10-Q 1 dow-q2x6302017.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, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
 
þ
 
Accelerated filer
 
¨
 
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
Smaller reporting company
 
¨
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
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, 2017
Common Stock, par value $2.50 per share
 
1,223,444,930 shares



The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 2017
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 Inc. (“DowDuPont”). These and other forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements. Important risk factors that may cause such a difference include, but are not limited to, (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 separations, including anticipated timing, any changes to the configuration of businesses included in the potential separations if implemented, (iii) the intended separation of the agricultural, materials science and specialty products businesses of the combined company post-merger in one or more tax efficient transactions on anticipated terms and timing, including a number of conditions which could delay, prevent or otherwise adversely affect the proposed transactions, including possible issues or delays in obtaining required regulatory approvals or clearances, disruptions in the financial markets or other potential barriers, (iv) potential litigation relating to the proposed transaction that could be instituted against Dow, DuPont or their respective directors, (v) the risk that disruptions from the proposed transaction will harm Dow’s or DuPont’s business, including current plans and operations, (vi) the ability of Dow or DuPont to retain and hire key personnel, (vii) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the merger, (viii) uncertainty as to the long-term value of DowDuPont common stock, (ix) continued availability of capital and financing and rating agency actions, (x) legislative, regulatory and economic developments, (xi) potential business uncertainty, including changes to existing business relationships, during the pendency of the merger that could affect Dow’s and/or DuPont’s financial performance, (xii) certain restrictions during the pendency of the merger that may impact Dow’s or DuPont’s ability to pursue certain business opportunities or strategic transactions and (xiii) 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 included in the Registration Statement on Form S-4 (File No. 333-209869) filed by DowDuPont 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 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.
 


3


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, 2016). Dow 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.

4


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,
2017

 
Jun 30,
2016

 
Jun 30,
2017

 
Jun 30,
2016

Net Sales
$
13,834

 
$
11,952

 
$
27,064

 
$
22,655

Cost of sales
10,764

 
9,275

 
20,961

 
17,226

Research and development expenses
405

 
399

 
821

 
760

Selling, general and administrative expenses
855

 
787

 
1,722

 
1,529

Amortization of intangibles
157

 
122

 
312

 
225

Restructuring charges (credits)
(12
)
 
454

 
(13
)
 
452

Equity in earnings of nonconsolidated affiliates
54

 
82

 
250

 
121

Sundry income (expense) - net
299

 
2,550

 
(171
)
 
1,309

Interest income
22

 
18

 
47

 
38

Interest expense and amortization of debt discount
226

 
208

 
445

 
409

Income Before Income Taxes
1,814

 
3,357

 
2,942

 
3,522

Provision for income taxes
455

 
130

 
668

 
20

Net Income
1,359

 
3,227

 
2,274

 
3,502

Net income attributable to noncontrolling interests
38

 
19

 
65

 
40

Net Income Attributable to The Dow Chemical Company
1,321

 
3,208

 
2,209

 
3,462

Preferred stock dividends

 
85

 

 
170

Net Income Available for The Dow Chemical Company Common Stockholders
$
1,321

 
$
3,123

 
$
2,209

 
$
3,292

 
 
 
 
 
 
 
 
Per Common Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
1.08

 
$
2.79

 
$
1.82

 
$
2.96

Earnings per common share - diluted
$
1.07

 
$
2.61

 
$
1.79

 
$
2.83

 


 
 
 
 
 


Dividends declared per share of common stock
$
0.46

 
$
0.46

 
$
0.92

 
$
0.92

Weighted-average common shares outstanding - basic
1,211.8

 
1,111.1

 
1,207.2

 
1,107.0

Weighted-average common shares outstanding - diluted
1,229.0

 
1,222.8

 
1,225.5

 
1,218.5

 


 
 
 
 
 


Depreciation
$
534

 
$
511

 
$
1,112

 
$
967

Capital Expenditures
$
795

 
$
997

 
$
1,549

 
$
1,817

See Notes to the Consolidated Financial Statements.


5


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2017

 
Jun 30,
2016

 
Jun 30,
2017

 
Jun 30,
2016

Net Income
$
1,359

 
$
3,227

 
$
2,274

 
$
3,502

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Unrealized gains (losses) on investments
(9
)
 
15

 
8

 
34

Cumulative translation adjustments
387

 
(86
)
 
626

 
242

Pension and other postretirement benefit plans
101

 
455

 
203

 
547

Derivative instruments
(39
)
 
33

 
(89
)
 
(1
)
Other comprehensive income
440

 
417

 
748

 
822

Comprehensive Income
1,799

 
3,644

 
3,022

 
4,324

Comprehensive income attributable to noncontrolling interests, net of tax
40

 
31

 
93

 
68

Comprehensive Income Attributable to The Dow Chemical Company
$
1,759

 
$
3,613

 
$
2,929

 
$
4,256

See Notes to the Consolidated Financial Statements.


6


The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited)
Jun 30,
2017

 
Dec 31,
2016

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2017: $87; 2016: $75)
$
6,218

 
$
6,607

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2017: $123; 2016: $110)
5,307

 
4,666

Other
5,557

 
4,358

Inventories
8,163

 
7,363

Other current assets
690

 
665

Total current assets
25,935

 
23,659

Investments
 
 
 
Investment in nonconsolidated affiliates
3,665

 
3,747

Other investments (investments carried at fair value - 2017: $1,999; 2016: $1,959)
2,985

 
2,969

Noncurrent receivables
755

 
708

Total investments
7,405

 
7,424

Property
 
 
 
Property
59,573

 
57,438

Less accumulated depreciation
35,457

 
33,952

Net property (variable interest entities restricted - 2017: $942; 2016: $961)
24,116

 
23,486

Other Assets
 
 
 
Goodwill
15,439

 
15,272

Other intangible assets (net of accumulated amortization - 2017: $4,708; 2016: $4,295)
5,812

 
6,026

Deferred income tax assets
2,922

 
3,079

Deferred charges and other assets
618

 
565

Total other assets
24,791

 
24,942

Total Assets
$
82,247

 
$
79,511

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
480

 
$
272

Long-term debt due within one year
955

 
635

Accounts payable:
 
 
 
Trade
4,623

 
4,519

Other
3,113

 
2,401

Income taxes payable
531

 
600

Dividends payable
559

 
508

Accrued and other current liabilities
3,168

 
3,669

Total current liabilities
13,429

 
12,604

Long-Term Debt (variable interest entities nonrecourse - 2017: $306; 2016: $330)
20,072

 
20,456

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities
916

 
923

Pension and other postretirement benefits - noncurrent
11,195

 
11,375

Asbestos-related liabilities - noncurrent
1,301

 
1,364

Other noncurrent obligations
5,745

 
5,560

Total other noncurrent liabilities
19,157

 
19,222

Stockholders’ Equity
 
 
 
Common stock
3,107

 
3,107

Additional paid-in capital
4,202

 
4,262

Retained earnings
31,417

 
30,338

Accumulated other comprehensive loss
(9,074
)
 
(9,822
)
Unearned ESOP shares
(198
)
 
(239
)
Treasury stock at cost
(1,033
)
 
(1,659
)
The Dow Chemical Company’s stockholders’ equity
28,421

 
25,987

Noncontrolling interests
1,168

 
1,242

Total equity
29,589

 
27,229

Total Liabilities and Equity
$
82,247

 
$
79,511

See Notes to the Consolidated Financial Statements.

