DOW-Q3-9.30.2013
Table of Contents

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

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

For the quarterly period ended SEPTEMBER 30, 2013

or

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

For the transition period from __________to__________

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

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

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

 
 
Outstanding at
Class
 
September 30, 2013
Common Stock, par value $2.50 per share
 
1,212,865,976 shares



Table of Contents

The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2013
TABLE OF CONTENTS

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


2

Table of Contents

The Dow Chemical Company and Subsidiaries

FORWARD-LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report including, without limitation, “Management's Discussion and Analysis,” and “Risk Factors.” These forward-looking statements are generally identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (see Part II, Item 1A of this Quarterly Report on Form 10-Q; Part II, Item 1A of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2013; and, Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2012). 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

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
 
Nine Months Ended
In millions, except per share amounts (Unaudited)
Sep 30,
2013

 
Sep 30,
2012

 
Sep 30,
2013

 
Sep 30,
2012

Net Sales
$
13,734

 
$
13,637

 
$
42,694

 
$
42,869

Cost of sales
11,716

 
11,368

 
35,526

 
35,853

Research and development expenses
418

 
434

 
1,270

 
1,245

Selling, general and administrative expenses
698

 
739

 
2,186

 
2,120

Amortization of intangibles
114

 
117

 
344

 
361

Restructuring charges

 

 

 
357

Equity in earnings of nonconsolidated affiliates
322

 
175

 
780

 
492

Sundry income (expense) - net
59

 
(21
)
 
2,080

 
23

Interest income
11

 
10

 
29

 
26

Interest expense and amortization of debt discount
264

 
318

 
839

 
959

Income Before Income Taxes
916

 
825

 
5,418

 
2,515

Provision for income taxes
231

 
234

 
1,630

 
664

Net Income
685

 
591

 
3,788

 
1,851

Net income attributable to noncontrolling interests
6

 
9

 
49

 
38

Net Income Attributable to The Dow Chemical Company
679

 
582

 
3,739

 
1,813

Preferred stock dividends
85

 
85

 
255

 
255

Net Income Available for The Dow Chemical Company Common Stockholders
$
594

 
$
497

 
$
3,484

 
$
1,558

 
 
 
 
 
 
 
 
Per Common Share Data:
 
 
 
 
 
 
 
Earnings per common share - basic
$
0.50

 
$
0.42

 
$
2.92

 
$
1.32

Earnings per common share - diluted
$
0.49

 
$
0.42

 
$
2.88

 
$
1.31

 


 
 
 
 
 


Common stock dividends declared per share of common stock
$
0.32

 
$
0.32

 
$
0.96

 
$
0.89

Weighted-average common shares outstanding - basic
1,187.4

 
1,172.7

 
1,184.9

 
1,167.8

Weighted-average common shares outstanding - diluted
1,194.2

 
1,179.5

 
1,287.8

 
1,174.9

 


 
 
 
 
 


Depreciation
$
509

 
$
514

 
$
1,518

 
$
1,530

Capital Expenditures
$
566

 
$
622

 
$
1,418

 
$
1,605

See Notes to the Consolidated Financial Statements.


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Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
 
Nine Months Ended
In millions (Unaudited)
Sep 30,
2013

 
Sep 30,
2012

 
Sep 30,
2013

 
Sep 30,
2012

Net Income
$
685

 
$
591

 
$
3,788

 
$
1,851

Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on investments
20

 
31

 
(11
)
 
63

Translation adjustments
303

 
339

 
34

 
165

Adjustments to pension and other postretirement benefit plans
149

 
97

 
432

 
279

Net gains (losses) on cash flow hedging derivative instruments
(16
)
 
19

 
(9
)
 
8

Other comprehensive income
456

 
486

 
446

 
515

Comprehensive Income
1,141

 
1,077

 
4,234

 
2,366

Comprehensive income attributable to noncontrolling interests, net of tax
9

 
9

 
18

 
38

Comprehensive Income Attributable to The Dow Chemical Company
$
1,132

 
$
1,068

 
$
4,216

 
$
2,328

See Notes to the Consolidated Financial Statements.


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Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited)
Sep 30,
2013

 
Dec 31,
2012

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2013: $170; 2012: $146)
$
5,272

 
$
4,318

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2013: $131; 2012: $121)
4,896

 
5,074

Other
4,880

 
4,605

Inventories
8,892

 
8,476

Deferred income tax assets - current
751

 
877

Other current assets
318

 
334

Total current assets
25,009

 
23,684

Investments
 
 
 
Investment in nonconsolidated affiliates
4,244

 
4,121

Other investments (investments carried at fair value - 2013: $2,004; 2012: $2,061)
2,496

 
2,565

Noncurrent receivables
341

 
313

Total investments
7,081

 
6,999

Property
 
 
 
Property
54,895

 
54,366

Less accumulated depreciation
37,535

 
36,846

Net property (variable interest entities restricted - 2013: $2,625; 2012: $2,554)
17,360

 
17,520

Other Assets
 
 
 
Goodwill
12,767

 
12,739

Other intangible assets (net of accumulated amortization - 2013: $3,168; 2012: $2,785)
4,383

 
4,711

Deferred income tax assets - noncurrent
2,930

 
3,333

Asbestos-related insurance receivables - noncurrent
160

 
155

Deferred charges and other assets
516

 
464

Total other assets
20,756

 
21,402

Total Assets
$
70,206

 
$
69,605

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
452

 
$
396

Long-term debt due within one year
680

 
672

Accounts payable:
 
 
 
