10-Q 1 dow-q2x6302016.htm 10-Q Document

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

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

For the quarterly period ended JUNE 30, 2016

or

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

For the transition period from __________to__________

Commission File Number: 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)

Delaware
 
38-1285128
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 989-636-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ   Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
 
þ
Accelerated filer
 
¨
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨  Yes    þ No

 
 
Outstanding at
Class
 
June 30, 2016
Common Stock, par value $2.50 per share
 
1,126,830,305 shares




The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 2016
TABLE OF CONTENTS

 
 
PAGE
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


2


The Dow Chemical Company and Subsidiaries

Throughout this Quarterly Report on Form 10-Q, except as otherwise noted 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 “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 effect an all-stock, merger of equals strategic combination with E. I. du Pont de Nemours and Company ("DuPont") resulting in a new combined company ("DowDuPont") and then, subsequent to the merger, Dow and DuPont intend to pursue the separation of DowDuPont's agriculture business, specialty products business and material science business through one or more tax-efficient transactions (collectively, the "Transaction"). Many factors could cause actual results to differ materially from these forward-looking statements with respect to the Transaction, including (i) the completion of the proposed Transaction on anticipated terms and timing, including obtaining 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 and other conditions to the completion of the merger, (ii) the ability of Dow and DuPont to integrate the business successfully and to achieve anticipated synergies, risks and costs and pursuit and/or implementation of the potential separation, including anticipated timing, and any changes to the configuration of businesses included in the potential separation, if implemented, (iii) potential litigation relating to the proposed Transaction that could be instituted against Dow, DuPont or their respective directors, (iv) the risk that disruptions from the proposed Transaction will harm Dow’s or DuPont’s business, including current plans and operations, (v) the ability of Dow or DuPont to retain and hire key personnel, (vi) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the merger, (vii) uncertainty as to the long-term value of DowDuPont common stock, (viii) continued availability of capital and financing and rating agency actions, (ix) legislative, regulatory and economic developments, (x) potential business uncertainty during the pendency of the merger that could affect Dow’s and/or DuPont’s economic performance, (xi) certain contractual restrictions that could be imposed on Dow and/or DuPont during the pendency of the merger that might impact Dow’s or DuPont’s ability to pursue certain business opportunities or strategic transactions and (xii) unpredictability and severity of catastrophic events, including, but not limited to, acts of terrorism or outbreak of war or hostilities, as well as management’s response to any of the aforementioned factors. These risks, as well as other risks associated with the proposed merger, are more fully discussed in the joint proxy statement/prospectus that is included in the registration statement on Form S-4 (File No. 333-209869) that was filed with the U.S. Securities and Exchange Commission in connection with the proposed merger. While the list of factors presented here is, and the list of factors presented in the registration statement on Form S-4 are, 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 DuPont’s consolidated financial condition, results of operations, credit rating or liquidity. Neither Dow nor DuPont assumes any obligation to publicly provide revisions or updates to any forward-looking statements, whether as a result of new information, future developments or otherwise, should circumstances change, except as otherwise required by securities and other applicable laws.

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” in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2015. 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
 
Six Months Ended
In millions, except per share amounts (Unaudited)
Jun 30,
2016

 
Jun 30,
2015

 
Jun 30,
2016

 
Jun 30,
2015

Net Sales
$
11,952

 
$
12,910

 
$
22,655

 
$
25,280

Cost of sales
9,275

 
10,146

 
17,226

 
19,681

Research and development expenses
399

 
429

 
760

 
812

Selling, general and administrative expenses
787

 
773

 
1,529

 
1,525

Amortization of intangibles
122

 
109

 
225

 
211

Restructuring charges
454

 
375

 
452

 
375

Equity in earnings of nonconsolidated affiliates
82

 
272

 
121

 
440

Sundry income (expense) - net
2,550

 
385

 
1,309

 
1,048

Interest income
18

 
11

 
38

 
28

Interest expense and amortization of debt discount
208

 
232

 
409

 
473

Income Before Income Taxes
3,357

 
1,514

 
3,522

 
3,719

Provision for income taxes
130

 
317

 
20

 
1,003

Net Income
3,227

 
1,197

 
3,502

 
2,716

Net income (loss) attributable to noncontrolling interests
19

 
(23
)
 
40

 
18

Net Income Attributable to The Dow Chemical Company
3,208

 
1,220

 
3,462

 
2,698

Preferred stock dividends
85

 
85

 
170

 
170

Net Income Available for The Dow Chemical Company Common Stockholders
$
3,123

 
$
1,135

 
$
3,292

 
$
2,528

 
 
 
 
 
 
 
 
Per Common Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
2.79

 
$
0.99

 
$
2.96

 
$
2.21

Earnings per common share - diluted
$
2.61

 
$
0.97

 
$
2.83

 
$
2.15

 


 
 
 
 
 


Dividends declared per share of common stock
$
0.46

 
$
0.42

 
$
0.92

 
$
0.84

Weighted-average common shares outstanding - basic
1,111.1

 
1,138.1

 
1,107.0

 
1,136.9

Weighted-average common shares outstanding - diluted
1,222.8

 
1,249.4

 
1,218.5

 
1,248.0

 


 
 
 
 
 


Depreciation
$
511

 
$
483

 
$
967

 
$
969

Capital Expenditures
$
997

 
$
998

 
$
1,817

 
$
1,901

See Notes to the Consolidated Financial Statements.