7


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2017

 
Jun 30,
2016

Operating Activities
 
 
 
Net Income
$
2,274

 
$
3,502

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

 

Depreciation and amortization
1,517

 
1,287

Provision (Credit) for deferred income tax
40

 
(993
)
Earnings of nonconsolidated affiliates less than dividends received
310

 
388

Pension contributions
(381
)
 
(506
)
Net gain on sales of investments
(53
)
 
(48
)
Net gain on sales of property, businesses and consolidated companies
(135
)
 
(74
)
Net gain on sale of ownership interests in nonconsolidated affiliates
(2
)
 

Net gain on step acquisition of nonconsolidated affiliates

 
(2,445
)
Restructuring charges (credits)
(13
)
 
452

Other net loss
75

 
62

Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(2,123
)
 
(1,320
)
Proceeds from interests in trade accounts receivable conduits
804

 
753

Inventories
(839
)
 
(238
)
Accounts payable
620

 
433

Other assets and liabilities
(279
)
 
1,114

Cash provided by operating activities
1,815

 
2,367

Investing Activities
 
 
 
Capital expenditures
(1,549
)
 
(1,817
)
Investment in gas field developments
(68
)
 

Construction of assets pending sale / leaseback

 
(12
)
Proceeds from sale / leaseback of assets

 
32

Payment into escrow account
(130
)
 
(835
)
Distribution from escrow account
130

 

Proceeds from sales of property, businesses and consolidated companies, net of cash divested
215

 
177

Acquisitions of property, businesses and consolidated companies, net of cash acquired
(31
)
 
(224
)
Cash acquired in step acquisition of nonconsolidated affiliate

 
1,050

Investments in and loans to nonconsolidated affiliates
(484
)
 
(569
)
Distributions and loan repayments from nonconsolidated affiliates
54

 
8

Proceeds from sale of ownership interests in nonconsolidated affiliates
54

 

Purchases of investments
(379
)
 
(301
)
Proceeds from sales and maturities of investments
435

 
428

Cash used in investing activities
(1,753
)
 
(2,063
)
Financing Activities
 
 
 
Changes in short-term notes payable
288

 
(66
)
Proceeds from issuance of long-term debt

 
30

Payments on long-term debt
(105
)
 
(459
)
Proceeds from sales of common stock
357

 
234

Transaction financing, debt issuance and other costs

 
(2
)
Employee taxes paid for share-based payment arrangements
(85
)
 
(65
)
Distributions to noncontrolling interests
(51
)
 
(66
)
Dividends paid to stockholders
(1,063
)
 
(1,185
)
Cash used in financing activities
(659
)
 
(1,579
)
Effect of Exchange Rate Changes on Cash
208

 
7

Summary
 
 
 
Decrease in cash and cash equivalents
(389
)
 
(1,268
)
Cash and cash equivalents at beginning of period
6,607

 
8,577

Cash and cash equivalents at end of period
$
6,218

 
$
7,309

See Notes to the Consolidated Financial Statements.

8


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Six Months Ended
In millions, except per share amounts (Unaudited)
Jun 30,
2017

 
Jun 30,
2016

Preferred Stock
 
 
 
Balance at beginning of year and end of period
$

 
$
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
4,262

 
4,936

Common stock issued / sold
357

 
234

Stock-based compensation and allocation of ESOP shares
(415
)
 
(280
)
Other
(2
)
 

Balance at end of period
4,202

 
4,890

Retained Earnings
 
 
 
Balance at beginning of year
30,338

 
28,425

Net income available for The Dow Chemical Company common stockholders
2,209

 
3,292

Dividends declared on common stock (per share - 2017: $0.92; 2016: $0.92)
(1,115
)
 
(1,021
)
Dividend equivalents
(15
)
 
(16
)
Balance at end of period
31,417

 
30,680

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(9,822
)
 
(8,667
)
Other comprehensive income
748

 
822

Balance at end of period
(9,074
)
 
(7,845
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(239
)
 
(272
)
Shares allocated to ESOP participants
41

 
40

Balance at end of period
(198
)
 
(232
)
Treasury Stock
 
 
 
Balance at beginning of year
(1,659
)
 
(6,155
)
Issuances - compensation plans
626

 
491

Balance at end of period
(1,033
)
 
(5,664
)
The Dow Chemical Company’s Stockholders’ Equity
28,421

 
28,936

Noncontrolling Interests
1,168

 
1,298

Total Equity
$
29,589

 
$
30,234

See Notes to the Consolidated Financial Statements.


9


(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, 2016.

Adoption of Accounting Standards Update ("ASU") 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting"
In the first quarter of 2017, the Company adopted ASU 2016-09 and elected to apply changes on a retrospective basis to the consolidated statements of cash flows related to the classification of excess tax benefits and employee taxes paid for share-based payment arrangements. See Note 2 for additional information. A summary of the changes made to the consolidated statements of cash flows for the six months ended June 30, 2016, is included in the following table:

Summary of Changes to the Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016
In millions
As Filed
 
Updated
Operating Activities
 
 
 
Excess tax benefits from share-based payment arrangements
$
(32
)
 
$

Other assets and liabilities
$
1,049

 
$
1,114

Cash provided by operating activities
$
2,270

 
$
2,367

Financing Activities
 
 
 
Excess tax benefits from share-based payment arrangements
$
32

 
$

Employee taxes paid for share-based payment arrangements
$

 
$
(65
)
Cash used in financing activities
$
(1,482
)
 
$
(1,579
)

10


NOTE 2 – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In the first quarter of 2017, the Company adopted 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 classification in the statement of cash flows. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Under the new guidance, excess tax benefits related to equity compensation are now recognized in "Provision for income taxes" in the consolidated statements of income rather than in "Additional paid-in capital" in the consolidated balance sheets and this change was applied on a prospective basis. Changes to the consolidated statements of cash flows related to the classification of excess tax benefits and employee taxes paid for share-based payment arrangements were implemented on a retrospective basis. See Note 1 for additional information.

