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EX-12.1 - EXHIBIT 12.1 - DOW CHEMICAL CO /DE/dow-q1x3312016ex121.htm
EX-23 - ANKURA CONSULTING GROUP, LLC - DOW CHEMICAL CO /DE/dow-q1x3312016ex23.htm
EX-31.A - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - DOW CHEMICAL CO /DE/dow-q1x3312016ex31a.htm
EX-31.B - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - DOW CHEMICAL CO /DE/dow-q1x3312016ex31b.htm
EX-32.B - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - DOW CHEMICAL CO /DE/dow-q1x3312016ex32b.htm
EX-32.A - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - DOW CHEMICAL CO /DE/dow-q1x3312016ex32a.htm

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

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

For the quarterly period ended MARCH 31, 2016

or

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

For the transition period from __________to__________

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

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

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

 
 
Outstanding at
Class
 
March 31, 2016
Common Stock, par value $2.50 per share
 
1,122,827,921 shares




The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended March 31, 2016
TABLE OF CONTENTS

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


2


The Dow Chemical Company and Subsidiaries

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

FORWARD-LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report including, without limitation, the following sections: “Management's Discussion and Analysis,” and “Risk Factors.” These forward-looking statements are generally identified by the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “may,” “opportunity,” “outlook,” “plan,” “project,” “should,” “strategy,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.

This document also contains statements about Dow's agreement to effect an all-stock, merger of equals strategic combination with E. I. du Pont de Nemours and Company ("DuPont") resulting in a new combined company ("DowDuPont") and then, subsequent to the merger, Dow and DuPont intend to pursue the separation of DowDuPont's agriculture business, specialty business and material science business through one or more tax-efficient transactions (collectively, the "Transaction"). Many factors could cause actual results to differ materially from these forward-looking statements with respect to the Transaction, including (i) the completion of the proposed Transaction on anticipated terms and timing, including obtaining shareholder and regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the new combined company’s operations and other conditions to the completion of the merger, (ii) the ability of Dow and DuPont to integrate the business successfully and to achieve anticipated synergies, risks and costs and pursuit and/or implementation of the potential separation, including anticipated timing, and any changes to the configuration of businesses included in the potential separation, if implemented, (iii) potential litigation relating to the proposed Transaction that could be instituted against Dow, DuPont or their respective directors, (iv) the risk that disruptions from the proposed Transaction will harm Dow’s or DuPont’s business, including current plans and operations, (v) the ability of Dow or DuPont to retain and hire key personnel, (vi) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the merger, (vii) uncertainty as to the long-term value of DowDuPont common stock, (viii) continued availability of capital and financing and rating agency actions, (ix) legislative, regulatory and economic developments, (x) potential business uncertainty during the pendency of the merger that could affect Dow’s and/or DuPont’s economic performance, (xi) certain contractual restrictions that could be imposed on Dow and/or DuPont during the pendency of the merger that might impact Dow’s or DuPont’s ability to pursue certain business opportunities or strategic transactions and (xii) unpredictability and severity of catastrophic events, including, but not limited to, acts of terrorism or outbreak of war or hostilities, as well as management’s response to any of the aforementioned factors. These risks, as well as other risks associated with the proposed merger, are more fully discussed in the joint proxy statement/prospectus that is included in the registration statement on Form S-4 (File No. 333-209869) that was filed with the U.S. Securities and Exchange Commission in connection with the proposed merger. While the list of factors presented here is, and the list of factors presented in the registration statement on Form S-4 are, considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on Dow’s or DuPont’s consolidated financial condition, results of operations, credit rating or liquidity. Neither Dow nor DuPont assumes any obligation to publicly provide revisions or updates to any forward-looking statements, whether as a result of new information, future developments or otherwise, should circumstances change, except as otherwise required by securities and other applicable laws.

A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (see Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2015). The Dow Chemical Company undertakes no obligation to update or revise publicly any forward-looking statements whether because of new information, future events, or otherwise, except as required by securities and other applicable laws.

3


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
In millions, except per share amounts (Unaudited)
Mar 31,
2016

 
Mar 31,
2015

Net Sales
$
10,703

 
$
12,370

Cost of sales
7,951

 
9,535

Research and development expenses
361

 
383

Selling, general and administrative expenses
742

 
752

Amortization of intangibles
103

 
102

Restructuring credits
(2
)
 

Equity in earnings of nonconsolidated affiliates
39

 
168

Sundry income (expense) - net
(1,241
)
 
663

Interest income
20

 
17

Interest expense and amortization of debt discount
201

 
241

Income Before Income Taxes
165

 
2,205

Provision (Credit) for income taxes
(110
)
 
686

Net Income
275

 
1,519

Net income attributable to noncontrolling interests
21

 
41

Net Income Attributable to The Dow Chemical Company
254

 
1,478

Preferred stock dividends
85

 
85

Net Income Available for The Dow Chemical Company Common Stockholders
$
169

 
$
1,393

 
 
 
 
Per Common Share Data:
 
 
 
Earnings per common share - basic
$
0.15

 
$
1.22

Earnings per common share - diluted
$
0.15

 
$
1.18

 
 
 


Dividends declared per share of common stock
$
0.46

 
$
0.42

Weighted-average common shares outstanding - basic
1,102.9

 
1,135.7

Weighted-average common shares outstanding - diluted
1,117.3

 
1,246.7

 
 
 


Depreciation
$
456

 
$
486

Capital Expenditures
$
820

 
$
903

See Notes to the Consolidated Financial Statements.


4


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
In millions (Unaudited)
Mar 31,
2016

 
Mar 31,
2015

Net Income
$
275

 
$
1,519

Other Comprehensive Income (Loss), Net of Tax
 
 
 
Net change in unrealized gains on investments
19

 
(2
)
Translation adjustments
328

 
(937
)
Adjustments to pension and other postretirement benefit plans
92

 
125

Net losses on cash flow hedging derivative instruments
(34
)
 
(9
)
Other comprehensive income (loss)
405

 
(823
)
Comprehensive Income
680

 
696

Comprehensive income attributable to noncontrolling interests, net of tax
37

 
41

Comprehensive Income Attributable to The Dow Chemical Company
$
643

 
$
655

See Notes to the Consolidated Financial Statements.


