10-Q 1 dow-q1x3312015.htm 10-Q DOW-Q1-3.31.2015
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, 2015

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, 2015
Common Stock, par value $2.50 per share
 
1,152,880,868 shares




The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended March 31, 2015
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

Throughout this Quarterly Report on Form 10-Q, except as otherwise indicated by the context, the terms “Company” or “Dow” as used herein mean The Dow Chemical Company and its consolidated 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,” “outlook,” “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.

This document also contains statements about Dow’s agreement to separate a substantial portion of its chlor-alkali and downstream derivatives business, distribute the business to Dow shareholders and then merge it with a subsidiary of Olin Corporation (the “Transaction”). Many factors could cause actual results to differ materially from these forward-looking statements with respect to the Transaction, including risks relating to the completion of the transaction on anticipated terms and timing, including obtaining shareholder and regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the new combined company’s operations, Olin’s ability to integrate the business successfully and to achieve anticipated synergies, and the risk that disruptions from the Transaction will harm Dow’s or Olin’s business. While the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on Dow’s or Olin’s consolidated financial condition, results of operations or liquidity.

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, 2014). 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,
2015

 
Mar 31,
2014

Net Sales
$
12,370

 
$
14,461

Cost of sales
9,535

 
11,733

Research and development expenses
383

 
391

Selling, general and administrative expenses
752

 
779

Amortization of intangibles
102

 
114

Equity in earnings of nonconsolidated affiliates
168

 
251

Sundry income (expense) - net
663

 
29

Interest income
17

 
13

Interest expense and amortization of debt discount
241

 
246

Income Before Income Taxes
2,205

 
1,491

Provision for income taxes
686

 
425

Net Income
1,519

 
1,066

Net income attributable to noncontrolling interests
41

 
17

Net Income Attributable to The Dow Chemical Company
1,478

 
1,049

Preferred stock dividends
85

 
85

Net Income Available for The Dow Chemical Company Common Stockholders
$
1,393

 
$
964

 
 
 
 
Per Common Share Data:
 
 
 
Earnings per common share - basic
$
1.22

 
$
0.80

Earnings per common share - diluted
$
1.18

 
$
0.79

 
 
 


Dividends declared per share of common stock
$
0.42

 
$
0.37

Weighted-average common shares outstanding - basic
1,135.7

 
1,190.6

Weighted-average common shares outstanding - diluted
1,246.7

 
1,207.7

 
 
 


Depreciation
$
486

 
$
517

Capital Expenditures
$
903

 
$
672

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,
2015

 
Mar 31,
2014

Net Income
$
1,519

 
$
1,066

Other Comprehensive Income (Loss), Net of Tax
 
 
 
Net change in unrealized gains on investments
(2
)
 
(11
)
Translation adjustments
(937
)
 
(71
)
Adjustments to pension and other postretirement benefit plans
125

 
81

Net gains (losses) on cash flow hedging derivative instruments
(9
)
 
4

Other comprehensive income (loss)
(823
)
 
3

Comprehensive Income
696

 
1,069

Comprehensive income attributable to noncontrolling interests, net of tax
41

 
20

Comprehensive Income Attributable to The Dow Chemical Company
$
655

 
$
1,049

See Notes to the Consolidated Financial Statements.


5


The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited)
Mar 31,
2015

 
Dec 31,
2014

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2015: $244; 2014: $190)
$
6,288

 
$
5,654

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2015: $105; 2014: $110)
4,695

 
4,685

Other
4,044

 
4,687

Inventories
8,087

 
8,101

Deferred income tax assets - current
908

 
812

Other current assets
372

 
328

Total current assets
24,394

 
24,267

Investments
 
 
 
Investment in nonconsolidated affiliates
3,912

 
4,201

Other investments (investments carried at fair value - 2015: $1,980; 2014: $2,009)
2,400

 
2,439

Noncurrent receivables
550

 
620

Total investments
6,862

 
7,260

Property
 
 
 
Property
54,201

 
55,230

Less accumulated depreciation
36,135

 
37,179

Net property (variable interest entities restricted - 2015: $2,708; 2014: $2,726)
18,066

 
18,051

Other Assets
 
 
 
Goodwill
12,183

 
12,632

Other intangible assets (net of accumulated amortization - 2015: $3,757; 2014: $3,737)
3,618

 
3,768

Deferred income tax assets - noncurrent
1,996

 
2,135

Asbestos-related insurance receivables - noncurrent
54

 
62

Deferred charges and other assets
616

 
621

Total other assets
18,467

 
19,218

Total Assets
$
67,789

 
$
68,796

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
482

 
$
551

Long-term debt due within one year
1,440

 
394

Accounts payable:
 
 
 
Trade
4,417

 
4,481

Other
2,198

 
2,299

Income taxes payable
702

 
361

Deferred income tax liabilities - current
104

 
105

Dividends payable
562

 
563

Accrued and other current liabilities
2,482

 
2,839

Total current liabilities
12,387

 
11,593

Long-Term Debt (variable interest entities nonrecourse - 2015: $1,227; 2014: $1,229)
17,867