4


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2016

 
Jun 30,
2015

 
Jun 30,
2016

 
Jun 30,
2015

Net Income
$
3,227

 
$
1,197

 
$
3,502

 
$
2,716

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Net change in unrealized gains on investments
15

 
1

 
34

 
(1
)
Translation adjustments
(86
)
 
317

 
242

 
(620
)
Adjustments to pension and other postretirement benefit plans
455

 
123

 
547

 
248

Net gains (losses) on cash flow hedging derivative instruments
33

 
(11
)
 
(1
)
 
(20
)
Other comprehensive income (loss)
417

 
430

 
822

 
(393
)
Comprehensive Income
3,644

 
1,627

 
4,324

 
2,323

Comprehensive income (loss) attributable to noncontrolling interests, net of tax
31

 
(32
)
 
68

 
9

Comprehensive Income Attributable to The Dow Chemical Company
$
3,613

 
$
1,659

 
$
4,256

 
$
2,314

See Notes to the Consolidated Financial Statements.


5


The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited)
Jun 30,
2016

 
Dec 31,
2015

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2016: $109; 2015: $158)
$
7,309

 
$
8,577

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2016: $106; 2015: $94)
5,171

 
4,078

Other
4,102

 
3,768

Inventories
8,212

 
6,871

Other current assets
1,516

 
647

Total current assets
26,310

 
23,941

Investments
 
 
 
Investment in nonconsolidated affiliates
3,576

 
3,958

Other investments (investments carried at fair value - 2016: $1,960; 2015: $1,866)
2,985

 
2,923

Noncurrent receivables
753

 
765

Total investments
7,314

 
7,646

Property
 
 
 
Property
56,700

 
50,802

Less accumulated depreciation
33,917

 
32,948

Net property (variable interest entities restricted - 2016: $1,054; 2015: $1,717)
22,783

 
17,854

Other Assets
 
 
 
Goodwill
15,442

 
12,154

Other intangible assets (net of accumulated amortization - 2016: $4,009; 2015: $3,770)
6,463

 
3,617

Deferred income tax assets
2,558

 
2,140

Asbestos-related insurance receivables - noncurrent
39

 
51

Deferred charges and other assets
615

 
535

Total other assets
25,117

 
18,497

Total Assets
$
81,524

 
$
67,938

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
235

 
$
454

Long-term debt due within one year
259

 
541

Accounts payable:
 
 
 
Trade
4,441

 
3,577

Other
2,607

 
2,287

Income taxes payable
625

 
452

Dividends payable
597

 
592

Accrued and other current liabilities
4,117

 
3,212

Total current liabilities
12,881

 
11,115

Long-Term Debt (variable interest entities nonrecourse - 2016: $393; 2015: $487)
20,852

 
16,215

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities
982

 
587

Pension and other postretirement benefits - noncurrent
9,894

 
9,119

Asbestos-related liabilities - noncurrent
357

 
387

Other noncurrent obligations
6,324

 
4,332

Total other noncurrent liabilities
17,557

 
14,425

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
3,107

 
3,107

Additional paid-in capital
4,890

 
4,936

Retained earnings
30,680

 
28,425

Accumulated other comprehensive loss
(7,845
)
 
(8,667
)
Unearned ESOP shares
(232
)
 
(272
)
Treasury stock at cost
(5,664
)
 
(6,155
)
The Dow Chemical Company’s stockholders’ equity
28,936

 
25,374

Non-redeemable noncontrolling interests
1,298

 
809

Total equity
30,234

 
26,183

Total Liabilities and Equity
$
81,524

 
$
67,938

See Notes to the Consolidated Financial Statements.

6


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2016

 
Jun 30,
2015

Operating Activities
 
 
 
Net Income
$
3,502

 
$
2,716

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

 

Depreciation and amortization
1,287

 
1,276

Credit for deferred income tax
(993
)
 
(69
)
Earnings of nonconsolidated affiliates less than dividends received
388

 
187

Pension contributions
(506
)
 
(725
)
Net gain on sales of investments
(48
)
 
(28
)
Net gain on sales of property, businesses and consolidated companies
(74
)
 
(734
)
Net gain on sale of ownership interests in nonconsolidated affiliates

 
(27
)
Net gain on step acquisition of nonconsolidated affiliates
(2,445
)
 
(361
)
Restructuring charges
452

 
375

Excess tax benefits from share-based payment arrangements
(32
)
 
(21
)
Other net loss
62

 
15

Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(1,320
)
 
(699
)
Proceeds from interests in trade accounts receivable conduits
753

 
713

Inventories
(238
)
 
(29
)
Accounts payable
433

 
(110
)
Other assets and liabilities
1,049

 
185

Cash provided by operating activities
2,270

 
2,664

Investing Activities
 
 
 
Capital expenditures
(1,817
)
 
(1,901
)
Construction of assets pending sale / leaseback
(12
)
 

Proceeds from sale / leaseback of assets
32

 

Payment into escrow account
(835
)
 

Proceeds from sales of property, businesses and consolidated companies, net of cash divested
177

 
1,471

Acquisitions of property, businesses and consolidated companies, net of cash acquired
(224
)
 
(54
)
Cash acquired in step acquisition of nonconsolidated affiliate
1,050

 

Investments in and loans to nonconsolidated affiliates
(569
)
 
(383
)
Distributions and loan repayments from nonconsolidated affiliates
8

 
11

Proceeds from sale of ownership interests in nonconsolidated affiliates

 
33

Purchases of investments
(301
)
 
(177
)
Proceeds from sales and maturities of investments
428

 
238

Cash used in investing activities
(2,063
)
 
(762
)
Financing Activities
 
 
 
Changes in short-term notes payable
(66
)
 
(62
)
Proceeds from issuance of long-term debt
30

 
211

Payments on long-term debt
(459
)
 
(108
)
Purchases of treasury stock

 
(500
)
Proceeds from sales of common stock
234

 
294

Transaction financing, debt issuance and other costs
(2
)
 
(3
)
Excess tax benefits from share-based payment arrangements
32

 
21

Contributions from noncontrolling interests

 
16

Distributions to noncontrolling interests
(66
)
 
(24
)
Dividends paid to stockholders
(1,185
)
 
(1,125
)
Cash used in financing activities
(1,482
)
 
(1,280
)
Effect of Exchange Rate Changes on Cash
7

 
(52
)
Summary
 
 
 
Increase (decrease) in cash and cash equivalents
(1,268
)
 
570

Cash and cash equivalents at beginning of period
8,577

 
5,654

Cash and cash equivalents at end of period
$
7,309

 
$
6,224

See Notes to the Consolidated Financial Statements.