5


The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited)
Mar 31,
2016

 
Dec 31,
2015

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2016: $202; 2015: $158)
$
6,610

 
$
8,577

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2016: $99; 2015: $94)
4,491

 
4,078

Other
4,270

 
3,768

Inventories
7,298

 
6,871

Other current assets
665

 
647

Total current assets
23,334

 
23,941

Investments
 
 
 
Investment in nonconsolidated affiliates
4,197

 
3,958

Other investments (investments carried at fair value - 2016: $1,892; 2015: $1,866)
2,939

 
2,923

Noncurrent receivables
572

 
765

Total investments
7,708

 
7,646

Property
 
 
 
Property
52,152

 
50,802

Less accumulated depreciation
33,732

 
32,948

Net property (variable interest entities restricted - 2016: $1,079; 2015: $1,717)
18,420

 
17,854

Other Assets
 
 
 
Goodwill
12,214

 
12,154

Other intangible assets (net of accumulated amortization - 2016: $3,917; 2015: $3,770)
3,591

 
3,617

Deferred income tax assets - noncurrent
2,537

 
2,140

Asbestos-related insurance receivables - noncurrent
48

 
51

Deferred charges and other assets
588

 
535

Total other assets
18,978

 
18,497

Total Assets
$
68,440

 
$
67,938

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
491

 
$
454

Long-term debt due within one year
256

 
541

Accounts payable:
 
 
 
Trade
3,729

 
3,577

Other
2,324

 
2,287

Income taxes payable
312

 
452

Dividends payable
595

 
592

Accrued and other current liabilities
3,975

 
3,212

Total current liabilities
11,682

 
11,115

Long-Term Debt (variable interest entities nonrecourse - 2016: $485; 2015: $487)
16,229

 
16,215

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities - noncurrent
575

 
587

Pension and other postretirement benefits - noncurrent
8,752

 
9,119

Asbestos-related liabilities - noncurrent
374

 
387

Other noncurrent obligations
4,394

 
4,332

Total other noncurrent liabilities
14,095

 
14,425

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
3,107

 
3,107

Additional paid-in capital
4,809

 
4,936

Retained earnings
28,074

 
28,425

Accumulated other comprehensive loss
(8,262
)
 
(8,667
)
Unearned ESOP shares
(264
)
 
(272
)
Treasury stock at cost
(5,865
)
 
(6,155
)
The Dow Chemical Company’s stockholders’ equity
25,599

 
25,374

Non-redeemable noncontrolling interests
835

 
809

Total equity
26,434

 
26,183

Total Liabilities and Equity
$
68,440

 
$
67,938

See Notes to the Consolidated Financial Statements.

6


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Three Months Ended
In millions (Unaudited)
Mar 31,
2016

 
Mar 31,
2015

Operating Activities
 
 
 
Net Income
$
275

 
$
1,519

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

 

Depreciation and amortization
607

 
634

Credit for deferred income tax
(451
)
 
(51
)
Earnings of nonconsolidated affiliates less than dividends received
360

 
407

Pension contributions
(448
)
 
(325
)
Net gain on sales of investments
(12
)
 
(22
)
Net gain on sales of property, businesses and consolidated companies
(8
)
 
(706
)
Restructuring credits
(2
)
 

Excess tax benefits from share-based payment arrangements
(26
)
 
(2
)
Other net loss
34

 
17

Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(1,043
)
 
(81
)
Proceeds from interests in trade accounts receivable conduits
187

 
285

Inventories
(432
)
 
(62
)
Accounts payable
135

 
(326
)
Other assets and liabilities
876

 
(29
)
Cash provided by operating activities
52

 
1,258

Investing Activities
 
 
 
Capital expenditures
(820
)
 
(903
)
Proceeds from sales of property, businesses and consolidated companies, net of cash divested
32

 
1,375

Acquisitions of businesses
(167
)
 
(79
)
Investments in and loans to nonconsolidated affiliates
(245
)
 
(125
)
Distributions and loan repayments from nonconsolidated affiliates
3

 
1

Purchases of investments
(121
)
 
(83
)
Proceeds from sales and maturities of investments
155

 
134

Cash provided by (used in) investing activities
(1,163
)
 
320

Financing Activities
 
 
 
Changes in short-term notes payable
(54
)
 
(39
)
Proceeds from issuance of long-term debt
29

 
102

Payments on long-term debt
(360
)
 
(13
)
Purchases of treasury stock

 
(500
)
Proceeds from sales of common stock
92

 
106

Transaction financing, debt issuance and other costs
(2
)
 
(1
)
Excess tax benefits from share-based payment arrangements
26

 
2

Contributions from noncontrolling interests

 
14

Distributions to noncontrolling interests
(11
)
 
(9
)
Dividends paid to stockholders
(591
)
 
(563
)
Cash used in financing activities
(871
)
 
(901
)
Effect of Exchange Rate Changes on Cash
15

 
(43
)
Summary
 
 
 
Increase (decrease) in cash and cash equivalents
(1,967
)
 
634

Cash and cash equivalents at beginning of period
8,577

 
5,654

Cash and cash equivalents at end of period
$
6,610

 
$
6,288

See Notes to the Consolidated Financial Statements.

7


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Three Months Ended
In millions, except per share amounts (Unaudited)
Mar 31,
2016

 
Mar 31,
2015

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

 
$
4,000

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

 
3,107

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

 
4,846

Common stock issued / sold
92

 
106

Stock-based compensation and allocation of ESOP shares
(219
)
 
(160
)
Balance at end of period
4,809

 
4,792

Retained Earnings
 
 
 
Balance at beginning of year
28,425

 
23,045

Net income available for The Dow Chemical Company common stockholders
169

 
1,393

Dividends declared on common stock (per share - 2016: $0.46; 2015: $0.42)
(509
)
 
(477
)
Dividend equivalents on participating securities
(11
)
 
(5
)
Balance at end of period
28,074

 
23,956

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(8,667
)
 
(8,017
)
Other comprehensive income (loss)
405

 
(823
)
Balance at end of period
(8,262
)
 
(8,840
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(272
)
 
(325
)
Shares allocated to ESOP participants
8

 
35

Balance at end of period
(264
)
 
(290
)
Treasury Stock
 
 
 
Balance at beginning of year
(6,155
)
 
(4,233
)
Purchases

 
(500
)
Issuances - compensation plans
290

 
245

Balance at end of period
(5,865
)
 
(4,488
)
The Dow Chemical Company’s Stockholders’ Equity
25,599

 
22,237

Non-redeemable Noncontrolling Interests
835

 
977

Total Equity
$
26,434

 
$
23,214

See Notes to the Consolidated Financial Statements.