 
18,838

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities - noncurrent
572

 
622

Pension and other postretirement benefits - noncurrent
9,863

 
10,459

Asbestos-related liabilities - noncurrent
425

 
438

Other noncurrent obligations
3,259

 
3,290

Total other noncurrent liabilities
14,119

 
14,809

Redeemable Noncontrolling Interest
202

 
202

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
3,107

 
3,107

Additional paid-in capital
4,792

 
4,846

Retained earnings
23,956

 
23,045

Accumulated other comprehensive loss
(8,840
)
 
(8,017
)
Unearned ESOP shares
(290
)
 
(325
)
Treasury stock at cost
(4,488
)
 
(4,233
)
The Dow Chemical Company’s stockholders’ equity
22,237

 
22,423

Non-redeemable noncontrolling interests
977

 
931

Total equity
23,214

 
23,354

Total Liabilities and Equity
$
67,789

 
$
68,796

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,
2015

 
Mar 31,
2014

Operating Activities
 
 
 
Net Income
$
1,519

 
$
1,066

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

 

Depreciation and amortization
634

 
672

Credit for deferred income tax
(51
)
 
(93
)
Earnings of nonconsolidated affiliates less than dividends received
407

 
298

Pension contributions
(325
)
 
(315
)
Net gain on sales of investments
(22
)
 
(39
)
Net gain on sales of property, businesses and consolidated companies
(706
)
 
(1
)
Excess tax benefits from share-based payment arrangements
(2
)
 
(25
)
Other net loss
17

 
25

Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(81
)
 
(871
)
Proceeds from interests in trade accounts receivable conduits
285

 
150

Inventories
(62
)
 
(798
)
Accounts payable
(326
)
 
391

Other assets and liabilities
(29
)
 
115

Cash provided by operating activities
1,258

 
575

Investing Activities
 
 
 
Capital expenditures
(903
)
 
(672
)
Proceeds from sale-leaseback of assets

 
6

Proceeds from sales of property, businesses and consolidated companies, net of cash divested
1,375

 
25

Acquisitions of businesses
(79
)
 

Investments in and loans to nonconsolidated affiliates
(125
)
 
(17
)
Distributions and loan repayments from nonconsolidated affiliates
1

 

Purchases of investments
(83
)
 
(220
)
Proceeds from sales and maturities of investments
134

 
224

Cash provided by (used in) investing activities
320

 
(654
)
Financing Activities
 
 
 
Changes in short-term notes payable
(39
)
 
(48
)
Proceeds from issuance of long-term debt
102

 
138

Payments on long-term debt
(13
)
 
(391
)
Purchases of treasury stock
(500
)
 
(1,250
)
Proceeds from issuance of common stock

 
480

Proceeds from sales of common stock
106

 
47

Issuance costs on debt and equity securities
(1
)
 
(1
)
Excess tax benefits from share-based payment arrangements
2

 
25

Contributions from noncontrolling interests
14

 
29

Distributions to noncontrolling interests
(9
)
 
(11
)
Purchases of noncontrolling interests

 
(4
)
Dividends paid to stockholders
(563
)
 
(466
)
Cash used in financing activities
(901
)
 
(1,452
)
Effect of Exchange Rate Changes on Cash
(43
)
 
(24
)
Summary
 
 
 
Increase (decrease) in cash and cash equivalents
634

 
(1,555
)
Cash and cash equivalents at beginning of period
5,654

 
5,940

Cash and cash equivalents at end of period
$
6,288

 
$
4,385

See Notes to the Consolidated Financial Statements.

7


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Three Months Ended
In millions, except per share amounts (Unaudited)
Mar 31,
2015

 
Mar 31,
2014

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

 
$
4,000

Common Stock
 
 
 
Balance at beginning of year
3,107

 
3,054

Common stock issued

 
38

Balance at end of period
3,107

 
3,092

Additional Paid-in Capital
 
 
 
Balance at beginning of year
4,846

 
3,928

Common stock issued / sold
106

 
489

Stock-based compensation and allocation of ESOP shares
(160
)
 
(4
)
Other

 
(6
)
Balance at end of period
4,792

 
4,407

Retained Earnings
 
 
 
Balance at beginning of year
23,045

 
21,407

Net income available for The Dow Chemical Company common stockholders
1,393

 
964

Dividends declared on common stock (per share - 2015: $0.42; 2014: $0.37)
(477
)
 
(437
)
Dividend equivalents on participating securities
(5
)
 
(5
)
Balance at end of period
23,956

 
21,929

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(8,017
)
 
(4,827
)
Other comprehensive income (loss)
(823
)
 
3

Balance at end of period
(8,840
)
 
(4,824
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(325
)
 
(357
)
Shares allocated to ESOP participants
35

 
8

Balance at end of period
(290
)
 
(349
)
Treasury Stock
 
 
 
Balance at beginning of year
(4,233
)
 
(307
)
Purchases
(500
)
 
(1,250
)
Issuances - compensation plans
245

 
43

Balance at end of period
(4,488
)
 
(1,514
)
The Dow Chemical Company’s Stockholders’ Equity
22,237

 
26,741

Non-redeemable Noncontrolling Interests
977

 
982

Total Equity
$
23,214

 
$
27,723

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, 2014.