Accounting Guidance Issued But Not Adopted as of June 30, 2017
In May 2014, the Financial Accounting Standards Board ("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 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.

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 has a team in place to analyze ASU 2014-09 and the related ASU's across all revenue streams to evaluate the impact of the new standard on revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. The Company is completing contract evaluations and validating the results of applying the new revenue guidance. The Company has also started drafting its accounting policies and performed an assessment of the new disclosure requirements and expects to complete its evaluation of the impact of the accounting and disclosure requirements on its business processes, controls and systems by the end of the third quarter of 2017. Full implementation will be completed by the end of 2017. Based on analysis completed to date, the Company expects the potential impact on the recognition of revenue from product sales and licensing arrangements to remain substantially unchanged. The Company expects to adopt the new standard using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018.

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

11


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 (ASU 2014-09). 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 August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows with respect to eight specific cash flow issues. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendments should be applied using a retrospective transition method to each period presented, if practicable. Early adoption is permitted, including adoption in an interim period, and any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. All amendments must be adopted in the same period. The Company is currently evaluating the impact of adopting this guidance.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. Early adoption is permitted in the first interim period of an annual reporting period for which financial statements have not been issued. The Company is currently evaluating the impact of adopting this guidance.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)," which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows, and, as a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted and the new guidance must be applied retrospectively to all periods presented. The Company is currently evaluating the impact of adopting this guidance.

In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets," which clarifies the scope of guidance on nonfinancial asset derecognition in Accounting Standards Codification ("ASC") 610-20 and the accounting for partial sales of nonfinancial assets. The new guidance also conforms the derecognition guidance for nonfinancial assets with the model in the new revenue standard (ASU 2014-09). The new standard is effective for annual reporting periods, and interim periods within those fiscal years, beginning after December 15, 2017, and an entity is required to apply the amendments at the same time that it applies the amendments in ASU 2014-09. The Company is currently evaluating the impact of adopting this guidance.

In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising

12


from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line item(s) that includes the service cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period in which the financial statements have not been issued. Entities must use a retrospective transition method to adopt the requirement for separate presentation of the income statement service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. 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 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 ownership restructure of Dow Corning. These actions are expected to be substantially completed by June 30, 2018.

As a result of these actions, the Company recorded pretax restructuring charges of $449 million in the second quarter of 2016 consisting of severance costs 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 (credits)" in the consolidated statements of income and reflected in the Company's segment results as follows: Consumer Solutions ($28 million), Infrastructure Solutions ($97 million), Performance Plastics ($10 million) and Corporate ($314 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 Charges
 
Severance Costs

 
Costs Associated with Exit and Disposal Activities

 
Total

In millions
Reserve balance at December 31, 2016
 
$
201

 
$
27

 
$
228

Cash payments
 
(59
)
 

 
(59
)
Reserve balance at March 31, 2017
 
$
142

 
$
27

 
$
169

Adjustments to the reserve
 

 
(3
)
 
(3
)
Cash payments
 
(51
)
 

 
(51
)
Reserve balance at June 30, 2017
 
$
91

 
$
24

 
$
115


Adjustments to the 2016 Restructuring Charge
In the second quarter of 2017, the Company recorded a favorable adjustment to the 2016 restructuring charge related to costs associated with exit and disposal activities of $3 million, included in "Restructuring charges (credits)" in the consolidated statements of income and reflected in the Infrastructure Solutions segment.

Severance Costs
The restructuring charge included 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. At December 31, 2016, severance of $67 million was paid, leaving a liability of $201 million for approximately 1,700 employees. In the first six months of 2017, severance of $110 million was paid, leaving a liability of $91 million for approximately 820 employees at June 30, 2017.

2015 Restructuring
Adjustments to the 2015 Restructuring Charge
In 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, reflected in the Infrastructure Solutions segment. In the second quarter of 2016, the Company recorded an unfavorable adjustment related to additional accruals for exit and disposal activities of $5 million, reflected in Agricultural Sciences ($4 million) and Consumer Solutions ($1 million). The adjustments were included in "Restructuring charges (credits)" in the consolidated statements of income.


13


In the first quarter of 2017, the Company recorded a favorable adjustment to the 2015 restructuring charge related to costs associated with exit and disposal activities of $1 million, reflected in the Agricultural Sciences segment. In the second quarter of 2017, the Company recorded a favorable adjustment to the severance accrual of $9 million, reflected in Corporate. The adjustments were included in "Restructuring charges (credits)" in the consolidated statements of income.

Severance Costs
The severance component of the 2015 restructuring charge of $235 million was for the separation of approximately 2,250 positions under the terms of the Company's ongoing benefit arrangements. At December 31, 2016, severance of $190 million was paid, leaving a liability of $45 million for approximately 290 employees. In the first six months of 2017, severance of $33 million was paid and the Company recorded a favorable adjustment of $9 million to the severance reserve, leaving a liability of $3 million for approximately 40 employees at June 30, 2017.

The 2015 restructuring activities were substantially completed at June 30, 2017, with remaining liabilities related to severance and costs associated with exit and disposal activities to be settled over time.

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


NOTE 4 – ACQUISITIONS
Ownership Restructure of Dow Corning Corporation
A complete summary of the ownership restructure of Dow Corning can be found in Note 4 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

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 held Corning's historical proportional interest in the Hemlock Semiconductor Group ("HSC Group") and cash (collectively, the “DCC Transaction”). As a result of the DCC Transaction, Dow Corning, previously a 50:50 joint venture between Dow and Corning, became a wholly owned subsidiary of Dow and is fully consolidated in the Company’s consolidated statements of income.

In the second quarter of 2016, the Company recognized a non-taxable gain on the DCC Transaction 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 also recognized a tax benefit of $141 million on the DCC Transaction in the second quarter of 2016, primarily due to the reassessment of a previously recognized deferred tax liability related to the basis difference in the Company’s investment in Dow Corning. See Notes 9, 12 and 13 for additional information.

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.



14


NOTE 5 – INVENTORIES
The following table provides a breakdown of inventories:
 
Inventories
In millions
Jun 30, 2017


Dec 31, 2016

Finished goods
$
4,699

 
$
4,230

Work in process
1,774

 
1,510

Raw materials
963

 
853

Supplies
876

 
823

Total FIFO inventories
$
8,312

 
$
7,416

Adjustment of inventories to a LIFO basis
(149
)
 
(53
)
Total inventories
$
8,163

 
$
7,363



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, 2016
$
1,472

 
$
6,017

 
$
5,840

 
$
425

 
$
1,518

 
$
15,272

Sale of SKC Haas Display Films (1)

 
(34
)
 

 

 

 
(34
)
Foreign currency impact

 
70

 
103

 
6

 
23

 
202

Other

 

 

 

 
(1
)
 
(1
)
Net goodwill at Jun 30, 2017
$
1,472

 
$
6,053

 
$
5,943

 
$
431

 
$
1,540

 
$
15,439

(1)
On June 30, 2017, the Company sold its ownership interest in the SKC Haas Display Films group of companies. See Note 19 for additional information.