8


(Unaudited)
 
The Dow Chemical Company and Subsidiaries
PART I – FINANCIAL INFORMATION, Item 1. Financial Statements
Notes to the Consolidated Financial Statements
Table of Contents


NOTE 1 – CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

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

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

 
Updated

Deferred income tax assets - current
$
827

 
$

Other current assets
$
354

 
$
647

Total current assets
$
24,475

 
$
23,941

Deferred income tax assets - noncurrent
$
1,694

 
$
2,140

Total other assets
$
18,051

 
$
18,497

Total Assets
$
68,026

 
$
67,938

Deferred income tax liabilities - current
$
100

 
$

Total current liabilities
$
11,215

 
$
11,115

Deferred income tax liabilities - noncurrent
$
575

 
$
587

Total other noncurrent liabilities
$
14,413

 
$
14,425

Total Liabilities and Equity
$
68,026

 
$
67,938


9


NOTE 2 – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
During the first quarter of 2016, the Company adopted ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which makes changes to both the variable interest model and voting interest model and eliminates the indefinite deferral of Financial Accounting Standards Board ("FASB") Statement No. 167, included in ASU 2010-10, for certain investment funds. All reporting entities that hold a variable interest in other legal entities had to re-evaluate their consolidation conclusions as well as disclosure requirements. This ASU was effective for annual periods beginning after December 15, 2015, and early adoption was permitted, including any interim period. The adoption of this guidance did not have an impact on the consolidated financial statements.

In the first quarter of 2016, the Company adopted ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This ASU was effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption was permitted. The adoption of this guidance did not have an impact on the consolidated financial statements.

In the first quarter of 2016, the Company early adopted ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 16, 2016, and interim periods within those annual periods, and may be applied prospectively or retrospectively. The change is reflected in "Deferred income tax assets - noncurrent" and "Deferred income tax liabilities - noncurrent" in the consolidated balance sheets on a retrospective basis and did not have a material impact on the consolidated financial statements. See Note 1 for additional information.

Accounting Guidance Issued But Not Adopted as of March 31, 2016
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which was issued in August 2015, revised the effective date for this ASU to annual and interim periods beginning on or after December 15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public entities. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in ASU 2014-09. The Company is currently evaluating the impact of adopting this guidance.

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

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

10


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

In March 2016, the FASB issued ASU 2016-06, "Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments," which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment is required to assess the embedded call (put) options solely in accordance with a four-step decision sequence. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and should be applied on a modified retrospective basis as of the beginning of the year for which the amendments are effective, and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

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 to the new revenue recognition standard on assessing whether an entity is a principal or an agent in a revenue transaction. This amendment addresses implementation issues that were discussed by the Revenue Recognition Transition Resource Group ("TRG") to clarify the principal versus agent assessment and lead to more consistent application. This new standard has the same effective date and transition requirements as ASU 2014-09. The Company is currently evaluating the impact of adopting this guidance.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for share-based payment awards to employees, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted in any annual or interim period for which financial statements have not yet been issued, and all amendments in the ASU that apply must be adopted in the same period. The Company is currently evaluating the impact of adopting this guidance.

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, addressing issues raised by stakeholders and discussed by the TRG. 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. This new standard has the same effective date and transition requirements as ASU 2014-09. The Company is currently evaluating the impact of adopting this guidance.


NOTE 3 – RESTRUCTURING
On April 29, 2015, Dow's Board of Directors approved actions to further streamline the organization and optimize the Company’s footprint as a result of the separation of a significant portion of Dow’s chlorine value chain. These actions, which will further accelerate Dow’s value growth and productivity targets, will result in a reduction of approximately 1,750 positions across a number of businesses and functions and adjustments to the Company's asset footprint to enhance competitiveness. These actions are expected to be completed primarily by March 31, 2017.

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


11


Severance Costs
The restructuring charges recorded in the second quarter of 2015 included severance of $196 million for the separation of approximately 1,750 employees under the terms of the Company's ongoing benefit arrangements. In the fourth quarter of 2015, the Company recorded an additional charge of $39 million related to the separation of approximately 500 additional employees, primarily by March 31, 2017. These costs were charged against Corporate. At December 31, 2015, severance of $92 million was paid, leaving a liability of $143 million for approximately 1,250 employees. In the first three months of 2016, severance of $30 million was paid, leaving a liability of $113 million for approximately 900 employees at March 31, 2016.

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

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

2015 Restructuring Activities
 
Costs Associated with Exit and Disposal Activities

 
 
 
 

In millions
 
 
Severance Costs

 
Total

Reserve balance at Dec 31, 2015
 
$
10

 
$
143

 
$
153

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

 
$
113

 
$
122


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


NOTE 4 – ACQUISITIONS AND DIVESTITURES
Acquisition of Cooperativa Central de Pesquisa Agrícola's Seed Business
On January 30, 2015, Dow AgroSciences LLC acquired Cooperativa Central de Pesquisa Agrícola's ("Coodetec") seed business for $169 million, of which $121 million was paid in 2015, $24 million was paid in the first quarter of 2016 and the remaining portion to be paid by the end of the first quarter of 2017. The acquisition of Coodetec's seed business is expected to advance the development of Dow AgroSciences' soybean program and strengthen the Company’s position in the corn market segment.

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

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


12


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

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

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

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

On October 5, 2015, the Company completed the split-off of its U.S. Gulf Coast Chlor-Alkali and Vinyl, Global Chlorinated Organics and Global Epoxy businesses ("chlorine value chain"). The Company has not reported the historical results of the chlorine value chain as discontinued operations in Dow's financial statements, as the divestiture of the chlorine value chain did not represent a strategic shift that had a major effect on the Company's operations and financial results. However, the chlorine value chain was considered an individually significant component and select income statement information is presented below for the three months ended March 31, 2015:

Dow Chlorine Value Chain Income Statement Information
Three Months Ended
In millions
Mar 31, 2015
Income Before Income Taxes (1)
$
37

Loss before income taxes attributable to noncontrolling interests 
1

Income Before Income Taxes attributable to The Dow Chemical Company (1)
$
38

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

In the first quarter of 2015, the Company incurred pretax charges of $26 million for nonrecurring transaction costs associated with the separation of the chlorine value chain, consisting primarily of financial and professional advisory fees, legal fees and information systems infrastructure costs. These charges, which are part of costs associated with portfolio and productivity actions, were included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in Corporate.


