipated credit losses; amounts shown below are the corresponding hypothetical decreases in the carrying value of interests.

Interests Held
Mar 31,
2014

 
Dec 31,
2013

In millions
 
Carrying value of interests held
$
1,339

 
$
1,227

Percentage of anticipated credit losses
0.71
%
 
0.71
%
Impact to carrying value - 10% adverse change
$
1

 
$
1

Impact to carrying value - 20% adverse change
$
3

 
$
2


Credit losses, net of any recoveries, on receivables sold during the three-month periods ended March 31, 2014 and 2013 were insignificant.

Following is an analysis of certain cash flows between the Company and the conduits:
 
Cash Proceeds
Three Months Ended
In millions
Mar 31,
2014

 
Mar 31,
2013

Sale of receivables
$

 
$
19

Collections reinvested in revolving receivables
$
6,189

 
$
6,130

Interests in conduits (1)
$
150

 
$
46

(1)
Presented in "Operating Activities" in the consolidated statements of cash flows.

Following is additional information related to the sale of receivables under these facilities:

Trade Accounts Receivable Sold
Mar 31,
2014

 
Dec 31,
2013

In millions
 
Delinquencies on sold receivables still outstanding
$
111

 
$
138

Trade accounts receivable outstanding and derecognized
$
2,648

 
$
2,494


The Company repurchased $8 million of previously sold receivables related to a divestiture during the three-month period ended March 31, 2013.



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NOTE 10 – NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
Notes Payable
In millions
Mar 31,
2014

 
Dec 31,
2013

Notes payable to banks
$
335

 
$
300

Notes payable to related companies
182

 
137

Notes payable trade
9

 
6

Total notes payable
$
526

 
$
443

Period-end average interest rates
3.06
%
 
3.23
%

Long-Term Debt

In millions
2014
Average
Rate

 
Mar 31,
2014

 
2013
Average
Rate

 
Dec 31,
2013

Promissory notes and debentures:
 
 
 
 
 
 
 
Final maturity 2014
2.90
%
 
$
55

 
5.33
%
 
$
399

Final maturity 2015
2.82
%
 
60

 
2.89
%
 
56

Final maturity 2016
2.53
%
 
805

 
2.53
%
 
805

Final maturity 2017
5.67
%
 
489

 
5.65
%
 
491

Final maturity 2018
5.45
%
 
567

 
5.43
%
 
570

Final maturity 2019
8.41
%
 
2,168

 
8.40
%
 
2,171

Final maturity 2020 and thereafter
5.40
%
 
10,056

 
5.41
%
 
10,029

Other facilities:

 

 

 

U.S. dollar loans, various rates and maturities
1.42
%
 
490

 
1.44
%
 
490

Foreign currency loans, various rates and maturities
3.17
%
 
1,163

 
3.18
%
 
1,140

Medium-term notes, varying maturities through 2024
3.70
%
 
1,242

 
3.76
%
 
1,143

Pollution control/industrial revenue bonds, varying maturities through 2038
5.86
%
 
492

 
5.59
%
 
518

Capital lease obligations

 
32

 

 
41

Unamortized debt discount

 
(332
)
 

 
(336
)
Long-term debt due within one year

 
(351
)
 

 
(697
)
Long-term debt

 
$
16,936

 

 
$
16,820


Annual Installments on Long-Term Debt
For Next Five Years at March 31, 2014
In millions
2014
$
340

2015
$
412

2016
$
1,370

2017
$
775

2018
$
931

2019
$
2,451


2014 Activity
During the first three months of 2014, the Company issued $99 million aggregate principal amount of InterNotes and approximately $26 million of long-term debt (net of $5 million of repayments) was entered into by consolidated variable interest entities. The Company also repaid $346 million of long-term debt related to the purchase of an ethylene facility (see Note 11 for additional information).

2013 Activity
On March 25, 2013, the Company redeemed $750 million aggregate principal amount of 7.6 percent notes due May 15, 2014, at a price of 107.8 percent of the principal amount of the notes, plus accrued and unpaid interest. As a result of this redemption, the Company realized a $60 million pretax loss on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in Corporate.