Trade
4,864

 
5,010

Other
2,340

 
2,327

Income taxes payable
466

 
251

Deferred income tax liabilities - current
91

 
95

Dividends payable
466

 
86

Accrued and other current liabilities
2,634

 
2,656

Total current liabilities
11,993

 
11,493

Long-Term Debt (variable interest entities nonrecourse - 2013: $1,456; 2012: $1,406)
17,487

 
19,919

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities - noncurrent
792

 
837

Pension and other postretirement benefits - noncurrent
11,020

 
11,459

Asbestos-related liabilities - noncurrent
483

 
530

Other noncurrent obligations
3,266

 
3,353

Total other noncurrent liabilities
15,561

 
16,179

Redeemable Noncontrolling Interest
147

 
147

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
3,042

 
3,008

Additional paid-in capital
3,701

 
3,281

Retained earnings
20,830

 
18,495

Accumulated other comprehensive loss
(7,070
)
 
(7,516
)
Unearned ESOP shares
(364
)
 
(391
)
Treasury stock at cost
(134
)
 

The Dow Chemical Company’s stockholders’ equity
24,005

 
20,877

Noncontrolling interests
1,013

 
990

Total equity
25,018

 
21,867

Total Liabilities and Equity
$
70,206

 
$
69,605

See Notes to the Consolidated Financial Statements.

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Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Nine Months Ended
In millions (Unaudited)
Sep 30,
2013

 
Sep 30,
2012

Operating Activities
 
 
 
Net Income
$
3,788

 
$
1,851

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

 

Depreciation and amortization
1,992

 
2,018

Provision (credit) for deferred income tax
123

 
(170
)
Earnings of nonconsolidated affiliates less than (in excess of) dividends received
(42
)
 
92

Pension contributions
(802
)
 
(836
)
Net gain on sales of investments
(40
)
 
(11
)
Net gain on sales of property, businesses and consolidated companies
(35
)
 
(72
)
Other net loss
15

 
40

Net gain on sale of ownership interests in nonconsolidated affiliates
(30
)
 

Restructuring charges

 
357

Loss on early extinguishment of debt
173

 
24

Excess tax benefits from share-based payment arrangements
(16
)
 
(59
)
Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(780
)
 
(2,399
)
Proceeds from interests in trade accounts receivable conduits
688

 
2,190

Inventories
(426
)
 
(1,039
)
Accounts payable
(197
)
 
(135
)
Other assets and liabilities
1,179

 
673

Cash provided by operating activities
5,590

 
2,524

Investing Activities
 
 
 
Capital expenditures
(1,418
)
 
(1,605
)
Proceeds from sale / leaseback of assets
39

 

Proceeds from sales of property, businesses and consolidated companies
68

 
74

Investments in consolidated companies, net of cash acquired
(18
)
 
(27
)
Investments in and loans to nonconsolidated affiliates
(78
)
 
(226
)
Distributions from nonconsolidated affiliates
18

 
16

Proceeds from sale of ownership interests in nonconsolidated affiliates
66

 

Purchases of investments
(367
)
 
(393
)
Proceeds from sales and maturities of investments
450

 
417

Cash used in investing activities
(1,240
)
 
(1,744
)
Financing Activities
 
 
 
Changes in short-term notes payable
39

 
(98
)
Proceeds from issuance of long-term debt
749

 
532

Payments on long-term debt
(3,314
)
 
(1,786
)
Purchases of treasury stock
(134
)
 

Proceeds from issuance of common stock
247

 
207

Issuance costs on debt and equity securities
(5
)
 

Excess tax benefits from share-based payment arrangements
16

 
59

Contributions from noncontrolling interests
35

 

Distributions to noncontrolling interests
(30
)
 
(60
)
Dividends paid to stockholders
(1,014
)
 
(1,211
)
Cash used in financing activities
(3,411
)
 
(2,357
)
Effect of Exchange Rate Changes on Cash
15

 
18

Summary
 
 
 
Increase (decrease) in cash and cash equivalents
954

 
(1,559
)
Cash and cash equivalents at beginning of year
4,318

 
5,444

Cash and cash equivalents at end of period
$
5,272

 
$
3,885

See Notes to the Consolidated Financial Statements.

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Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Nine Months Ended
In millions (Unaudited)
Sep 30,
2013

 
Sep 30,
2012

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

 
$
4,000

Common Stock
 
 
 
Balance at beginning of year
3,008

 
2,961

Common stock issued
34

 
37

Balance at end of period
3,042

 
2,998

Additional Paid-in Capital
 
 
 
Balance at beginning of year
3,281

 
2,663

Common stock issued
213

 
170

Stock-based compensation and allocation of ESOP shares
207

 
279

Balance at end of period
3,701

 
3,112

Retained Earnings
 
 
 
Balance at beginning of year
18,495

 
19,087

Net income available for The Dow Chemical Company common stockholders
3,484

 
1,558

Dividends declared on common stock (per share: $0.96 in 2013, $0.89 in 2012)
(1,139
)
 
(1,042
)
Other
(10
)
 
(12
)
Balance at end of period
20,830

 
19,591

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(7,516
)
 
(5,996
)
Other comprehensive income
446

 
515

Balance at end of period
(7,070
)
 
(5,481
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(391
)
 
(434
)
Shares allocated to ESOP participants
27

 
44

Balance at end of period
(364
)
 
(390
)
Treasury Stock
 
 
 
Balance at beginning of year

 

Purchases
(134
)
 

Balance at end of period
(134
)
 

The Dow Chemical Company’s Stockholders’ Equity
24,005

 
23,830

Noncontrolling Interests
 
 
 
Balance at beginning of year
990

 
1,010

Net income attributable to noncontrolling interests
49

 
38

Distributions to noncontrolling interests
(30
)
 
(60
)
Capital contributions (noncash capital contributions 2013: $-; 2012: $97)
35

 
97

Consolidation of a variable interest entity

 
37

Cumulative translation adjustments
(26
)
 
9

Other
(5
)
 

Balance at end of period
1,013

 
1,131

Total Equity
$
25,018

 
$
24,961

See Notes to the Consolidated Financial Statements.


