Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended JUNE 30, 2018

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.)
2211 H.H. DOW WAY, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 989-636-1000
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Former name, former address and former fiscal year, if changed since last report)

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨  Yes    þ No

At June 30, 2018, 100 shares of common stock were outstanding, all of which were held by the registrant's parent, DowDuPont Inc.

The registrant meets the conditions set forth in General Instruction H(l)(a) and (b) for Form 10-Q and is therefore filing this form with a reduced disclosure format.


Table of Contents

The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 2018
TABLE OF CONTENTS

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

2

Table of Contents

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, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may appear throughout this report including, without limitation, the section: “Management's Discussion and Analysis.” These forward-looking statements often address expected future business and financial performance and financial condition, and often contain words such as “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “may,” “opportunity,” “outlook,” “plan,” “project,” “seek,” “see,” “should,” “strategy,” “will,” “would,” “target,” “will be,” “will continue,” “will likely result” and similar expressions and variations or negatives of these words. 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.

On December 11, 2015, Dow and E. I. du Pont de Nemours and Company ("DuPont") entered into an Agreement and Plan of Merger, as amended on March 31, 2017 (the "Merger Agreement"), under which the companies would combine in an all-stock merger of equals transaction (the "Merger"). Effective August 31, 2017, the Merger was completed and each of Dow and DuPont became subsidiaries of DowDuPont Inc. ("DowDuPont").

Forward-looking statements by their nature address matters that are, to varying degrees, uncertain, including important risks associated with the Merger and the intended separation, subject to approval of the Company's Board of Directors and customary closing conditions, of DowDuPont’s materials science business under the Dow brand as well as the intended separation of DowDuPont’s agriculture and specialty products businesses in one or more tax-efficient transactions on anticipated terms (the “Intended Business Separations”). Forward-looking statements are not guarantees of future performance and are based on certain assumptions and expectations of future events which may not be realized. Forward-looking statements also involve risks and uncertainties, many of which are beyond Dow's control. Some of the important factors that could cause Dow’s actual results to differ materially from those projected in any such forward-looking statements include, but are not limited to: (i) costs to achieve and achieving the successful integration of the respective agriculture, materials science and specialty products businesses of Dow and DuPont, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, productivity actions, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the combined operations; (ii) costs to achieve and achievement of the anticipated synergies by the combined agriculture, materials science and specialty products businesses; (iii) risks associated with the Intended Business Separations, including conditions which could delay, prevent or otherwise adversely affect the proposed transactions, including possible issues or delays in obtaining required regulatory approvals or clearances related to the Intended Business Separations, associated costs, disruptions in the financial markets or other potential barriers; (iv) disruptions or business uncertainty, including from the Intended Business Separations, could adversely impact Dow’s business (either directly or indirectly in connection with disruptions to DowDuPont or DuPont); (v) Dow's ability to retain and hire key personnel; (vi) uncertainty as to the long-term value of DowDuPont common stock; and (vii) risks to DowDuPont's, Dow's and DuPont's business, operations and results of operations from: the availability of and fluctuations in the cost of feedstocks and energy; balance of supply and demand and the impact of balance on prices; failure to develop and market new products and optimally manage product life cycles; ability, cost and impact on business operations, including the supply chain, of responding to changes in market acceptance, rules, regulations and policies and failure to respond to such changes; outcome of significant litigation, environmental matters and other commitments and contingencies; failure to appropriately manage process safety and product stewardship issues; global economic and capital market conditions, including the continued availability of capital and financing, as well as inflation, interest and currency exchange rates; changes in political conditions, including trade disputes and retaliatory actions; business or supply disruptions; security threats, such as acts of sabotage, terrorism or war, natural disasters and weather events and patterns which could result in a significant operational event for the Company or adversely impact demand or production; ability to discover, develop and protect new technologies and to protect and enforce the Company's intellectual property rights; failure to effectively manage acquisitions, divestitures, alliances, joint ventures and other portfolio changes; 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 are and will be more fully discussed in the current, quarterly and annual reports filed with the U.S. Securities and Exchange Commission by DowDuPont. While the list of factors presented here is 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.

3

Table of Contents

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 consolidated financial condition, results of operations, credit rating or liquidity. Neither Dow nor DowDuPont 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, 2017). Dow undertakes no obligation to update or revise publicly any forward-looking statements whether because of new information, future events, or otherwise, except as required by securities and other applicable laws.


4

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
Six Months Ended
In millions (Unaudited)
Jun 30,
2018
Jun 30,
2017
Jun 30,
2018
Jun 30,
2017
Net sales
$
15,793

$
13,834

$
30,692

$
27,064

Cost of sales
12,400

10,761

23,952

20,955

Research and development expenses
407

408

793

827

Selling, general and administrative expenses
748

720

1,499

1,479

Amortization of intangibles
155

157

314

312

Restructuring and asset related charges (credits) - net
98

(12
)
263

(13
)
Integration and separation costs
231

136

433

245

Equity in earnings of nonconsolidated affiliates
231

54

474

250

Sundry income (expense) - net
5

322

88

(122
)
Interest expense and amortization of debt discount
274

226

544

445

Income before income taxes
1,716

1,814

3,456

2,942

Provision for income taxes
406

455

769

668

Net income
1,310

1,359

2,687

2,274

Net income attributable to noncontrolling interests
31

38

66

65

Net income available for The Dow Chemical Company common stockholder
$
1,279

$
1,321

$
2,621

$
2,209

 
 
 
 
 
Depreciation
$
606

$
534

$
1,227

$
1,112

Capital expenditures
$
564

$
795

$
987

$
1,549

See Notes to the Consolidated Financial Statements.


5

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
Six Months Ended
In millions (Unaudited)
Jun 30,
2018
Jun 30,
2017
Jun 30,
2018
Jun 30,
2017
Net income
$
1,310

$
1,359

$
2,687

$
2,274

Other comprehensive income (loss), net of tax
 
 
 
 
Unrealized gains (losses) on investments
(14
)
(9
)
(39
)
8

Cumulative translation adjustments
(470
)
387

(94
)
626

Pension and other postretirement benefit plans
124

101

250

203

Derivative instruments
118

(39
)
124

(89
)
Total other comprehensive income (loss)
(242
)
440

241

748

Comprehensive income
1,068

1,799

2,928

3,022

Comprehensive income (loss) attributable to noncontrolling interests, net of tax
(1
)
40

27

93

Comprehensive income attributable to The Dow Chemical Company
$
1,069

$
1,759

$
2,901

$
2,929

See Notes to the Consolidated Financial Statements.

6

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions, except share amounts (Unaudited)
Jun 30,
2018
Dec 31,
2017
Assets
 
 
Current Assets
 
 
Cash and cash equivalents (variable interest entities restricted - 2018: $116; 2017: $107)
$
4,823

$
6,188

Marketable securities
133

4

Accounts and notes receivable:
 
 
Trade (net of allowance for doubtful receivables - 2018: $125; 2017: $117)
8,951

7,338

Other
4,135

4,711

Inventories
9,346

8,376

Other current assets
898

627

Total current assets
28,286

27,244

Investments
 
 
Investment in nonconsolidated affiliates
3,755

3,742

Other investments (investments carried at fair value - 2018: $1,720; 2017: $1,512)
2,488

2,510

Noncurrent receivables
489

594

Total investments
6,732

6,846

Property
 
 
Property
60,761

60,426

Less accumulated depreciation
37,369

36,614

Net property (variable interest entities restricted - 2018: $786; 2017: $907)
23,392

23,812

Other Assets
 
 
Goodwill
13,894

13,938

Other intangible assets (net of accumulated amortization - 2018: $5,424; 2017: $5,161)
5,236

5,549

Deferred income tax assets
1,672

1,722

Deferred charges and other assets
1,009

829

Total other assets
21,811

22,038

Total Assets
$
80,221

$
79,940

Liabilities and Equity
 
 
Current Liabilities
 
 
Notes payable
$
862

$
484

Long-term debt due within one year
2,837

752

Accounts payable:
 
