XFRA:DCH1 Dow Chemical Co Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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DOW-Q1-3.31.2012
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2012
Commission File Number: 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)

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

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

 
 
Outstanding at
Class
 
March 31, 2012
Common Stock, par value $2.50 per share
 
1,195,379,948 shares




The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended March 31, 2012
TABLE OF CONTENTS

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


2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
In millions, except per share amounts (Unaudited)
Mar 31,
2012

 
Mar 31,
2011

Net Sales
$
14,719

 
$
14,733

Cost of sales
12,285

 
12,117

Research and development expenses
405

 
400

Selling, general and administrative expenses
707

 
700

Amortization of intangibles
122

 
123

Restructuring charges
357

 

Acquisition-related integration expenses

 
31

Equity in earnings of nonconsolidated affiliates
169

 
298

Sundry income (expense) - net
17

 
(449
)
Interest income
6

 
7

Interest expense and amortization of debt discount
329

 
377

Income Before Income Taxes
706

 
841

Provision for income taxes
186

 
120

Net Income
520

 
721

Net income attributable to noncontrolling interests
23

 
11

Net Income Attributable to The Dow Chemical Company
497

 
710

Preferred stock dividends
85

 
85

Net Income Available for The Dow Chemical Company Common Stockholders
$
412

 
$
625

 
 
 
 
Per Common Share Data:
 
 
 
Earnings per common share - basic
$
0.35

 
$
0.55

Earnings per common share - diluted
$
0.35

 
$
0.54

 


 
 
Common stock dividends declared per share of common stock
$
0.25

 
$
0.15

Weighted-average common shares outstanding - basic
1,160.9

 
1,139.5

Weighted-average common shares outstanding - diluted
1,168.7

 
1,161.2

 


 
 
Depreciation
$
510

 
$
559

Capital Expenditures
$
402

 
$
405

See Notes to the Consolidated Financial Statements.


3


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Three Months Ended
In millions (Unaudited)
Mar 31,
2012

 
Mar 31,
2011

Net Income
$
520

 
$
721

Other Comprehensive Income (Loss), Net of Tax
 
 
 
Net change in unrealized gains on investments
57

 
14

Translation adjustments
282

 
441

Adjustments to pension and other postretirement benefit plans
85

 
72

Net losses on cash flow hedging derivative instruments
(14
)
 
(9
)
Other comprehensive income
410

 
518

Comprehensive Income
930

 
1,239

Comprehensive income attributable to noncontrolling interests, net of tax
23

 
11

Comprehensive Income Attributable to The Dow Chemical Company
$
907

 
$
1,228

See Notes to the Consolidated Financial Statements.

4


The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited)
Mar 31,
2012

 
Dec 31,
2011

Assets
Current Assets
 
 
 
Cash and cash equivalents (variable interest entities restricted - 2012: $154; 2011: $170)
$
3,608

 
$
5,444

Marketable securities and interest-bearing deposits
2

 
2

Accounts and notes receivable:
 
 
 
Trade (net of allowance for doubtful receivables - 2012: $139; 2011: $121)
5,480

 
4,900

Other
5,026

 
4,726

Inventories
8,882

 
7,577

Deferred income tax assets - current
596

 
471

Other current assets
317

 
302

Total current assets
23,911

 
23,422

Investments
 
 
 
Investment in nonconsolidated affiliates
3,118

 
3,405

Other investments (investments carried at fair value - 2012: $2,098; 2011: $2,008)
2,597

 
2,508

Noncurrent receivables
1,265

 
1,144

Total investments
6,980

 
7,057

Property
 
 
 
Property
53,013

 
52,216

Less accumulated depreciation
35,734

 
34,917

Net property (variable interest entities restricted - 2012: $2,264; 2011: $2,169)
17,279

 
17,299

Other Assets
 
 
 
Goodwill
12,973

 
12,930

Other intangible assets (net of accumulated amortization - 2012: $2,490; 2011: $2,349)
4,983