7


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Six Months Ended
In millions, except per share amounts (Unaudited)
Jun 30,
2016

 
Jun 30,
2015

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

 
$
4,000

Common Stock
 
 
 
Balance at beginning of year and end of period
3,107

 
3,107

Additional Paid-in Capital
 
 
 
Balance at beginning of year
4,936

 
4,846

Common stock issued / sold
234

 
294

Stock-based compensation and allocation of ESOP shares
(280
)
 
(301
)
Balance at end of period
4,890

 
4,839

Retained Earnings
 
 
 
Balance at beginning of year
28,425

 
23,045

Net income available for The Dow Chemical Company common stockholders
3,292

 
2,528

Dividends declared on common stock (per share - 2016: $0.92; 2015: $0.84)
(1,021
)
 
(956
)
Dividend equivalents on participating securities
(16
)
 
(11
)
Balance at end of period
30,680

 
24,606

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(8,667
)
 
(8,017
)
Other comprehensive income (loss)
822

 
(393
)
Balance at end of period
(7,845
)
 
(8,410
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(272
)
 
(325
)
Shares allocated to ESOP participants
40

 
41

Balance at end of period
(232
)
 
(284
)
Treasury Stock
 
 
 
Balance at beginning of year
(6,155
)
 
(4,233
)
Purchases

 
(500
)
Issuances - compensation plans
491

 
487

Balance at end of period
(5,664
)
 
(4,246
)
The Dow Chemical Company’s Stockholders’ Equity
28,936

 
23,612

Non-redeemable Noncontrolling Interests
1,298

 
839

Total Equity
$
30,234

 
$
24,451

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
Basis of Presentation
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, 2015.

Updated Significant Accounting Policy
Foreign Currency Translation
The local currency has been primarily used as the functional currency throughout the world. Translation gains and losses of those operations that use local currency as the functional currency are included in the consolidated balance sheets in "Accumulated other comprehensive loss" ("AOCL"). For certain subsidiaries, the U.S. dollar is used as the functional currency. This occurs when the subsidiary operates in an economic environment where the products produced and sold are tied to U.S. dollar-denominated markets, or when the foreign subsidiary operates in a hyper-inflationary environment. Where the U.S. dollar is used as the functional currency, foreign currency translation gains and losses are reflected in income.

9


Adoption of Accounting Standards Update 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes"
In the first quarter of 2016, the Company early adopted Accounting Standards Update ("ASU") 2015-17. The Company elected to apply the new guidance on a retrospective basis and, as a result, changes have been made to the presentation of deferred income tax assets and liabilities in the consolidated balance sheets at December 31, 2015. See Note 2 for additional information. In addition, a change was made to the prior year consolidated balance sheets to reclassify prepaid tax assets of $293 million to "Other current assets." A summary of the changes made to the consolidated balance sheets at December 31, 2015, is included in the following table:

Summary of Changes to the Consolidated Balance Sheets at December 31, 2015
In millions
As Filed

 
Updated

Deferred income tax assets - current
$
827

 
$

Other current assets
$
354

 
$
647

Total current assets
$
24,475

 
$
23,941

Deferred income tax assets - noncurrent
$
1,694

 
$
2,140

Total other assets
$
18,051

 
$
18,497

Total Assets
$
68,026

 
$
67,938

Deferred income tax liabilities - current
$
100

 
$

Total current liabilities
$
11,215

 
$
11,115

Deferred income tax liabilities - noncurrent
$
575

 
$
587

Total other noncurrent liabilities
$
14,413

 
$
14,425

Total Liabilities and Equity
$
68,026

 
$
67,938



NOTE 2 – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In the first quarter of 2016, the Company adopted 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 Financial Accounting Standards Board ("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 had to re-evaluate their consolidation conclusions as well as disclosure requirements. This ASU was effective for annual periods beginning after December 15, 2015, and early adoption was permitted, including any interim period. The adoption of this guidance did not have an impact on the consolidated financial statements.

In the first quarter of 2016, the Company adopted 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 was effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption was permitted. The adoption of this guidance did not have an impact on the consolidated financial statements.

In the first quarter of 2016, the Company early adopted ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, and may be applied prospectively or retrospectively. The change is reflected in "Deferred income tax assets" and "Deferred income tax liabilities" in the consolidated balance sheets on a retrospective basis and did not have a material impact on the consolidated financial statements. See Note 1 for additional information.

Accounting Guidance Issued But Not Adopted as of June 30, 2016
In May 2014, the FASB issued 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

10


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.