 
Trade
5,224

5,360

Other
3,939

3,062

Income taxes payable
736

694

Accrued and other current liabilities
3,294

4,025

Total current liabilities
16,892

14,377

Long-Term Debt (variable interest entities nonrecourse - 2018: $147; 2017: $249)
17,122

19,765

Other Noncurrent Liabilities
 
 
Deferred income tax liabilities
776

764

Pension and other postretirement benefits - noncurrent
10,305

10,794

Asbestos-related liabilities - noncurrent
1,179

1,237

Other noncurrent obligations
5,930

5,994

Total other noncurrent liabilities
18,190

18,789

Stockholders’ Equity
 
 
Common stock (authorized and issued 100 shares of $0.01 par value each)


Additional paid-in capital
6,861

6,553

Retained earnings
29,536

28,050

Accumulated other comprehensive loss
(9,387
)
(8,591
)
Unearned ESOP shares
(145
)
(189
)
The Dow Chemical Company’s stockholders’ equity
26,865

25,823

Noncontrolling interests
1,152

1,186

Total equity
28,017

27,009

Total Liabilities and Equity
$
80,221

$
79,940

See Notes to the Consolidated Financial Statements.

7

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Six Months Ended
In millions (Unaudited)
Jun 30,
2018
Jun 30,
2017
Operating Activities
 
 
Net income
$
2,687

$
2,274

Adjustments to reconcile net income to net cash provided by (used for) operating activities:


Depreciation and amortization
1,666

1,517

Provision (Credit) for deferred income tax
(102
)
40

Earnings of nonconsolidated affiliates less than dividends received
123

310

Net periodic pension benefit cost
219

219

Pension contributions
(377
)
(381
)
Net gain on sales of assets, businesses and investments
(54
)
(190
)
Adjustment to gain on step acquisition of nonconsolidated affiliate
41


Restructuring and asset related charges (credits) - net
263

(13
)
Other net loss
249

252

Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
Accounts and notes receivable
(1,800
)
(3,233
)
Inventories
(1,011
)
(839
)
Accounts payable
792

826

Other assets and liabilities, net
(1,146
)
(883
)
Cash provided by (used for) operating activities
1,550

(101
)
Investing Activities
 
 
Capital expenditures
(987
)
(1,549
)
Investment in gas field developments
(46
)
(68
)
Proceeds from sales of property and businesses, net of cash divested
48

215

Investments in and loans to nonconsolidated affiliates
(2
)
(484
)
Distributions and loan repayments from nonconsolidated affiliates
55

54

Proceeds from sale of ownership interests in nonconsolidated affiliates

54

Purchases of investments
(900
)
(379
)
Proceeds from sales and maturities of investments
752

435

Proceeds from interests in trade accounts receivable conduits
656

1,914

Cash provided by (used for) investing activities
(424
)
192

Financing Activities
 
 
Changes in short-term notes payable
346

288

Payments on long-term debt
(570
)
(105
)
Proceeds from issuance of parent company stock
85


Proceeds from sales of common stock

357

Employee taxes paid for share-based payment arrangements
(84
)
(85
)
Contingent payment for acquisition of businesses

(31
)
Distributions to noncontrolling interests
(67
)
(51
)
Dividends paid to stockholders

(1,063
)
Dividends paid to parent
(2,110
)

Other financing activities, net
3


Cash used for financing activities
(2,397
)
(690
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(68
)
208

Summary
 
 
Decrease in cash, cash equivalents and restricted cash
(1,339
)
(391
)
Cash, cash equivalents and restricted cash at beginning of period
6,207

6,624

Cash, cash equivalents and restricted cash at end of period
$
4,868

$
6,233

See Notes to the Consolidated Financial Statements.

8

Table of Contents

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
In millions (Unaudited)
Common Stock
Add'l Paid in Capital
Retained Earnings
Accum Other Comp Loss
Unearned ESOP
Treasury Stock
Non-controlling Interests
Total Equity
2017
 
 
 
 
 
 
 
 
Balance at Dec 31, 2016
$
3,107

$
4,262

$
30,338

$
(9,822
)
$
(239
)
$
(1,659
)
$
1,242

$
27,229

Net income available for The Dow Chemical Company common stockholders


2,209





2,209

Other comprehensive income



748




748

Dividends to stockholders


(1,115
)




(1,115
)
Common stock issued/sold

357




626


983

Stock-based compensation and allocation of ESOP shares

(415
)


41



(374
)
Impact of noncontrolling interests






(74
)
(74
)
Other

(2
)
(15
)




(17
)
Balance at Jun 30, 2017
$
3,107

$
4,202

$
31,417

$
(9,074
)
$
(198
)
$
(1,033
)
$
1,168

$
29,589

2018
 
 
 
 
 
 
 
 
Balance at Dec 31, 2017
$

$
6,553

$
28,050

$
(8,591
)
$
(189
)
$

$
1,186

$
27,009

Adoption of accounting standards (Note 1)


989

(1,037
)



(48
)
Net income available for The Dow Chemical Company common stockholder


2,621





2,621

Other comprehensive income



241




241

Dividends to parent


(2,110
)




(2,110
)
Issuance of parent company stock

85






85

Stock-based compensation and allocation of ESOP shares

223



44



267

Impact of noncontrolling interests






(34
)
(34
)
Other


(14
)




(14
)
Balance at Jun 30, 2018
$

$
6,861

$
29,536

$
(9,387
)
$
(145
)
$

$
1,152

$
28,017

See Notes to the Consolidated Financial Statements.









9

Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Note
 
Page
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19


NOTE 1 – CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Effective August 31, 2017, pursuant to the merger of equals transaction contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, Dow and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, as a result, Dow and DuPont became subsidiaries of DowDuPont (the "Merger"). In accordance with the accounting guidance for earnings per share, the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries.

Following the Merger, Dow and DuPont intend to pursue, subject to certain customary conditions, including, among others, the effectiveness of registration statements filed with the U.S. Securities and Exchange Commission and approval by the board of directors of DowDuPont, the separation of the combined company's agriculture, materials science and specialty products businesses through one or more tax-efficient transactions ("Intended Business Separations").
 
Beginning September 1, 2017, transactions between DowDuPont, Dow and DuPont and their affiliates are reflected in these consolidated financial statements and will be disclosed as related party transactions, when material. Transactions between Dow and DuPont primarily consist of the sale and procurement of certain feedstocks, energy and raw materials that are consumed in each company's manufacturing process. See Note 19 for additional information.

Effective with the Merger, Dow’s business activities are components of its parent company’s business operations. Dow’s business activities, including the assessment of performance and allocation of resources, are reviewed and managed by DowDuPont. Information used by the chief operating decision maker of Dow relates to the Company in its entirety. Accordingly, there are no separate reportable business segments for the Company under Accounting Standards Codification ("ASC") Topic 280 “Segment Reporting” and the Company’s business results are reported in this Form 10-Q as a single operating segment.


10

Table of Contents

Except as otherwise indicated by the context, the term "Union Carbide" means Union Carbide Corporation, a wholly owned subsidiary of Dow, and "Dow Silicones" means Dow Silicones Corporation (formerly known as Dow Corning Corporation, which changed its name effective as of February 1, 2018), a wholly owned subsidiary of Dow.

Changes to Prior Period Consolidated Financial Statements
As a result of the Merger, certain reclassifications of prior period amounts have been made to improve comparability with DowDuPont and conform with the current period presentation. Presentation changes were made to the consolidated statements of income, consolidated statements of cash flows and consolidated statements of equity. In addition, certain reclassifications of prior period data have been made in the Notes to the Consolidated Financial Statements to conform with the current period presentation.

In the first quarter of 2018, the Company adopted new accounting standards that required retrospective application. The Company updated the consolidated statements of income as a result of adopting Accounting Standards Update ("ASU") 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The consolidated statements of cash flows were updated as a result of adopting ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" and ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." See Note 2 for additional information.