 
5,061

Deferred income tax assets - noncurrent
2,523

 
2,559

Asbestos-related insurance receivables - noncurrent
168

 
172

Deferred charges and other assets
781

 
724

Total other assets
21,428

 
21,446

Total Assets
$
69,598

 
$
69,224

Liabilities and Equity
Current Liabilities
 
 
 
Notes payable
$
555

 
$
541

Long-term debt due within one year
1,798

 
2,749

Accounts payable:
 
 
 
Trade
4,944

 
4,778

Other
2,369

 
2,216

Income taxes payable
514

 
382

Deferred income tax liabilities - current
125

 
129

Dividends payable
379

 
376

Accrued and other current liabilities
2,781

 
2,463

Total current liabilities
13,465

 
13,634

Long-Term Debt (variable interest entities nonrecourse - 2012: $1,276; 2011: $1,138)
18,224

 
18,310

Other Noncurrent Liabilities
 
 
 
Deferred income tax liabilities - noncurrent
1,061

 
1,091

Pension and other postretirement benefits - noncurrent
8,905

 
9,034

Asbestos-related liabilities - noncurrent
591

 
608

Other noncurrent obligations
3,154

 
3,109

Total other noncurrent liabilities
13,711

 
13,842

Redeemable Noncontrolling Interest
147

 
147

Stockholders’ Equity
 
 
 
Preferred stock, series A
4,000

 
4,000

Common stock
2,988

 
2,961

Additional paid-in capital
2,846

 
2,663

Retained earnings
19,203

 
19,087

Accumulated other comprehensive loss
(5,586
)
 
(5,996
)
Unearned ESOP shares
(425
)
 
(434
)
The Dow Chemical Company’s stockholders’ equity
23,026

 
22,281

Noncontrolling interests
1,025

 
1,010

Total equity
24,051

 
23,291

Total Liabilities and Equity
$
69,598

 
$
69,224

See Notes to the Consolidated Financial Statements.

5


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
 
 
Three Months Ended
In millions (Unaudited)
Mar 31,
2012

 
Mar 31,
2011

Operating Activities
 
 
 
Net Income
$
520

 
$
721

Adjustments to reconcile net income to net cash used in operating activities:

 

Depreciation and amortization
679

 
731

Credit for deferred income tax
(158
)
 
(112
)
Earnings of nonconsolidated affiliates less than dividends received
316

 
210

Pension contributions
(380
)
 
(220
)
Net gain on sales of investments
(7
)
 
(16
)
Net gain on sales of property, businesses and consolidated companies
(54
)
 
(4
)
Other net (gain) loss
25

 
(1
)
Restructuring charges
357

 

Loss on early extinguishment of debt
24

 
472

Excess tax benefits from share-based payment arrangements
(57
)
 
(9
)
Changes in assets and liabilities, net of effects of acquired and divested companies:
 
 
 
Accounts and notes receivable
(2,416
)
 
(1,940
)
Proceeds from interests in trade accounts receivable conduits
1,662

 
990

Inventories
(1,300
)
 
(1,045
)
Accounts payable
185

 
351

Other assets and liabilities
553

 
(303
)
Cash used in operating activities
(51
)
 
(175
)
Investing Activities
 
 
 
Capital expenditures
(402
)
 
(405
)
Construction of assets pending sale / leaseback

 
(62
)
Proceeds from sale / leaseback of assets

 
46

Proceeds from sales of property, businesses and consolidated companies
61

 
81

Acquisitions of businesses

 
(6
)
Investments in consolidated companies, net of cash acquired

 
(54
)
Investments in and loans to nonconsolidated affiliates
(101
)
 
(36
)
Distributions from nonconsolidated affiliates

 
27

Purchases of investments
(160
)
 
(159
)
Proceeds from sales and maturities of investments
140

 
216

Cash used in investing activities
(462
)
 
(352
)
Financing Activities
 
 
 
Changes in short-term notes payable
(58
)
 
55

Proceeds from issuance of long-term debt
224

 
20

Payments on long-term debt
(1,313
)
 
(2,923
)
Purchases of treasury stock

 
(19
)
Proceeds from issuance of common stock
122

 
54

Proceeds from sales of common stock

 
98

Excess tax benefits from share-based payment arrangements
57

 
9

Contribution from noncontrolling interests

 
20

Distributions to noncontrolling interests
(46
)
 
(18
)
Dividends paid to stockholders
(374
)
 
(256
)
Cash used in financing activities
(1,388
)
 
(2,960
)
Effect of Exchange Rate Changes on Cash
65

 
10

Summary
 
 
 
Decrease in cash and cash equivalents
(1,836
)
 
(3,477
)
Cash and cash equivalents at beginning of year
5,444

 
7,039

Cash and cash equivalents at end of period
$
3,608

 
$
3,562

See Notes to the Consolidated Financial Statements.