NOTE 2 – RECENT ACCOUNTING GUIDANCE
Accounting Guidance Issued But Not Yet Adopted as of March 31, 2015
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The tentative revised effective date for this ASU is for annual and interim periods beginning on or after December 15, 2017, and early adoption will be permitted. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in the ASU. The Company is currently evaluating the impact of adopting this guidance.

In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which makes changes to both the variable interest model and voting interest model and eliminates the indefinite deferral of FASB Statement No. 167, included in ASU 2010-10, for certain investment funds. All reporting entities that hold a variable interest in other legal entities will need to re-evaluate their consolidation conclusions as well as disclosure requirements. This ASU is effective for annual periods beginning after December 15, 2015, and early adoption is permitted, including any interim period. The Company is currently evaluating the impact of adopting this guidance.

In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, and amortization of those costs should be reported as interest expense.

9


This ASU is effective for financial statements issued for annual and interim periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis for each period presented in the balance sheet. The Company is currently evaluating the impact of adopting this guidance.

In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which provides guidance about whether a cloud computing arrangement includes a software license. The customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.


NOTE 3 – ACQUISITIONS AND DIVESTITURES
Acquisition of Cooperativa Central de Pesquisa Agrícola's Seed Business
On January 30, 2015, Dow AgroSciences LLC ("DAS") acquired Cooperativa Central de Pesquisa Agrícola's ("Coodetec") seed business for $169 million, with $79 million paid in the first quarter of 2015, approximately $20 million to be paid during the remainder of 2015 and the remaining portion to be paid in two equal installments in the first quarter of 2016 and 2017. The acquisition of Coodetec's seed business is expected to advance the development of Dow AgroSciences' soybean program and strengthen the Company’s position in the corn market segment.

The following table summarizes the fair values of the assets acquired and liabilities assumed from Coodetec on January 30, 2015. The valuation process is not complete. Final determination of the fair values may result in further adjustments to the values presented below.

Assets Acquired and Liabilities Assumed
On January 30,

In millions
2015

Purchase Price
$
169

Fair Value of Assets Acquired
 
Inventories
$
24

Property
35

Other intangible assets (1)
81

Total Assets Acquired
$
140

Fair Value of Liabilities Assumed
 
Accrued and other current liabilities
$
2

Total Liabilities Assumed
$
2

Goodwill
$
31

(1)
Includes $14 million of trademarks, $1 million of customer-related intangibles, $20 million of germplasm and $46 million of in-process research and development. See Note 5 for additional information.

Pending Acquisition of ExxonMobil Chemical Company's Interest in Univation Technologies, LLC
On October 2, 2014, the Company signed a definitive agreement with ExxonMobil Chemical Company ("ExxonMobil") to restructure the ownership of Univation Technologies, LLC ("Univation"), currently a 50:50 joint venture between Dow and ExxonMobil. This transaction will result in Univation becoming a wholly owned subsidiary of Dow. This transaction is expected to close in May 2015, pending regulatory approvals.

Divestiture of the Global Sodium Borohydride Business
On January 30, 2015, the Company sold its global Sodium Borohydride business ("SBH"), part of the Performance Materials & Chemicals segment, to Vertellus Performance Chemicals LLC. The divestiture included a manufacturing facility located in Elma, Washington, as well as the associated business, inventory, customer contracts and lists, process technology, business know-how and certain intellectual property. The sale was completed for $184 million, net of working capital adjustments and costs to sell, with proceeds subject to customary post-closing adjustments.

The Company recognized a pretax gain of $18 million on the sale in the first quarter of 2015, included in "Sundry income (expense) - net" and reflected in the Performance Materials & Chemicals segment. The Company recognized an after-tax loss of $9 million on the sale, primarily due to non-deductible goodwill included with this transaction.

10


SBH Assets and Liabilities Divested on January 30, 2015
Performance Materials & Chemicals

In millions
Inventories
$
23

Property
21

Goodwill
45

Other intangible assets
75

Total assets divested
$
164

Components of accumulated other comprehensive loss divested
$
2

Net carrying value divested
$
166


Divestiture of ANGUS Chemical Company
On February 2, 2015, the Company sold ANGUS Chemical Company (“ANGUS”), part of the Performance Materials & Chemicals segment, to Golden Gate Capital. The divestiture included the business headquarters and research and development facility in Buffalo Grove, Illinois; manufacturing facilities located in Sterlington, Louisiana, and Ibbenbueren, Germany; a packaging facility in Niagara Falls, New York; as well as the associated business, inventory, customer contracts, process technology, business know-how and certain intellectual property. The sale was completed for $1.151 billion, net of working capital adjustments, costs to sell and other transaction expenses, with proceeds subject to customary post-closing adjustments. The proceeds included a $10 million note receivable included in "Noncurrent receivables" in the consolidated balance sheets.