In May 2014, the FASB and International Accounting Standards Board formed The Joint Transition Resource Group for Revenue Recognition ("TRG"), consisting of financial statement preparers, auditors and users, to seek feedback on potential issues related to the implementation of the new revenue standard. As a result of feedback from the TRG, the FASB has issued additional guidance to provide clarification, implementation guidance and practical expedients to address some of the challenges of implementation. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which is an amendment on assessing whether an entity is a principal or an agent in a revenue transaction. This amendment addresses issues to clarify the principal versus agent assessment and lead to more consistent application. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," which contains amendments to the new revenue recognition standard on identifying performance obligations and accounting for licenses of intellectual property. The amendments related to identifying performance obligations clarify when a promised good or service is separately identifiable and allows entities to disregard items that are immaterial in the context of a contract. The licensing implementation amendments clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether revenue is recognized over time or at a point in time. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," which provides clarity and implementation guidance on assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The new standards have the same effective date and transition requirements as ASU 2014-09. 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, first-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 January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognize assets and liabilities for leases with lease terms of more than twelve months and recognition, presentation and measurement in the financial statements will depend on its classification as a finance or operating lease. In addition, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. Lessor accounting remains largely unchanged from current U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, using a modified retrospective approach, and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for share-based payment awards to employees, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and

11


classification in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted in any annual or interim period for which financial statements have not yet been issued, and all amendments in the ASU that apply must be adopted in the same period. The Company is currently evaluating the impact of adopting this guidance.


NOTE 3 – RESTRUCTURING
2016 Restructuring
On June 27, 2016, the Board of Directors of the Company approved a restructuring plan that incorporates actions related to the recent ownership restructure of Dow Corning Corporation ("Dow Corning"). These actions, aligned with Dow’s value growth and synergy targets, will result in a global workforce reduction of approximately 2,500 positions, with most of these positions resulting from synergies related to the Dow Corning transaction. 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 $449 million in the second quarter of 2016 consisting of severance charges of $268 million, asset write-downs and write-offs of $153 million and costs associated with exit and disposal activities of $28 million. The impact of these charges is shown as "Restructuring charges" in the consolidated statements of income and reflected in the Company's segments results as shown in the following table:

2016 Restructuring Charges by
Operating Segment
 
Severance Costs

 
Impairment of Long-Lived Assets and Other Assets

 
Costs Associated with Exit or Disposal Activities

 
Total

In millions
Consumer Solutions
 
$

 
$
23

 
$
5

 
$
28

Infrastructure Solutions
 

 
74

 
23

 
97

Performance Plastics
 

 
10

 

 
10

Corporate
 
268

 
46

 

 
314

Total
 
$
268

 
$
153

 
$
28

 
$
449


Details regarding the components of the 2Q16 restructuring charge are discussed below:

Severance Costs
The restructuring charge includes severance of $268 million for the separation of approximately 2,500 employees under the terms of the Company's ongoing benefit arrangements, primarily by June 30, 2018. These costs were charged against Corporate.

Impairment of Long-Lived Assets and Other Assets
The restructuring charges related to the write-down and write-off of assets in the second quarter of 2016 total $153 million. Details regarding the write-downs and write-offs are as follows:

In the second quarter of 2016, the Company recorded a charge of $70 million for asset write-downs and write-offs including the shutdown of an Energy & Water Solutions solar manufacturing facility in Midland, Michigan; the write-down of a solar facility in Milpitas, California; and, the write-off of capital projects and in-process research and development. The charge was reflected in the Infrastructure Solutions operating segment. The Midland facility is expected to be shut down by the end of the fourth quarter of 2016.

To enhance competitiveness and streamline costs associated with the ownership restructure of Dow Corning, silicones manufacturing facilities in Yamakita, Japan, and Greensboro, North Carolina, will be shut down by the end of the second quarter of 2018 and an idled facility was shut down in the second quarter of 2016. As a result, in the second quarter of 2016 the Company recorded a charge of $25 million reflected in Consumer Solutions ($21 million) and Infrastructure Solutions ($4 million).

The closure and/or consolidation of certain corporate facilities and data centers. Write-downs of $25 million were recorded in the second quarter of 2016, impacting Corporate. These facilities will be shut down no later than the end of the second quarter of 2018.


12


A decision was made to shut down a small manufacturing facility and to write-down other non-manufacturing assets, including a cost method investment and aircraft. Write-downs of $33 million were recorded in the second quarter of 2016, impacting Consumer Solutions ($2 million), Performance Plastics ($10 million) and Corporate ($21 million). The manufacturing facility was shut down in the second quarter of 2016.

Costs Associated with Exit and Disposal Activities
The restructuring charges for cost associated with exit and disposal activities, including contract cancellation penalties, environmental remediation and warranty liabilities, totaled $28 million in the second quarter of 2016, impacting Consumer Solutions ($5 million) and Infrastructure Solutions ($23 million).

The following table summarizes the activities related to the Company's 2016 restructuring reserve, which is included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets:

2016 Restructuring Activities
 
Severance Costs

 
Impairment of Long-Lived Assets and Other Assets

 
Costs Associated with Exit and Disposal Activities

 
Total

In millions
Restructuring charge recognized in the second quarter of 2016
 
$
268

 
$
153

 
$
28

 
$
449

Charges against the reserve
 

 
(153
)
 

 
(153
)
Reserve balance at June 30, 2016
 
$
268

 
$

 
$
28

 
$
296


2015 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 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 primarily by March 31, 2017.

As a result of the 2015 restructuring activities, the Company recorded pretax restructuring charges of $375 million in the second quarter of 2015 consisting of costs associated with exit and disposal activities of $10 million, severance costs of $196 million and asset write-downs and write-offs of $169 million. In the fourth quarter of 2015, the Company recorded restructuring charge adjustments of $40 million, including severance costs of $39 million for the separation of approximately 500 additional positions as part of the Company's effort to streamline the organization, and $1 million of costs associated with exit and disposal activities.

