10-Q 1 dow-q3x9302015.htm 10-Q 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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

For the quarterly period ended SEPTEMBER 30, 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
 
September 30, 2015
Common Stock, par value $2.50 per share
 
1,158,614,590 shares




The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 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. 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
 
Nine Months Ended
In millions, except per share amounts (Unaudited)
Sep 30,
2015

 
Sep 30,
2014

 
Sep 30,
2015

 
Sep 30,
2014

Net Sales
$
12,036

 
$
14,405

 
$
37,316

 
$
43,783

Cost of sales
9,349

 
11,776

 
29,030

 
35,853

Research and development expenses
382

 
409

 
1,194

 
1,219

Selling, general and administrative expenses
689

 
753

 
2,214

 
2,283

Amortization of intangibles
105

 
108

 
316

 
330

Restructuring charges

 

 
375

 

Equity in earnings of nonconsolidated affiliates
135

 
229

 
575

 
707

Sundry income (expense) - net
632

 
(23
)
 
1,680

 
31

Interest income
18

 
10

 
46

 
32

Interest expense and amortization of debt discount
233

 
233

 
706

 
721

Income Before Income Taxes
2,063

 
1,342

 
5,782

 
4,147

Provision for income taxes
627

 
378

 
1,630

 
1,147

Net Income
1,436

 
964

 
4,152

 
3,000

Net income attributable to noncontrolling interests
61

 
27

 
79

 
47

Net Income Attributable to The Dow Chemical Company
1,375

 
937

 
4,073

 
2,953

Preferred stock dividends
85

 
85

 
255

 
255

Net Income Available for The Dow Chemical Company Common Stockholders
$
1,290

 
$
852

 
$
3,818

 
$
2,698

 
 
 
 
 
 
 
 
Per Common Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
1.12

 
$
0.72

 
$
3.33

 
$
2.27

Earnings per common share - diluted
$
1.09

 
$
0.71

 
$
3.24

 
$
2.24

 


 
 
 
 
 


Dividends declared per share of common stock
$
0.42

 
$
0.37

 
$
1.26

 
$
1.11

Weighted-average common shares outstanding - basic
1,141.3

 
1,167.2

 
1,138.4

 
1,178.9

Weighted-average common shares outstanding - diluted
1,250.6

 
1,184.1

 
1,248.9

 
1,195.7

 


 
 
 
 
 


Depreciation
$
494

 
$
550

 
$
1,463

 
$
1,592

Capital Expenditures
$
916

 
$
930

 
$
2,817

 
$
2,466

See Notes to the Consolidated Financial Statements.


4


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
 
Nine Months Ended
In millions (Unaudited)
Sep 30,
2015

 
Sep 30,
2014

 
Sep 30,
2015

 
Sep 30,
2014

Net Income
$
1,436

 
$
964

 
$
4,152

 
$
3,000

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Net change in unrealized gains on investments
(54
)
 
(24
)
 
(55
)
 
(15
)
Translation adjustments
(135
)
 
(716
)
 
(755
)
 
(800
)
Adjustments to pension and other postretirement benefit plans
122

 
93

 
370

 
264

Net gains (losses) on cash flow hedging derivative instruments
(108
)
 
5

 
(128
)
 
7

Other comprehensive loss
(175
)
 
(642
)
 
(568
)
 
(544
)
Comprehensive Income
1,261

 
322

 
3,584

 
2,456

Comprehensive income attributable to noncontrolling interests, net of tax
39

 
11

 
48

 
40

Comprehensive Income Attributable to The Dow Chemical Company
$
1,222

 
$
311

 
$
3,536

 
$
2,416

See Notes to the Consolidated Financial Statements.