The Company recognized a pretax gain of $670 million on the sale in the first quarter of 2015, included in "Sundry income (expense) - net" and reflected in the Performance Materials & Chemicals segment.

ANGUS Assets and Liabilities Divested on February 2, 2015
Performance Materials & Chemicals

In millions
Current assets
$
124

Property
101

Goodwill
292

Other assets
8

Total assets divested
$
525

Current liabilities
$
17

Other noncurrent liabilities
37

Total liabilities divested
$
54

Components of accumulated other comprehensive loss divested
$
10

Net carrying value divested
$
481


The Company evaluated the divestitures of SBH and ANGUS and determined they do not represent a strategic shift that has a major effect on the Company's operations and financial results and do not qualify as individually significant components of the Company. As a result, these divestitures are not reported as discontinued operations.


NOTE 4 – INVENTORIES
The following table provides a breakdown of inventories:
 
Inventories
In millions
Mar 31, 2015

 
Dec 31, 2014

Finished goods
$
4,597

 
$
4,547

Work in process
1,832

 
1,905

Raw materials
814

 
797

Supplies
844

 
852

Total inventories
$
8,087

 
$
8,101

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $326 million at March 31, 2015 and $569 million at December 31, 2014.



11


NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the carrying amount of goodwill by operating segment:

Goodwill
Agricultural Sciences

 
Consumer Solutions

 
Infrastructure Solutions

 
Performance
Materials & Chemicals

 
Performance Plastics

 
Total  

In millions
Net goodwill at Dec 31, 2014
$
1,558

 
$
4,389

 
$
4,451

 
$
809

 
$
1,425

 
$
12,632

Divestiture of ANGUS Chemical Company

 

 

 
(292
)
 

 
(292
)
Divestiture of the Sodium Borohydride business

 

 

 
(45
)
 

 
(45
)
Goodwill related to the Coodetec acquisition
31

 

 

 

 

 
31

Foreign currency impact

 
(17
)
 
(79
)
 
(11
)
 
(36
)
 
(143
)
Net goodwill at Mar 31, 2015
$
1,589

 
$
4,372

 
$
4,372

 
$
461

 
$
1,389

 
$
12,183


The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At March 31, 2015
 
At December 31, 2014
In millions
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net  

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Licenses and intellectual property
$
1,773

 
$
(1,092
)
 
$
681

 
$
1,777

 
$
(1,060
)
 
$
717

Patents
120

 
(107
)
 
13

 
122

 
(108
)
 
14

Software
1,283

 
(655
)
 
628

 
1,287

 
(648
)
 
639

Trademarks
686

 
(418
)
 
268

 
685

 
(409
)
 
276

Customer-related
3,259

 
(1,341
)
 
1,918

 
3,443

 
(1,366
)
 
2,077

Other
175

 
(144
)
 
31

 
158

 
(146
)
 
12

Total other intangible assets, finite lives
$
7,296

 
$
(3,757
)
 
$
3,539

 
$
7,472

 
$
(3,737
)
 
$
3,735

IPR&D (1), indefinite lives
79

 

 
79

 
33

 

 
33

Total other intangible assets
$
7,375

 
$
(3,757
)
 
$
3,618

 
$
7,505

 
$
(3,737
)
 
$
3,768

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

On January 30, 2015, DAS acquired Coodetec's seed business resulting in an increase to intangible assets of $81 million, which included $14 million of trademarks, $1 million of customer-related intangibles, $20 million of germplasm (included in "Other" in the table above) and $46 million of IPR&D. See Note 3 for additional information on the acquisition.

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

Amortization Expense
Three Months Ended
In millions
Mar 31, 2015

 
Mar 31, 2014

Other intangible assets, excluding software
$
102

 
$
114

Software, included in “Cost of sales”
$
18

 
$
16


Total estimated amortization expense for 2015 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2015
$
480

2016
$
465

2017
$
434

2018
$
414

2019
$
350

2020
$
327


12


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, 2014. If applicable, updates have been included in the respective section below.