Severance Costs
The restructuring charges recorded in the second quarter of 2015 included severance of $196 million for the separation of approximately 1,750 employees under the terms of the Company's ongoing benefit arrangements. In the fourth quarter of 2015, the Company recorded an additional charge of $39 million related to the separation of approximately 500 additional employees, primarily by March 31, 2017. These costs were charged against Corporate. At December 31, 2015, severance of $92 million was paid, leaving a liability of $143 million for approximately 1,250 employees. In the first six months of 2016, severance of $55 million was paid, leaving a liability of $88 million for approximately 650 employees at June 30, 2016.

Adjustments to the 2015 Restructuring Charge
During the first quarter of 2016, the Company recorded a favorable adjustment to the 2015 restructuring charge related to the impairment of long-lived assets of $2 million, included in "Restructuring charges" in the consolidated statements of income and reflected in the Infrastructure Solutions segment.

During the second quarter of 2016, the Company recorded an unfavorable adjustment to the 2015 restructuring charge related to additional accruals for exit and disposal activities of $5 million, included in "Restructuring charges" in the consolidated statements of income and reflected in Agricultural Sciences ($4 million) and Consumer Solutions ($1 million).


13


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

2015 Restructuring Activities
 
Costs Associated with Exit and Disposal Activities

 
 
 
 

In millions
 
 
Severance Costs

 
Total

Reserve balance at Dec 31, 2015
 
$
10

 
$
143

 
$
153

Cash payments
 
(1
)
 
(30
)
 
(31
)
Reserve balance at Mar 31, 2016
 
$
9

 
$
113

 
$
122

Adjustments to the reserve
 
5

 

 
5

Cash payments
 
(1
)
 
(25
)
 
$
(26
)
Reserve balance at June 30, 2016
 
$
13

 
$
88

 
$
101


Dow expects to incur future costs related to its 2015 and 2016 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 and are not included in the restructuring activities tables.


NOTE 4 – ACQUISITIONS AND DIVESTITURES
Ownership Restructure of Dow Corning Corporation
On June 1, 2016, the Company announced the closing of the transaction with Corning Incorporated ("Corning"), Dow Corning and HS Upstate Inc., (“Splitco”), pursuant to which Corning exchanged with Dow Corning its 50 percent equity interest in Dow Corning for 100 percent of the stock of Splitco which holds Corning's historical proportional interest in the Hemlock Semiconductor Group ("HSC Group") and approximately $4.8 billion in cash (the “DCC Transaction”). As a result of the DCC Transaction, Dow Corning, previously a 50:50 joint venture between Dow and Corning, is now a wholly owned subsidiary of Dow. In connection with the DCC Transaction, on May 31, 2016, Dow Corning incurred $4.5 billion of indebtedness in order to fund the contribution of cash to Splitco. See Notes 6, 7, 13 and 14 for additional information.

At June 1, 2016, the Company's equity interest in Dow Corning, excluding the HSC Group, was $1,968 million and previously classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets. This equity interest was remeasured to fair value which resulted in a non-taxable gain of $2,445 million, net of closing costs and other comprehensive loss related to the Company's interest in Dow Corning. The gain was included in "Sundry income (expense) - net" and reflected in the Consumer Solutions ($1,301 million) and Infrastructure Solutions ($1,144 million) segments. The Company recognized a tax benefit of $141 million on the DCC Transaction, primarily due to the reassessment of a previously recognized deferred tax liability on the basis difference in the Company’s investment in Dow Corning.

The Company utilized an income approach with a discounted cash flow model to determine the enterprise fair value of Dow Corning. The valuation process resulted in an enterprise fair value of $9,636 million. The following table summarizes the fair values of Dow Corning's remaining assets and liabilities, excluding the HSC Group, on June 1, 2016, which are now fully consolidated by Dow. The valuation process at June 30, 2016 is not complete. Final determination of the fair values may result in further adjustments to the values presented in the following table.



14


Assets Acquired and Liabilities Assumed on June 1, 2016
In millions
 
Fair Value of Previously Held Equity Investment, excluding the HSC Group
$
4,818

Fair Value of Assets Acquired
 
Cash and cash equivalents
$
1,050

Accounts and notes receivable - Trade
640

Accounts and notes receivable - Other
223

Inventories
1,147

Other current assets
51

Investment in nonconsolidated affiliates
110

Noncurrent receivables
112

Property
4,019

Other intangible assets (1)
2,987

Deferred income tax assets
1,001

Other assets
98

Total Assets Acquired
$
11,438

Fair Value of Liabilities Assumed
 
Accounts payable - Trade
$
374

Income taxes payable
261

Accrued and other current liabilities
406

Other current liabilities
95

Long-Term Debt
4,672

Deferred income tax liabilities
1,840

Pension and other postretirement benefits - noncurrent (2)
1,241

Other noncurrent obligations
438

Total Liabilities Assumed
$
9,327

Non-redeemable noncontrolling interests
$
473

Goodwill
$
3,180

(1)
Includes $30 million of trademarks, $1,200 million of licenses and intellectual property, $2 million of software and $1,755 million of customer-related intangibles. See Note 6 for additional information.
(2)
Includes pension and other postretirement benefits as well as long-term disability obligations.

The DCC Transaction resulted in the recognition of $3,180 million of goodwill which is not deductible for tax purposes. Goodwill largely consists of expected synergies resulting from the DCC Transaction. Cost synergies will be achieved through a combination of workforce consolidations and savings from actions such as harmonizing energy contracts at large sites, optimizing warehouse and logistics footprints, implementing materials and maintenance best practices, combining information technology service structures and leveraging existing research and development knowledge management systems. See Note 6 for additional information on goodwill, including the allocation by segment.