5


The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited)
Sep 30,
2015

 
Dec 31,
2014

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2015: $259; 2014: $190)
$
7,623

 
$
5,654

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2015: $95; 2014: $110)
4,398

 
4,685

Other
3,769

 
4,687

Inventories
7,822

 
8,101

Deferred income tax assets - current
807

 
812

Other current assets
433

 
328

Total current assets
24,852

 
24,267

Investments
 
 
 
Investment in nonconsolidated affiliates
4,464

 
4,201

Other investments (investments carried at fair value - 2015: $1,936; 2014: $2,009)
2,272

 
2,439

Noncurrent receivables
736

 
620

Total investments
7,472

 
7,260

Property
 
 
 
Property
55,751

 
55,230

Less accumulated depreciation
36,893

 
37,179

Net property (variable interest entities restricted - 2015: $2,502; 2014: $2,726)
18,858

 
18,051

Other Assets
 
 
 
Goodwill
12,261

 
12,632

Other intangible assets (net of accumulated amortization - 2015: $3,742; 2014: $3,737)
3,743

 
3,768

Deferred income tax assets - noncurrent
2,004

 
2,135

Asbestos-related insurance receivables - noncurrent
51

 
62

Deferred charges and other assets
643

 
621

Total other assets
18,702

 
19,218

Total Assets
$
69,884

 
$
68,796

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
426

 
$
551

Long-term debt due within one year
1,850

 
394

Accounts payable:
 
 
 
Trade
3,893

 
4,481

Other
2,195

 
2,299

Income taxes payable
981

 
361

Deferred income tax liabilities - current
119

 
105

Dividends payable
565

 
563

Accrued and other current liabilities
3,176

 
2,839

Total current liabilities
13,205

 
11,593

Long-Term Debt (variable interest entities nonrecourse - 2015: $1,062; 2014: $1,229)
17,462

 
18,838

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities - noncurrent
546

 
622

Pension and other postretirement benefits - noncurrent
9,515

 
10,459

Asbestos-related liabilities - noncurrent
399

 
438

Other noncurrent obligations
3,483

 
3,290

Total other noncurrent liabilities
13,943

 
14,809

Redeemable Noncontrolling Interest
108

 
202

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
3,107

 
3,107

Additional paid-in capital
4,900

 
4,846

Retained earnings
25,411

 
23,045

Accumulated other comprehensive loss
(8,585
)
 
(8,017
)
Unearned ESOP shares
(278
)
 
(325
)
Treasury stock at cost
(4,222
)
 
(4,233
)
The Dow Chemical Company’s stockholders’ equity
24,333

 
22,423

Non-redeemable noncontrolling interests
833

 
931

Total equity
25,166

 
23,354

Total Liabilities and Equity
$
69,884

 
$
68,796

See Notes to the Consolidated Financial Statements.

6


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Nine Months Ended
In millions (Unaudited)
Sep 30,
2015

 
Sep 30,
2014

Operating Activities
 
 
 
Net Income
$
4,152

 
$
3,000

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

 

Depreciation and amortization
1,921

 
2,055

Credit for deferred income tax
(131
)
 
(8
)
Earnings of nonconsolidated affiliates less than dividends received
188

 
120

Pension contributions
(788
)
 
(756
)
Net gain on sales of investments
(33
)
 
(69
)
Net gain on sales of property, businesses and consolidated companies
(1,421
)
 
(36
)
Net gain on sale of ownership interests in nonconsolidated affiliates
(27
)
 

Net gain on step acquisition of a nonconsolidated affiliate
(361
)
 

Restructuring charges
375

 

Excess tax benefits from share-based payment arrangements
(22
)
 
(30
)
Other net loss
44

 
46

Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(163
)
 
(1,108
)
Proceeds from interests in trade accounts receivable conduits
865

 
758

Inventories
188

 
(688
)
Accounts payable
(707
)
 
218

Other assets and liabilities
1,095

 
243

Cash provided by operating activities
5,175

 
3,745

Investing Activities
 
 
 
Capital expenditures
(2,817
)
 
(2,466
)
Proceeds from sale-leaseback of assets

 
417

Proceeds from sales of property, businesses and consolidated companies, net of cash divested
2,179

 
97

Acquisitions of property, businesses and consolidated companies, net of cash acquired
(62
)
 

Purchases of previously leased assets
(40
)
 

Investments in consolidated companies, net of cash acquired

 
(6
)
Investments in and loans to nonconsolidated affiliates
(610
)
 
(47
)
Distributions and loan repayments from nonconsolidated affiliates
13

 
23

Proceeds from sale of ownership interests in nonconsolidated affiliates
33

 

Purchases of investments
(273
)
 
(461
)
Proceeds from sales and maturities of investments
337

 
544

Cash used in investing activities
(1,240
)
 
(1,899
)
Financing Activities
 
 
 
Changes in short-term notes payable
(69
)
 