6


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Equity
 
 
Three Months Ended
In millions (Unaudited)
Mar 31,
2012

 
Mar 31,
2011

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

 
$
4,000

Common Stock
 
 
 
Balance at beginning of year
2,961

 
2,931

Common stock issued
27

 
8

Balance at end of period
2,988

 
2,939

Additional Paid-in Capital
 
 
 
Balance at beginning of year
2,663

 
2,286

Common stock issued
95

 
47

Stock-based compensation and allocation of ESOP shares
88

 
(90
)
Balance at end of period
2,846

 
2,243

Retained Earnings
 
 
 
Balance at beginning of year
19,087

 
17,736

Net income available for The Dow Chemical Company common stockholders
412

 
625

Dividends declared on common stock (per share: $0.25 in 2012, $0.15 in 2011)
(292
)
 
(172
)
Other
(4
)
 
(2
)
Balance at end of period
19,203

 
18,187

Accumulated Other Comprehensive Loss
 
 
 
Balance at beginning of year
(5,996
)
 
(4,399
)
Other comprehensive income
410

 
518

Balance at end of period
(5,586
)
 
(3,881
)
Unearned ESOP Shares
 
 
 
Balance at beginning of year
(434
)
 
(476
)
Shares allocated to ESOP participants
9

 
9

Balance at end of period
(425
)
 
(467
)
Treasury Stock
 
 
 
Balance at beginning of year

 
(239
)
Purchases

 
(19
)
Issuance to employees and employee plans

 
258

Balance at end of period

 

The Dow Chemical Company’s Stockholders’ Equity
23,026

 
23,021

Noncontrolling Interests
 
 
 
Balance at beginning of year
1,010

 
803

Net income attributable to noncontrolling interests
23

 
11

Distributions to noncontrolling interests
(46
)
 
(18
)
Capital contributions

 
20

Consolidation of a variable interest entity
37

 

Other
1

 

Balance at end of period
1,025

 
816

Total Equity
$
24,051

 
$
23,837

See Notes to the Consolidated Financial Statements.


7


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



NOTE A – CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“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, 2011.


NOTE B – RECENT ACCOUNTING GUIDANCE
On January 1, 2012, the Company adopted Accounting Standards Update ("ASU") 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income," as amended by ASU 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." This standard improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. See the Consolidated Statements of Comprehensive Income and Note P.

On January 1, 2012, the Company adopted ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS," which provides common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards ("IFRS"). See Note H for additional information about fair value measurements.




8


Accounting Guidance Issued But Not Adopted as of March 31, 2012
In December 2011, the Financial Accounting Standards Board ("FASB") issued ASU 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities," which requires entities to disclose both gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting agreement. The objective of the disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. Retrospective presentation for all comparative periods presented is required. The Company is currently evaluating the impact of adopting this guidance.


NOTE C – RESTRUCTURING
2012 Restructuring
On March 27, 2012, the Company's Board of Directors approved a restructuring plan to optimize its portfolio, respond to changing and volatile economic conditions, particularly in Western Europe, and to advance the Company's Efficiency for Growth program, which was initiated by the Company in the second quarter of 2011. The restructuring plan includes the elimination of approximately 900 positions. In addition, the Company will shut down a number of manufacturing facilities. These actions are expected to be completed primarily over the next two years.

As a result of the restructuring activities, the Company recorded pretax restructuring charges of $357 million in the first quarter of 2012 consisting of costs associated with exit or disposal activities of $150 million, severance costs of $113 million and asset write-downs and write-offs of $94 million. The impact of these charges is shown as "Restructuring charges" in the consolidated statements of income and reflected in the Company's segment results as shown in the following table.