The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At June 30, 2017
 
At December 31, 2016
In millions
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net  

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Licenses and intellectual property
$
3,151

 
$
(1,426
)
 
$
1,725

 
$
3,148

 
$
(1,286
)
 
$
1,862

Patents
108

 
(99
)
 
9

 
106

 
(97
)
 
9

Software
1,382

 
(739
)
 
643

 
1,336

 
(696
)
 
640

Trademarks
696

 
(536
)
 
160

 
696

 
(503
)
 
193

Customer-related
4,954

 
(1,759
)
 
3,195

 
4,806

 
(1,567
)
 
3,239

Other
168

 
(149
)
 
19

 
168

 
(146
)
 
22

Total other intangible assets, finite lives
$
10,459

 
$
(4,708
)
 
$
5,751

 
$
10,260

 
$
(4,295
)
 
$
5,965

IPR&D (1), indefinite lives
61

 

 
61

 
61

 

 
61

Total other intangible assets
$
10,520

 
$
(4,708
)
 
$
5,812

 
$
10,321

 
$
(4,295
)
 
$
6,026

(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.


15


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

Amortization Expense
Three Months Ended
 
Six Months Ended
In millions
Jun 30, 2017

 
Jun 30, 2016

 
Jun 30, 2017

 
Jun 30, 2016

Other intangible assets, excluding software
$
157

 
$
122

 
$
312

 
$
225

Software, included in “Cost of sales”
$
20

 
$
19

 
$
40

 
$
37


Total estimated amortization expense for 2017 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2017
$
724

2018
$
731

2019
$
655

2020
$
618

2021
$
584

2022
$
514



NOTE 7 – 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, 2016. If applicable, updates have been included in the respective section below.

The following table summarizes the fair value of financial instruments at June 30, 2017 and December 31, 2016:

Fair Value of Financial Instruments
 
At June 30, 2017
 
At December 31, 2016
In millions
Cost

 
Gain

 
Loss

 
Fair
Value

 
Cost

 
Gain

 
Loss

 
Fair
Value

Marketable securities: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt (2)
$
610

 
$
15

 
$
(8
)
 
$
617

 
$
607

 
$
13

 
$
(12
)
 
$
608

Corporate bonds
610

 
30

 
(3
)
 
637

 
623

 
27

 
(5
)
 
645

Total debt securities
$
1,220

 
$
45

 
$
(11
)
 
$
1,254

 
$
1,230

 
$
40

 
$
(17
)
 
$
1,253

Equity securities
690

 
84

 
(29
)
 
745

 
658

 
98

 
(50
)
 
706

Total marketable securities
$
1,910

 
$
129

 
$
(40
)
 
$
1,999

 
$
1,888

 
$
138

 
$
(67
)
 
$
1,959

Long-term debt including debt due within one year (3)
$
(21,027
)
 
$
6

 
$
(2,218
)
 
$
(23,239
)
 
$
(21,091
)
 
$
129

 
$
(1,845
)
 
$
(22,807
)
Derivatives relating to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rates
$

 
$

 
$
(5
)
 
$
(5
)
 
$

 
$

 
$
(5
)
 
$
(5
)
Commodities (4)
$

 
$
61

 
$
(269
)
 
$
(208
)
 
$

 
$
56

 
$
(213
)
 
$
(157
)
Foreign currency
$

 
$
25

 
$
(182
)
 
$
(157
)
 
$

 
$
84

 
$
(30
)
 
$
54

(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 $14 million at June 30, 2017 and $18 million at December 31, 2016.
(4)
Presented net of cash collateral, as disclosed in Note 8.


16


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, 2017 and 2016:

Investing Results
Six Months Ended
In millions
Jun 30,
2017

 
Jun 30,
2016

Proceeds from sales of available-for-sale securities
$
383

 
$
331

Gross realized gains
$
48

 
$
23

Gross realized losses
$
(1
)
 
$
(1
)

The following table summarizes the contractual maturities of the Company’s investments in debt securities:

 
Contractual Maturities of Debt Securities
at June 30, 2017
In millions
Amortized Cost

 
Fair Value

Within one year
$
10

 
$
10

One to five years
329

 
338

Six to ten years
656

 
663

After ten years
225

 
243

Total
$
1,220

 
$
1,254


At June 30, 2017, the Company had $309 million ($261 million at December 31, 2016) 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 June 30, 2017, the Company had investments in money market funds of $850 million classified as cash equivalents ($239 million at December 31, 2016).

The aggregate cost of the Company’s cost method investments totaled $116 million at June 30, 2017 ($120 million at December 31, 2016). 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 for the six-month period ended June 30, 2017 and no reduction, other than the restructuring charge, for the six-month period ended June 30, 2016.

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 six months of 2017, the Company entered into and subsequently terminated interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations with maturity dates extending through 2022. The fair value adjustment resulting from these swaps was a gain on the derivatives of $3 million. At June 30, 2017 and December 31, 2016, the Company had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations.

Subsequent to June 30, 2017, the Company entered into, and subsequently terminated, interest rate swaps with gross notional U.S. dollar equivalent of $300 million designated as fair value hedges of underlying fixed rate debt obligations. The fair value adjustment resulting from these swaps was an insignificant gain, which will be recorded in the third quarter of 2017.

Net Foreign Investment Hedges
For derivative instruments that are designated and qualify as net foreign investment hedges, the effective portion of the gain or loss on the derivative is included in “Cumulative Translation Adjustments” in "Accumulated other comprehensive loss" ("AOCL"). The Company had open foreign currency contracts designated as net foreign investment hedges with a gross notional U.S. dollar equivalent of $4,670 million at June 30, 2017 ($2,641 million at December 31, 2016). In addition, at June 30, 2017, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign

17


investment of $179 million ($172 million at December 31, 2016). The results of hedges of the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCL was a net loss after-tax of $39 million at June 30, 2017 (net gain after-tax of $1 million at December 31, 2016).