The following table summarizes the fair value of financial instruments at March 31, 2015 and December 31, 2014:
 
Fair Value of Financial Instruments
 
At March 31, 2015
 
At December 31, 2014
In millions
Cost

 
Gain

 
Loss

 
Fair
Value

 
Cost

 
Gain

 
Loss

 
Fair
Value

Marketable securities: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt (2)
$
517

 
$
31

 
$

 
$
548

 
$
559

 
$
26

 
$
(1
)
 
$
584

Corporate bonds
677

 
54

 
(1
)
 
730

 
654

 
45

 
(2
)
 
697

Total debt securities
$
1,194

 
$
85

 
$
(1
)
 
$
1,278

 
$
1,213

 
$
71

 
$
(3
)
 
$
1,281

Equity securities
557

 
164

 
(19
)
 
702

 
566

 
177

 
(15
)
 
728

Total marketable securities
$
1,751

 
$
249

 
$
(20
)
 
$
1,980

 
$
1,779

 
$
248

 
$
(18
)
 
$
2,009

Long-term debt including debt due within one year (3)
$
(19,307
)
 
$
3

 
$
(2,606
)
 
$
(21,910
)
 
$
(19,232
)
 
$
100

 
$
(2,318
)
 
$
(21,450
)
Derivatives relating to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rates
$

 
$

 
$
(12
)
 
$
(12
)
 
$

 
$

 
$
(12
)
 
$
(12
)
Commodities (4)
$

 
$
5

 
$
(164
)
 
$
(159
)
 
$

 
$
3

 
$
(81
)
 
$
(78
)
Foreign currency
$

 
$
23

 
$
(139
)
 
$
(116
)
 
$

 
$
26

 
$
(71
)
 
$
(45
)
(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 hedge adjustments of $20 million at March 31, 2015 and $21 million at December 31, 2014.
(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. The following table provides the investing results from available-for-sale securities for the three-month periods ended March 31, 2015 and March 31, 2014:

Investing Results
Three Months Ended
In millions
Mar 31,
2015

 
Mar 31,
2014

Proceeds from sales of available-for-sale securities
$
114

 
$
208

Gross realized gains
$
23

 
$
46

Gross realized losses
$
(1
)
 
$
(1
)
The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities
at March 31, 2015
In millions
Amortized Cost

 
Fair Value

Within one year
$
17

 
$
17

One to five years
468

 
491

Six to ten years
511

 
542

After ten years
198

 
228

Total
$
1,194

 
$
1,278


At March 31, 2015, the Company had $2,102 million ($1,050 million at December 31, 2014) of held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had 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, 2015, the Company had investments in money market funds of $1,369 million classified as cash equivalents ($1,655 million at December 31, 2014).

13


The aggregate cost of the Company’s cost method investments totaled $190 million at March 31, 2015 ($181 million at December 31, 2014). Due to the nature of these investments, either the cost basis approximates fair market value or fair value is not readily determinable. These investments are reviewed quarterly for impairment indicators. The Company's impairment analysis resulted in no reduction in the cost basis of these investments for the three-month period ended March 31, 2015 ($5 million reduction in the three-month period ended March 31, 2014).
Accounting for Derivative Instruments and Hedging Activities
Fair Value Hedges
For interest rate swap 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. At March 31, 2015, the Company had an interest rate swap with a notional amount of $100 million (zero at December 31, 2014) designated as a fair value hedge of underlying fixed rate debt obligations with a maturity date of May 2019. The fair value adjustments resulting from this swap were a gain on the derivative of less than $1 million at March 31, 2015 (zero at December 31, 2014).

The following table provides the fair value and gross balance sheet classification of derivative instruments at March 31, 2015 and December 31, 2014:
 
Fair Value of Derivative Instruments
In millions
Balance Sheet Classification
 
Mar 31,
2015

 
Dec 31,
2014

Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Commodities
Other current assets
 
$
2

 
$
4

Foreign currency
Accounts and notes receivable – Other
 
48

 
25

Total derivatives designated as hedges
 
 
$
50

 
$
29

Derivatives not designated as hedges:
 
 
 
 
 
Commodities
Other current assets
 
$
4

 
$
2

Foreign currency
Accounts and notes receivable – Other
 
64

 
91

Total derivatives not designated as hedges
 
 
$
68

 
$
93

Total asset derivatives
 
 
$
118

 
$
122

Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Accounts payable – Other
 
$
12

 
$
12

Commodities
Accounts payable – Other
 
165

 
106

Foreign currency
Accounts payable – Other
 
1

 

Total derivatives designated as hedges
 
 
$
178

 
$
118

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

 
$
2

Foreign currency
Accounts payable – Other
 
227

 
161

Total derivatives not designated as hedges
 
 
$
229

 
$
163

Total liability derivatives
 
 
$
407

 
$
281


Foreign currency derivatives not designated as hedges are used to offset foreign exchange gains or 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 loss" to income within the next 12 months are a $4 million loss for interest rate contracts, a $37 million loss for commodity contracts and a $61 million gain for foreign currency contracts.