2012 Restructuring Charges by Operating Segment
In millions
Costs associated with Exit or Disposal Activities

 
Severance Costs

 
Impairment of Long-Lived Assets and Other Assets

 
Total

Electronic and Functional Materials
$

 
$

 
$
17

 
$
17

Coatings and Infrastructure Solutions
4

 

 
37

 
41

Performance Materials
146

 

 
40

 
186

Corporate

 
113

 

 
113

Total
$
150

 
$
113

 
$
94

 
$
357


Details regarding the components of the 2012 restructuring charges are discussed below:

Costs Associated with Exit or Disposal Activities
The restructuring charges for costs associated with exit or disposal activities totaled $150 million in the first quarter of 2012 and included contract cancellation fees of $149 million, impacting Performance Materials ($146 million) and Coatings and Infrastructure Solutions ($3 million), and asbestos abatement costs of $1 million impacting Coatings and Infrastructure Solutions.

Severance Costs
The restructuring charges included severance of $113 million for the separation of approximately 900 employees under the terms of the Company's ongoing benefit arrangements, primarily by June 30, 2012. These costs were charged against Corporate. At March 31, 2012, no severance had been paid.

Impairment of Long-Lived Assets and Other Assets
The restructuring charges related to the write-down and write-off of assets in the first quarter of 2012 totaled $94 million. Details regarding the write-downs and write-offs are as follows:

The Company evaluated its facilities that manufacture STYROFOAM™ brand insulation and as a result, the decision was made to shut down facilities in Balatonfuzfo, Hungary; Estarreja, Portugal; and Charleston, Illinois. In addition, a

9


facility in Terneuzen, The Netherlands will be idled and impaired. Write-downs associated with these facilities of
$37 million were recorded in the first quarter of 2012 against the Coatings and Infrastructure Solutions segment. These facilities are expected to be shut down by year-end 2012.

The decision was made to shut down and/or consolidate certain manufacturing assets in the Polyurethanes and Epoxy businesses in Texas and Germany. Write-downs associated with these assets of $15 million were recorded in the first quarter of 2012 against the Performance Materials segment. These assets are expected to be shut down by the end of the third quarter of 2012.

Certain capital projects were canceled resulting in the write-off of project spending of $42 million against the Performance Materials ($25 million) and Electronic and Functional Materials ($17 million) segments.

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

2012 Restructuring Activities
 
 
 
 
 
 
 
In millions
Costs associated with Exit or Disposal Activities

 
Severance Costs

 
 Impairment of Long-Lived Assets and Other Assets

 
Total

Restructuring charges recognized in the first quarter of 2012
$
150

 
$
113

 
$
94

 
$
357

Charges against the reserve

 

 
(94
)
 
(94
)
Reserve balance at Mar 31, 2012
$
150

 
$
113

 
$

 
$
263


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


NOTE D – ACQUISITIONS AND DIVESTITURES
Rohm and Haas Acquisition and Integration Related Expenses
During the first quarter of 2011, pretax charges totaling $31 million were recorded for integration costs related to the April 1, 2009 acquisition of Rohm and Haas Company ("Rohm and Haas"), which was completed in the first quarter of 2011. These charges were recorded in "Acquisition-related integration expenses" in the consolidated statements of income and reflected in Corporate.

Divestiture of the Styron Business Unit
On June 17, 2010, the Company sold the Styron business unit ("Styron") to an affiliate of Bain Capital Partners. The proceeds received on the sale included a $75 million long-term note receivable. In addition, the Company elected to acquire a 7.5 percent equity interest in the resulting privately held, global materials company.

On February 3, 2011, Styron repaid the $75 million long-term note receivable, plus interest. In the first quarter of 2011, the Company received dividend income of $25 million, recorded in "Sundry income (expense) - net" in the consolidated statements of income and reflected in Corporate. The Company continued to hold a 6.5 percent equity interest at March 31, 2012.