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Table of Contents

(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
 
Page
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Subsequent Event


NOTE 1 – CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.


NOTE 2 – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
During the first quarter of 2013, the Company adopted Accounting Standards Update ("ASU") ASU 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities," which requires entities to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement and ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Asset and Liabilities," which clarifies the scope of the offsetting disclosures of ASU 2011-11. The objective of the disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. The adoption of these standards was immaterial to the consolidated financial statements.

During the first quarter of 2013, the Company adopted ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income, by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. See Note 16 for the disclosures related to this adoption.

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Accounting Guidance Issued But Not Adopted as of September 30, 2013
In February 2013, the Financial Accounting Standards Board ("FASB") issued ASU 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date," which defines how entities measure obligations from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date and for which no guidance exists, except for obligations addressed within existing guidance in U.S. GAAP. The guidance also requires entities to disclose the nature and amount of the obligation as well as other information about those obligations. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective presentation for all comparative periods presented is required and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

In March 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity," which defines the treatment of the release of cumulative translation adjustments upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted and prior periods should not be adjusted. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which defines the presentation requirements of an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted and retrospective application is permitted, but not required. The Company is currently evaluating the impact of adopting this guidance.


NOTE 3 – RESTRUCTURING
4Q12 Restructuring
On October 23, 2012, the Company's Board of Directors approved a restructuring plan ("4Q12 Restructuring") to advance the next stage of the Company's transformation and to address macroeconomic uncertainties. The 4Q12 Restructuring plan accelerates the Company's structural cost reduction program and will affect approximately 2,850 positions and result in the shutdown of approximately 20 manufacturing facilities. These actions are expected to be completed primarily by March 31, 2015. As a result of the 4Q12 Restructuring activities, the Company recorded pretax restructuring charges of $990 million in the fourth quarter of 2012 consisting of costs associated with exit or disposal activities of $39 million, severance costs of $375 million and asset write-downs and write-offs of $576 million.

The severance component of the 4Q12 Restructuring charge of $375 million was for the separation of approximately 2,850 employees under the terms of the Company's ongoing benefit arrangements, primarily by March 31, 2015. At December 31, 2012, severance of $8 million had been paid and a liability of $367 million remained for 2,767 employees. In the first nine months of 2013, severance of $183 million was paid, leaving a liability of $184 million for approximately 1,000 employees at September 30, 2013.

The following table summarizes the activities related to the Company's 4Q12 Restructuring reserve:

4Q12 Restructuring Activities
Costs Associated with Exit or Disposal Activities

 
Severance Costs

 
Total

In millions
 
Reserve balance at December 31, 2012
$
30

 
$
367

 
$
397

Cash payments
(1
)
 
(69
)
 
(70
)
Reserve balance at March 31, 2013
$
29

 
$
298

 
$
327

Cash payments
(1
)
 
(59
)
 
(60
)
Reserve balance at June 30, 2013
$
28

 
$
239

 
$
267

Cash payments
(1
)
 
(55
)
 
(56
)
Reserve balance at September 30, 2013
$
27

 
$
184

 
$
211



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Table of Contents

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

1Q12 Restructuring
On March 27, 2012, the Company's Board of Directors approved a restructuring plan ("1Q12 Restructuring") to optimize its portfolio, respond to changing and volatile economic conditions, particularly in Western Europe, and to advance the Company's Efficiency for Growth program. The 1Q12 Restructuring plan included the shutdown of a number of manufacturing facilities and the elimination of approximately 900 positions. These actions are expected to be completed primarily by December 31, 2013. As a result of the 1Q12 Restructuring activities, the Company recorded pretax restructuring charges of $357 million in the first quarter of 2012 consisting of costs associated with exit or disposal activities of $150 million, severance costs of $113 million and asset write-downs and write-offs of $94 million. The impact of these charges was shown as "Restructuring charges" in the consolidated statements of income.

The severance component of the 1Q12 Restructuring charge of $113 million was for the separation of approximately 900 employees under the terms of the Company's ongoing benefit arrangements, primarily by December 31, 2013. At December 31, 2012, severance of $82 million had been paid and a liability of $31 million remained for 248 employees. In the first nine months of 2013, severance of $26 million was paid, leaving a liability of $5 million for approximately 70 employees at September 30, 2013.

The following table summarizes the activities related to the Company's 1Q12 Restructuring reserve:

1Q12 Restructuring Activities
Costs Associated with Exit or Disposal Activities

 
 
 
 



In millions
Severance Costs

Total

Reserve balance at December 31, 2012
$
56

 
$
31

 
$
87

Cash payments
(4
)
 
(20
)
 
(24
)
Noncash settlements
(7
)
 

 
(7
)
Foreign currency impact
(1
)
 

 
(1
)
Reserve balance at March 31, 2013
$
44

 
$
11

 
$
55

Cash payments
(4
)
 
(5
)
 
(9
)
Noncash settlements
(1
)
 

 
(1
)
Reserve balance at June 30, 2013
$
39

 
$
6

 
$
45

Cash payments
(1
)
 
(1
)
 
(2
)
Reserve balance at September 30, 2013
$
38

 
$
5

 
$
43


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

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



11

Table of Contents

NOTE 4 – INVENTORIES
The following table provides a breakdown of inventories:
 
Inventories
In millions
Sep 30, 2013

 
Dec 31, 2012

Finished goods
$
4,872

 
$
4,880

Work in process
2,223

 
1,910

Raw materials
929

 
866

Supplies
868

 
820

Total inventories
$
8,892

 
$
8,476

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $857 million at September 30, 2013 and $842 million at December 31, 2012.