Changes to the consolidated financial statements as a result of the Merger and the retrospective application of the new accounting standards are summarized as follows:

Summary of Changes to the Consolidated Statements of Income
Three Months Ended Jun 30, 2017
In millions
As Filed
Merger Reclass 1
ASU Impact 2
Updated
Cost of sales
$
10,764

$
(1
)
$
(2
)
$
10,761

Research and development expenses
$
405

$

$
3

$
408

Selling, general and administrative expenses
$
855

$
(135
)
$

$
720

Integration and separation costs
$

$
136

$

$
136

Sundry income (expense) - net
$
299

$
22

$
1

$
322

Interest income
$
22

$
(22
)
$

$


Summary of Changes to the Consolidated Statements of Income
Six Months Ended Jun 30, 2017
In millions
As Filed
Merger Reclass 1
ASU Impact 2
Updated
Cost of sales
$
20,961

$
(1
)
$
(5
)
$
20,955

Research and development expenses
$
821

$

$
6

$
827

Selling, general and administrative expenses
$
1,722

$
(244
)
$
1

$
1,479

Integration and separation costs
$

$
245

$

$
245

Sundry income (expense) - net
$
(171
)
$
47

$
2

$
(122
)
Interest income
$
47

$
(47
)
$

$

1.
Costs associated with integration and separation activities are now separately reported as “Integration and separation costs” and were reclassified from "Cost of sales" and “Selling, general and administrative expenses.” In addition, “Interest income” was reclassified to “Sundry income (expense) - net.”
2.
Reflects changes resulting from the adoption of ASU 2017-07. See Note 2 for additional information.



11

Table of Contents

Summary of Changes to the Consolidated Statements of Cash Flows
Six Months Ended Jun 30, 2017
In millions
As Filed
Merger Reclass
ASU Impact 1
Updated
Operating Activities
 
 
 
 
Net periodic pension benefit cost
$

$
219

$

$
219

Net gain on sales of assets, businesses and investments
$

$
(190
)
$

$
(190
)
Net gain on sales of investments
$
(53
)
$
53

$

$

Net gain on sales of property, businesses and consolidated companies
$
(135
)
$
135

$

$

Net gain on sale of ownership interests in nonconsolidated affiliates
$
(2
)
$
2

$

$

Other net loss
$
75

$
177

$

$
252

Proceeds from interests in trade accounts receivable conduits
$
804

$

$
(804
)
$

Accounts and notes receivable
$
(2,123
)
$

$
(1,110
)
$
(3,233
)
Accounts payable
$
620

$
206

$

$
826

Other assets and liabilities, net
$
(279
)
$
(602
)
$
(2
)
$
(883
)
Cash provided by (used for) operating activities
$
1,815

$

$
(1,916
)
$
(101
)
Investing Activities








Payment into escrow account
$
(130
)
$

$
130

$

Distribution from escrow account
$
130

$

$
(130
)
$

Acquisitions of property, businesses and consolidated companies, net of cash acquired
$
(31
)
$

$
31

$

Proceeds from interests in trade accounts receivable conduits
$

$

$
1,914

$
1,914

Cash provided by (used for) investing activities
$
(1,753
)
$

$
1,945

$
192

Financing Activities








Contingent payment for acquisition of businesses
$

$

$
(31
)
$
(31
)
Cash used for financing activities
$
(659
)
$

$
(31
)
$
(690
)
Summary
 
 
 
 
Decrease in cash, cash equivalents and restricted cash
$
(389
)
$

$
(2
)
$
(391
)
Cash, cash equivalents and restricted cash at beginning of period
$
6,607

$

$
17

$
6,624

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

$

$
15

$
6,233

1.
Reflects the adoption of ASU 2016-15 and ASU 2016-18. See Note 2 for additional information. In connection with the review and implementation of ASU 2016-15, the Company also changed the prior year value of “Proceeds from interests in trade accounts receivable conduits” due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits. 

Summary of Changes to the Consolidated Statements of Equity
Six Months Ended Jun 30, 2017
In millions
As Filed
Merger Reclass
Updated
Dividend equivalents on participating securities
$
(15
)
$
15

$

Other
$

$
(15
)
$
(15
)


12

Table of Contents

Opening Balance Sheet Impact of Accounting Standards Adoption
In the first quarter of 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" and the associated ASUs (collectively, "Topic 606"), ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" and ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." See Note 2 for additional information on these ASUs. The cumulative effect on the Company's January 1, 2018, consolidated balance sheet as a result of adopting these accounting standards is summarized in the following table:

Summary of Impacts to the Consolidated Balance Sheet
Dec 31, 2017
Adjustments due to:
Jan 1, 2018
In millions
As Filed
Topic 606
ASU 2016-01
ASU 2016-16
Updated
Assets
 
 
 
 
 
Inventories
$
8,376

$
(11
)
$

$

$
8,365

Other current assets
$
627

$
29

$

$
31

$
687

Total current assets
$
27,244

$
18

$

$
31

$
27,293

Deferred income tax assets
$
1,722

$
25

$

$
10

$
1,757

Deferred charges and other assets
$
829

$
43

$

$

$
872

Total other assets
$
22,038

$
68

$

$
10

$
22,116

Total Assets
$
79,940

$
86

$

$
41

$
80,067

Liabilities
 
 
 
 


Accounts payable - Other
$
3,062

$
10

$

$

$
3,072

Income taxes payable
$
694

$
(2
)
$

$

$
692

Accrued and other current liabilities
$
4,025

$
50

$

$

$
4,075

Total current liabilities
$
14,377

$
58

$

$

$
14,435

Other noncurrent obligations
$
5,994

$
117

$

$

$
6,111

Total other noncurrent liabilities
$
18,789

$
117

$

$

$
18,906

Stockholders' Equity
 
 
 
 


Retained earnings
$
28,050

$
(89
)
$
(20
)
$
41

$
27,982

Accumulated other comprehensive loss
$
(8,591
)
$

$
20

$

$
(8,571
)
The Dow Chemical Company's stockholders' equity
$
25,823

$
(89
)
$

$
41

$
25,775

Total equity
$
27,009

$
(89
)
$

$
41

$
26,961

Total Liabilities and Equity
$
79,940

$
86

$

$
41

$
80,067


The most significant changes as a result of adopting Topic 606 relate to the Company's contract liabilities which includes payments received in advance of performance. Contract liabilities, which are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets, increased as certain performance obligations, which were previously recognized over time and related to the licensing of certain rights to patents and technology, as well as other performance obligations, are now recognized at a point in time as none of the three criteria for 'over time' recognition under Topic 606 are met.

In the second quarter of 2018, the Company early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This standard was adopted on April 1, 2018, and resulted in a $1,057 million increase to retained earnings due to the reclassification from accumulated other comprehensive loss. The reclassification was primarily related to the change in the federal corporate tax rate and the effect of the Tax Cuts and Jobs Act of 2017 ("The Act") on the Company's pension plans, derivative instruments, available-for-sale securities and cumulative translation adjustments. This reclassification is reflected in the "Adoption of accounting standards" line in the consolidated statements of equity. See Note 2 for additional information.




13

Table of Contents

Current Period Impact of Topic 606
The following table summarizes the effects of adopting Topic 606 on the Company's consolidated balance sheets, which was applied prospectively to contracts not completed at January 1, 2018. The effect of adopting Topic 606 did not have a material impact on the consolidated statements of income and the consolidated statements of cash flows.