10


NOTE E – INVENTORIES
The following table provides a breakdown of inventories:
 
Inventories
In millions
Mar 31, 2012

 
Dec 31, 2011

Finished goods
$
4,994

 
$
4,327

Work in process
2,087

 
1,716

Raw materials
1,016

 
765

Supplies
785

 
769

Total inventories
$
8,882

 
$
7,577

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $1,148 million at March 31, 2012 and $1,105 million at December 31, 2011.


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

Goodwill
Electronic
and
Functional
Materials

 
Coatings
and Infra-
structure
Solutions

 
Ag
Sciences

 
Perf
Materials

 
Perf
Plastics

 
Feedstocks
and Energy

 
Total  

In millions
 
 
 
 
 
 
Net goodwill at Dec 31, 2011
$
4,934

 
$
4,041

 
$
1,558

 
$
959

 
$
1,375

 
$
63

 
$
12,930

Foreign currency impact
13

 
18

 

 
1

 
11

 

 
43

Net goodwill at Mar 31, 2012
$
4,947

 
$
4,059

 
$
1,558

 
$
960

 
$
1,386

 
$
63

 
$
12,973


The following table provides information regarding the Company’s other intangible assets:
 
Other Intangible Assets
At March 31, 2012
 
At December 31, 2011
In millions
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net  

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
Licenses and intellectual property
$
1,700

 
$
(631
)
 
$
1,069

 
$
1,693

 
$
(594
)
 
$
1,099

Patents
119

 
(104
)
 
15

 
119

 
(97
)
 
22

Software
1,064

 
(613
)
 
451

 
1,049

 
(596
)
 
453

Trademarks
691

 
(237
)
 
454

 
695

 
(224
)
 
471

Customer related
3,699

 
(796
)
 
2,903

 
3,652

 
(730
)
 
2,922

Other
149

 
(109
)
 
40

 
150

 
(108
)
 
42

Total other intangible assets, finite lives
$
7,422

 
$
(2,490
)
 
$
4,932

 
$
7,358

 
$
(2,349
)
 
$
5,009

IPR&D (1), indefinite lives
51

 

 
51

 
52

 

 
52

Total other intangible assets
$
7,473

 
$
(2,490
)
 
$
4,983

 
$
7,410

 
$
(2,349
)
 
$
5,061

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

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

Amortization Expense
Three Months Ended
In millions
Mar 31,
2012

 
Mar 31,
2011

Other intangible assets, excluding software
$
122

 
$
123

Software, included in “Cost of sales”
$
15

 
$
23



11


Total estimated amortization expense for 2012 and the five succeeding fiscal years is as follows:

Estimated Amortization Expense
In millions
2012
$
556

2013
$
535

2014
$
514

2015
$
496

2016
$
484

2017
$
450



NOTE G – FINANCIAL INSTRUMENTS
Investments
The Company’s investments in marketable securities are primarily classified as available-for-sale.
 
Investing Results
Three Months Ended
In millions
Mar 31,
2012

 
Mar 31,
2011

Proceeds from sales of available-for-sale securities
$
134

 
$
190

Gross realized gains
$
5

 
$
9

Gross realized losses
$
(4
)
 
$
(1
)

The following table summarizes the contractual maturities of the Company’s investments in debt securities:
 
Contractual Maturities of Debt Securities at March 31, 2012
In millions
Amortized Cost

 
Fair Value

Within one year
$
28

 
$
29

One to five years
454

 
498

Six to ten years
505

 
546

After ten years
235

 
274

Total
$
1,222

 
$
1,347


At March 31, 2012, the Company had $1,700 million held-to-maturity securities (primarily Treasury Bills) classified as cash equivalents, as these securities had original maturities of three months or less ($1,836 million at December 31, 2011). The Company’s investments in held-to-maturity securities are held at amortized cost, which approximates fair value. At March 31, 2012, the Company had investments in money market funds of $3 million classified as cash equivalents ($1,090 million at December 31, 2011).
The net unrealized gain recognized during the first quarter of 2012 on trading securities held at March 31, 2012 was $24 million ($11 million during the three-month period ended March 31, 2011).