96

Proceeds from issuance of long-term debt
333

 
2,328

Payments on long-term debt
(175
)
 
(643
)
Purchases of treasury stock
(500
)
 
(3,100
)
Proceeds from issuance of common stock

 
679

Proceeds from sales of common stock
313

 
214

Issuance costs on debt and equity securities
(5
)
 
(19
)
Excess tax benefits from share-based payment arrangements
22

 
30

Contributions from noncontrolling interests
17

 
36

Distributions to noncontrolling interests
(46
)
 
(31
)
Purchases of noncontrolling interests
(42
)
 
(40
)
Dividends paid to stockholders
(1,689
)
 
(1,507
)
Cash used in financing activities
(1,841
)
 
(1,957
)
Effect of Exchange Rate Changes on Cash
(125
)
 
(61
)
Summary
 
 
 
Increase (decrease) in cash and cash equivalents
1,969

 
(172
)
Cash and cash equivalents at beginning of period
5,654

 
5,940

Cash and cash equivalents at end of period
$
7,623

 
$
5,768

See Notes to the Consolidated Financial Statements.

7


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Nine Months Ended
In millions, except per share amounts (Unaudited)
Sep 30,
2015

 
Sep 30,
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

 
53

Balance at end of period
3,107

 
3,107

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

 
3,928

Common stock issued / sold
313

 
840

Stock-based compensation and allocation of ESOP shares
(277
)
 
(20
)
Other
18

 
(7
)
Balance at end of period
4,900

 
4,741

Retained Earnings
 
 
 
Balance at beginning of year
23,045

 
21,407

Net income available for The Dow Chemical Company common stockholders
3,818

 
2,698

Dividends declared on common stock (per share - 2015: $1.26; 2014: $1.11)
(1,436
)
 
(1,299
)
Dividend equivalents on participating securities
(16
)
 
(14
)
Balance at end of period
25,411

 
22,792

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(8,017
)
 
(4,827
)
Other comprehensive loss
(568
)
 
(544
)
Balance at end of period
(8,585
)
 
(5,371
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(325
)
 
(357
)
Shares allocated to ESOP participants
47

 
20

Balance at end of period
(278
)
 
(337
)
Treasury Stock
 
 
 
Balance at beginning of year
(4,233
)
 
(307
)
Purchases
(500
)
 
(3,100
)
Issuances - compensation plans
511

 
206

Balance at end of period
(4,222
)
 
(3,201
)
The Dow Chemical Company’s Stockholders’ Equity
24,333

 
25,731

Non-redeemable Noncontrolling Interests
833

 
980

Total Equity
$
25,166

 
$
26,711

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 September 30, 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. ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which was issued in August 2015, revised the effective date for this ASU to annual and interim periods beginning on or after December 15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public entities. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in ASU 2014-09. The Company is currently evaluating the impact of adopting this guidance.


9


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 2015-05, "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. If 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 a 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.

In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)," which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Further, the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. 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 new guidance should be applied on a retrospective basis to all periods presented. The Company is currently evaluating the impact of adopting this guidance.

In May 2015, the FASB issued ASU 2015-09, "Financial Services--Insurance (Topic 944): Disclosures about Short-Duration Contracts," which amends ASC 944 to expand disclosures that an insurance entity must provide about its short-duration insurance contracts related to the liability for unpaid claims and claim adjustment expenses. This ASU is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out ("LIFO"). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of adopting this guidance.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments," which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers would now recognize measurement-period adjustments during the period in which they determine the amount of the adjustment. This ASU is effective for annual and interim reporting periods beginning after December 15, 2015, including interim periods within those fiscal years, and should be applied prospectively to adjustments for provisional amounts that occur after the effective date with early adoption permitted for financial statements that have not been issued. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.



10


NOTE 3 – RESTRUCTURING
On April 29, 2015, Dow's Board of Directors approved actions to further streamline the organization and optimize the Company’s footprint as a result of the pending separation of a significant portion of Dow’s chlorine value chain. These actions, which will further accelerate Dow’s value growth and productivity targets, will result in a reduction of approximately 1,750 positions across a number of businesses and functions and adjustments to the Company's asset footprint to enhance competitiveness. These actions are expected to be completed during the next two years.