The following table provides the fair value and gross balance sheet classification of derivative instruments at June 30, 2017 and December 31, 2016:
 
Fair Value of Derivative Instruments
In millions
Balance Sheet Classification
 
Jun 30,
2017

 
Dec 31,
2016

Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Commodities
Other current assets
 
$
17

 
$
42

Commodities
Deferred charges and other assets
 
11

 
10

Foreign currency
Accounts and notes receivable - Other
 
38

 
90

Total derivatives designated as hedges
 
 
$
66

 
$
142

Derivatives not designated as hedges:
 
 
 
 
 
Commodities
Other current assets
 
$
40

 
$
13

Commodities
Deferred charges and other assets
 
9

 
12

Foreign currency
Accounts and notes receivable - Other
 
137

 
103

Total derivatives not designated as hedges
 
 
$
186

 
$
128

Total asset derivatives
 
 
$
252

 
$
270

Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Accrued and other current liabilities
 
$
3

 
$
3

Interest rates
Other noncurrent obligations
 
2

 
2

Commodities
Accrued and other current liabilities
 
67

 
32

Commodities
Other noncurrent obligations
 
190

 
196

Foreign currency
Accrued and other current liabilities
 
106

 
55

Total derivatives designated as hedges
 
 
$
368

 
$
288

Derivatives not designated as hedges:
 
 
 
 
 
Commodities
Accrued and other current liabilities
 
$
49

 
$
4

Commodities
Other noncurrent obligations
 
1

 
2

Foreign currency
Accounts payable - Other
 
226

 
84

Total derivatives not designated as hedges
 
 
$
276

 
$
90

Total liability derivatives
 
 
$
644

 
$
378


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 AOCL to income within the next 12 months are a $2 million loss for interest rate contracts, a $35 million loss for commodity contracts and a $14 million loss for foreign currency contracts.



18


NOTE 8 – 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, 2016. 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, 2017

In millions
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)

 
Significant
Other
Observable
Inputs
(Level 2)

 
Significant
Unobservable
Inputs
(Level 3)

 
Counterparty
and Cash
Collateral
Netting (1)

 
Total  

Assets at fair value:
 
 
 
 
 
 
 
 
 
Cash equivalents (2)
$

 
$
1,159

 
$

 
$

 
$
1,159

Interests in trade accounts receivable conduits (3)

 

 
1,684

 

 
1,684

Equity securities (4)
656

 
89

 

 

 
745

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
617

 

 

 
617

Corporate bonds

 
637

 

 

 
637

Derivatives relating to: (6)

 

 

 

 
 
Commodities
23

 
54

 

 
(16
)
 
61

Foreign currency

 
175

 

 
(150
)
 
25

Total assets at fair value
$
679

 
$
2,731

 
$
1,684

 
$
(166
)
 
$
4,928

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

 
$
23,239

 
$

 
$

 
$
23,239

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
5

 

 

 
5

Commodities
28

 
279

 

 
(38
)
 
269

Foreign currency

 
332

 

 
(150
)
 
182

Total liabilities at fair value
$
28

 
$
23,855

 
$

 
$
(188
)

$
23,695

(1)
Counterparty and 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 cash collateral 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 7 for the classification of derivatives in the consolidated balance sheets.
(7)
See Note 7 for information on fair value measurements of long-term debt.


19


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

 
$
500

 
$

 
$

 
$
500

Interests in trade accounts receivable conduits (3)

 

 
1,237

 

 
1,237

Equity securities (4)
619

 
87

 

 

 
706

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
608

 

 

 
608

Corporate bonds

 
645

 

 

 
645

Derivatives relating to: (6)

 

 

 

 
 
Commodities
48

 
29

 

 
(21
)
 
56

Foreign currency

 
193

 

 
(109
)
 
84

Total assets at fair value
$
667

 
$
2,062

 
$
1,237

 
$
(130
)
 
$
3,836

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

 
$
22,807

 
$

 
$

 
$
22,807

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
5

 

 

 
5

Commodities
20

 
214

 

 
(21
)
 
213

Foreign currency

 
139

 

 
(109
)
 
30

Total liabilities at fair value
$
20

 
$
23,165

 
$

 
$
(130
)
 
$
23,055

(1)
Counterparty and 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 cash collateral 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 7 for the classification of derivatives in the consolidated balance sheets.
(7)
See Note 7 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 $44 million at June 30, 2017 (less than $1 million at December 31, 2016).

The following table summarizes the changes in fair value measurements of interests held in trade receivable conduits using Level 3 inputs for the three- and six-month periods ended June 30, 2017 and 2016:

Fair Value Measurements Using Level 3 Inputs
Three Months Ended
 
Six Months Ended
Interests Held in Trade Receivable Conduits (1)
In millions
Jun 30,
2017

 
Jun 30,
2016

 
Jun 30,
2017

 
Jun 30,
2016

Balance at beginning of period
$
1,663

 
$
1,195

 
$
1,237

 
$
943

Loss included in earnings (2)
(2
)
 

 
(2
)
 
(1
)
Purchases
713

 
520

 
1,253

 
960

Settlements
(690
)
 
(566
)
 
(804
)
 
(753
)
Balance at end of period
$
1,684

 
$
1,149

 
$
1,684

 
$
1,149

(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.



20


NOTE 9 – SUPPLEMENTARY INFORMATION
The Company uses "Sundry income (expense) – net" to record a variety of income and expense items such as foreign exchange gains and losses, dividends from investments, gains and losses on sales of investments and assets, and certain litigation matters. For the three months ended June 30, 2017, "Sundry income (expense) - net" was income of $299 million (income of $2,550 million for the three months ended June 30, 2016). For the six months ended June 30, 2017, "Sundry income (expense) - net" was expense of $171 million (income of $1,309 million for the six months ended June 30, 2016). The following table provides the most significant transactions recorded in "Sundry income (expense) – net" for the three- and six-month periods ended June 30, 2017 and 2016.

Sundry Income (Expense) - Net
Three Months Ended
 
Six Months Ended
In millions
Jun 30,
2017

 
Jun 30,
2016

 
Jun 30,
2017

 
Jun 30,
2016

Gain related to Nova patent infringement award (1)
$
137

 
$

 
$
137

 
$

Gain on sales of other assets and investments
$
133

 
$
78

 
$
137

 
$
85

Loss related to Bayer CropSciences arbitration matter (1)
$

 
$

 
$
(469
)
 
$

Gain on ownership restructure of Dow Corning (2)
$

 
$
2,445

 
$

 
$
2,445

Settlement of urethane matters class action lawsuit and opt-out cases (1)
$

 
$

 
$

 
$
(1,235
)
(1)    See Note 10 for additional information.
(2)    See Note 4 for additional information.