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

Goodwill
Electronic
and
Functional
Materials

 
Coatings
and Infra-
structure
Solutions

 
Ag
Sciences

 
Perf
Materials

 
Perf
Plastics

 
Feedstocks
and Energy

 
Total  

In millions
Net goodwill at Dec 31, 2012
$
4,945

 
$
4,052

 
$
1,558

 
$
740

 
$
1,381

 
$
63

 
$
12,739

Sale of a Plastics Additives product line

 

 

 
(3
)
 

 

 
(3
)
Foreign currency impact
9

 
13

 

 
1

 
8

 

 
31

Net goodwill at Sep 30, 2013
$
4,954

 
$
4,065

 
$
1,558

 
$
738

 
$
1,389

 
$
63

 
$
12,767


The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At September 30, 2013
 
At December 31, 2012
In millions
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net  

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Licenses and intellectual property
$
1,771

 
$
(866
)
 
$
905

 
$
1,729

 
$
(747
)
 
$
982

Patents
124

 
(106
)
 
18

 
120

 
(100
)
 
20

Software
1,145

 
(597
)
 
548

 
1,047

 
(548
)
 
499

Trademarks
686

 
(329
)
 
357

 
691

 
(285
)
 
406

Customer related
3,630

 
(1,129
)
 
2,501

 
3,688

 
(974
)
 
2,714

Other
158

 
(141
)
 
17

 
158

 
(131
)
 
27

Total other intangible assets, finite lives
$
7,514

 
$
(3,168
)
 
$
4,346

 
$
7,433

 
$
(2,785
)
 
$
4,648

IPR&D (1), indefinite lives
37

 

 
37

 
63

 

 
63

Total other intangible assets
$
7,551

 
$
(3,168
)
 
$
4,383

 
$
7,496

 
$
(2,785
)
 
$
4,711

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

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

Amortization Expense
Three Months Ended
 
Nine Months Ended
In millions
Sep 30, 2013

 
Sep 30, 2012

 
Sep 30, 2013

 
Sep 30, 2012

Other intangible assets, excluding software
$
114

 
$
117

 
$
344

 
$
361

Software, included in “Cost of sales”
$
15

 
$
15

 
$
48

 
$
46



12

Table of Contents

Total estimated amortization expense for 2013 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2013
$
527

2014
$
512

2015
$
494

2016
$
482

2017
$
448

2018
$
431



NOTE 6 – FINANCIAL INSTRUMENTS
Investments
The Company’s investments in marketable securities are primarily classified as available-for-sale.

 
Investing Results
Nine Months Ended
In millions
Sep 30,
2013

 
Sep 30,
2012

Proceeds from sales of available-for-sale securities
$
409

 
$
401

Gross realized gains
$
63

 
$
30

Gross realized losses
$
(12
)
 
$
(10
)
The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities
at September 30, 2013
In millions
Amortized Cost

 
Fair Value

Within one year
$
35

 
$
35

One to five years
468

 
505

Six to ten years
552

 
567

After ten years
142

 
160

Total
$
1,197

 
$
1,267


At September 30, 2013, the Company had $1,625 million ($1,701 million at December 31, 2012) of held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had original maturities of three months or less at the time of purchase. The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At September 30, 2013, the Company had investments in money market funds of $463 million classified as cash equivalents ($252 million at December 31, 2012).

The net unrealized loss from mark-to-market adjustments recognized in earnings during the three-month period ended September 30, 2013 on trading securities held at September 30, 2013 was $1 million ($1 million gain during the three-month period ended September 30, 2012). The net unrealized loss from mark-to-market adjustments recognized in earnings during the nine-month period ended September 30, 2013 on trading securities held at September 30, 2013 was $11 million ($3 million gain during the nine-month period ended September 30, 2012).


13

Table of Contents

The following table provides the fair value and gross unrealized losses of the Company’s investments that were deemed to be temporarily impaired at September 30, 2013 and December 31, 2012, aggregated by investment category:
Temporarily Impaired Securities Less than 12 Months (1)
 
At September 30, 2013
 
At December 31, 2012
In millions
Fair
Value

 
Unrealized
Losses

 
Fair
Value

 
Unrealized
Losses

Debt securities:
 
 
 
 
 
 
 
Government debt (2)
$
100

 
$
(5
)
 
$

 
$

Corporate bonds
165

 
(5
)
 
22

 
(1
)
Total debt securities
$
265

 
$
(10
)
 
$
22

 
$
(1
)
Equity securities
169

 
(8
)
 
30

 
(2
)
Total temporarily impaired securities
$
434

 
$
(18
)
 
$
52

 
$
(3
)
(1)
Unrealized losses of 12 months or more were less than $1 million.
(2)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities' obligations.