As a result of these actions, the Company recorded pretax restructuring charges of $375 million in the second quarter of 2015 consisting of costs associated with exit or disposal activities of $10 million, severance costs of $196 million and asset write-downs and write-offs of $169 million. The impact of these charges is shown as "Restructuring charges" in the consolidated statements of income and reflected in the Company's segment results as shown in the following table. The Company also recorded $14 million of "Net loss attributable to noncontrolling interests" for noncontrolling interests' portion of the restructuring charges.

2015 Restructuring Charges by Operating Segment
In millions
 
Costs Associated with Exit or Disposal Activities

 
Severance Costs

 
Impairment of Long-Lived Assets, Investments and Other Assets

 
Total

Agricultural Sciences
 
$
6

 
$

 
$
8

 
$
14

Consumer Solutions
 
2

 

 
65

 
67

Infrastructure Solutions
 
2

 

 
25

 
27

Performance Plastics
 

 

 
12

 
12

Corporate
 

 
196

 
59

 
255

Total
 
$
10

 
$
196

 
$
169

 
$
375


Details regarding the components of the 2015 restructuring charges are discussed below:

Costs Associated with Exit and Disposal Activities
The restructuring charges for costs associated with exit and disposal activities, primarily environmental remediation and contract penalties, totaled $10 million in the second quarter of 2015, impacting Agricultural Sciences ($6 million), Consumer Solutions ($2 million) and Infrastructure Solutions ($2 million).

Severance Costs
The restructuring charges included severance of $196 million for the separation of approximately 1,750 employees under the terms of the Company's ongoing benefit arrangements, primarily by June 30, 2017. These costs were charged against Corporate. At September 30, 2015, severance of $57 million was paid, leaving a liability of $139 million for approximately 1,160 employees.

Impairment of Long-Lived Assets, Investments and Other Assets
The restructuring charges related to the write-down and write-off of assets in the second quarter of 2015 totaled $169 million. Details regarding the write-downs and write-offs are as follows:

As a result of changing market dynamics in certain end-use markets, select manufacturing facilities and non-core assets aligned with the Dow Electronic Materials business will be shut down. The assets impacted include certain display films and metalorganic precursors, including a metalorganic materials manufacturing site in North Andover, Massachusetts, and related operations in Taoyuan, Taiwan, as well as certain display films’ manufacturing assets aligned with SKC Haas Display Films Co., Ltd., a majority-owned joint venture located in Cheonan, South Korea. In the second quarter of 2015, the Company recorded a $51 million charge for asset write-downs and write-offs in the Dow Electronic Materials business, which is reflected in the Consumer Solutions segment. The facilities and assets associated with these charges are expected to be shut down primarily by the end of 2016.

The Company will shut down and/or consolidate manufacturing capacity in the Dow Building & Construction business. As a result, the Company recorded a charge of $15 million in the second quarter of 2015 for asset write-offs which is reflected in the Infrastructure Solutions segment. The impacted facilities are expected to be shut down by the end of the third quarter of 2016.

11


A Consumer Care manufacturing facility in Institute, West Virginia, will be shut down in the fourth quarter of 2015. As a result, an asset write-down of $14 million was recorded against the Consumer Solutions segment.

A Dow Packaging and Specialty Plastics plant in Schkopau, Germany, was permanently shut down in the second quarter of 2015, resulting in an asset write-off of $12 million against the Performance Plastics segment.

Select operations in Agricultural Sciences will be shut down, closed or idled by the end of the fourth quarter of 2015, resulting in a pretax charge of $8 million for the write-down of assets.

A decision was made to shut down a number of small manufacturing and administrative facilities to optimize the Company's asset footprint. Write-downs of $14 million were recorded in the second quarter of 2015, impacting Infrastructure Solutions ($10 million) and Corporate ($4 million). These facilities will be shut down no later than the second quarter of 2016.

Due to a change in the Company's strategy to monetize and exit certain Venture Capital portfolio investments, a write-down of $55 million was recorded in the second quarter of 2015, reflected in Corporate.

The following table summarizes the activities related to the Company's 2015 restructuring reserve, which is included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets as shown in the following table.