NOTE 10 – COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. At June 30, 2017, the Company had accrued obligations of $904 million for probable environmental remediation and restoration costs, including $152 million for the remediation of Superfund sites. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately twice that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s results of operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. At December 31, 2016, the Company had accrued obligations of $909 million for probable environmental remediation and restoration costs, including $151 million for the remediation of Superfund sites.

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

Litigation
Asbestos-Related Matters of Union Carbide Corporation
A summary of Asbestos-Related Matters of Union Carbide Corporation can be found in Note 15 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Introduction
Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.


21


Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.

Estimating the Asbestos-Related Liability
Since 2003, Union Carbide has engaged Ankura Consulting Group, LLC ("Ankura"), a third party actuarial specialist, to review Union Carbide's historical asbestos-related claim and resolution activity in order to assist Union Carbide's management in estimating the asbestos-related liability. Each year, Ankura has reviewed the claim and resolution activity to determine the appropriateness of updating the most recent Ankura study. Historically, every other year beginning in October, Ankura has completed a full review and formal update to the most recent Ankura study.

Based on the December 2016 Ankura study and Union Carbide's own review of the data, and taking into account the change in accounting policy that occurred in the fourth quarter of 2016, Union Carbide's total asbestos-related liability through the terminal year of 2049, including asbestos-related defense and processing costs, was $1,490 million at December 31, 2016, and included in “Accrued and other current liabilities” and “Asbestos-related liabilities - noncurrent” in the consolidated balance sheets.

Each quarter, Union Carbide reviews claims filed, settled and dismissed, as well as average settlement and resolution costs by disease category. Union Carbide also considers additional quantitative and qualitative factors such as the nature of pending claims, trial experience of Union Carbide and other asbestos defendants, current spending for defense and processing costs, significant appellate rulings and legislative developments, trends in the tort system, and their respective effects on expected future resolution costs. Union Carbide's management considers all these factors in conjunction with the most recent Ankura study and determines whether a change in the estimate is warranted. Based on Union Carbide's review of 2017 activity, it was determined that no adjustment to the accrual was required at June 30, 2017.

Union Carbide’s asbestos-related liability for pending and future claims and defense and processing costs was $1,422 million at June 30, 2017, and approximately 14 percent of the recorded liability related to pending claims and approximately 86 percent related to future claims.

Summary
The Company's management believes the amounts recorded by Union Carbide for the asbestos-related liability (including defense and processing costs) reflect reasonable and probable estimates of the liability based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of defending and disposing of each such claim, as well as the numerous uncertainties surrounding asbestos litigation in the United States over a significant period of time, could cause the actual costs for Union Carbide to be higher or lower than those projected or those recorded. Any such events could result in an increase or decrease in the recorded liability.

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

Urethane Matters
A full description of the Urethane Matters can be found in Note 15 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Class Action Lawsuit
On February 26, 2016, the Company announced a proposed settlement of $835 million for the Urethane Matters Class Action Lawsuit, which included damages, class attorney fees and post-judgment interest. As a result, in the first quarter of 2016, the Company recorded a loss of $835 million, included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in the Performance Materials & Chemicals segment. On May 11, 2016, the Company moved the $835 million settlement amount into an escrow account. On July 29, 2016, the U.S. District Court for the District of Kansas granted final approval of the settlement and the funds were released from escrow on August 30, 2016.

Opt-Out Cases
On April 5, 2016, the Company entered into a binding settlement for the Opt-Out Cases under which the Company would pay the named plaintiffs $400 million, inclusive of damages and attorney fees. As a result, the Company recorded a loss of $400 million in the first quarter of 2016, included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in the Performance Materials & Chemicals segment. Payment of this settlement occurred on May 4, 2016.


22


Bayer CropScience v. Dow AgroSciences ICC Arbitration
On August 13, 2012, Bayer CropScience AG and Bayer CropScience NV (together, “Bayer”) filed a request for arbitration with the International Chamber of Commerce ("ICC") International Court of Arbitration against Dow AgroSciences LLC, a wholly owned subsidiary of the Company, and other subsidiaries of the Company (collectively, “DAS”) under a 1992 license agreement executed by predecessors of the parties (the “License Agreement”). In its request for arbitration, Bayer alleged that (i) DAS breached the License Agreement, (ii) the License Agreement was properly terminated with no ongoing rights to DAS, (iii) DAS has infringed and continues to infringe its patent rights related to the use of the pat gene in certain soybean and cotton seed products, and (iv) Bayer is entitled to monetary damages and injunctive relief. DAS denied that it breached the License Agreement and asserted that the License Agreement remained in effect because it was not properly terminated. DAS also asserted that all of Bayer’s patents at issue are invalid and/or not infringed, and, therefore, for these reasons (and others), a license was not required. During the pendency of the arbitration proceeding, DAS filed six re-examination petitions with the United States Patent & Trademark Office (“USPTO”) against the Bayer patents, asserting that each patent is invalid based on the doctrine against double-patenting and/or prior art. The USPTO granted all six petitions, and, on February 26, 2015, the USPTO issued an office action rejecting the patentability of the sole Bayer patent claim in the only asserted Bayer patent that has not expired and that forms the basis for the vast majority of the damages in the arbitral award discussed below.

A three-member arbitration tribunal presided over the arbitration proceeding (the “tribunal”). In a decision dated October 9, 2015, the tribunal determined that (i) DAS breached the License Agreement, (ii) Bayer properly terminated the License Agreement, (iii) all of the patents remaining in the proceeding are valid and infringed, and (iv) that Bayer is entitled to monetary damages in the amount of $455 million inclusive of pre-judgment interest and costs (the “arbitral award”). One of the arbitrators, however, issued a partial dissent finding that all of the patents are invalid based on the double-patenting doctrine. The tribunal also denied Bayer’s request for injunctive relief. The arbitration award is not self-executing and must be confirmed by a court for it to be enforceable and to have the legal effect of a judgment.

On October 16, 2015, Bayer filed a motion in U.S. District Court for the Eastern District of Virginia ("Federal District Court") seeking to confirm the arbitral award. DAS opposed the motion and filed separate motions to vacate the award, or in the alternative, to stay enforcement of the award until the USPTO issues final office actions with respect to the re-examination proceedings. On January 15, 2016, the Federal District Court denied DAS's motions and confirmed the award. DAS appealed the Federal District Court's decision and posted a bond to stay enforcement of the award during the appeal. On March 1, 2017, the U.S. Court of Appeals for the Federal Circuit ("Federal Circuit") affirmed the arbitral award. As a result of this action, in the first quarter of 2017, the Company recorded a loss of $469 million, inclusive of the arbitral award and post-judgment interest, which is included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in the Agricultural Sciences segment. On March 31, 2017, DAS filed a combined petition for Rehearing or Rehearing En Banc with the Federal Circuit which was denied on May 12, 2017. On May 19, 2017, the Federal Circuit issued a mandate denying DAS's request to stay the arbitral award pending judicial review by the United States Supreme Court. On May 26, 2017, the Company paid the $469 million arbitral award to Bayer.