14


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, 2014. 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, 2015

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)
$

 
$
3,471

 
$

 
$

 
$
3,471

Interests in trade accounts receivable conduits (3)

 

 
1,263

 

 
1,263

Equity securities (4)
666

 
36

 

 

 
702

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
548

 

 

 
548

Corporate bonds

 
730

 

 

 
730

Derivatives relating to: (6)

 

 

 

 
 
Commodities
1

 
5

 

 
(1
)
 
5

Foreign currency

 
112

 

 
(89
)
 
23

Total assets at fair value
$
667

 
$
4,902

 
$
1,263

 
$
(90
)
 
$
6,742

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

 
$
21,910

 
$

 
$

 
$
21,910

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
12

 

 

 
12

Commodities
1

 
166

 

 
(3
)
 
164

Foreign currency

 
228

 

 
(89
)
 
139

Total liabilities at fair value
$
1

 
$
22,316

 
$

 
$
(92
)

$
22,225

(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.

15


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

 
$
2,705

 
$

 
$

 
$
2,705

Interests in trade accounts receivable conduits (3)

 

 
1,328

 

 
1,328

Equity securities (4)
692

 
36

 

 

 
728

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
584

 

 

 
584

Corporate bonds

 
697

 

 

 
697

Derivatives relating to: (6)

 

 

 

 
 
Commodities

 
6

 

 
(3
)
 
3

Foreign currency

 
116

 

 
(90
)
 
26

Total assets at fair value
$
692

 
$
4,144

 
$
1,328

 
$
(93
)
 
$
6,071

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

 
$
21,450

 
$

 
$

 
$
21,450

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
12

 

 

 
12

Commodities
9

 
99

 

 
(27
)
 
81

Foreign currency

 
161

 

 
(90
)
 
71

Total liabilities at fair value
$
9

 
$
21,722

 
$

 
$
(117
)
 
$
21,614

(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 $6 million at March 31, 2015 ($29 million at December 31, 2014).
The following table summarizes the changes in fair value measurements using Level 3 inputs for the three-month periods ended March 31, 2015 and March 31, 2014:

Fair Value Measurements Using Level 3 Inputs
Three Months Ended
Interests Held in Trade Receivable Conduits (1)
In millions
Mar 31,
2015

 
Mar 31,
2014

Balance at beginning of period
$
1,328

 
$
1,227

Gain (loss) included in earnings (2)
1

 
(1
)
Purchases
219

 
263

Settlements
(285
)
 
(150
)
Balance at end of period
$
1,263

 
$
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.



16


NOTE 8 – COMMITMENTS AND CONTINGENT LIABILITIES
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, 2015, the Company had accrued obligations of $700 million for probable environmental remediation and restoration costs, including $74 million for the remediation of Superfund sites, and are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets. 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, 2014, the Company had accrued obligations of $706 million for probable environmental remediation and restoration costs, including $78 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. 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. On June 12, 2014, the Company submitted a modified plan based on MDEQ comments. The 2014 Plan was approved on June 27, 2014. As of December 31, 2014, remediation has been completed on all of the 132 properties that tested 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 ("Floodplain") as an additional segment. In August 2014, the EPA proposed for public comment the techniques that can be used to remedy the Floodplain, including proposed site specific clean-up criteria. In January 2015, the Company and the EPA entered into an order to address remediation of the Floodplain. The remedial work is expected to take place over the next 6 years. 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 three separate

17


orders to perform limited remedial actions to implement early actions - two separate orders to address remedial actions in two of the nine geographic segments in the first Operable Unit and the order to address the Floodplain.

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. All cooperative studies have been completed. 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, 2015, the accrual for these off-site matters was $69 million (included in the total accrued obligation of $700 million at March 31, 2015). At December 31, 2014, the Company had an accrual for these off-site matters of $62 million (included in the total accrued obligation of $706 million at December 31, 2014).

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, and use of pesticides containing dibromochloropropane (“DBCP”) have 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 four 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

18


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 2014, 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, 2014. The resulting study, completed by ARPC in December 2014, estimated that the undiscounted cost of disposing of pending and future claims against Union Carbide and Amchem, excluding future defense and processing costs, to be between $540 million and $640 million through 2029 based on the data as of September 30, 2014. As in earlier studies, ARPC provided longer periods of time in its December 2014 study, but also reaffirmed that forecasts for shorter periods of time are more accurate than those for longer periods of time.

In December 2014, based on ARPC's December 2014 study and Union Carbide's own review of the asbestos claim and resolution activity, Union Carbide determined that an adjustment to the accrual was required due to the increase in mesothelioma claim activity compared with what had been forecasted in the December 2012 study. Accordingly, Union Carbide increased its asbestos-related liability for pending and future claims by $78 million. At December 31, 2014 the asbestos-related liability for pending and future claims was $513 million. At December 31, 2014, approximately 22 percent of the recorded liability related to pending claims and approximately 78 percent related to future claims.

Based on Union Carbide’s review of 2015 activity, Union Carbide determined that no adjustment to the accrual was required at March 31, 2015. Union Carbide’s asbestos-related liability for pending and future claims was $500 million at March 31, 2015. 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 most of the carriers involved in the Insurance Litigation and continues to pursue a settlement with the remaining carrier. Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $10 million at March 31, 2015 and December 31, 2014.