Summary of Impacts to the Consolidated Balance Sheets



As Reported at Jun 30, 2018
Adjustments
Balance at Jun 30, 2018 Excluding Adoption of Topic 606
In millions
Assets
 
 
 
Inventories
$
9,346

$
24

$
9,370

Other current assets
$
898

$
(36
)
$
862

Total current assets
$
28,286

$
(12
)
$
28,274

Deferred income tax assets
$
1,672

$
(27
)
$
1,645

Deferred charges and other assets
$
1,009

$
(43
)
$
966

Total other assets
$
21,811

$
(70
)
$
21,741

Total Assets
$
80,221

$
(82
)
$
80,139

Liabilities
 
 
 
Accounts payable - Other
$
3,939

$
(10
)
$
3,929

Income taxes payable
$
736

$
2

$
738

Accrued and other current liabilities
$
3,294

$
(19
)
$
3,275

Total current liabilities
$
16,892

$
(27
)
$
16,865

Other noncurrent obligations
$
5,930

$
(134
)
$
5,796

Total other noncurrent liabilities
$
18,190

$
(134
)
$
18,056

Stockholders' Equity
 
 
 
Retained earnings
$
29,536

$
79

$
29,615

The Dow Chemical Company's stockholders' equity
$
26,865

$
79

$
26,944

Total equity
$
28,017

$
79

$
28,096

Total Liabilities and Equity
$
80,221

$
(82
)
$
80,139


Significant Accounting Policy Updates
The Company's significant accounting policy for revenue was updated as a result of the adoption of Topic 606:

Revenue
The Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of Topic 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 3 for additional information on revenue recognition.

Revenue related to the Company's insurance operations includes third-party insurance premiums, which are earned over the terms of the related insurance policies and reinsurance contracts.

As a result of the adoption of ASU 2018-02, the Company's significant accounting policy for income taxes was updated to indicate the Company uses the portfolio approach for releasing income tax effects from accumulated other comprehensive loss.

Dividends
Prior to the Merger, the Company declared dividends of $0.46 per share for the three months ended June 30, 2017 ($0.92 per share for the six months ended June 30, 2017). Effective with the Merger, Dow no longer has publicly traded common stock. Dow's common shares are owned solely by its parent company, DowDuPont. As a result, following the Merger, the Company’s Board of Directors ("Board") determines whether or not there will be a dividend distribution to DowDuPont. See Note 19 for additional information.


14

Table of Contents

NOTE 2 – RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In the second quarter of 2018, the Company early adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which amends the hedge accounting recognition and presentation under ASC 815, with the objectives of improving the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities and simplifying the application of hedge accounting by preparers. The new standard expands the strategies eligible for hedge accounting, relaxes the timing requirements of hedge documentation and effectiveness assessments, and permits, in certain cases, the use of qualitative assessments on an ongoing basis to assess hedge effectiveness. The new guidance also requires new disclosures and presentation. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted in any interim or annual period after issuance of the ASU. Entities must adopt the new guidance by applying a modified retrospective approach to hedging relationships existing as of the adoption date. The adoption of the new guidance did not have a material impact on the consolidated financial statements.

In the second quarter of 2018, the Company early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from The Act, which was enacted on December 22, 2017, and requires certain disclosures about stranded tax effects. An entity has the option of applying the new guidance at the beginning of the period of adoption or retrospectively to each period (or periods) in which the tax effects related to items remaining in accumulated other comprehensive income are recognized. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period for reporting periods in which the financial statements have not yet been issued. The Company's adoption of the new standard was applied prospectively at the beginning of the second quarter of 2018, with a reclassification of the stranded tax effects as a result of the The Act from accumulated other comprehensive loss to retained earnings. See Note 1 for additional information.

In the first quarter of 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition," and most industry specific guidance. 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. In 2015 and 2016, the Financial Accounting Standards Board ("FASB") issued additional ASUs related to Topic 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance obligations, and accounting for licenses, and included other improvements and practical expedients. The new guidance was effective for annual and interim periods beginning after December 15, 2017. The Company elected to adopt the new guidance using the modified retrospective transition method for all contracts not completed as of the date of adoption. The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of the first quarter of 2018. The comparative periods have not been restated and continue to be accounted for under Topic 605. The adoption of the new guidance did not have a material impact on the consolidated financial statements. See Notes 1 and 3 for additional disclosures regarding the Company's contracts with customers as well as the impact of adopting Topic 606.

In the first quarter of 2018, the Company adopted 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 was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company applied the amendments in the new guidance by means of a cumulative-effect adjustment to the opening balance of retained earnings at the beginning of the first quarter of 2018. The adoption of the new guidance did not have a material impact on the consolidated financial statements. See Notes 1 and 16 for additional information.

In the first quarter of 2018, the Company adopted ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statements of cash flows and addresses eight specific cash flow issues. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A key provision in the new guidance impacted the presentation of interests in certain trade accounts receivable conduits, which were retrospectively

15

Table of Contents

reclassified from "Operating Activities" to "Investing Activities" in the consolidated statements of cash flows. See Note 1 for additional information.

In the first quarter of 2018, the Company adopted ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The new guidance was applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the first quarter of 2018. The adoption of this guidance did not have a material impact on the consolidated financial statements. See Note 1 for additional information.

In the first quarter of 2018, the Company adopted ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which clarifies how entities should present restricted cash and restricted cash equivalents in the statements of cash flows, and as a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statements of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The new guidance changed the presentation of restricted cash in the consolidated statements of cash flows and was implemented on a retrospective basis in the first quarter of 2018. See Notes 1 and 5 for additional information.

In the first quarter of 2018, the Company adopted ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost must be presented separately from the line items that includes the service cost. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Entities were required to use a retrospective transition method to adopt the requirement for separate income statement presentation of the service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. Accordingly, in the first quarter of 2018, the Company used a retrospective transition method to reclassify net periodic benefit cost, other than the service component, from "Cost of sales," "Research and development expenses" and "Selling, general and administrative expenses" to "Sundry income (expense) - net" in the consolidated statements of income. See Note 1 for additional information.

Accounting Guidance Issued But Not Adopted at June 30, 2018
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 (Topic 606). 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 has a cross-functional team in place to evaluate and implement the new guidance. The team continues to review existing lease arrangements and has engaged a third party to assist with the collection of lease data. The impact of applying the practical expedients and accounting policy elections has been evaluated and the Company is in the process of documenting the related considerations and decisions. The Company is currently implementing a software solution, enhancing accounting systems and updating business processes and controls related to leases. Collectively, these activities are expected to facilitate the Company's ability to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019. The Company is working to quantify the impact and anticipates that the adoption of the new standard will result in a material increase in lease-related assets and liabilities in the consolidated balance sheets.



16

Table of Contents

NOTE 3 – REVENUE
Revenue Recognition
The majority of the Company's revenue is derived from product sales. In the three and six months ended June 30, 2018, 99 percent of the Company's sales related to product sales (98 percent in the three and six months ended June 30, 2017). The remaining sales were primarily related to Dow's insurance operations and licensing of patents and technologies. As of January 1, 2018, the Company accounts for revenue in accordance with Topic 606, "Revenue from Contracts with Customers," except for revenue from Dow's insurance operations, which is accounted for in accordance with Topic 944, "Financial Services - Insurance."

Product Sales
Product sales consist of sales of the Company's products to manufacturers and distributors. The Company considers order confirmations or purchase orders, which in some cases are governed by master supply agreements, to be contracts with a customer. Product sale contracts are generally short-term contracts where the time between order confirmation and satisfaction of all performance obligations is less than one year. However, the Company has some long-term contracts which can span multiple years.

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, usually upon shipment, with payment terms typically in the range of 30 to 60 days after invoicing, depending on business and geographic region. When the Company performs shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to shipment), these are considered fulfillment activities, and accordingly, the costs are accrued when the related revenue is recognized. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. The Company has elected to use the practical expedient to expense cash and non-cash sales incentives, as the amortization period for the costs to obtain the contract would have been one year or less.

Certain long-term contracts include a series of distinct goods that are delivered continuously to the customer through a pipeline (e.g., feedstocks). For these types of product sales, the Company invoices the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date. As a result, the Company recognizes revenue based on the amount billable to the customer in accordance with the right to invoice practical expedient.