The Company continues to believe the arbitral award is fundamentally flawed in numerous respects because it (i) violates U.S. public policy prohibiting enforcement of invalid patents, (ii) manifestly disregards applicable law, and (iii) disregards unambiguous contract provisions and ignores the essence of the applicable contracts. The USPTO has now issued office actions rejecting the patentability of all four patents that Bayer asserted in the case. The Company is continuing to pursue its legal rights with respect to this matter, including by filing a petition for writ of certiorari with the United States Supreme Court.

The arbitral award will not impact DAS’s commercialization of its soybean and cotton seed products, including those containing the ENLIST™ technologies.

Rocky Flats Matter
A summary of the Rocky Flats Matter can be found in Note 15 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

The Company and Rockwell International Corporation ("Rockwell") (collectively, the "defendants") were defendants in a class action lawsuit filed in 1990 on behalf of property owners ("plaintiffs") in Rocky Flats, Colorado, who asserted claims for nuisance and trespass based on alleged property damage caused by plutonium releases from a nuclear weapons facility owned by the U.S. Department of Energy ("DOE") (the "facility") but operated by Dow and Rockwell. The plaintiffs tried their case as a public liability action under the Price Anderson Act ("PAA"). Dow and Rockwell litigated this matter in the U.S. District Court for the District of Colorado ("District Court"), the U.S. Tenth Circuit Court of Appeals and then filed a petition for writ of certiorari in the United States Supreme Court. On May 18, 2016, Dow, Rockwell and the plaintiffs entered into a settlement agreement for $375 million, of which $131 million was paid by Dow. The DOE authorized the settlement pursuant to the PAA and the nuclear hazards indemnity provisions contained in Dow's and Rockwell's contracts. The District Court granted

23


preliminary approval to the class settlement on August 5, 2016. On April 28, 2017, the District Court conducted a fairness hearing and granted final judgment approving the class settlement and dismissed class claims against the defendants ("final judgment order"). The litigation is now concluded.

On December 13, 2016, the United States Civil Board of Contract Appeals unanimously ordered the United States government to pay the amounts stipulated in the settlement agreement. On January 17, 2017, the Company received a full indemnity payment of $131 million from the United States government for Dow's share of the class settlement. On January 26, 2017, the Company placed $130 million in an escrow account for the settlement payment owed to the plaintiffs. The funds were subsequently released from escrow as a result of the final judgment order. At June 30, 2017, there are no outstanding balances in the consolidated balance sheets related to this matter ($131 million included in "Accounts and notes receivable - Other" and $130 million included in "Accrued and other current liabilities" at December 31, 2016).

Dow Corning Chapter 11 Related Matters
A summary of the Dow Corning Chapter 11 Related Matters can be found in Note 15 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Introduction
In 1995, Dow Corning, then a 50:50 joint venture between Dow and Corning voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code in order to resolve Dow Corning’s breast implant liabilities and related matters (the “Chapter 11 Proceeding”). Dow Corning emerged from the Chapter 11 Proceeding on June 1, 2004 (the “Effective Date”) and is implementing the Joint Plan of Reorganization (the “Plan”). The Plan provides funding for the resolution of breast implant and other product liability litigation covered by the Chapter 11 Proceeding and provides a process for the satisfaction of commercial creditor claims in the Chapter 11 Proceeding. As of June 1, 2016, Dow Corning is a wholly owned subsidiary of Dow.

Breast Implant and Other Product Liability Claims
Under the Plan, a product liability settlement program administered by an independent claims office (the “Settlement Facility”) was created to resolve breast implant and other product liability claims. Product liability claimants rejecting the settlement program in favor of pursuing litigation must bring suit against a litigation facility (the “Litigation Facility”). Under the Plan, total payments committed by Dow Corning to resolving product liability claims are capped at a maximum $2,350 million net present value (“NPV”) determined as of the Effective Date using a discount rate of seven percent (approximately $3,685 million undiscounted at June 30, 2017). Of this amount, no more than $400 million NPV determined as of the Effective Date can be used to fund the Litigation Facility.

Dow Corning has an obligation to fund the Settlement Facility and the Litigation Facility over a 16-year period, commencing at the Effective Date. As of June 30, 2017, Dow Corning and its insurers have made life-to-date payments of $1,762 million to the Settlement Facility and the Settlement Facility reported an unexpended balance of $140 million.

Dow Corning's liability for breast implant and other product liability claims ("Implant Liability") was $263 million at June 30, 2017 ($263 million at December 31, 2016), which is included in "Other noncurrent obligations" in the consolidated balance sheets. Dow Corning is not aware of circumstances that would change the factors used in estimating the Implant Liability and believes the recorded liability reflects the best estimate of the remaining funding obligations under the Plan; however, the estimate relies upon a number of significant assumptions, including: future claim filing levels in the Settlement Facility will be similar to those in the revised settlement program, which management uses to estimate future claim filing levels for the Settlement Facility; future acceptance rates, disease mix, and payment values will be materially consistent with historical experience; no material negative outcomes in future controversies or disputes over Plan interpretation will occur; and the Plan will not be modified. If actual outcomes related to any of these assumptions prove to be materially different, the future liability to fund the Plan may be materially different than the amount estimated. If Dow Corning was ultimately required to fund the full liability up to the maximum capped value, the liability would be $1,923 million at June 30, 2017.

Commercial Creditor Issues
The Plan provides that each of Dow Corning’s commercial creditors (the “Commercial Creditors”) would receive in cash the sum of (a) an amount equal to the principal amount of their claims and (b) interest on such claims. The actual amount of interest that will ultimately be paid to these Commercial Creditors is uncertain due to pending litigation between Dow Corning and the Commercial Creditors regarding the appropriate interest rates to be applied to outstanding obligations from the 1995 bankruptcy filing date through the Effective Date, as well as the presence of any recoverable fees, costs and expenses. Upon the Plan becoming effective, Dow Corning paid approximately $1,500 million to the Commercial Creditors, representing principal and an amount of interest that Dow Corning considers undisputed.