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,
2015

 
Dec 31,
2014

Receivables for defense and resolution costs – carriers with settlement agreements
$
54

 
$
69

Receivables for insurance recoveries – carriers without settlement agreements
10

 
10

Total
$
64

 
$
79


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.

19


Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs was $24 million in the first quarter of 2015 ($25 million in the first quarter of 2014) and was reflected in "Cost of sales" in the consolidated statements of income.

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.

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 remaining defendant, the other defendants having previously settled. On February 20, 2013, the jury 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 appealed this judgment to the U.S. Tenth Circuit Court of Appeals ("Tenth Circuit" or "Court of Appeals"), which heard oral arguments on the matter on May 14, 2014. On September 29, 2014, the Court of Appeals issued an opinion affirming the District Court judgment. On October 14, 2014, the Company filed a petition for Rehearing or Rehearing En Banc (collectively the "Rehearing Petition") with the Court of Appeals, which the Circuit Court denied on November 7, 2014.

On March 9, 2015, the Company filed a petition for writ of certiorari ("Writ Petition") with the U.S. Supreme Court ("Supreme Court"), seeking judicial review by the Supreme Court and requesting that the Supreme Court ultimately correct fundamental errors in the Circuit Court opinion. While it is unknowable whether or not the Supreme Court will accept the Writ Petition for review, there are several compelling reasons why the Supreme Court should grant the petition for writ of certiorari, and if the petition for writ of certiorari is accepted, the Company believes it is likely that the District Court judgment will be vacated. Specifically, it is the Company's position that the Tenth Circuit decision violates the law as expressed by the Supreme Court as set out in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) and Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013). The Tenth Circuit also did not follow accepted law from other federal circuits on dispositive case issues, including legal precedent from the U.S. First, Second, Third, Fifth, Ninth and D.C. Circuit Courts. Finally, the erroneous law applied by the Tenth Circuit is not supported by any other circuit court. In April 2015, six amici filed Amicus Briefs in support of Dow’s Writ Petition. The class plaintiffs' opposition brief is due May 11, 2015, and pursuant to the current Supreme Court schedule, it is reasonably anticipated the Supreme Court may issue a decision on the Writ Petition by the end of June 2015.

The Company has consistently denied plaintiffs’ allegations of price fixing and, as outlined above, the Company will continue to vigorously defend this litigation. As with any litigation and based on various factors, the Company may from time to time

20


pursue confidential settlement negotiations to resolve the matter. As part of the Company’s review of the jury verdict, the resulting judgment and the Court of Appeals’ opinion, the Company assessed the legal and factual circumstances of the case, the trial record, the appellate record, and the applicable law including clear precedent from the Supreme Court. Based on this review and the reasons stated above, the Company believes the judgment and decision from the Court of Appeals are not appropriate. As a result, 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. While the Company believes it is not probable a loss will occur, the existence of the jury verdict, the Court of Appeals' opinion, and subsequent denial of Dow's Rehearing Petition indicate that it is reasonably possible that a loss could occur. The estimate of the possible range of loss to Dow is zero to the $1.06 billion judgment (excluding post-judgment interest and possible award of class attorney fees).

On September 30, 2014, the "opt-out" cases that had been consolidated with the class action lawsuit for purposes of pre-trial proceedings were remanded from the District Court to the U.S. District Court for the District of New Jersey.

In addition to the matters described above, there are two separate but inter-related matters in Ontario and Quebec, Canada. In March 2014, the Superior Court of Justice in London, Ontario, ruled in favor of the plaintiffs’ motion for class certification.  Dow filed its Notice of Motion for Leave to Appeal in March 2014, which was subsequently denied. The Quebec case has been stayed pending the outcome of the Ontario case. The Company has concluded it is not probable that a loss will occur and, therefore, a liability has not been recorded with respect to the opt-out litigation or the Canadian 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 product liability, patent infringement, governmental regulation, contract and commercial litigation, 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. It is the opinion of the Company’s management that the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, financial condition and cash flows of the Company.

Purchase Commitments
A summary of the Company's purchase commitments can be found in Note 14 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes to the purchase commitments since December 31, 2014.
 
Guarantees
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, 2015
In millions
Final
Expiration
 
Maximum Future
Payments

 
Recorded  
Liability  

Guarantees
2021
 
$
4,979

 
$
132

Residual value guarantees
2024
 
900

 
120

Total guarantees
 
 
$
5,879

 
$
252


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

 
Recorded  
Liability  

Guarantees
2021
 
$
5,042

 
$
160

Residual value guarantees
2024
 
951

 
123

Total guarantees
 
 
$
5,993

 
$
283


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 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 six years,

21


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.

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 $11.1 billion of Total Project Financing outstanding at March 31, 2015 ($10.5 billion at December 31, 2014). 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.

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.