The transaction price includes estimates for reductions in revenue from customer rebates and right of returns on product sales. These amounts are estimated based upon the most likely amount of consideration to which the customer will be entitled. The Company’s obligation for right of returns is limited primarily to the Seed principal product group. All estimates are based on historical experience, anticipated performance and the Company’s best judgment at the time to the extent it is probable that a significant reversal of revenue recognized will not occur. All estimates for variable consideration are reassessed periodically. The Company has elected the practical expedient to not adjust the amount of consideration for the effects of a significant financing component for all instances in which the period between payment and transfer of the goods will be one year or less.

For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative standalone selling price. The standalone selling price is the observable price which depicts the price as if sold to a similar customer in similar circumstances.

Patents, Trademarks and Licenses
The Company enters into licensing arrangements in which it licenses certain rights of its patents and technology to customers. Revenue from the majority of the Company’s licenses for patents and technology is derived from sales-based royalties. The Company estimates the amount of sales-based royalties it expects to be entitled based on historical sales to the customer. For the remaining revenue from licensing arrangements, payments are typically received from the Company’s licensees based on billing schedules established in each contract. Revenue is recognized by the Company when the performance obligation is satisfied.

Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. At June 30, 2018, the Company had remaining performance obligations related to material rights granted to customers for contract renewal options of $99 million and unfulfilled performance obligations for the licensing of technology of $228 million. The Company expects revenue to be recognized for the remaining performance obligations over the next one to six years.

The remaining performance obligations are for product sales that have expected durations of one year or less, product sales of materials delivered through a pipeline for which the Company has elected the right to invoice practical expedient, or variable consideration attributable to royalties for licenses of patents and technology. The Company has received advance payments from customers related to long-term supply agreements that are deferred and recognized over the life of the contract, with remaining contract terms that range up to 23 years. The Company will have rights to future consideration for revenue recognized when

17

Table of Contents

product is delivered to the customer. These payments are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets.

Disaggregation of Revenue
The Company disaggregates its revenue from contracts with customers by principal product group and geographic region, as the Company believes it best depicts the nature, amount, timing and uncertainty of its revenue and cash flows. See details in the tables below:

Net Trade Revenue by Principal Product Group
Three Months Ended
Jun 30, 2018
Six Months Ended
Jun 30, 2018
In millions
Coatings & Performance Monomers
$
1,103

$
2,057

Construction Chemicals
226

408

Consumer Solutions
1,516

2,879

Crop Protection
1,436

2,558

Electronics & Imaging
652

1,279

Hydrocarbons & Energy
1,833

3,612

Industrial Biosciences
132

267

Industrial Solutions
1,198

2,358

Nutrition & Health
157

313

Packaging and Specialty Plastics
3,886

7,740

Polyurethanes & CAV
2,460

4,831

Safety & Construction
523

967

Seed
269

640

Transportation & Advanced Polymers
326

630

Corporate
73

146

Other
3

7

Total
$
15,793

$
30,692


Net Trade Revenue by Geographic Region
Three Months Ended
Jun 30, 2018
Six Months Ended
Jun 30, 2018
In millions
U.S. & Canada
$
5,765

$
11,233

EMEA 1
4,739

9,504

Asia Pacific
3,675

6,931

Latin America
1,614

3,024

Total
$
15,793

$
30,692

1. Europe, Middle East and Africa.

Contract Balances
The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Contract liabilities include payments received in advance of performance under the contract and are realized when the associated revenue is recognized under the contract. "Contract liabilities - current" primarily reflects deferred revenue from prepayments from customers for product to be delivered in a time period of 12 months or less. "Contract liabilities - noncurrent" includes advance payments that the Company has received from customers related to long-term supply agreements and royalty payments that are deferred and recognized over the life of the contract.

Revenue recognized in the first six months of 2018 from amounts included in contract liabilities at the beginning of the period was approximately $110 million. In the first six months of 2018, the amount of contract assets reclassified to receivables as a result of the right to the transaction consideration becoming unconditional was insignificant. The Company did not recognize any asset impairment charges related to contract assets during the period.


18

Table of Contents

The following table summarizes the contract balances at June 30, 2018 and December 31, 2017:

Contract Balances
Jun 30,
 2018
Topic 606 Adjustments Jan 1, 2018
Dec 31, 2017
In millions
Accounts and notes receivable - Trade
$
8,951

$

$
7,338

Contract assets - current 1
$
20

$
18

$

Contract assets - noncurrent 2
$
45

$
43

$

Contract liabilities - current 3
$
152

$
50

$
117

Contract liabilities - noncurrent 4
$
1,454

$
117

$
1,365

1. Included in "Other current assets" in the consolidated balance sheets.
2. Included in "Deferred charges and other assets" in the consolidated balance sheets.
3. Included in "Accrued and other current liabilities" in the consolidated balance sheets.
4. Included in "Other noncurrent obligations" in the consolidated balance sheets.


NOTE 4 – RESTRUCTURING AND ASSET RELATED CHARGES (CREDITS) - NET
Restructuring Plans
DowDuPont Cost Synergy Program
In September and November 2017, DowDuPont approved post-merger restructuring actions under the DowDuPont Cost Synergy Program (the "Synergy Program") which is designed to integrate and optimize the organization following the Merger and in preparation for the Intended Business Separations. Based on all actions approved to date under the Synergy Program, the Company expects to record total pretax restructuring charges of approximately $1.3 billion, comprised of approximately $525 million to $575 million of severance and related benefit costs; $400 million to $440 million of asset write-downs and write-offs; and $290 million to $310 million of costs associated with exit and disposal activities.

As a result of these actions, the Company recorded pretax restructuring charges of $687 million in 2017, consisting of severance and related benefit costs of $357 million, asset write-downs and write-offs of $287 million and costs associated with exit and disposal activities of $43 million.

For the three months ended June 30, 2018, the Company recorded pretax restructuring charges of $88 million, consisting of severance and related benefit costs of $38 million, asset write-downs and write-offs of $27 million and costs associated with exit and disposal activities of $23 million. For the six months ended June 30, 2018, the Company recorded pretax restructuring charges of $251 million, consisting of severance and related benefit costs of $142 million, asset write-downs and write-offs of $75 million and costs associated with exit and disposal activities of $34 million. The impact of these charges is shown as "Restructuring and asset related charges (credits) - net" in the consolidated statements of income. The Company expects to record additional restructuring charges during 2018 and 2019 and substantially complete the Synergy Program by the end of 2019.

The following table summarizes the activities related to the Synergy Program. At June 30, 2018, $250 million was included in "Accrued and other current liabilities" ($231 million at December 31, 2017) and $108 million was included in "Other noncurrent obligations" ($118 million at December 31, 2017) in the consolidated balance sheets.

Synergy Program
Severance and Related Benefit Costs
Asset Write-downs and Write-offs
Costs Associated with Exit and Disposal Activities
Total
In millions
2017 restructuring charges
$
357

$
287

$
43

$
687

Charges against the reserve

(287
)

(287
)
Cash payments
(51
)


(51
)
Reserve balance at Dec 31, 2017
$
306

$

$
43

$
349

2018 restructuring charges 1
142

75

34

251

Charges against the reserve

(75
)

(75
)
Cash payments
(137
)

(30
)
(167
)
Reserve balance at Jun 30, 2018
$
311

$

$
47

$
358

1.
Included in "Restructuring and asset related charges (credits) - net" in the consolidated statements of income.


19

Table of Contents

The restructuring charges related to the write-down and write-off of assets in the first six months of 2018 totaled $75 million and primarily related to assets aligned with seed activities.

2016 Restructuring
On June 27, 2016, Dow's Board approved a restructuring plan that incorporated actions related to the ownership restructure of Dow Silicones. These actions, aligned with Dow’s value growth and synergy targets, will result in a global workforce reduction of approximately 2,500 positions, with most of these positions resulting from synergies related to the ownership restructure of Dow Silicones.