NOTE 5 – INVENTORIES
The following table provides a breakdown of inventories:
 
Inventories
In millions
Mar 31, 2016


Dec 31, 2015

Finished goods
$
4,057

 
$
3,879

Work in process
1,625

 
1,502

Raw materials
743

 
730

Supplies
764

 
768

Total FIFO inventories
$
7,189

 
$
6,879

Adjustment of inventories to a LIFO basis
109

 
(8
)
Total inventories
$
7,298

 
$
6,871




13


NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the carrying amount of goodwill by operating segment:

Goodwill
Agricultural Sciences

 
Consumer Solutions

 
Infrastructure Solutions

 
Performance
Materials & Chemicals

 
Performance Plastics

 
Total  

In millions
Net goodwill at Dec 31, 2015
$
1,472

 
$
4,374

 
$
4,382

 
$
391

 
$
1,535

 
$
12,154

Acquisition of an aniline plant (1)

 

 

 
17

 

 
17

Foreign currency impact

 
5

 
24

 
4

 
10

 
43

Net goodwill at Mar 31, 2016
$
1,472

 
$
4,379

 
$
4,406

 
$
412

 
$
1,545

 
$
12,214

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

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

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net  

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Licenses and intellectual property
$
2,000

 
$
(1,125
)
 
$
875

 
$
1,943

 
$
(1,087
)
 
$
856

Patents
120

 
(109
)
 
11

 
119

 
(108
)
 
11

Software
1,267

 
(650
)
 
617

 
1,253

 
(628
)
 
625

Trademarks
667

 
(456
)
 
211

 
666

 
(441
)
 
225

Customer-related
3,212

 
(1,435
)
 
1,777

 
3,164

 
(1,366
)
 
1,798

Other
165

 
(142
)
 
23

 
165

 
(140
)
 
25

Total other intangible assets, finite lives
$
7,431

 
$
(3,917
)
 
$
3,514

 
$
7,310

 
$
(3,770
)
 
$
3,540

IPR&D (1), indefinite lives
77

 

 
77

 
77

 

 
77

Total other intangible assets
$
7,508

 
$
(3,917
)
 
$
3,591

 
$
7,387

 
$
(3,770
)
 
$
3,617

(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
In millions
Mar 31, 2016

 
Mar 31, 2015

Other intangible assets, excluding software
$
103

 
$
102

Software, included in “Cost of sales”
$
18

 
$
18


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

Estimated Amortization Expense
In millions
2016
$
478

2017
$
478

2018
$
456

2019
$
386

2020
$
354

2021
$
326




14


NOTE 7 – NONCONSOLIDATED AFFILIATES
The table below presents summarized financial information for Dow Corning Corporation, a significant nonconsolidated affiliate (at 100 percent):

Summarized Income Statement Information
Three Months Ended
In millions
Mar 31, 2016

 
Mar 31, 2015

Sales
$
1,316

 
$
1,364

Gross Profit (1)
$
350

 
$
358

Net Income
$
112

 
$
185

(1)
Gross profit for the three months ended March 31, 2016 includes $57 million of "Research and development expenses" ($62 million for the three months ended March 31, 2015).


NOTE 8 – FINANCIAL INSTRUMENTS
A summary of the Company's financial instruments, risk management policies, derivative instruments and hedging activities can be found in Note 11 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. If applicable, updates have been included in the respective section below.

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

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

 
Gain

 
Loss

 
Fair
Value

 
Cost

 
Gain

 
Loss

 
Fair
Value

Marketable securities: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt (2)
$
592

 
$
38

 
$

 
$
630

 
$
597

 
$
22

 
$
(7
)
 
$
612

Corporate bonds
621

 
39

 
(8
)
 
652

 
633

 
26

 
(8
)
 
651

Total debt securities
$
1,213

 
$
77

 
$
(8
)
 
$
1,282

 
$
1,230

 
$
48

 
$
(15
)
 
$
1,263

Equity securities
565

 
104

 
(59
)
 
610

 
555

 
108

 
(60
)
 
603

Total marketable securities
$
1,778

 
$
181

 
$
(67
)
 
$
1,892

 
$
1,785

 
$
156

 
$
(75
)
 
$
1,866

Long-term debt including debt due within one year (3)
$
(16,485
)
 
$
110

 
$
(2,027
)
 
$
(18,402
)
 
$
(16,756
)
 
$
424

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

 
$

 
$
(11
)
 
$
(11
)
 
$

 
$

 
$
(4
)
 
$
(4
)
Commodities (4)
$

 
$
3

 
$
(260
)
 
$
(257
)
 
$

 
$
6

 
$
(248
)
 
$
(242
)
Foreign currency
$

 
$
152

 
$
(41
)
 
$
111

 
$

 
$
109

 
$
(32
)
 
$
77

(1)
Included in “Other investments” in the consolidated balance sheets.
(2)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(3)
Cost includes fair value hedge adjustments of $18 million at March 31, 2016 and $18 million at December 31, 2015.
(4)
Presented net of cash collateral, as disclosed in Note 9.

Investments
The Company’s investments in marketable securities are primarily classified as available-for-sale. The following table provides the investing results from available-for-sale securities for the three-month periods ended March 31, 2016 and March 31, 2015:

Investing Results
Three Months Ended
In millions
Mar 31,
2016

 
Mar 31,
2015

Proceeds from sales of available-for-sale securities
$
121

 
$
114

Gross realized gains
$
6

 
$
23

Gross realized losses
$

 
$
(1
)

15


The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities
at March 31, 2016
In millions
Amortized Cost

 
Fair Value

Within one year
$
7

 
$
7

One to five years
413

 
430

Six to ten years
604

 
637

After ten years
189

 
208

Total
$
1,213

 
$
1,282


At March 31, 2016, the Company had $2,650 million ($3,354 million at December 31, 2015) of held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had maturities of three months or less at the time of purchase. The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At March 31, 2016, the Company had investments in money market funds of $450 million classified as cash equivalents ($1,689 million at December 31, 2015).

The aggregate cost of the Company’s cost method investments totaled $169 million at March 31, 2016 ($157 million at December 31, 2015). Due to the nature of these investments, either the cost basis approximates fair market value or fair value is not readily determinable. These investments are reviewed quarterly for impairment indicators. The Company's impairment analysis resulted in no reduction in the cost basis of these investments for the three-month periods ended March 31, 2016 and March 31, 2015.
Accounting for Derivative Instruments and Hedging Activities
The following table provides the fair value and gross balance sheet classification of derivative instruments at March 31, 2016 and December 31, 2015:
 
Fair Value of Derivative Instruments
In millions
Balance Sheet Classification
 
Mar 31,
2016

 
Dec 31,
2015

Asset Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Commodities
Other current assets
 
$
4

 
$
3

Foreign currency
Other current assets
 
6

 
5

Total derivatives designated as hedges
 
 
$
10

 
$
8

Derivatives not designated as hedges:
 
 
 
 
 
Commodities
Other current assets
 
$

 
$
4

Foreign currency
Accounts and notes receivable – Other
 
254

 
156

Total derivatives not designated as hedges
 
 
$
254

 
$
160

Total asset derivatives
 
 
$
264

 
$
168

Liability Derivatives
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rates
Accrued and other current liabilities
 
$
8

 
$
4

Interest rates
Other noncurrent obligations
 
3

 

Commodities
Accrued and other current liabilities
 
33

 
28

Commodities
Other noncurrent obligations
 
233

 
234

Foreign currency
Accrued and other current liabilities
 
22

 
1

Total derivatives designated as hedges
 
 
$
299

 
$
267

Derivatives not designated as hedges:
 
 
 
 
 
Commodities
Accrued and other current liabilities
 
$
1

 
$

Foreign currency
Accounts payable – Other
 
127

 
83

Total derivatives not designated as hedges
 
 
$
128

 
$
83

Total liability derivatives
 
 
$
427

 
$
350


Foreign currency derivatives not designated as hedges are used to offset foreign exchange gains or losses resulting from the underlying exposures of foreign currency denominated assets and liabilities.