24


In 2006, the U.S. Court of Appeals for the Sixth Circuit concluded that there is a general presumption that contractually specified default interest should be paid by a solvent debtor to unsecured creditors (the “Interest Rate Presumption”) and permitting Dow Corning’s Commercial Creditors to recover fees, costs, and expenses where allowed by the relevant loan agreements. The matter was remanded to the U.S. District Court for the Eastern District of Michigan ("District Court") for further proceedings, including rulings on the facts surrounding specific claims and consideration of any equitable factors that would preclude the application of the Interest Rate Presumption. On May 10, 2017, the District Court entered a stipulated order resolving pending discovery motions and established a discovery schedule for the Commercial Creditors matter. As a result, Dow Corning and its third party consultants conducted further analysis of the Commercial Creditors claims and defenses. This analysis indicated the estimated remaining liability to Commercial Creditors to be within a range of $77 million to $260 million. No single amount within the range appears to be a better estimate than any other amount within the range. Therefore, Dow Corning recorded the minimum liability within the range, which resulted in a decrease to the Commercial Creditor liability of $33 million, which was included in "Sundry income (expense) - net" in the consolidated statements of income. At June 30, 2017, the liability related to Dow Corning’s potential obligation to pay additional interest to its Commercial Creditors in the Chapter 11 Proceeding was $77 million and is included in "Accrued and other current liabilities" in the consolidated balance sheets ($108 million at December 31, 2016). The actual amount of interest that will be paid to these creditors is uncertain and will ultimately be resolved through continued proceedings in the District Court.

Indemnifications
In connection with the June 1, 2016 ownership restructure of Dow Corning, the Company is indemnified by Corning for 50 percent of future losses associated with certain pre-closing liabilities, including the Implant Liability and Commercial Creditors matters described above, subject to certain conditions and limits. The maximum amount of indemnified losses which may be recovered are subject to a cap that declines over time. Indemnified losses are capped at (1) $1.5 billion until May 31, 2018, (2) $1 billion between May 31, 2018 and May 31, 2023, and (3) no recoveries are permitted after May 31, 2023. No indemnification assets were recorded at June 30, 2017 or December 31, 2016.

Summary
The amounts recorded by Dow Corning for the Chapter 11 related matters described above were based on current, known facts, which management believes reflect reasonable and probable estimates of the liability. However, future events could cause the actual costs for Dow Corning to be higher or lower than those projected or those recorded. Any such events could result in an increase or decrease in the recorded liability.

Other Litigation Matters
In addition to the specific matters described above, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to product liability, patent infringement, employment matters, governmental tax and regulation disputes, contract and commercial litigation, and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. Dow has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies may provide coverage that could be utilized to minimize the financial impact, if any, of certain contingencies described above. It is the opinion of the Company’s management that the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, financial condition and cash flows of the Company.

Gain Contingency - Dow v. Nova Chemicals Corporation Patent Infringement Matter
On December 9, 2010, Dow filed suit in the Federal Court in Ontario, Canada ("Federal Court") alleging that Nova Chemicals Corporation ("Nova") was infringing the Company's Canadian polyethylene patent 2,106,705 (the "'705 Patent"). Nova counterclaimed on the grounds of invalidity and non-infringement. In accordance with Canadian practice, the suit was bifurcated into a merits phase, followed by a damages phase. Following trial in the merits phase, in May 2014 the Federal Court ruled that the Company's '705 Patent was valid and infringed by Nova. Nova appealed to the Canadian Federal Court of Appeal, which affirmed the Federal Court decision in August 2016. Nova then sought leave to appeal its loss to the Supreme Court of Canada, which dismissed Nova’s petition in April 2017. As a result, Nova has exhausted all appeal rights on the merits, and it is undisputed that Nova owes Dow the profits it earned from its infringing sales as determined in the trial for the damages phase.

On April 19, 2017, the Federal Court issued a Public Judgment in the damages phase, which detailed its conclusions on how to calculate the profits to be awarded to Dow. Dow and Nova submitted their respective calculations of the damages to the Federal Court in May 2017. On June 29, 2017, the Federal Court issued a Confidential Supplemental Judgment, concluding that Nova must pay $645 million Canadian dollars (equivalent to $495 million U.S. dollars) to Dow, plus pre- and post-judgment interest, for which Dow received payment of $501 million from Nova on July 6, 2017. Although Nova is appealing portions of the damages judgment, certain portions of it are indisputable and will be owed to Dow regardless of the outcome of any further appeals by Nova. As a result of these actions and in accordance with ASC 450-30 "Gain Contingencies," the Company recorded

25


a $160 million pretax gain in the second quarter of 2017, reflected in the Performance Plastics segment, of which $137 million is included in "Sundry income (expense) - net" and $23 million is included in "Selling, general and administrative expenses" in the consolidated statements of income. At June 30, 2017, included in the Company's consolidated balance sheets was $501 million in "Accounts and notes receivable - Other" for the damages judgment and $341 million in "Other noncurrent obligations" related to the disputed portion of the damages judgment. Dow is confident of its chances of defending the entire judgment on appeal, particularly the trial court's determinations on important factual issues, which will be accorded deferential review on appeal.

Purchase Commitments
A summary of the Company's purchase commitments can be found in Note 15 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to the purchase commitments since December 31, 2016.
 
Guarantees
The following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for each type of guarantee:

Guarantees
At June 30, 2017
 
At December 31, 2016
In millions
Final
Expiration
 
Maximum Future
Payments

 
Recorded  
Liability  

 
Final
Expiration
 
Maximum Future
Payments

 
Recorded  
Liability  

Guarantees
2021
 
$
4,886

 
$
73

 
2021
 
$
5,096

 
$
86

Residual value guarantees
2027
 
998

 
134

 
2027
 
947

 
134

Total guarantees
 
 
$
5,884

 
$
207

 
 
 
$
6,043

 
$
220


Guarantees
Guarantees arise during the ordinary course of business from relationships with customers and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others (via delivery of cash or other assets) if specified triggering events occur. With guarantees, such as commercial or financial contracts, non-performance by the guaranteed party triggers the obligation of the Company to make payments to the beneficiary of the guarantee. The majority of the Company’s guarantees relate to debt of nonconsolidated affiliates, which have expiration dates ranging from less than one year to four years, and trade financing transactions in Latin America, which typically expire within one year of inception. The Company’s current expectation is that future payment or performance related to the non-performance of others is considered unlikely.

The Company has entered into guarantee agreements (“Guarantees”) related to project financing for Sadara Chemical Company ("Sadara"), a nonconsolidated affiliate. The total of an Islamic bond and additional project financing (collectively “Total Project Financing”) obtained by Sadara is approximately $12.5 billion. Sadara had $12.4 billion of Total Project Financing outstanding at June 30, 2017 ($12.4 billion at December 31, 2016). The Company's guarantee of the Total Project Financing is in proportion to the Company's 35 percent ownership interest in Sadara, or up to approximately $4.4 billion