For the three months ended June 30, 2018, the Company recorded pretax restructuring charges of $7 million, consisting of a favorable adjustment to the severance reserve of $8 million and a charge of $15 million for costs associated with exit and disposal activities. For the six months ended June 30, 2018, the Company recorded pretax restructuring charges of $6 million, consisting of a favorable adjustment to the severance reserve of $8 million and a charge of $14 million for costs associated with exit and disposal activities. The impact of these charges is shown as "Restructuring and asset related charges (credits) - net" in the consolidated statements of income. The 2016 restructuring activities were substantially complete at June 30, 2018, with remaining liabilities for severance and related benefit costs and costs associated with exit and disposal activities to be settled over time.

The following table summarizes the activities related to the Company's 2016 restructuring reserve:

2016 Restructuring
Severance and Related Benefit Costs
Costs Associated with Exit and Disposal Activities
Total
In millions
Reserve balance at Dec 31, 2017
$
51

$
17

$
68

Adjustments to the reserve 1
(8
)
14

6

Cash payments
(37
)
(4
)
(41
)
Reserve balance at Jun 30, 2018
$
6

$
27

$
33

1.
Included in "Restructuring and asset related charges (credits) - net" in the consolidated statements of income.

Dow expects to incur additional costs in the future related to its restructuring activities. Future costs are expected to include demolition costs related to closed facilities and restructuring plan implementation costs; these costs will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.


NOTE 5 – SUPPLEMENTARY INFORMATION
The Company uses "Sundry income (expense) – net" to record a variety of income and expense items such as foreign currency exchange gains and losses, interest income, dividends from investments, gains and losses on sales of investments and assets, non-operating pension and other postretirement benefit plan credits or costs, and certain litigation matters. For the three months ended June 30, 2018, "Sundry income (expense) - net" was income of $5 million compared with income of $322 million for the three months ended June 30, 2017. The second quarter of 2017 included a $137 million gain related to the Nova patent infringement matter and gains on sales of assets and other investments. For the six months ended June 30, 2018, "Sundry income (expense) - net" was income of $88 million compared with expense of $122 million for the six months ended June 30, 2017. In addition to the amounts previously discussed, the first six months of 2017 included a $469 million loss related to the Bayer CropScience arbitration matter. See Note 11 for additional information.


20

Table of Contents

Cash, Cash Equivalents and Restricted Cash
The Company is required to set aside funds for various activities that arise in the normal course of business including, but not limited to, insurance contracts, legal matters and other agreements. These funds typically have legal restrictions associated with them and are deposited in an escrow account or held in a separately identifiable account by the Company.

The following table provides a reconciliation of cash, cash equivalents and restricted cash presented in the consolidated balance sheets to the total cash, cash equivalents and restricted cash presented in the consolidated statements of cash flows:

Reconciliation of Cash, Cash Equivalents and Restricted Cash
Jun 30, 2018
Dec 31, 2017
Jun 30, 2017
In millions
Cash and cash equivalents
$
4,823

$
6,188

$
6,218

Restricted cash 1
45

19

15

Total cash, cash equivalents and restricted cash
$
4,868

$
6,207

$
6,233

1. Included in "Other current assets" in the consolidated balance sheets.


NOTE 6 – INCOME TAXES
On December 22, 2017, The Act was enacted. The Act reduces the U.S. federal corporate income tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves towards a territorial system. At June 30, 2018, the Company had not completed its accounting for the tax effects of The Act; however, as described below, the Company made reasonable estimates of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118, income tax effects of The Act may be refined upon obtaining, preparing, or analyzing additional information during the measurement period and such changes could be material. During the measurement period, provisional amounts may also be adjusted for the effects, if any, of interpretative guidance issued by U.S. regulatory and standard-setting bodies.

As a result of The Act, the Company remeasured its U.S. federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. However, the Company is still analyzing certain aspects of The Act and refining its calculations. No adjustment was recorded in the second quarter of 2018. The Company has recorded a cumulative charge of $19 million to "Provision for income taxes" since the enactment of The Act.

The Act requires a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits (“E&P”), which results in a one-time transition tax. The Company has not yet completed its calculation of the total post-1986 foreign E&P for its foreign subsidiaries as E&P will not be finalized until the DowDuPont federal income tax return is filed. The Company has not recorded a change to the $865 million provisional charge recorded in the fourth quarter of 2017 with respect to the one-time transition tax.

In the six months ended June 30, 2018, the Company recorded an indirect impact of The Act related to prepaid tax on the intercompany sale of inventory. The amount recorded related to the inventory was a $38 million charge to "Provision for income taxes."

For tax years beginning after December 31, 2017, The Act introduced new provisions for U.S. taxation of certain global intangible low-taxed income ("GILTI"). The Company is evaluating the policy election on whether the additional liability will be recorded in the period in which it is incurred or recognized for the basis differences that would be expected to reverse in future years.

Each year the Company files tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. The ultimate resolution of such uncertainties is not expected to have a material impact on the Company's results of operations.



21

Table of Contents

NOTE 7 – INVENTORIES
The following table provides a breakdown of inventories:

Inventories
Jun 30, 2018
Dec 31, 2017
In millions
Finished goods
$
5,677

$
5,213

Work in process
2,239

1,747

Raw materials
961

898

Supplies
870

848

Total
$
9,747

$
8,706

Adjustment of inventories to a LIFO basis
(401
)
(330
)
Total inventories 1
$
9,346

$
8,376

1.
In the first quarter of 2018, the Company adopted Topic 606, which resulted in a cumulative effect change to the Company's January 1, 2018 "Inventories" balance. See Note 1 for additional information.


NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the carrying amount of goodwill:

Goodwill
 
In millions
Net goodwill at Dec 31, 2017
$
13,938

Foreign currency impact
(44
)
Net goodwill at Jun 30, 2018
$
13,894


The following table provides information regarding the Company’s other intangible assets:

Other Intangible Assets
Jun 30, 2018
Dec 31, 2017
In millions
Gross
Carrying
Amount
Accum
Amort
Net
Gross
Carrying
Amount
Accum
Amort
Net  
Intangible assets with finite lives:
 
 
 
 
 
 
Developed technology
$
3,254

$
(1,804
)
$
1,450

$
3,263

$
(1,690
)
$
1,573

Software
1,479

(833
)
646

1,420

(780
)
640

Trademarks/tradenames
689

(594
)
95

697

(570
)
127

Customer-related
4,945

(2,030
)
2,915

5,035

(1,965
)
3,070

Other
243

(163
)
80

245

(156
)
89

Total other intangible assets, finite lives
$
10,610

$
(5,424
)
$
5,186

$
10,660

$
(5,161
)
$
5,499

In-process research and development
50


50

50


50

Total other intangible assets
$
10,660

$
(5,424
)
$
5,236

$
10,710

$
(5,161
)
$
5,549


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

Amortization Expense
Three Months Ended
Six Months Ended
In millions
Jun 30, 2018
Jun 30, 2017
Jun 30, 2018
Jun 30, 2017
Other intangible assets, excluding software
$
155

$
157

$
314

$
312

Software, included in “Cost of sales”
$
25

$
20

$
48

$
40



22

Table of Contents

Total estimated amortization expense for 2018 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2018
$
718

2019
$
672

2020
$
635

2021
$
603

2022
$
532

2023
$
508



NOTE 9 – TRANSFERS OF FINANCIAL ASSETS
The Company has historically sold trade accounts receivable of select North American 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.

In the fourth quarter of 2017, the Company suspended further sales of trade accounts receivable through these facilities and began reducing outstanding balances through collections of trade accounts receivable previously sold to such conduits. The Company has the ability to resume such sales to the conduits, subject to certain prior notice requirements, at the discretion of the Company.

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
Jun 30,
2018
Dec 31,
2017
In millions
Carrying value of interests held
$
24

$
677

Percentage of anticipated credit losses
36.81
%
2.64
%
Impact to carrying value - 10% adverse change
$

$

Impact to carrying value - 20% adverse change
$

$
1


Credit losses, net of any recoveries, on receivables sold were insignificant for the three and six months ended June 30, 2018 and 2017.