The fair value of "Accounts and notes receivables - Trade" acquired was $640 million, with gross contractual amounts receivable of $654 million of which $14 million was deemed uncollectible. Liabilities assumed from Dow Corning on June 1, 2016 included certain contingent liabilities relating to breast implant and other products liability claims valued at $290 million, included in "Other noncurrent obligations" and commercial creditor issues valued at $105 million, included in “Accrued and other current liabilities” in the consolidated balance sheets. See Note 11 for additional information on contingent liabilities. Gross operating loss carryforwards of $568 million were assumed from Dow Corning on June 1, 2016. The operating loss carryforwards expire either in years beyond 2020 or have an indefinite carryforward period.

15


The following table summarizes the major classes of assets and liabilities underlying the deferred tax assets and liabilities resulting from DCC Transaction:

Deferred Tax Balances at June 1, 2016
Deferred Tax
Deferred Tax
In millions
Assets
Liabilities
Property
$
161

$
743

Tax loss and credit carryforwards
227


Postretirement benefit obligations
474


Other accruals and reserves
68

52

Intangibles
11

1,004

Inventory
2

33

Long-term debt
49


Investments
23

8

Subtotal
$
1,015

$
1,840

Valuation allowances
(14
)

Total Deferred Tax Balances
$
1,001

$
1,840


The Company evaluated the disclosure requirements under Accounting Standards Codification ("ASC") 805 "Business Combinations" and determined the DCC Transaction was not considered a material business combination for purposes of disclosing the revenue and earnings of Dow Corning since the date of the ownership restructure as well as supplemental pro forma information.

Beginning in June 2016, the results of Dow Corning, excluding the HSC Group, are fully consolidated in the Company’s consolidated statements of income. Prior to June 2016, the Company’s 50 percent share of Dow Corning’s results of operations was reported in “Equity in earnings of nonconsolidated affiliates” in the consolidated statements of income. The results of the HSC Group continue to be treated as an equity method investment and reported as “Equity in earnings of nonconsolidated affiliates” in the consolidated statements of income.

Acquisition of Cooperativa Central de Pesquisa Agrícola's Seed Business
On January 30, 2015, Dow AgroSciences LLC acquired Cooperativa Central de Pesquisa Agrícola's ("Coodetec") seed business for $169 million, of which $121 million was paid in 2015, $24 million was paid in the first quarter of 2016 and the remaining portion to be paid by the end of the first quarter of 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.

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.

Beginning in May 2015, Univation's results of operations were 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.

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.

In the first quarter of 2015, the Company recognized a pretax gain of $18 million on the sale, 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.


16


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.

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

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 were not reported as discontinued operations.

Reverse Morris Trust Transaction
A summary of the Reverse Morris Trust transaction can be found in Note 6 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

On October 5, 2015, the Company completed the split-off of its U.S. Gulf Coast Chlor-Alkali and Vinyl, Global Chlorinated Organics and Global Epoxy businesses ("chlorine value chain"). The Company has not reported the historical results of the chlorine value chain as discontinued operations in Dow's financial statements, as the divestiture of the chlorine value chain did not represent a strategic shift that had a major effect on the Company's operations and financial results. However, the chlorine value chain was considered an individually significant component of the Company. Select income statement information is presented below for the three- and six-month periods ended June 30, 2015:

Dow Chlorine Value Chain Income Statement Information
Three Months Ended
Six Months Ended
In millions
Jun 30, 2015
Jun 30, 2015
Income Before Income Taxes (1)
$
39

$
76

Loss before income taxes attributable to noncontrolling interests 
4

5

Income Before Income Taxes attributable to The Dow Chemical Company (1)
$
43

$
81

(1)    Excludes transaction costs associated with the separation of the chlorine value chain, which are reported below.

In the second quarter of 2016, the Company recognized a pretax gain of $6 million for post-closing adjustments, included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in the Performance Materials & Chemicals segment.

In the second quarter of 2015, the Company incurred pretax charges of $43 million and $69 million in the first six months of 2015, for nonrecurring transaction costs associated with the separation of the chlorine value chain, consisting primarily of financial and professional advisory fees, legal fees and information systems infrastructure costs. These charges, which are part of costs associated with portfolio and productivity actions, were included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in Corporate.



17


NOTE 5 – INVENTORIES
The following table provides a breakdown of inventories:
 
Inventories
In millions
Jun 30, 2016


Dec 31, 2015

Finished goods
$
4,744

 
$
3,879

Work in process
1,662

 
1,502

Raw materials
973

 
730

Supplies
845

 
768

Total FIFO inventories
$
8,224

 
$
6,879

Adjustment of inventories to a LIFO basis
(12
)
 
(8
)
Total inventories
$
8,212

 
$
6,871


Total inventories increased $1,341 million from December 31, 2015, primarily due to the DCC Transaction. See Note 4 for additional information.


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, 2015
$
1,472

 
$
4,374

 
$
4,382

 
$
391

 
$
1,535

 
$
12,154

Acquisition of an aniline plant

 

 

 
37

 

 
37

Sale of a product line

 

 

 

 
(5
)
 
(5
)
Goodwill related to the DCC Transaction (1)

 
1,685

 
1,495

 

 

 
3,180

Foreign currency impact

 
35

 
37

 
1

 
3

 
76

Net goodwill at Jun 30, 2016
$
1,472

 
$
6,094

 
$
5,914

 
$
429

 
$
1,533

 
$
15,442

(1)
Final determination of the goodwill value assigned may result in adjustments to the preliminary value recorded.