2015 Restructuring Activities
 
Costs Associated with Exit and Disposal Activities

 
 
 
Impairment of Long-Lived Assets, Investments and Other Assets

 
 
In millions
 
 
Severance Costs

 
 
Total

Restructuring charge recognized in the second quarter of 2015
 
$
10

 
$
196

 
$
169

 
$
375

Charges against the reserve
 

 

 
(169
)
 
(169
)
Cash payments
 

 
(13
)
 

 
(13
)
Reserve balance at June 30, 2015
 
$
10

 
$
183

 
$

 
$
193

Cash payments
 

 
(44
)
 

 
(44
)
Reserve balance at Sep 30, 2015
 
$
10

 
$
139

 
$

 
$
149


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


NOTE 4 – 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 $96 million settled in the first nine months of 2015, approximately $2 million to be paid during the remainder of 2015 and the remaining portion to be paid primarily by the end of the first quarter 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.


12


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, 2015
In millions
 
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 6 for additional information.

Step Acquisition of Univation Technologies, LLC
On May 5, 2015, Univation Technologies, LLC ("Univation"), previously a 50:50 joint venture between Dow and ExxonMobil Chemical Company ("ExxonMobil"), became a wholly owned subsidiary of Dow as a result of ExxonMobil redeeming its entire equity interest in Univation in exchange for certain assets and liabilities of Univation. The Company's equity interest in Univation of $159 million, previously classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets, was remeasured to fair value which resulted in a non-taxable gain of $361 million recognized in the second quarter of 2015, included in "Sundry income (expense) - net" and reflected in the Performance Plastics segment.

The following table summarizes the fair values of Univation's remaining assets and liabilities on May 5, 2015, which are now fully consolidated by Dow:

Assets Acquired and Liabilities Assumed on May 5, 2015
In millions
 
Fair Value of Previously Held Equity Investment
$
520

Fair Value of Assets Acquired
 
Current assets
$
113

Property
56

Other intangible assets (1)
433

Total Assets Acquired
$
602

Fair Value of Liabilities Assumed
 
Current liabilities
$
102

Long-term debt
9

Deferred income tax liabilities - noncurrent
126

Total Liabilities Assumed
$
237

Goodwill (2)
$
141

(1)
Includes $340 million of licenses and intellectual property, $5 million of software, $12 million of trademarks and $76 million of customer-related intangibles. See Note 6 for additional information.
(2)
Net of a $14 million settlement of an affiliate's pre-existing obligations and not deductible for tax purposes.

Beginning in May 2015, Univation's results of operations are fully consolidated in the Company's consolidated statements of income. Prior to May 2015, the Company's 50 percent share of Univation's results of operations was reported as "Equity in earnings of nonconsolidated affiliates" in the consolidated statements of income.


13


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.

SBH Assets and Liabilities Divested on January 30, 2015
 
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
 
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



14


Divestiture of the AgroFresh Business
On July 31, 2015, the Company sold its AgroFresh business, part of the Agricultural Sciences segment, to Boulevard Acquisition Corp., which was subsequently renamed AgroFresh Solutions, Inc. (“AFSI”). The divestiture included trade receivables, inventory, property, customer lists, trademarks and certain intellectual property. The sale was completed for $859 million, net of working capital adjustments, costs to sell and other transaction expenses, with proceeds subject to customary post-closing adjustments. The proceeds included a $635 million cash payment; 17.5 million common shares of AFSI, which represents a 35 percent equity interest, valued at $210 million based on the closing stock price on July 31, 2015, and included in “Investment in nonconsolidated affiliates” in the consolidated balance sheets; and, a receivable for six million warrants to purchase common shares of AFSI, which was valued at $14 million and classified as “Accounts and notes receivable - other” in the consolidated balance sheets. The warrants will be received by the Company within nine months from the closing date. The Company is also eligible to receive contingent consideration of $50 million, subject to certain performance conditions. In addition, the Company has a tax receivable agreement with AFSI, where AFSI is obligated to share with Dow potential tax savings associated with the purchase of the AgroFresh business. The Company has not recognized either of these potential future payments as proceeds. See Notes 7 and 13 for further information on the Company’s equity interest and variable interests in AFSI.

The Company recognized a pretax gain of $624 million on the sale in the third quarter of 2015, of which $128 million relates to the Company's retained equity interest in AFSI. The pretax gain was included in "Sundry income (expense) - net" and reflected in the Agricultural Sciences segment.