Portfolio managers regularly review the Company’s holdings to determine if any investments are other-than-temporarily impaired. The analysis includes reviewing the amount of the impairment, as well as the length of time it has been impaired. In addition, specific guidelines for each instrument type are followed to determine if an other-than-temporary impairment has occurred.
For debt securities, the credit rating of the issuer, current credit rating trends, the trends of the issuer’s overall sector, the ability of the issuer to pay expected cash flows and the length of time the security has been in a loss position are considered in determining whether unrealized losses represent an other-than-temporary impairment. The Company did not have any credit-related losses during the nine-month periods ended September 30, 2013 or September 30, 2012.
For equity securities, the Company’s investments are primarily in Standard & Poor’s (“S&P”) 500 companies; however, the Company’s policies allow investments in companies outside of the S&P 500. The largest holdings are Exchange Traded Funds that represent the S&P 500 index or an S&P 500 sector or subset; the Company also has holdings in Exchange Traded Funds that represent emerging markets. The Company considers the evidence to support the recovery of the cost basis of a security including volatility of the stock, the length of time the security has been in a loss position, value and growth expectations, and overall market and sector fundamentals, as well as technical analysis, in determining whether unrealized losses represent an other-than-temporary impairment. In the nine-month period ended September 30, 2013, other-than-temporary impairment write-downs on investments still held by the Company were $2 million ($5 million in the nine-month period ended September 30, 2012).

The aggregate cost of the Company’s cost method investments totaled $184 million at September 30, 2013 ($176 million at December 31, 2012). Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed quarterly for impairment indicators. The Company's impairment analysis resulted in a $4 million reduction in the cost basis of these investments for the nine-month period ended September 30, 2013 ($3 million reduction in the nine-month period ended September 30, 2012).

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Table of Contents

The following table summarizes the fair value of financial instruments at September 30, 2013 and December 31, 2012:
 
Fair Value of Financial Instruments
 
At September 30, 2013
 
At December 31, 2012
In millions
Cost

 
Gain

 
Loss

 
Fair
Value

 
Cost

 
Gain

 
Loss

 
Fair
Value

Marketable securities: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt (2)
$
532

 
$
34

 
$
(5
)
 
$
561

 
$
506

 
$
59

 
$

 
$
565

Corporate bonds
665

 
47

 
(6
)
 
706

 
676

 
81

 
(1
)
 
756

Total debt securities
$
1,197

 
$
81

 
$
(11
)
 
$
1,267

 
$
1,182

 
$
140

 
$
(1
)
 
$
1,321

Equity securities
592

 
153

 
(8
)
 
737

 
634

 
109

 
(3
)
 
740

Total marketable securities
$
1,789

 
$
234

 
$
(19
)
 
$
2,004

 
$
1,816

 
$
249

 
$
(4
)
 
$
2,061

Long-term debt incl. debt due within one year (3)
$
(18,167
)
 
$
257

 
$
(2,113
)
 
$
(20,023
)
 
$
(20,591
)
 
$
24

 
$
(3,195
)
 
$
(23,762
)
Derivatives relating to:
 
 
 
 
 
 

 
 
 
 
 
 
 

Interest rates
$

 
$
1

 
$
(4
)
 
$
(3
)
 
$

 
$
1

 
$
(6
)
 
$
(5
)
Commodities (4)
$

 
$
13

 
$
(11
)
 
$
2

 
$

 
$
26

 
$
(7
)
 
$
19

Foreign currency
$

 
$
67

 
$
(27
)
 
$
40

 
$

 
$
34

 
$
(20
)
 
$
14

(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 adjustments of $22 million at September 30, 2013 and $23 million at December 31, 2012.
(4)
Presented net of cash collateral, as disclosed in Note 7.

Risk Management
Dow’s business operations give rise to market risk exposure due to changes in interest rates, foreign currency exchange rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as cash flow, fair value or net foreign investment hedges where appropriate. Accounting guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value. A secondary objective is to add value by creating additional nonspecific exposures within established limits and policies; derivatives used for this purpose are not designated as hedges. The potential impact of creating such additional exposures is not material to the Company’s results.

The Company’s risk management program for interest rate, foreign currency and commodity risks is based on fundamental, mathematical and technical models that take into account the implicit cost of hedging. Risks created by derivative instruments and the mark-to-market valuations of positions are strictly monitored at all times, using value at risk and stress tests. Counterparty credit risk arising from these contracts is not significant because the Company minimizes counterparty concentration, deals primarily with major financial institutions of solid credit quality, and the majority of its hedging transactions mature in less than three months. In addition, the Company minimizes concentrations of credit risk through its global orientation by transacting with large, internationally diversified financial counterparties. It is the Company’s policy to not have credit-risk-related contingent features in its derivative instruments. No significant concentration of counterparty credit risk existed at September 30, 2013. The Company does not anticipate losses from credit risk, and the net cash requirements arising from counterparty risk associated with risk management activities are not expected to be material in 2013.
The Company revises its strategies as market conditions dictate and management reviews its overall financial strategies and the impacts from using derivatives in its risk management program with the Company’s Board of Directors.
Interest Rate Risk Management
The Company enters into various interest rate contracts with the objective of lowering funding costs or altering interest rate exposures related to fixed and variable rate obligations. In these contracts, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed-upon notional principal amount. At September 30, 2013, the Company had open interest rate swaps with maturity dates that extend to 2021.