Warranties
The Company provides warranty policies on certain products and accrues liabilities under warranty policies using historical warranty claim experience. Adjustments are made to accruals as claim data and historical experience change. The following table summarizes changes in the Company's warranty liability:

Warranty Accrual
Mar 31,
2015

 
Dec 31, 2014

In millions
Balance at January 1
$
107

 
$
24

Accruals related to existing warranties
2

 
104

Settlements
(6
)
 
(21
)
Balance at end of period
$
103

 
$
107


Asset Retirement Obligations
The Company has recognized asset retirement obligations for the following activities: demolition and remediation activities at manufacturing and administrative sites primarily in the United States, Canada, Brazil, Argentina 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 primarily in the United States, Canada, Argentina and Europe.

The aggregate carrying amount of asset retirement obligations recognized by the Company was $89 million at March 31, 2015 and $84 million at December 31, 2014. The discount rate used to calculate the Company’s asset retirement obligations was 1.48 percent at March 31, 2015 and 1.48 percent at December 31, 2014. 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.



22


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,
2015

 
Dec 31,
2014

In millions
 
Carrying value of interests held
$
1,263

 
$
1,328

Percentage of anticipated credit losses
0.34
%
 
0.35
%
Impact to carrying value - 10% adverse change
$
1

 
$
1

Impact to carrying value - 20% adverse change
$
2

 
$
2


Credit losses, net of any recoveries, on receivables sold were insignificant during the three-month periods ended March 31, 2015 and March 31, 2014.

Following is an analysis of certain cash flows between the Company and the conduits:
 
Cash Proceeds
Three Months Ended
In millions
Mar 31,
2015

 
Mar 31,
2014

Sale of receivables
$
12

 
$

Collections reinvested in revolving receivables
$
5,461

 
$
6,189

Interests in conduits (1)
$
285

 
$
150

(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,
2015

 
Dec 31,
2014

In millions
 
Delinquencies on sold receivables still outstanding
$
113

 
$
133

Trade accounts receivable outstanding and derecognized
$
2,524

 
$
2,607




23


NOTE 10 – NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
Notes Payable
In millions
Mar 31,
2015

 
Dec 31,
2014

Notes payable to banks and other lenders
$
351

 
$
353

Notes payable to related companies
124

 
189

Notes payable trade
7

 
9

Total notes payable
$
482

 
$
551

Period-end average interest rates
4.53
%
 
4.08
%

Long-Term Debt

In millions
2015
Average
Rate

 
Mar 31,
2015

 
2014
Average
Rate

 
Dec 31,
2014

Promissory notes and debentures:
 
 
 
 
 
 
 
Final maturity 2015
2.74
%
 
$
60

 
2.74
%
 
$
60

Final maturity 2016
2.52
%
 
805

 
2.52
%
 
805

Final maturity 2017
5.66
%
 
489

 
5.66
%
 
489

Final maturity 2018
5.44
%
 
567

 
5.44
%
 
567

Final maturity 2019
8.41
%
 
2,168

 
8.41
%
 
2,168

Final maturity 2020
4.37
%
 
1,877

 
4.37
%
 
1,877

Final maturity 2021 and thereafter
5.31
%
 
10,186

 
5.31
%
 
10,186

Other facilities:

 

 

 

U.S. dollar loans, various rates and maturities
1.39
%
 
461

 
1.38
%
 
461

Foreign currency loans, various rates and maturities
3.01
%
 
994

 
3.01
%
 
1,013

Medium-term notes, varying maturities through 2025
3.51
%
 
1,620

 
3.55
%
 
1,528

Tax-exempt bonds, varying maturities through 2038
5.66
%
 
343

 
5.66
%
 
343

Capital lease obligations

 
81

 

 
85

Unamortized debt discount

 
(344
)
 

 
(350
)
Long-term debt due within one year

 
(1,440
)
 

 
(394
)
Long-term debt

 
$
17,867

 

 
$
18,838


Annual Installments on Long-Term Debt
For Next Five Years at March 31, 2015
In millions
2015
$
380

2016
$
1,373

2017
$
773

2018
$
935

2019
$
2,579

2020
$
2,073


2015 Activity
During the first three months of 2015, the Company issued $93 million aggregate principal amount of InterNotes and approximately $3 million of long-term debt (net of $5 million of repayments) was entered into by consolidated variable interest entities.

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 production facility (see Note 11 for additional information).


24


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

Committed and Available Credit Facilities at March 31, 2015
In millions
 
Effective Date
 
Committed Credit

 
Credit Available

 
Maturity Date
 
Interest
Five Year Competitive Advance and Revolving Credit Facility (1)
 
March 2015
 
$
5,000

 
$
5,000

 
March 2020
 
Floating rate
Bilateral Revolving Credit Facility
 
March 2013
 
100

 
100

 
March 2016
 
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
 
 
 
$
6,300

 
$
6,000

 
 
 
 
(