The net after-tax amounts to be reclassified from "Accumulated other comprehensive loss" to income within the next 12 months are a $2 million loss for interest rate contracts, a $20 million loss for commodity contracts and a $15 million loss for foreign currency contracts.

16


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

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

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

 
$
3,100

 
$

 
$

 
$
3,100

Interests in trade accounts receivable conduits (3)

 

 
1,195

 

 
1,195

Equity securities (4)
573

 
37

 

 

 
610

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
630

 

 

 
630

Corporate bonds

 
652

 

 

 
652

Derivatives relating to: (6)

 

 

 

 
 
Commodities
4

 

 

 
(1
)
 
3

Foreign currency

 
260

 

 
(108
)
 
152

Total assets at fair value
$
577

 
$
4,679

 
$
1,195

 
$
(109
)
 
$
6,342

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

 
$
18,402

 
$

 
$

 
$
18,402

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
11

 

 

 
11

Commodities
7

 
260

 

 
(7
)
 
260

Foreign currency

 
149

 

 
(108
)
 
41

Total liabilities at fair value
$
7

 
$
18,822

 
$

 
$
(115
)

$
18,714

(1)
Cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.
(2)
Treasury Bills and money market funds included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value.
(3)
Included in “Accounts and notes receivable – Other” in the consolidated balance sheets. See Note 12 for additional information on transfers of financial assets.
(4)
The Company’s investments in equity and debt securities are primarily classified as available-for-sale and are included in “Other investments” in the consolidated balance sheets.
(5)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(6)
See Note 8 for the classification of derivatives in the consolidated balance sheets.
(7)
See Note 8 for information on fair value measurements of long-term debt.

17


Basis of Fair Value Measurements
on a Recurring Basis
at December 31, 2015

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

 
Significant
Other
Observable
Inputs
(Level 2)

 
Significant
Unobservable
Inputs
(Level 3)

 
Counterparty
and Cash
Collateral
Netting (1)

 
Total  

Assets at fair value:
 
 
 
 
 
 
 
 
 
Cash equivalents (2)
$

 
$
5,043

 
$

 
$

 
$
5,043

Interests in trade accounts receivable conduits (3)

 

 
943

 

 
943

Equity securities (4)
564

 
39

 

 

 
603

Debt securities: (4)

 

 

 

 
 
Government debt (5)

 
612

 

 

 
612

Corporate bonds

 
651

 

 

 
651

Derivatives relating to: (6)

 

 

 

 
 
Commodities
5

 
2

 

 
(1
)
 
6

Foreign currency

 
161

 

 
(52
)
 
109

Total assets at fair value
$
569

 
$
6,508

 
$
943

 
$
(53
)
 
$
7,967

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

 
$
18,000

 
$

 
$

 
$
18,000

Derivatives relating to: (6)
 
 
 
 
 
 
 
 
 
Interest rates

 
4

 

 

 
4

Commodities
6

 
256

 

 
(14
)
 
248

Foreign currency

 
84

 

 
(52
)
 
32

Total liabilities at fair value
$
6

 
$
18,344

 
$

 
$
(66
)
 
$
18,284

(1)
Cash collateral amounts represent the estimated net settlement amount when applying netting and set-off rights included in master netting arrangements between the Company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.
(2)
Treasury Bills and money market funds included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value.
(3)
Included in “Accounts and notes receivable – Other” in the consolidated balance sheets. See Note 12 for additional information on transfers of financial assets.
(4)
The Company’s investments in equity and debt securities are primarily classified as available-for-sale and are included in “Other investments” in the consolidated balance sheets.
(5)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations.
(6)
See Note 8 for the classification of derivatives in the consolidated balance sheets.
(7)
See Note 8 for information on fair value measurements of long-term debt.
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 $13 million at March 31, 2016 ($26 million at December 31, 2015).
The following table summarizes the changes in fair value measurements using Level 3 inputs for the three-month periods ended March 31, 2016 and March 31, 2015:

Fair Value Measurements Using Level 3 Inputs
Three Months Ended
Interests Held in Trade Receivable Conduits (1)
In millions
Mar 31,
2016

 
Mar 31,
2015

Balance at beginning of period
$
943

 
$
1,328

Gain (loss) included in earnings (2)
(1
)
 
1

Purchases
440

 
219

Settlements
(187
)
 
(285
)
Balance at end of period
$
1,195

 
$
1,263

(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.



18


NOTE 10 – 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, and gains and losses on sales of investments and assets. In the first quarter of 2016, "Sundry income (expense) - net" was net expense of $1,241 million, which included a $1,235 million loss related to the settlement of the urethane matters class action lawsuit and opt-out cases, reflected in Performance Materials & Chemicals. See Note 11 for additional information. In the first quarter of 2015, "Sundry income (expense) - net" was net income of $663 million which included a $670 million gain on the divestiture of ANGUS Chemical Company and an $18 million gain on the divestiture of the global Sodium Borohydride business (both reflected in Performance Materials & Chemicals). See Note 4 for additional information.


NOTE 11 – COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. At March 31, 2016, the Company had accrued obligations of $695 million for probable environmental remediation and restoration costs, including $73 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 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, 2015, the Company had accrued obligations of $670 million for probable environmental remediation and restoration costs, including $74 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 was renewed and replaced by the MDEQ on September 25, 2015, and included provisions requiring the Company to conduct an investigation to determine the nature and extent of off-site contamination in the City of Midland soils, the Tittabawassee River and Saginaw River sediment and floodplain soils, and the Saginaw Bay, and, if necessary, undertake remedial action.

City of Midland
On March 6, 2012, the Company submitted an Interim Response Activity Plan Designed to Meet Criteria ("Work Plan") to the MDEQ that involved the sampling of soil at residential properties near the Midland site for the presence of dioxins to determine where clean-up may be required and then conducting remediation for properties that sample above the remediation criteria. The MDEQ approved the Work Plan on June 1, 2012, and implementation of the Work Plan began on June 4, 2012. The Company also submitted and had approved by the MDEQ, amendments to the Work Plan. Remediation had been completed on all 132 properties that tested above the remediation criteria, and this completion is noted in the License.