During the first three months of 2013, the Company issued $72 million aggregate principal amount of InterNotes and approximately $44 million of long-term debt was entered into by consolidated variable interest entities. The Company also redeemed $250 million of 5.6 percent notes that matured on March 15, 2013 and $64 million principal amount of InterNotes were redeemed at maturity.

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Available Credit Facilities
The following table summarizes the Company's credit facilities:

Committed and Available Credit Facilities at March 31, 2014
In millions
 
Effective Date
 
Committed Credit

 
Credit Available

 
Maturity Date
 
Interest
Five Year Competitive Advance and Revolving Credit Facility
 
October 2011
 
$
5,000

 
$
5,000

 
October 2016
 
Floating rate
Bilateral Revolving Credit Facility
 
October 2012
 
170

 
170

 
October 2016
 
Floating rate
Bilateral Revolving Credit Facility
 
March 2013
 
100

 
100

 
March 2015
 
Floating rate
Bilateral Revolving Credit Facility
 
March 2013
 
300

 
300

 
October 2016
 
Floating rate
Term Loan Facility
 
March 2013
 
300

 

 
March 2016
 
Floating rate
Bilateral Revolving Credit Facility
 
April 2013
 
200

 
200

 
April 2016
 
Floating rate
Bilateral Revolving Credit Facility
 
October 2013
 
200

 
200

 
October 2016
 
Floating rate
Bilateral Revolving Credit Facility
 
October 2013
 
100

 
100

 
October 2016
 
Floating rate
Bilateral Revolving Credit Facility
 
January 2014
 
100

 
100

 
October 2016
 
Floating rate
Total Committed and Available Credit Facilities
 
 
 
$
6,470

 
$
6,170

 
 
 
 

Debt Covenants and Default Provisions
There were no material changes to the debt covenants and default provisions related to the Company's outstanding long-term debt and primary, private credit agreements in the first quarter of 2014. For additional information on the Company's debt covenants and default provisions, see Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.


NOTE 11 – VARIABLE INTEREST ENTITIES
A complete description of the Company's variable interest entities can be found in Note 19 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Consolidated Variable Interest Entities
During the first quarter of 2014, the membrane chlor-alkali joint venture at the Company's Freeport, Texas integrated manufacturing complex successfully initiated full-scale, commercial production.
The Company previously held a variable interest in an owner trust, for which the Company was the primary beneficiary. The owner trust leased an ethylene facility in The Netherlands to the Company, whereby substantially all of the rights and obligations of ownership were transferred to the Company. The Company's variable interest in the owner trust related to a fixed purchased price option. On January 2, 2014, the Company purchased the ethylene facility for $406 million, including cash payments of $350 million and a note payable of $56 million, which is classified as "Notes payable" in the consolidated balance sheets and will be paid by December 31, 2014. In the first quarter of 2014, the Company classified $346 million as "Payments on long-term debt" and $4 million as "Purchases of noncontrolling interests" in the consolidated statements of cash flows. Future payments on the note payable will be classified as "Purchases of noncontrolling interests" in the consolidated statements of cash flows.

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The Company's consolidated financial statements include the assets, liabilities and results of operations of variable interest entities ("VIEs"), for which the Company is the primary beneficiary. The other equity holders’ interests are reflected in “Net income attributable to noncontrolling interests” in the consolidated statements of income and "Redeemable Noncontrolling Interest" and “Noncontrolling interests” in the consolidated balance sheets. The following table summarizes the carrying amounts of the entities’ assets and liabilities included in the Company’s consolidated balance sheets at March 31, 2014 and December 31, 2013:
 
Assets and Liabilities of Consolidated VIEs
In millions
Mar 31,
2014

 
Dec 31,
2013

Cash and cash equivalents (1)
$
184

 
$
147

Other current assets
154

 
143

Property
2,699

 
2,646