AgroFresh Assets and Liabilities Divested on July 31, 2015
 
In millions
Current assets
$
40

Inventories
18

Property
5

Goodwill
101

Other intangible assets
82

Deferred charges and other assets
1

Total assets divested
$
247

Current liabilities
$
8

Other noncurrent obligations
4

Total liabilities divested
$
12

Net carrying value divested
$
235


The Company evaluated the divestitures of SBH, ANGUS and AgroFresh 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 5 – INVENTORIES
The following table provides a breakdown of inventories:
 
Inventories
In millions
Sep 30, 2015


Dec 31, 2014

Finished goods
$
4,390

 
$
4,547

Work in process
1,771

 
1,905

Raw materials
837

 
797

Supplies
824

 
852

Total inventories
$
7,822

 
$
8,101

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $100 million at September 30, 2015 and $569 million at December 31, 2014.



15


NOTE 6 – 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
)
Sale of an Agricultural Sciences product line
(10
)
 

 

 

 

 
(10
)
Divestiture of AgroFresh
(101
)
 

 

 

 

 
(101
)
Goodwill related to the Coodetec acquisition
31

 

 

 

 

 
31

Goodwill related to the Univation step acquisition

 

 

 

 
141

 
141

Foreign currency impact

 
(11
)
 
(51
)
 
(8
)
 
(25
)
 
(95
)
Net goodwill at Sep 30, 2015
$
1,478

 
$
4,378

 
$
4,400

 
$
464

 
$
1,541

 
$
12,261


The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At September 30, 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
$
1,967

 
$
(1,075
)
 
$
892

 
$
1,777

 
$
(1,060
)
 
$
717

Patents
121

 
(109
)
 
12

 
122

 
(108
)
 
14

Software
1,257

 
(622
)
 
635

 
1,287

 
(648
)
 
639

Trademarks
689

 
(445
)
 
244

 
685

 
(409
)
 
276

Customer-related
3,197

 
(1,343
)
 
1,854

 
3,443

 
(1,366
)
 
2,077

Other
175

 
(148
)
 
27

 
158

 
(146
)
 
12

Total other intangible assets, finite lives
$
7,406

 
$
(3,742
)
 
$
3,664

 
$
7,472

 
$
(3,737
)
 
$
3,735

IPR&D (1), indefinite lives
79

 

 
79

 
33

 

 
33

Total other intangible assets
$
7,485

 
$
(3,742
)
 
$
3,743

 
$
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 4 for additional information on this acquisition.

Intangible assets acquired as part of the Univation step acquisition are presented in the table below. See Note 4 for additional information on this acquisition.

Univation Intangible Assets
Gross
Carrying
Amount

Weighted-average Amortization Period
In millions
Intangible assets with finite lives:
 
 
  Licenses and intellectual property
$
340

10 years
  Software
5

5 years
  Trademarks
12

18 years
  Customer-related
76

10 years
Total
$
433

10 years


16


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

Amortization Expense
Three Months Ended
 
Nine Months Ended
In millions
Sep 30, 2015

 
Sep 30, 2014

 
Sep 30, 2015

 
Sep 30, 2014

Other intangible assets, excluding software
$
105

 
$
108

 
$
316

 
$
330

Software, included in “Cost of sales”
$
19

 
$
18

 
$
54

 
$
51


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

Estimated Amortization Expense
In millions
2015
$
500

2016
$
487

2017
$
469

2018
$
453

2019
$
382

2020
$
358



NOTE 7 – NONCONSOLIDATED AFFILIATES
On May 5, 2015, Univation, previously a 50:50 joint venture between Dow and ExxonMobil Chemical Company, became a wholly owned subsidiary of Dow. As a result, Univation is now owned 100 percent by Dow and the Company's equity interest in Univation, which was previously classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets, was remeasured to fair value. See Note 4 for additional information on this transaction, including details on the fair value of assets acquired and liabilities assumed.

At December 31, 2014, the Company had a $193 million note receivable with Sadara Chemical Company ("Sadara"), included in "Noncurrent receivables" in the consolidated balance sheets, that was converted to equity in the first quarter of 2015 and reclassified to "Investment in nonconsolidated affiliates" in the consolidated balance sheets. During the first nine months of 2015, the Company loaned an additional $560 million to Sadara, of which $280 million has been converted to equity. Dow continues to maintain a 35 percent ownership interest in Sadara.