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. 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 program from 2005 through 2009.

The Tittabawassee River, beginning at the Midland site and extending down to the first six miles of the Saginaw River, are designated as the first Operable Unit for purposes of conducting the remedial investigation, feasibility study and remedial design work. This work will be performed in a largely upriver to downriver sequence for eight geographic segments of the Tittabawassee and upper Saginaw Rivers. In the first quarter of 2012, the EPA requested the Company address the

19


Tittabawasee River floodplain ("Floodplain") as an additional segment. In August 2014, the EPA proposed for public comment the techniques that can be used to remedy the Floodplain, including proposed site specific clean-up criteria. In January 2015, the Company and the EPA entered into an order to address remediation of the Floodplain. The remedial work is expected to take place over the next five years. The remainder of the Saginaw River and the Saginaw Bay are designated as a second Operable Unit and the work associated with that unit may also be geographically segmented. The AOC does not obligate the Company to perform removal or remedial action; that action can only be required by a separate order. The Company and the EPA will be negotiating orders separate from the AOC that will obligate the Company to perform remedial actions under the scope of work of the AOC. The Company and the EPA have entered into three separate orders to perform limited remedial actions to implement early actions - three separate orders to address remedial actions in three of the nine geographic segments in the first Operable Unit and the order to address the Floodplain.

Alternative Dispute Resolution Process
The Company, the EPA, the U.S. Department of Justice, and the natural resource damage trustees (which include the Michigan Office of the Attorney General, the MDEQ, the U.S. Fish and Wildlife Service, the U.S. Bureau of Indian Affairs and the Saginaw-Chippewa tribe) have been engaged in negotiations to seek to resolve potential governmental claims against the Company related to historical off-site contamination associated with the City of Midland, the Tittabawassee and Saginaw Rivers and the Saginaw Bay. The Company and the governmental parties started meeting in the fall of 2005 and entered into a Confidentiality Agreement in December 2005. The Company continues to conduct negotiations under the Federal Alternative Dispute Resolution Act with all of the governmental parties, except the EPA which withdrew from the alternative dispute resolution process on September 12, 2007.

On September 28, 2007, the Company and the natural resource damage trustees entered into a Funding and Participation Agreement that addressed the Company’s payment of past costs incurred by the natural resource damage trustees, payment of the costs of a trustee coordinator and a process to review additional cooperative studies that the Company might agree to fund or conduct with the natural resource damage trustees. On March 18, 2008, the Company and the natural resource damage trustees entered into a Memorandum of Understanding ("MOU") to provide a mechanism for the Company to fund cooperative studies related to the assessment of natural resource damages. This MOU was amended and funding of cooperative studies was extended until March 2014. All cooperative studies have been completed. On April 7, 2008, the natural resource damage trustees released their "Natural Resource Damage Assessment Plan for the Tittabawassee River System Assessment Area."

At March 31, 2016, the accrual for these off-site matters was $64 million (included in the total accrued obligation of $695 million at March 31, 2016). At December 31, 2015, the Company had an accrual for these off-site matters of $62 million (included in the total accrued obligation of $670 million at December 31, 2015).

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

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

Based on a study completed in January 2003 by Analysis, Research & Planning Corporation (now known as Ankura Consulting Group, LLC (“Ankura”) as a result of the March 2016 merger of Analysis, Research & Planning Corporation and Ankura), Union Carbide increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, Union Carbide has compared current asbestos claim and resolution activity to the results of the most recent Ankura study at each balance sheet date to determine

20


whether the accrual continues to be appropriate. In addition, Union Carbide has requested Ankura to review Union Carbide’s historical asbestos claim and resolution activity each year since 2004 to determine the appropriateness of updating the most recent Ankura study.

In October 2015, Union Carbide requested Ankura to review its historical asbestos claim and resolution activity and determine the appropriateness of updating its December 2014 study. In response to that request, Ankura reviewed and analyzed data through September 30, 2015. In December 2015, Ankura stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in the December 2014 study and, therefore, the estimate in that study remained applicable. Based on Union Carbide's own review of the asbestos claim and resolution activity and Ankura's response, Union Carbide determined that no change to the accrual would be required. At December 31, 2015, the asbestos-related liability for pending and future claims was $437 million. At December 31, 2015, approximately 21 percent of the recorded liability related to pending claims and approximately 79 percent related to future claims.

Based on Union Carbide’s review of 2016 activity, Union Carbide determined that no adjustment to the accrual was required at March 31, 2016. Union Carbide’s asbestos-related liability for pending and future claims was $423 million at March 31, 2016. Approximately 22 percent of the recorded liability related to pending claims and approximately 78 percent related to future claims.

Union Carbide has receivables for insurance recoveries related to its asbestos liability as well as receivables for defense and resolution costs submitted to insurance carriers that have settlement agreements in place regarding their asbestos-related insurance coverage. After a review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, after taking into account the solvency and historical payment experience of various insurance carriers; existing insurance settlements; and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies, Union Carbide continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection. At March 31, 2016, Union Carbide's receivable for insurance recoveries related to its asbestos liability and defense and resolution costs was $53 million ($61 million at December 31, 2015).

Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $17 million in the first quarter of 2016 ($24 million in the first quarter of 2015) and was reflected in "Cost of sales" in the consolidated statements of income.

Summary
The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for Union Carbide to be higher or lower than those projected or those recorded.

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

It is the opinion of Dow’s management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense costs, could have a material impact on the Company’s results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

Urethane Matters
Class Action Lawsuit
On February 16, 2006, the Company, among others, received a subpoena from the U.S. Department of Justice ("DOJ") as part of a previously announced antitrust investigation of manufacturers of polyurethane chemicals, including methylene diphenyl diisocyanate, toluene diisocyanate, polyether polyols and system house products. The Company cooperated with the DOJ and, following an extensive investigation, on December 10, 2007, the Company received notice from the DOJ that it had closed its investigation of potential antitrust violations involving these products without indictments or pleas.

In 2005, the Company, among others, was named as a defendant in multiple civil class action lawsuits alleging a conspiracy to fix the price of various urethane chemical products, namely the products that were the subject of the above described DOJ

21


antitrust investigation. These lawsuits were consolidated in the U.S. District Court for the District of Kansas (the "District Court") or have been tolled. On July 29, 2008, the District Court certified a class of purchasers of the products for the six-year period from 1999 through 2004 ("plaintiff class"). In January 2013, the class action lawsuit went to trial in the District Court with the Company as the sole remaining defendant, the other defendants having previously settled. On February 20, 2013, the jury returned a damages verdict of approximately $400 million against the Company, which ultimately was trebled by the District Court under applicable antitrust laws, less offsets from other settling defendants, resulting in a judgment entered in July 2013 in the amount of $1.06 billion. The Company appealed this judgment to the U.S. Tenth Circuit Court of Appeals ("Tenth Circuit" or "Court of Appeals"), and on September 29, 2014, the Court of Appeals issued an opinion affirming the District Court judgment. On October 14, 2014, the Company filed a petition for Rehearing or Rehearing En Banc (collectively the "Rehearing Petition") with the Court of Appeals, which was denied on November 7, 2014.