Following is an analysis of certain cash flows between the Company and the conduits:

Cash Proceeds
Three Months Ended
Six Months Ended
In millions
Jun 30,
2018
Jun 30,
2017
Jun 30,
2018
Jun 30,
2017
Collections reinvested in revolving receivables
$

$
6,051

$

$
11,732

Interests in conduits 1
$
211

$
1,363

$
656

$
1,914

1.
Presented in "Investing Activities" in the consolidated statements of cash flows in accordance with ASU 2016-15. See Notes 1 and 2 for additional information. In connection with the review and implementation of ASU 2016-15, the Company also changed the prior year value of “Interests in conduits” due to additional interpretive guidance of the required method for calculating the cash received from beneficial interests in the conduits.


23

Table of Contents

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

Trade Accounts Receivable Sold
Jun 30,
2018
Dec 31,
2017
In millions
Delinquencies on sold receivables still outstanding
$
36

$
82

Trade accounts receivable outstanding and derecognized
$
36

$
612



NOTE 10 – NOTES PAYABLE, LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES
A summary of the Company's notes payable, long-term debt and available credit facilities 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, 2017. If applicable, updates have been included in the respective section below.

2018 Activity
In the first six months of 2018, the Company redeemed $333 million of 5.7 percent notes at maturity, and an aggregate principal amount of $20 million of International Notes ("InterNotes") at maturity. In addition, approximately $75 million of long-term debt was repaid by consolidated variable interest entities. The Company also called an aggregate principal amount of $125 million tax-exempt bonds of various interest rates and maturities in 2029, 2033 and 2038. As a result of the redemptions, the Company recognized a pretax loss of $1 million on the early extinguishment of debt, included in “Sundry income (expense) - net” in the consolidated statements of income.

In May 2018, the Company gave notice to call an additional $218 million of tax-exempt bonds with original maturity dates in 2033, which were repaid on July 16, 2018.

2017 Activity
In the first six months of 2017, the Company redeemed $30 million aggregate principal amount of InterNotes at maturity. In addition, approximately $60 million of long-term debt was repaid by consolidated variable interest entities.

Term Loan Facility
In connection with the ownership restructure of Dow Silicones on May 31, 2016, Dow Silicones incurred $4.5 billion of indebtedness under a certain third party credit agreement ("Term Loan Facility"). The Company subsequently guaranteed the obligations of Dow Silicones under the Term Loan Facility and, as a result, the covenants and events of default applicable to the Term Loan Facility are substantially similar to the covenants and events of default set forth in the Company's Five Year Competitive Advance and Revolving Credit Facility. In the second quarter of 2018, Dow Silicones exercised the 19-month extension option making amounts borrowed under the Term Loan Facility repayable on December 30, 2019. In addition, Dow Silicones amended the Term Loan Facility to include an additional 2-year extension option, at Dow Silicones' election, upon satisfaction of certain customary conditions precedent.
 
Debt Covenants and Default Provisions
There were no material changes to the debt covenants and default provisions related to the Company's outstanding long-term debt and primary, private credit agreements in the first six months of 2018. For additional information on the Company's debt covenants and default provisions, see Note 15 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.


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 June 30, 2018, the Company had accrued obligations of $834 million for probable environmental remediation and restoration costs, including $143 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 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

24

Table of Contents

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, 2017, the Company had accrued obligations of $878 million for probable environmental remediation and restoration costs, including $152 million for the remediation of Superfund sites.

Litigation
Asbestos-Related Matters of Union Carbide Corporation
A summary of Asbestos-Related Matters of Union Carbide Corporation can be found in Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Introduction
Union Carbide 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.

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

Based on the December 2017 Ankura review and Union Carbide's own review of the data, Union Carbide's total asbestos-related liability through the terminal year of 2049, including asbestos-related defense and processing costs, was $1,369 million at December 31, 2017, and included in “Accrued and other current liabilities” and “Asbestos-related liabilities - noncurrent” in the consolidated balance sheets.

Each quarter, Union Carbide reviews claims filed, settled and dismissed, as well as average settlement and resolution costs by disease category. Union Carbide also considers additional quantitative and qualitative factors such as the nature of pending claims, trial experience of Union Carbide and other asbestos defendants, current spending for defense and processing costs, significant appellate rulings and legislative developments, trends in the tort system, and their respective effects on expected future resolution costs. Union Carbide's management considers all these factors in conjunction with the most recent Ankura study and determines whether a change in the estimate is warranted. Based on Union Carbide's review of 2018 activity, it was determined that no adjustment to the accrual was required at June 30, 2018.

Union Carbide’s asbestos-related liability for pending and future claims and defense and processing costs was $1,310 million at June 30, 2018, and approximately 16 percent of the recorded liability related to pending claims and approximately 84 percent related to future claims.

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

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


25

Table of Contents

Bayer CropScience v. Dow AgroSciences ICC Arbitration
A summary of the Bayer CropScience v. Dow AgroSciences ICC Arbitration can be found in Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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 infringed its patent rights related to the use of the pat gene in certain soybean and cotton seed products, and (iv) Bayer was 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.

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.

On March 1, 2017, the U.S. Court of Appeals for the Federal Circuit affirmed the arbitral award. As a result of this action, in the first quarter of 2017, the Company recorded a loss of $469 million, inclusive of the arbitral award and post-judgment interest, which was included in "Sundry income (expense) - net" in the consolidated statements of income. On May 26, 2017, the Company paid the $469 million arbitral award to Bayer as a result of that decision. On September 11, 2017, DAS filed a petition for writ of certiorari with the United States Supreme Court to review the case, but the Court denied DAS’s petition. The litigation is now concluded with no risk of further liability.

Rocky Flats Matter
A summary of the Rocky Flats Matter can be found in Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

The Company and Rockwell International Corporation ("Rockwell") (collectively, the "defendants") were defendants in a class action lawsuit filed in 1990 on behalf of property owners ("plaintiffs") in Rocky Flats, Colorado, who asserted claims for nuisance and trespass based on alleged property damage caused by plutonium releases from a nuclear weapons facility owned by the U.S. Department of Energy ("DOE") but operated by Dow and Rockwell. The plaintiffs tried their case as a public liability action under the Price Anderson Act ("PAA"). Dow and Rockwell litigated this matter in the U.S. District Court for the District of Colorado, the U.S. Tenth Circuit Court of Appeals and then filed a petition for writ of certiorari in the United States Supreme Court. On May 18, 2016, Dow, Rockwell and the plaintiffs entered into a settlement agreement for $375 million, of which $131 million was paid by Dow. The DOE authorized the settlement pursuant to the PAA and the nuclear hazards indemnity provisions contained in Dow's and Rockwell's contracts. On April 28, 2017, the District Court conducted a fairness hearing and granted final judgment approving the class settlement and dismissed class claims against the defendants ("final judgment order").

On December 13, 2016, the United States Civil Board of Contract Appeals unanimously ordered the United States government to pay the amounts stipulated in the settlement agreement. On January 17, 2017, the Company received a full indemnity payment of $131 million from the United States government for Dow's share of the class settlement. On January 26, 2017, the Company placed $130 million in an escrow account for the settlement payment owed to the plaintiffs. The funds were subsequently released from escrow as a result of the final judgment order. The litigation is now concluded.


26

Table of Contents

Dow Silicones Chapter 11 Related Matters
A summary of the Dow Silicones Chapter 11 Related Matters can be found in Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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

Breast Implant and Other Product Liability Claims
Under the Plan, a product liability settlement program administered by an independent claims office (the “Settlement Facility”) was created to resolve breast implant and other product liability claims. Product liability claimants rejecting the settlement program in favor of pursuing litigation must bring suit against a litigation facility (the “Litigation Facility”). Dow Silicones has an obligation to fund the Settlement Facility and the Litigation Facility over a 16-year period, commencing at the Effective Date. At June 30, 2018, Dow Silicones and its insurers have made life-to-date payments of $1,762 million to the Settlement Facility and the Settlement Facility reported an unexpended balance of $126 million.