On July 31, 2015, the Company sold its AgroFresh business to Boulevard Acquisition Corp., which was subsequently renamed AgroFresh Solutions, Inc. ("AFSI"). Proceeds received on the divestiture of AgroFresh included 17.5 million common shares of AFSI, which was valued at $210 million and represents a 35 percent ownership interest in AFSI. The Company has accounted for its ownership interest in AFSI using the equity method of accounting with the Company's investment in AFSI classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets and the Company's share of AFSI's results of operations included in "Equity in earnings of nonconsolidated affiliates" in the consolidated statements of income, aligned with the Agricultural Sciences segment. See Note 4 for further information on this transaction.



17


NOTE 8 – 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 September 30, 2015 and December 31, 2014:
 
Fair Value of Financial Instruments
 
At September 30, 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)
$
550

 
$
29

 
$
(1
)
 
$
578

 
$
559

 
$
26

 
$
(1
)
 
$
584

Corporate bonds
647

 
35

 
(6
)
 
676

 
654

 
45

 
(2
)
 
697

Total debt securities
$
1,197

 
$
64

 
$
(7
)
 
$
1,254

 
$
1,213

 
$
71

 
$
(3
)
 
$
1,281

Equity securities
594

 
146

 
(58
)
 
682

 
566

 
177

 
(15
)
 
728

Total marketable securities
$
1,791

 
$
210

 
$
(65
)
 
$
1,936

 
$
1,779

 
$
248

 
$
(18
)
 
$
2,009

Long-term debt including debt due within one year (3)
$
(19,312
)
 
$
346

 
$
(1,876
)
 
$
(20,842
)
 
$
(19,232
)
 
$
100

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

 
$

 
$
(10
)
 
$
(10
)
 
$

 
$

 
$
(12
)
 
$
(12
)
Commodities (4)
$

 
$
4

 
$
(240
)
 
$
(236
)
 
$

 
$
3

 
$
(81
)
 
$
(78
)
Foreign currency
$

 
$
36

 
$
(36
)
 
$

 
$

 
$
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 $19 million at September 30, 2015 and $21 million at December 31, 2014.
(4)
Presented net of cash collateral, as disclosed in Note 9.

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 nine-month periods ended September 30, 2015 and September 30, 2014:

Investing Results
Nine Months Ended
In millions
Sep 30,
2015

 
Sep 30,
2014

Proceeds from sales of available-for-sale securities
$
279

 
$
489

Gross realized gains
$
39

 
$
75

Gross realized losses
$
(5
)
 
$
(2
)
The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities
at September 30, 2015
In millions
Amortized Cost

 
Fair Value

Within one year
$
25

 
$
25

One to five years
478

 
497

Six to ten years
495

 
515

After ten years
199

 
217

Total
$
1,197

 
$
1,254


At September 30, 2015, the Company had $3,465 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 September 30, 2015, the Company had investments in money market funds of $971 million classified as cash equivalents ($1,655 million at December 31, 2014).

18


The aggregate cost of the Company’s cost method investments totaled $161 million at September 30, 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. During the second quarter of 2015, a write-down of $55 million was recorded as part of the 2015 restructuring charge due to a change in the Company's strategy to monetize and exit certain Venture Capital portfolio investments. See Note 3 for more information on the Company's restructuring activities. The Company's impairment analysis resulted in additional reductions in the cost basis of these investments of less than $1 million for the nine-month period ended September 30, 2015 ($6 million reduction in the nine-month period ended September 30, 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. During the first nine months of 2015, the Company entered into and subsequently terminated an interest rate swap designated as a fair value hedge of an underlying fixed rate debt obligation 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 September 30, 2015 and December 31, 2014, the Company had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations.