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Table of Contents

Foreign Currency Risk Management
The Company’s global operations require active participation in foreign exchange markets. The Company enters into foreign exchange forward contracts and options, and cross-currency swaps to hedge various currency exposures or create desired exposures. Exposures primarily relate to assets, liabilities and bonds denominated in foreign currencies, as well as economic exposure, which is derived from the risk that currency fluctuations could affect the dollar value of future cash flows related to operating activities. The primary business objective of the activity is to optimize the U.S. dollar value of the Company’s assets, liabilities and future cash flows with respect to exchange rate fluctuations. Assets and liabilities denominated in the same foreign currency are netted, and only the net exposure is hedged. At September 30, 2013, the Company had forward contracts, options and cross-currency swaps to buy, sell or exchange foreign currencies. These contracts had various expiration dates, primarily in the fourth quarter of 2013.
Commodity Risk Management
The Company has exposure to the prices of commodities in its procurement of certain raw materials. The primary purpose of commodity hedging activities is to manage the price volatility associated with these forecasted inventory purchases. At September 30, 2013, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These agreements had various expiration dates through the fourth quarter of 2015.
Accounting for Derivative Instruments and Hedging Activities
Cash Flow Hedges
For derivatives that are designated and qualify as cash flow hedging instruments, the effective portion of the gain or loss on the derivative is recorded in “Accumulated other comprehensive income (loss)” (“AOCI”); it is reclassified to “Cost of sales” in the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCI fluctuate based on changes in the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCI and net income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market conditions during any period. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period income.
The Company had open interest rate derivatives designated as cash flow hedges at September 30, 2013 with a net loss of $2 million after tax and a notional U.S. dollar equivalent of $528 million (net loss of $3 million after tax and a notional U.S. dollar equivalent of $433 million December 31, 2012).
Current open foreign currency forward contracts hedge the currency risk of forecasted feedstock purchase transactions until March 2014. The effective portion of the mark-to-market effects of the foreign currency forward contracts is recorded in AOCI; it is reclassified to income in the same period or periods that the underlying feedstock purchase affects income. The net loss from the foreign currency hedges included in AOCI at September 30, 2013 was $8 million after tax (net loss of $14 million after tax at December 31, 2012). At September 30, 2013, the Company had open forward contracts with various expiration dates to buy, sell or exchange foreign currencies with a notional U.S. dollar equivalent of $536 million ($366 million at December 31, 2012).
Commodity swaps, futures and option contracts with maturities of not more than 36 months are utilized and designated as cash flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until December 2014. The effective portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCI; it is reclassified to income in the same period or periods that the underlying commodity purchase affects income. The net gain from commodity hedges included in AOCI at September 30, 2013 was $8 million after tax (net gain of $24 million after tax at December 31, 2012). At September 30, 2013 and December 31, 2012, the Company had the following gross aggregate notionals of outstanding commodity forward and futures contracts to hedge forecasted purchases:
 
Commodity
Sep 30,
2013

 
Dec 31,
2012

 
Notional Volume Unit
Corn
4.9

 
1.9

 
million bushels
Crude Oil
1.5

 
0.4

 
million barrels
Ethane
1.8

 
1.8

 
million barrels
Naphtha
2.0

 
90.0

 
kilotons
Natural Gas
113.2

 
186.0

 
million million British thermal units
Soybeans
1.6

 
1.3

 
million bushels

The net after-tax amounts to be reclassified from AOCI to income within the next 12 months are a $3 million loss for interest rate contracts, a $10 million gain for commodity contracts and an $8 million loss for foreign currency contracts.

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Table of Contents

Fair Value Hedges
For derivative 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. The Company had no open interest rate swaps designated as fair value hedges of underlying fixed rate debt obligations at September 30, 2013 or December 31, 2012.
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 AOCI. At September 30, 2013 and December 31, 2012, the Company had no open forward contracts or outstanding options to buy, sell or exchange foreign currencies designated as net foreign investment hedges. At September 30, 2013, the Company had outstanding foreign-currency denominated debt designated as a hedge of net foreign investment of $204 million ($233 million at December 31, 2012). The result of hedges of the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCI was a net gain of $18 million after tax at September 30, 2013 (net gain of $22 million after tax at December 31, 2012). See Note 16 for further detail on changes in AOCI.
Other Derivative Instruments
The Company utilizes futures, options and swap instruments that are effective as economic hedges of commodity price exposures, but do not meet the hedge accounting criteria for derivatives and hedging. At September 30, 2013 and December 31, 2012, the Company had the following gross aggregate notionals of outstanding commodity contracts:
 
Commodity
Sep 30,
2013

 
Dec 31,
2012

 
Notional Volume Unit
Ethane
0.4

 
1.0

 
million barrels
Naphtha
69.0

 

 
kilotons
Natural Gas
9.2

 
33.0

 
million million British thermal units
Propane
45.0

 

 
kilotons

The Company also uses foreign exchange forward contracts, options and cross-currency swaps that are not designated as hedging instruments primarily to manage foreign currency exposure. The Company had open foreign exchange contracts with various expiration dates to buy, sell or exchange foreign currencies with a gross notional U.S. dollar equivalent of $15,305 million at September 30, 2013 ($17,637 million at December 31, 2012) and had no open interest rate swaps at September 30, 2013 ($472 million at December 31, 2012).