The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At June 30, 2016
 
At December 31, 2015
In millions
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net  

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Licenses and intellectual property
$
3,150

 
$
(1,145
)
 
$
2,005

 
$
1,943

 
$
(1,087
)
 
$
856

Patents
108

 
(97
)
 
11

 
119

 
(108
)
 
11

Software
1,297

 
(667
)
 
630

 
1,253

 
(628
)
 
625

Trademarks
697

 
(471
)
 
226

 
666

 
(441
)
 
225

Customer-related
4,990

 
(1,486
)
 
3,504

 
3,164

 
(1,366
)
 
1,798

Other
164

 
(143
)
 
21

 
165

 
(140
)
 
25

Total other intangible assets, finite lives
$
10,406

 
$
(4,009
)
 
$
6,397

 
$
7,310

 
$
(3,770
)
 
$
3,540

IPR&D (1), indefinite lives
66

 

 
66

 
77

 

 
77

Total other intangible assets
$
10,472

 
$
(4,009
)
 
$
6,463

 
$
7,387

 
$
(3,770
)
 
$
3,617

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

In the second quarter of 2016, the Company wrote-off $11 million of IPR&D as part of the 2016 restructuring charge. See Note 3 for additional information.


18


Intangible assets included as part of the DCC Transaction are presented in the table below. See Note 4 for additional information on this transaction.

Dow Corning Intangible Assets
Gross
Carrying
Amount

Weighted-average Amortization Period
In millions
Intangible assets with finite lives:
 
 
  Licenses and intellectual property
$
1,200

9 years
  Software
2

5 years
  Trademarks
30

3 years
  Customer-related
1,755

19 years
Total
$
2,987

15 years

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

Amortization Expense
Three Months Ended
 
Six Months Ended
In millions
Jun 30, 2016

 
Jun 30, 2015

 
Jun 30, 2016

 
Jun 30, 2015

Other intangible assets, excluding software
$
122

 
$
109

 
$
225

 
$
211

Software, included in “Cost of sales”
$
19

 
$
17

 
$
37

 
$
35


Total estimated amortization expense for 2016 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2016
$
605

2017
$
725

2018
$
702

2019
$
626

2020
$
590

2021
$
562



NOTE 7 – NONCONSOLIDATED AFFILIATES
As a result of the DCC Transaction, Dow Corning, previously a 50:50 joint venture between Dow and Corning, is now a wholly owned subsidiary of Dow. The Company's equity interest in Dow Corning, 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 the DCC Transaction, including details on the fair value of assets acquired and liabilities assumed.

Dow Corning continues to maintain an equity interest in the HSC Group. The HSC Group was included as part of the Dow Corning equity method investment and classified as "Investment in nonconsolidated affiliates" in the consolidated balance sheets. The following table includes the carrying value of the nonconsolidated affiliates included in the HSC Group at June 1, 2016, including the balance sheet classification of each investment:

HSC Group at June 1, 2016
Ownership Interest

 
Investment

 
Balance Sheet Classification
In millions
Hemlock Semiconductor L.L.C. (1)
50.1
%
 
$
(958
)
 
Other noncurrent obligations
DC HSC Holdings LLC (2)
50.0
%
 
$
571

 
Investment in nonconsolidated affiliates
(1)
Hemlock Semiconductor L.L.C. is a nonconsolidated variable interest entity. See Note 14 for additional information.
(2)
DC HSC Holdings LLC holds an 80.5 percent indirect ownership interest in Hemlock Semiconductor Operations.

At June 30, 2016, the Company had a $162 million note receivable with Sadara Chemical Company ("Sadara"), included in "Noncurrent receivables" in the consolidated balance sheets ($473 million at December 31, 2015). During the first six months of 2016, the Company loaned an additional $569 million to Sadara and converted approximately $880 million of the loan balance into equity. Dow continues to maintain a 35 percent ownership interest in Sadara.


19


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 11 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. If applicable, updates have been included in the respective section below.

The following table summarizes the fair value of financial instruments at June 30, 2016 and December 31, 2015:

Fair Value of Financial Instruments
 
At June 30, 2016
 
At December 31, 2015
In millions
Cost

 
Gain

 
Loss

 
Fair
Value

 
Cost

 
Gain

 
Loss

 
Fair
Value

Marketable securities: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt (2)
$
572

 
$
42

 
$

 
$
614

 
$
597

 
$
22

 
$
(7
)
 
$
612

Corporate bonds
671

 
47

 
(3
)
 
715

 
633

 
26

 
(8
)
 
651

Total debt securities
$
1,243

 
$
89

 
$
(3
)
 
$
1,329

 
$
1,230

 
$
48

 
$
(15
)
 
$
1,263

Equity securities
579

 
101

 
(49
)
 
631

 
555

 
108

 
(60
)
 
603

Total marketable securities
$
1,822

 
$
190

 
$
(52
)
 
$
1,960

 
$
1,785

 
$
156

 
$
(75
)
 
$
1,866

Long-term debt including debt due within one year (3)
$
(21,111
)
 
$
17

 
$
(2,306
)
 
$
(23,400
)
 
$
(16,756
)
 
$
424

 
$
(1,668
)
 
$
(18,000
)
Derivatives relating to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rates
$

 
$

 
$
(9
)
 
$
(9
)
 
$

 
$

 
$
(4
)
 
$
(4
)
Commodities (4)
$

 
$
17

 
$
(222
)
 
$
(205
)
 
$

 
$
6

 
$
(248
)
 
$
(242
)
Foreign currency
$

 
$
54

 
$
(139
)
 
$
(85
)
 
$

 
$
109

 
$
(32
)
 
$
77

(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 $18 million at June 30, 2016 and $18 million at December 31, 2015.
(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 six-month periods ended June 30, 2016 and June 30, 2015:

Investing Results
Six Months Ended
In millions
Jun 30,
2016

 
Jun 30,
2015

Proceeds from sales of available-for-sale securities
$
331

 
$
195

Gross realized gains
$
23

 
$
31

Gross realized losses
$
(1
)
 
$
(2
)
The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities
at June 30, 2016
In millions
Amortized Cost

 
Fair Value

Within one year
$
15

 
$
15

One to five years
314

 
327

Six to ten years
653

 
696

After ten years
261

 
291

Total
$
1,243

 
$
1,329



20


The following tables provide the fair value and gross unrealized losses of the Company’s investments that were deemed to be temporarily impaired at June 30, 2016 and December 31, 2015, aggregated by investment category:

Temporarily Impaired Securities at June 30, 2016
 
Less than 12 months
 
12 months or more
 
Total
In millions
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

 
Fair Value

 
Unrealized Losses

Corporate bonds
$
45

 
$
(1
)
 
$
13

 
$
(1
)
 
$
58

 
$
(2
)
Equity securities
30

 
(5
)
 
143

 
(44
)
 
173

 
(49
)
Total temporarily impaired securities
$
75

 
$
(6
)
 
$
156

 
$
(45
)
 
$
231

 
$
(51
)

Temporarily Impaired Securities at December 31, 2015
 
Less than 12 months
 
12 months or more
 
Total
In millions
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

 
Fair Value

 
Unrealized Losses

Government debt (1)
$
251

 
$
(7
)
 
$
1

 
$

 
$
252

 
$
(7
)
Corporate bonds
175

 
(8
)
 
1

 

 
176

 
(8
)
Equity securities
197

 
(54
)
 
10

 
(6
)
 
207

 
(60
)
Total temporarily impaired securities
$
623

 
$
(69
)
 
$
12

 
$
(6
)
 
$
635

 
$
(75
)
(1)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities' obligations.

At June 30, 2016, the Company had $850 million ($3,354 million at December 31, 2015) 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 also had $835 million of Treasury Bills in an escrow account related to the proposed settlement of the urethanes class action lawsuit, which was classified as "Other current assets" in the consolidated balance sheets. See Note 11 for additional information. The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At June 30, 2016, the Company had investments in money market funds of $249 million classified as cash equivalents ($1,689 million at December 31, 2015).

The aggregate cost of the Company’s cost method investments totaled $151 million at June 30, 2016 ($157 million at December 31, 2015). 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 2016, a write-down of $4 million was recorded as part of the 2016 restructuring charge. The Company's impairment analysis resulted in no reduction in the cost basis of these investments, other than the restructuring charge, for the six-month periods ended June 30, 2016 and June 30, 2015.

21


Accounting for Derivative Instruments and Hedging Activities
The following table provides the fair value and gross balance sheet classification of derivative instruments at June 30, 2016 and December 31, 2015:
 
Fair Value of Derivative Instruments
In millions
Balance Sheet Classification
 
Jun 30,
2016

 
Dec 31,
2015

Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Commodities
Other current assets
 
$
14

 
$
3

Commodities
Deferred charges and other assets
 
3

 

Foreign currency
Other current assets
 
8

 
5

Total derivatives designated as hedges
 
 
$
25

 
$
8

Derivatives not designated as hedges:
 
 
 
 
 
Commodities
Deferred charges and other assets
 
$
1

 
$
4

Foreign currency
Accounts and notes receivable – Other
 
155

 
156

Total derivatives not designated as hedges
 
 
$
156

 
$
160

Total asset derivatives
 
 
$
181

 
$
168

Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Accrued and other current liabilities
 
$
7

 
$
4

Interest rates
Other noncurrent obligations
 
2

 

Commodities
Accrued and other current liabilities
 
23

 
28

Commodities
Other noncurrent obligations
 
200

 
234

Foreign currency
Accrued and other current liabilities
 
12

 
1

Total derivatives designated as hedges
 
 
$
244

 
$
267

Derivatives not designated as hedges:
 
 
 
 
 
Commodities
Other noncurrent obligations
 
$
8

 
$

Foreign currency
Accounts payable – Other
 
236

 
83

Total derivatives not designated as hedges
 
 
$
244

 
$
83

Total liability derivatives
 
 
$
488

 
$
350


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 $3 million loss for interest rate contracts, a $4 million loss for commodity contracts and a $6 million loss for foreign currency contracts.

22


NOTE 9 – FAIR VALUE MEASUREMENTS
A summary of the Company's recurring and nonrecurring fair value measurements can be found in Note 12 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. 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 June 30, 2016

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 and other current assets (2)
$

 
$
1,934

 
$

 
$

 
$
1,934

Interests in trade accounts receivable conduits (3)

 

 
1,149

 

 
1,149

Equity securities (4)
593

 
38

 

 

 
631

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
614

 

 

 
614

Corporate bonds

 
664

 
51

 

 
715

Derivatives relating to: (6)

 

 

 

 
 
Commodities
13

 
5

 

 
(1
)
 
17

Foreign currency

 
163

 

 
(109
)
 
54

Total assets at fair value
$
606

 
$
3,418

 
$
1,200

 
$
(110
)
 
$
5,114

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

 
$
23,400

 
$

 
$

 
$
23,400

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
9

 

 

 
9

Commodities
2

 
229

 

 
(9
)
 
222

Foreign currency

 
248

 

 
(109
)
 
139

Total liabilities at fair value
$
2

 
$
23,886

 
$

 
$
(118
)

$
23,770

(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" and "Other current assets" 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 12 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.

23


Basis of Fair Value Measurements
on a Recurring Basis
at December 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