The following table provides the fair value and gross balance sheet classification of derivative instruments at September 30, 2015 and December 31, 2014:
 
Fair Value of Derivative Instruments
In millions
Balance Sheet Classification
 
Sep 30,
2015

 
Dec 31,
2014

Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Commodities
Other current assets
 
$
1

 
$
4

Foreign currency
Accounts and notes receivable – Other
 
1

 
25

Total derivatives designated as hedges
 
 
$
2

 
$
29

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

 
$
2

Foreign currency
Accounts and notes receivable – Other
 
93

 
91

Total derivatives not designated as hedges
 
 
$
97

 
$
93

Total asset derivatives
 
 
$
99

 
$
122

Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Accounts payable – Other
 
$
10

 
$
12

Commodities
Accounts payable – Other
 
29

 
58

Commodities
Other noncurrent obligations
 
214

 
48

Foreign currency
Accounts payable – Other
 
8

 

Total derivatives designated as hedges
 
 
$
261

 
$
118

Derivatives not designated as hedges:
 
 
 
 
 
Commodities
Accounts payable – Other
 
$
3

 
$
2

Foreign currency
Accounts payable – Other
 
86

 
161

Total derivatives not designated as hedges
 
 
$
89

 
$
163

Total liability derivatives
 
 
$
350

 
$
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 $2 million loss for interest rate contracts, a $37 million loss for commodity contracts and a $1 million loss for foreign currency contracts.



19


NOTE 9 – 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 September 30, 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)
$

 
$
4,436

 
$

 
$

 
$
4,436

Interests in trade accounts receivable conduits (3)

 

 
1,019

 

 
1,019

Equity securities (4)
639

 
43

 

 

 
682

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
578

 

 

 
578

Corporate bonds

 
676

 

 

 
676

Derivatives relating to: (6)

 

 

 

 
 
Commodities
2

 
3

 

 
(1
)
 
4

Foreign currency

 
94

 

 
(58
)
 
36

Total assets at fair value
$
641

 
$
5,830

 
$
1,019

 
$
(59
)
 
$
7,431

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

 
$
20,842

 
$

 
$

 
$
20,842

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
10

 

 

 
10

Commodities
5

 
241

 

 
(6
)
 
240

Foreign currency

 
94

 

 
(58
)
 
36

Total liabilities at fair value
$
5

 
$
21,187

 
$

 
$
(64
)

$
21,128

(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 11 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 8 for the classification of derivatives in the consolidated balance sheets.
(7)
See Note 8 for information on fair value measurements of long-term debt.

20


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 11 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 8 for the classification of derivatives in the consolidated balance sheets.
(7)
See Note 8 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 $19 million at September 30, 2015 ($29 million at December 31, 2014).
The following table summarizes the changes in fair value measurements using Level 3 inputs for the three- and nine-month periods ended September 30, 2015 and September 30, 2014:

Fair Value Measurements Using Level 3 Inputs
Three Months Ended
 
Nine Months Ended
Interests Held in Trade Receivable Conduits (1)
In millions
Sep 30,
2015

 
Sep 30,
2014

 
Sep 30,
2015

 
Sep 30,
2014

Balance at beginning of period
$
1,056

 
$
1,297

 
$
1,328

 
$
1,227

Gain (loss) included in earnings (2)

 
1

 

 
(1
)
Purchases
115

 
341

 
556

 
960

Settlements
(152
)
 
(211
)
 
(865
)
 
(758
)
Balance at end of period
$
1,019

 
$
1,428

 
$
1,019

 
$
1,428

(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.






21


Fair Value Measurements on a Nonrecurring Basis
The following table summarizes the basis used to measure certain assets and liabilities at fair value on a nonrecurring basis in the consolidated balance sheets at September 30, 2015:

Basis of Fair Value Measurements
on a Nonrecurring Basis
at September 30, 2015

 
Significant
Other
Unobservable
Inputs

 
Total
Losses

In millions
 
(Level 3)

 
2015

Assets at fair value:
 
 
 
 
Long-lived assets, investments and other assets
 
$
24

 
$
(169
)

As part of the 2015 restructuring plan that was approved on April 29, 2015, the Company will shut down a number of manufacturing facilities. The manufacturing assets and facilities associated with this plan, classified as Level 3 measurements, were written down to $7 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the investment. In addition, a change in the Company's strategy to monetize and exit certain Venture Capital portfolio investments resulted in the write-down of certain investments. These investments, also classified as a Level 3 measurement, were valued at $17 million using unobservable inputs, including assumptions a market participant would use to measure the fair value of the investment. These impairment charges, totaling $169 million, are included in "Restructuring charges" in the consolidated statements of income. See Note 3 for additional information on the Company's 2015 restructuring program.


NOTE 10 – COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability ha