On March 9, 2015, the Company filed a petition for writ of certiorari ("Writ Petition") with the U.S. Supreme Court, seeking judicial review by the Supreme Court and requesting that it correct fundamental errors in the Circuit Court opinion. There were several compelling reasons why the Supreme Court should have granted the Writ Petition and the Company believed it was likely that the District Court judgment would be vacated. Specifically, the Company's position was that the Tenth Circuit decision violated the law as expressed by the Supreme Court as set out in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) ("Wal-Mart") and Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013) ("Comcast"). The Tenth Circuit also did not follow accepted law from other federal circuits on dispositive case issues, including legal precedent from the U.S. First, Second, Third, Fifth, Ninth and D.C. Circuit Courts. Finally, the Company argued that the erroneous law applied by the Tenth Circuit was not supported by any other federal circuit court. In April 2015, six amici filed amicus briefs in support of the Company's Writ Petition. On June 8, 2015, the Supreme Court granted a petition for a writ of certiorari in another case, Tyson Foods, Inc. v. Bouaphakeo, PEG, et al., ("Tyson Foods") (Supreme Court No. 14-1146), which presented an issue core to the questions presented in the Company's Writ Petition: whether class-wide damages can be determined by simply applying the average injury observed in a sample. The Company's case was considered by the Supreme Court in conference on June 11, 2015. On June 15, 2015, the Supreme Court issued its decisions from its conference and did not rule on the Company's Writ Petition. Subsequently, the Writ Petition was not listed for further consideration by the Supreme Court at its weekly conferences. The Company was advised that this meant that the Supreme Court was withholding further consideration of the Company's Writ Petition while it considered the Tyson Foods case on the merits. As a result, the Company did not expect any further action on its Writ Petition until sometime in 2016. The Company believed that the Supreme Court accepted Tyson Foods for the compelling reasons also advanced by the Company in its Writ Petition and that the Supreme Court would issue an opinion in Tyson Foods that was favorable to the Company's case. Accordingly, on August 14, 2015, the Company filed an amicus brief in Tyson Foods supporting Tyson Foods’ position.

On February 26, 2016, the Company announced a proposed settlement under which Dow would pay the plaintiff class $835 million, which includes damages, class attorney fees and post-judgment interest. The agreement is conditioned upon the Supreme Court holding Dow's Writ Petition in abeyance and subsequent approval of the class settlement by the District Court. The proposed settlement will resolve the $1.06 billion judgment and any subsequent claim for attorneys' fees, costs and post-judgment interest against Dow. 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 March 7, 2016, the Supreme Court approved the joint motion to hold Dow’s Writ Petition in abeyance and a motion to approve the settlement is now pending before the District Court. The Company expects to pay the $835 million settlement in the second half of 2016.

Dow changed its risk assessment on this matter as a result of new growing political uncertainties due to events within the Supreme Court, including Justice Scalia's death, and the increased likelihood for unfavorable outcomes for businesses involved in class action lawsuits. Of particular importance was the fact that Justice Scalia had written the majority opinions in both the Wal-Mart and Comcast cases. The Company continues to believe that it was not part of any conspiracy and the judgment was fundamentally flawed as a matter of class action law.

Opt-Out Cases
Shortly after the July 2008 class certification ruling, a series of "opt-out" cases were filed by a number of large volume purchasers who elected not to be class members. These opt-out cases are substantively identical to the class action lawsuit, but expanded the period of time to include 1994 through 1998. On September 30, 2014, the opt-out cases, which had been consolidated with the class action lawsuit for purposes of pre-trial proceedings were remanded from the District Court to the U.S. District Court for the District of New Jersey. A consolidated jury trial of the opt-out cases began on March 8, 2016. On April 5, 2016, the Company entered into a binding settlement for the opt-out cases under which Dow would pay the plaintiffs $400 million, inclusive of damages and attorney fees, with payment due on May 4, 2016. The Company changed its risk assessment on this matter as a result of the uncertainty of a jury trial outcome along with the automatic trebling of an adverse verdict. As a result, the Company recorded a loss of $400 million in the first quarter of 2016, included in "Sundry income

22


(expense) - net" in the consolidated statements of income and reflected in the Performance Materials & Chemicals segment. The Company continues to deny allegations of price fixing and maintains that it was not part of any conspiracy.

Canadian Matters
In addition to the matters described above, there are two separate but inter-related matters in Ontario and Quebec, Canada. In March 2014, the Superior Court of Justice in London, Ontario, ruled in favor of the plaintiffs’ motion for class certification.  The Company filed its Notice of Motion for Leave to Appeal in March 2014, which was subsequently denied. This matter is currently in the preliminary pre-trial stage, but no trial date has been set. With a certified class in the Ontario case, the Quebec case is effectively rendered moot and, therefore, the parties have agreed that it will not be prosecuted independently of any future outcome in the Ontario case. The Company has concluded it is not probable a loss has been incurred and, therefore, a liability is not recorded with respect to these matters. The Company has determined that any possible loss on these matters is not material to the Company’s results of operations and cash flows as the Company's exposure is significantly less than the Class Action Lawsuit and Opt-Out Cases due to: (i) the limited exposure period based upon other known settlements relating to the Canadian Matters, (ii) antitrust verdicts in Canada are not trebled, and (iii) the Canadian cases are based on different legal theories and different applicable law.    

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' motions and confirmed the award. The USPTO has now issued office actions rejecting the patentability of all four patents that Bayer asserted in the case. The USPTO re-examination proceedings remain ongoing. DAS has appealed the federal district court's decision, and DAS has posted a bond to stay enforcement of the award during the appeal.

The Company believes the arbitral award is fundamentally flawed in numerous respects and is confident that it will be vacated on appeal 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 Company continues to believe that Bayer’s patents are invalid for multiple reasons and that the damages awarded cannot be supported under prevailing patent law, including U.S. Supreme Court precedent. In addition, the Company anticipates that the USPTO will conclude with final office actions declaring each of the patents invalid in the pending re-examination proceedings which will provide a strong basis to vacate the arbitral award. If the federal appellate court denies the Company's appeal, the Company can seek judicial review by the U.S. Supreme Court.