17

Table of Contents

The following table provides the fair value and gross balance sheet classification of derivative instruments at September 30, 2013 and December 31, 2012:

Fair Value of Derivative Instruments

In millions
Balance Sheet Classification
 
Sep 30,
2013

 
Dec 31,
2012

Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Other current assets
 
$
1

 
$
1

Commodities
Other current assets
 
16

 
28

Foreign currency
Accounts and notes receivable – Other
 
4

 
3

Total derivatives designated as hedges
 
 
$
21

 
$
32

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

 
$
3

Foreign currency
Accounts and notes receivable – Other
 
96

 
52

Total derivatives not designated as hedges
 
 
$
97

 
$
55

Total asset derivatives
 
 
$
118

 
$
87

Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Accounts payable – Other
 
$
4

 
$
5

Commodities
Accounts payable – Other
 
19

 
21

Foreign currency
Accounts payable – Other
 
12

 
14

Total derivatives designated as hedges
 
 
$
35

 
$
40

Derivatives not designated as hedges:
 
 
 
 
 
Interest rates
Accounts payable – Other
 
$

 
$
1

Commodities
Accounts payable – Other
 
2

 
6

Foreign currency
Accounts payable – Other
 
48

 
27

Total derivatives not designated as hedges
 
 
$
50

 
$
34

Total liability derivatives
 
 
$
85

 
$
74




18

Table of Contents

NOTE 7 – FAIR VALUE MEASUREMENTS
Fair Value Measurements on a Recurring Basis
The following tables summarize the bases used to measure certain assets and liabilities at fair value on a recurring basis:

Basis of Fair Value Measurements
on a Recurring Basis
at September 30, 2013

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

 
Significant
Other
Observable
Inputs
(Level 2)

 
Significant
Unobservable
Inputs
(Level 3)

 
Counterparty
and Cash
Collateral
Netting (1)

 
Total  

Assets at fair value:
 
 
 
 
 
 
 
 
 
Cash equivalents (2)
$

 
$
2,088

 
$

 
$

 
$
2,088

Interests in trade accounts receivable conduits (3)

 

 
1,363

 

 
1,363

Equity securities (4)
702

 
35

 

 

 
737

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
561

 

 

 
561

Corporate bonds

 
706

 

 

 
706

Derivatives relating to: (6)

 

 

 

 
 
Interest rates

 
1

 

 

 
1

Commodities
5

 
12

 

 
(4
)
 
13

Foreign currency

 
100

 

 
(33
)
 
67

Total assets at fair value
$
707

 
$
3,503

 
$
1,363

 
$
(37
)
 
$
5,536

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

 
$
20,023

 
$

 
$

 
$
20,023

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
4

 

 

 
4

Commodities
9

 
12

 

 
(10
)
 
11

Foreign currency

 
60

 

 
(33
)
 
27

Total liabilities at fair value
$
9

 
$
20,099

 
$

 
$
(43
)

$
20,065

(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)
Primarily Treasury Bills included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value.
(3)
Included in “Accounts and notes receivable – Other” in the consolidated balance sheets. See Note 9 for additional information on transfers of financial assets.
(4)
The Company’s investments in equity and debt securities are primarily classified as available-for-sale and are included in “Other investments” in the consolidated balance sheets.
(5)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(6)
See Note 6 for the classification of derivatives in the consolidated balance sheets.
(7)
See Note 6 for information on fair value adjustments to long-term debt, included at cost in the consolidated balance sheets.


19

Table of Contents

Basis of Fair Value Measurements
on a Recurring Basis
at December 31, 2012

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)
$

 
$
1,953

 
$

 
$

 
$
1,953

Interests in trade accounts receivable conduits (3)

 

 
1,057

 

 
1,057

Equity securities (4)
702

 
38

 

 

 
740

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
565

 

 

 
565

Corporate bonds

 
756

 

 

 
756

Derivatives relating to: (6)

 

 

 

 
 
Interest rates

 
1

 

 

 
1

Commodities
9

 
22

 

 
(5
)
 
26

Foreign currency

 
55

 

 
(21
)
 
34

Total assets at fair value
$
711

 
$
3,390

 
$
1,057

 
$
(26
)
 
$
5,132

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

 
$
23,762

 
$

 
$

 
$
23,762

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
6

 

 

 
6

Commodities
16

 
11

 

 
(20
)
 
7

Foreign currency

 
41

 

 
(21
)
 
20

Total liabilities at fair value
$
16

 
$
23,820

 
$

 
$
(41
)
 
$
23,795

(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)
Primarily Treasury Bills included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value.
(3)
Included in “Accounts and notes receivable – Other” in the consolidated balance sheets. See Note 9 for additional information on transfers of financial assets.
(4)
The Company’s investments in equity and debt securities are primarily classified as available-for-sale and are included in “Other investments” in the consolidated balance sheets.
(5)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(6)
See Note 6 for the classification of derivatives in the consolidated balance sheets.
(7)
See Note 6 for information on fair value adjustments to long-term debt, included at cost in the consolidated balance sheets.
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 $28 million at September 30, 2013 ($20 million at December 31, 2012).
For assets and liabilities classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange in which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For assets and liabilities classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability, or by using observable market data points of similar, more liquid securities to imply the price. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.
For derivative assets and liabilities, standard industry models are used to calculate the fair value of the various financial instruments based on significant observable market inputs, such as foreign exchange rates, commodity prices, swap rates, interest rates and implied volatilities obtained from various market sources. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.

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For all other assets and liabilities for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models. See Note 6 for further information on the types of instruments used by the Company for risk management.