Dow Silicones' liability for breast implant and other product liability claims ("Implant Liability") was $263 million at June 30, 2018 ($263 million at December 31, 2017), which was included in "Other noncurrent obligations" in the consolidated balance sheets. Dow Silicones is not aware of circumstances that would change the factors used in estimating the Implant Liability and believes the recorded liability reflects the best estimate of the remaining funding obligations under the Plan; however, the estimate relies upon a number of significant assumptions, including: future claim filing levels in the Settlement Facility will be similar to those in a prior settlement program, which management uses to estimate future claim filing levels for the Settlement Facility; future acceptance rates, disease mix, and payment values will be materially consistent with historical experience; no material negative outcomes in future controversies or disputes over Plan interpretation will occur; and the Plan will not be modified. If actual outcomes related to any of these assumptions prove to be materially different, the future liability to fund the Plan may be materially different than the amount estimated. If Dow Silicones was ultimately required to fund the full liability up to the maximum capped value, the liability would be $2,047 million at June 30, 2018.

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

On May 10, 2017, the U.S. District Court for the Eastern District of Michigan entered a stipulated order resolving pending discovery motions and established a discovery schedule for the Commercial Creditors matter. As a result, Dow Silicones and its third party consultants conducted further analysis of the Commercial Creditors claims and defenses. This analysis indicated the estimated remaining liability to Commercial Creditors to be within a range of $77 million to $260 million. No single amount within the range appears to be a better estimate than any other amount within the range. Therefore, Dow Silicones recorded the minimum liability within the range, which resulted in a decrease to the Commercial Creditor liability of $33 million in the second quarter of 2017, which was included in "Sundry income (expense) - net" in the consolidated statements of income. At June 30, 2018, the liability related to Dow Silicones' potential obligation to pay additional interest to its Commercial Creditors in the Chapter 11 Proceeding was $80 million and is included in "Accrued and other current liabilities" in the consolidated balance sheets ($78 million at December 31, 2017). The actual amount of interest that will be paid to these creditors is uncertain and will ultimately be resolved through continued proceedings in the District Court.

Indemnifications
In connection with the June 1, 2016, ownership restructure of Dow Silicones, the Company is indemnified by Corning for 50 percent of future losses associated with certain pre-closing liabilities, including the Implant Liability and Commercial Creditors matters described above, subject to certain conditions and limits. The maximum amount of indemnified losses which may be

27

Table of Contents

recovered are subject to a cap that declines over time. No indemnification assets were recorded at June 30, 2018 or December 31, 2017.

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

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

Gain Contingency - Dow v. Nova Chemicals Corporation Patent Infringement Matter
A summary of the Dow v. Nova Chemicals Corporation Patent Infringement Matter can be found in Note 16 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

On December 9, 2010, Dow filed suit in the Federal Court in Ontario, Canada ("Federal Court") alleging that Nova Chemicals Corporation ("Nova") was infringing the Company's Canadian polyethylene patent 2,106,705. Nova counterclaimed on the grounds of invalidity and non-infringement. On June 29, 2017, the Federal Court issued a Confidential Supplemental Judgment, concluding that Nova must pay $645 million Canadian dollars (equivalent to $495 million U.S. dollars) to Dow, plus pre- and post-judgment interest, for which Dow received payment of $501 million from Nova on July 6, 2017. Although Nova is appealing portions of the damages judgment, certain portions of it are indisputable and will be owed to Dow regardless of the outcome of any further appeals by Nova. As a result of these actions and in accordance with ASC 450-30 "Gain Contingencies," the Company recorded a $160 million pretax gain in the second quarter of 2017 of which $137 million was included in "Sundry income (expense) - net" and $23 million was included in "Selling, general and administrative expenses" in the consolidated statements of income. At June 30, 2018, the Company had $341 million ($341 million at December 31, 2017) included in "Other noncurrent obligations" related to the disputed portion of the damages judgment. Dow is confident of its chances of defending the entire judgment on appeal, particularly the trial court's determinations on important factual issues, which will be accorded deferential review on appeal.

Guarantees
The following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for each type of guarantee:

Guarantees
Jun 30, 2018
Dec 31, 2017
In millions
Final
Expiration
Maximum 
Future Payments
Recorded  
Liability  
Final
Expiration
Maximum 
Future Payments
Recorded  
Liability  
Guarantees
2023
$
4,572

$
45

2023
$
4,774

$
49

Residual value guarantees
2027
895

132

2027
889

135

Total guarantees
 
$
5,467

$
177

 
$
5,663

$
184


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 remote.


28

Table of Contents

The Company has entered into guarantee agreements ("Guarantees") related to project financing for Sadara Chemical Company ("Sadara"), a nonconsolidated affiliate. The total of an Islamic bond and additional project financing (collectively “Total Project Financing”) obtained by Sadara is approximately $12.5 billion. Sadara had $12.4 billion of Total Project Financing outstanding at June 30, 2018 ($12.4 billion at December 31, 2017). 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 satisfactory fulfillment of certain other conditions, including passage of an extensive operational testing program, which is expected by the middle of 2019, and must occur no later than December 2020.

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.


NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the changes and after-tax balances of each component of accumulated other comprehensive loss ("AOCL") for the six months ended June 30, 2018 and 2017:

Accumulated Other Comprehensive Loss 1
Unrealized Gains (Losses) on Investments
Cumulative Translation Adj
Pension and Other Postretire Benefits
Derivative Instruments
Total Accum Other Comp Loss
In millions
Balance at Jan 1, 2017
$
43

$
(2,381
)
$
(7,389
)
$
(95
)
$
(9,822
)
Other comprehensive income (loss) before reclassifications
38

632


(73
)
597

Amounts reclassified from accumulated other comprehensive income (loss)
(30
)
(6
)
203

(16
)
151

Net other comprehensive income (loss)
$
8

$
626

$
203

$
(89
)
$
748

Balance at Jun 30, 2017
$
51

$
(1,755
)
$
(7,186
)
$
(184
)
$
(9,074
)
 
 
 
 
 
 
Balance at Jan 1, 2018 2
$
17

$
(1,481
)
$
(6,998
)
$
(109
)
$
(8,571
)
Other comprehensive income (loss) before reclassifications
(41
)
(92
)

75

(58
)
Amounts reclassified from accumulated other comprehensive income (loss)
2

(2
)
250

49

299

Net other comprehensive income (loss)
$
(39
)
$
(94
)
$
250

$
124

$
241

Reclassification of stranded tax effects 3
$
(1
)
$
(107
)
$
(927
)
$
(22
)
$
(1,057
)
Balance at Jun 30, 2018
$
(23
)
$
(1,682
)
$
(7,675
)
$
(7
)
$
(9,387
)
1.
Prior year amounts have been updated to conform with the current year presentation.
2.
The beginning balance of "Unrealized gains (losses) on investments" was increased by $20 million to reflect the impact of the adoption of ASU 2016-01. See Notes 1 and 2 for additional information.
3.
Amounts reclassified to retained earnings as a result of the adoption of ASU 2018-02. See Notes 1 and 2 for additional information.

The tax effects on the net activity related to each component of other comprehensive income (loss) for the three and six months ended June 30, 2018 and 2017 were as follows:

Tax Benefit (Expense)
Three Months Ended
Six Months Ended
In millions
Jun 30, 2018
Jun 30, 2017
Jun 30, 2018
Jun 30, 2017
Unrealized gains (losses) on investments
$
(3
)
$
(4
)
$
(9
)
$
4

Cumulative translation adjustments
25

8

20

26

Pension and other postretirement benefit plans
34

48

62

95

Derivative instruments
12

(7
)
9

(21
)
Tax benefit from income taxes related to other comprehensive income (loss) items
$
68

$
45

$
82

$
104



29

Table of Contents

A summary of the reclassifications out of AOCL for the three and six months ended June 30, 2018 and 2017 is provided as follows:

Reclassifications Out of Accumulated Other Comprehensive Loss
Three Months Ended
Six Months Ended
Consolidated Statements of Income Classification