As part of the Company’s review of the arbitral award, the Company assessed the legal and factual circumstances of the case, the record of the arbitration and USPTO re-examination status, and the applicable law to vacate the arbitral award. Based on

23


this review and the reasons stated above, the Company has concluded it is not probable that a loss has been incurred and, therefore, a liability has not been recorded with respect to this matter. While the Company believes it is not probable that a loss has been incurred, the existence of the arbitral award and the federal district court confirmation of the award indicates that it is reasonably possible that a loss could occur. The estimate of the possible range of loss to the Company is zero to the $455 million amount set forth in the arbitral award (excluding post-judgment interest).

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

Other Litigation Matters
In addition to the specific matters described above, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to product liability, patent infringement, governmental regulation, contract and commercial litigation, and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. Dow has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies 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.

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, 2015. There have been no material changes to the purchase commitments since December 31, 2015.
 
Guarantees
The following tables provide a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for each type of guarantee:

Guarantees at March 31, 2016
In millions
Final
Expiration
 
Maximum Future
Payments

 
Recorded  
Liability  

Guarantees
2021
 
$
4,977

 
$
100

Residual value guarantees
2025
 
921

 
115

Total guarantees
 
 
$
5,898

 
$
215


Guarantees at December 31, 2015
In millions
Final
Expiration
 
Maximum Future
Payments

 
Recorded  
Liability  

Guarantees
2021
 
$
4,910

 
$
102

Residual value guarantees
2025
 
912

 
117

Total guarantees
 
 
$
5,822

 
$
219


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 five 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 billion of Total Project Financing outstanding at March 31, 2016 ($11.9 billion at December 31, 2015). The Company's guarantee of the Total Project Financing is in proportion to the Company's 35 percent ownership interest in Sadara, or up to approximately $4.4 billion when the project financing is fully drawn. The Guarantees will be released upon completion of construction of the Sadara complex and

24


satisfactory fulfillment of certain other conditions, including passage of an extensive operational testing program, which is currently anticipated by the end of 2017.

Residual Value Guarantees
The Company provides guarantees related to leased assets specifying the residual value that will be available to the lessor at lease termination through sale of the assets to the lessee or third parties.

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

Warranty Accrual
Mar 31,
2016

 
Dec 31, 2015

In millions
Balance at January 1
$
93

 
$
107

Accruals related to existing warranties

 
5

Settlements
(3
)
 
(19
)
Balance at end of period
$
90

 
$
93


Asset Retirement Obligations
The Company has recognized asset retirement obligations for the following activities: demolition and remediation activities at manufacturing and administrative sites primarily in the United States, Canada, Brazil, Argentina and Europe; and capping activities at landfill sites in the United States, Canada, Brazil and Italy. The Company has also recognized conditional asset retirement obligations related to asbestos encapsulation as a result of planned demolition and remediation activities at manufacturing and administrative sites primarily in the United States, Canada, Argentina, Chile, Colombia and Europe.

The aggregate carrying amount of asset retirement obligations recognized by the Company was $99 million at March 31, 2016, and $96 million at December 31, 2015. The discount rate used to calculate the Company’s asset retirement obligations was 2.25 percent at March 31, 2016, and 1.48 percent at December 31, 2015. These obligations are included in the consolidated balance sheets as "Accrued and other current liabilities" and "Other noncurrent obligations."

The Company has not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in its consolidated financial statements. It is the opinion of the Company’s management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material impact on the Company’s consolidated financial statements based on current costs.



25


NOTE 12 – TRANSFERS OF FINANCIAL ASSETS
The Company sells trade accounts receivable of select North America entities and qualifying trade accounts receivable of select European entities on a revolving basis to certain multi-seller commercial paper conduit entities ("conduits"). The proceeds received are comprised of cash and interests in specified assets of the conduits (the receivables sold by the Company) that entitle the Company to the residual cash flows of such specified assets in the conduits after the commercial paper has been repaid. Neither the conduits nor the investors in those entities have recourse to other assets of the Company in the event of nonpayment by the debtors.
The following table summarizes the carrying value of interests held, which represents the Company's maximum exposure to loss related to the receivables sold, and the percentage of anticipated credit losses related to the trade accounts receivable sold. Also provided is the sensitivity of the fair value of the interests held to hypothetical adverse changes in the anticipated credit losses; amounts shown below are the corresponding hypothetical decreases in the carrying value of interests.

Interests Held
Mar 31,
2016

 
Dec 31,
2015

In millions
 
Carrying value of interests held
$
1,195

 
$
943

Percentage of anticipated credit losses
0.33
%
 
0.34
%
Impact to carrying value - 10% adverse change
$
1

 
$
1

Impact to carrying value - 20% adverse change
$
1

 
$
1


Credit losses, net of any recoveries, on receivables sold were insignificant during the three-month periods ended March 31, 2016 and March 31, 2015.

Following is an analysis of certain cash flows between the Company and the conduits:
 
Cash Proceeds
Three Months Ended
In millions
Mar 31,
2016

 
Mar 31,
2015

Sale of receivables
$

 
$
12

Collections reinvested in revolving receivables
$
4,548

 
$
5,461

Interests in conduits (1)
$
187

 
$
285

(1)
Presented in "Operating Activities" in the consolidated statements of cash flows.

Following is additional information related to the sale of receivables under these facilities:

Trade Accounts Receivable Sold
Mar 31,
2016

 
Dec 31,
2015

In millions
 
Delinquencies on sold receivables still outstanding
$
58

 
$
97

Trade accounts receivable outstanding and derecognized
$
2,309

 
$
2,152




26


NOTE 13 – NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
Notes Payable
In millions
Mar 31,
2016

 
Dec 31,
2015

Notes payable to banks and other lenders
$
219

 
$
277

Notes payable to related companies
266

 
171

Notes payable trade
6

 
6

Total notes payable
$
491

 
$
454

Period-end average interest rates
2.85
%
 
4.00
%

Long-Term Debt

In millions
2016
Average
Rate

 
Mar 31,
2016

 
2015
Average
Rate

 
Dec 31,
2015

Promissory notes and debentures:
 
 
 
 
 
 
 
Final maturity 2016
9.80
%
 
$
7

 
2.64
%
 
$
356

Final maturity 2017
6.06
%
 
442

 
6.06
%
 
442

Final maturity 2018
5.78
%
 
339

 
5.78
%
 
339

Final maturity 2019
8.55
%
 
2,123

 
8.55
%
 
2,123

Final maturity 2020
4.46
%
 
1,547

 
4.46
%
 
1,547

Final maturity 2021
4.72
%
 
1,424

 
4.72
%
 
1,424

Final maturity 2022 and thereafter
5.54