During the nine-month period ended September 30, 2013, the Company transferred from Level 1 to Level 2 certain over-the-counter equity securities valued at $4 million, as these securities trade in less active markets. There were no transfers between Levels 1 and 2 in the year ended December 31, 2012.
For assets classified as Level 3 measurements, the fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity. The fair value of the Company’s interests held in trade receivable conduits is determined by calculating the expected amount of cash to be received using the key input of anticipated credit losses in the portfolio of receivables sold that have not yet been collected. Given the short-term nature of the underlying receivables, discount rate and prepayments are not factors in determining the fair value of the interests. See Note 9 for further information on assets classified as Level 3 measurements.
The following table summarizes the changes in fair value measurements using Level 3 inputs for the three- and nine-month periods ended September 30, 2013 and 2012:

Fair Value Measurements Using Level 3 Inputs
Three Months Ended
 
Nine Months Ended
Interests Held in Trade Receivable Conduits (1)
In millions
Sep 30,
2013

 
Sep 30,
2012

 
Sep 30,
2013

 
Sep 30,
2012

Balance at beginning of period
$
1,291

 
$
1,220

 
$
1,057

 
$
1,141

Loss included in earnings (2)
(1
)
 
(2
)
 
(3
)
 
(4
)
Purchases
325

 
343

 
997

 
2,396

Settlements
(252
)
 
(218
)
 
(688
)
 
(2,190
)
Balance at September 30
$
1,363

 
$
1,343

 
$
1,363

 
$
1,343

(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.

Fair Value Measurements on a Nonrecurring Basis
The following table summarizes the bases used to measure certain assets and liabilities at fair value on a nonrecurring basis in the consolidated balance sheets at September 30, 2012:

Basis of Fair Value Measurements
on a Nonrecurring Basis
at September 30, 2012
 
Significant
Other
Unobservable
Inputs

 
Total
Losses

In millions
 
(Level 3)

 
2012

Assets at fair value:
 
 
 
 
Long-lived assets and other assets
 
$
10

 
$
(123
)

As part of the 1Q12 Restructuring plan that was approved on March 27, 2012, the Company shut down a number of manufacturing facilities during 2012. The manufacturing assets and facilities associated with this plan were written down to zero in the first quarter of 2012 and a $94 million impairment charge was included in "Restructuring charges" in the consolidated statements of income. In addition, a $29 million asset impairment charge was recognized in the Performance Materials segment in the third quarter of 2012. The assets, classified as Level 3 measurements, are valued using unobservable inputs, including assumptions a market participant would use to measure the fair value of the group of assets. See Note 3 for additional information on the Company's restructuring activities.


NOTE 8 – COMMITMENTS AND CONTINGENT LIABILITIES
Dow Corning Credit Facility
The Company is a 50 percent shareholder in Dow Corning Corporation ("Dow Corning"). On June 1, 2004, the Company agreed to provide a credit facility to Dow Corning as part of Dow Corning's Joint Plan of Reorganization. The aggregate amount of the facility was originally $300 million; it was reduced to $50 million effective June 1, 2013, of which the Company's share is $25 million. At September 30, 2013, no draws had been taken against the credit facility.


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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 September 30, 2013, the Company had accrued obligations of $748 million for probable environmental remediation and restoration costs, including $76 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Company’s results of operations, financial condition and cash flows. It is the opinion of the Company’s management, however, that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Company’s results of operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. At December 31, 2012, the Company had accrued obligations of $754 million for probable environmental remediation and restoration costs, including $69 million for the remediation of Superfund sites.

Midland Off-Site Environmental Matters
On June 12, 2003, the Michigan Department of Environmental Quality ("MDEQ") issued a Hazardous Waste Operating License (the "License") to the Company’s Midland, Michigan manufacturing site (the "Midland site"), which included provisions requiring the Company to conduct an investigation to determine the nature and extent of off-site contamination in the City of Midland soils, the Tittabawassee River and Saginaw River sediment and floodplain soils, and the Saginaw Bay, and, if necessary, undertake remedial action.

City of Midland
The MDEQ, as a result of ongoing discussions with the Company regarding the implementation of the requirements of the License, announced on February 16, 2012, a proposed plan to resolve the issue of dioxin contamination in residential soils in Midland. As part of the proposed plan, the Company will sample soil at residential properties near the Midland site for the presence of dioxins to determine where clean-up may be required. On March 6, 2012, the Company submitted an Interim Response Activity Plan Designed to Meet Criteria ("Work Plan") to the MDEQ. On May 25, 2012, the Company submitted a revision to the Work Plan to the MDEQ to address agency and public comments. The MDEQ approved the Work Plan on June 1, 2012. Implementation of the Work Plan began on June 4, 2012. The Company submitted amendments to the Work Plan to increase the number of properties to be sampled in 2012. The amendments were approved by the MDEQ on July 23, 2012 and September 13, 2012. On February 15, 2013, the Company submitted a plan for properties to be sampled during 2013 ("2013 Plan"), as required by the approved Work Plan. Approval of the 2013 Plan was granted in May 2013. During the third quarter of 2013, the Company submitted amendments to the 2013 Plan to increase the number of properties to be sampled in 2013. Approval of the amendments to the 2013 Plan was granted on October 14, 2013 and additional sampling of properties is in progress. As of September 30, 2013, 86 of the 98 properties identified through sampling as being above the remediation criteria have been remediated.

Tittabawassee and Saginaw Rivers, Saginaw Bay
The Company, the U.S. Environmental Protection Agency ("EPA") and the State of Michigan ("State") entered into an administrative order on consent ("AOC"), effective January 21, 2010, that requires the Company to conduct a remedial investigation, a feasibility study and a remedial design for the Tittabawassee River, the Saginaw River and the Saginaw Bay, and pay the oversight costs of the EPA and the State under the authority of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). These actions, to be conducted under the lead oversight of the EPA, will build upon the investigative work completed under the State Resource Conservation Recovery Act ("RCRA") program from 2005 through 2009. The Tittabawassee River, beginning at the Midland site and extending down to the first six miles of the Saginaw River, are designated as the first Operable Unit for purposes of conducting the remedial investigation, feasibility study and remedial design work. This work will be performed in a largely upriver to downriver sequence for eight geographic segments of the Tittabawassee and upper Saginaw R