12


The following tables provide the fair value and gross unrealized losses of the Company’s investments that were deemed to be temporarily impaired at March 31, 2012 and December 31, 2011, aggregated by investment category:
Temporarily Impaired Securities at March 31, 2012 (1)
 
Less than 12 months
In millions
Fair
Value

 
Unrealized
Losses

Debt securities:
 
 
 
Government debt (2)
$
23

 
$

Corporate bonds
55

 
(1
)
Total debt securities
$
78

 
$
(1
)
Equity securities
157

 
(8
)
Total temporarily impaired securities
$
235

 
$
(9
)
(1)
Unrealized losses of 12 months or more were less than $1 million.
(2)
U.S. Treasury obligations, U.S. agency obligations, agency mortgage-backed securities and other municipalities’ obligations, with unrealized losses of less than $1 million.
Temporarily Impaired Securities at December 31, 2011 (1)
 
Less than 12 months
In millions
Fair
Value

 
Unrealized
Losses

Debt securities:
 
 
 
Corporate bonds
$
44

 
$
(2
)
Equity securities
190

 
(36
)
Total temporarily impaired securities
$
234

 
$
(38
)
(1)
Unrealized losses of 12 months or more were less than $1 million.

Portfolio managers regularly review the Company’s holdings to determine if any investments are other-than-temporarily impaired. The analysis includes reviewing the amount of the impairment, as well as the length of time it has been impaired. In addition, specific guidelines for each instrument type are followed to determine if an other-than-temporary impairment has occurred.
For debt securities, the credit rating of the issuer, current credit rating trends, the trends of the issuer’s overall sector, the ability of the issuer to pay expected cash flows and the length of time the security has been in a loss position are considered in determining whether unrealized losses represent an other-than-temporary impairment. The Company did not have any credit-related losses during the first quarters of 2012 or 2011.
For equity securities, the Company’s investments are primarily in Standard & Poor’s (“S&P”) 500 companies; however, the Company’s policies allow investments in companies outside of the S&P 500. The largest holdings are Exchange Traded Funds that represent the S&P 500 index or an S&P 500 sector or subset; the Company also has holdings in Exchange Traded Funds that represent emerging markets. The Company considers the evidence to support the recovery of the cost basis of a security including volatility of the stock, the length of time the security has been in a loss position, value and growth expectations, and overall market and sector fundamentals, as well as technical analysis, in determining whether unrealized losses represent an other-than-temporary impairment. In the first quarter of 2012, other-than-temporary impairment write-downs on investments still held by the Company were $4 million ($2 million in the first quarter of 2011).
The aggregate cost of the Company’s cost method investments totaled $186 million at March 31, 2012 and $179 million at December 31, 2011. Due to the nature of these investments, the fair market value is not readily determinable. These investments are reviewed quarterly for impairment indicators. At March 31, 2012, the Company's impairment analysis resulted in no reduction in the cost basis of these investments (no reduction at March 31, 2011).

13


The following table summarizes the fair value of financial instruments at March 31, 2012 and December 31, 2011:
 
Fair Value of Financial Instruments
 
At March 31, 2012
 
At December 31, 2011
In millions
Cost

 
Gain

 
Loss

 
Fair
Value

 
Cost

 
Gain

 
Loss

 
Fair
Value

Marketable securities: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government debt (2)
$
549

 
$
53

 
$

 
$
602

 
$
556

 
$
62

 
$

 
$
618

Corporate bonds
673

 
73

 
(1
)
 
745

 
652

 
73

 
(2
)
 
723

Total debt securities
$
1,222

 
$
126

 
$
(1
)
 
$
1,347

 
$
1,208

 
$
135

 
$
(2
)
 
$
1,341

Equity securities
649

 
110

 
(8
)
 
751

 
646

 
57

 
(36
)
 
667

Total marketable securities
$
1,871

 
$
236

 
$
(9
)
 
$
2,098

 
$
1,854

 
$
192

 
$
(38
)
 
$
2,008

Long-term debt incl. debt due within one year (3)
$
(20,022
)
 
$
41

 
$
(2,799
)
 
$
(22,780
)
 
$
(21,059
)
 
$
6

 
$
(2,736
)
 
$
(23,789
)
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