NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2016 and 2015, AND FOR THE YEAR ENDED DECEMBER 31, 2016
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1.
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DESCRIPTION OF THE PLAN
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The following description of The Dow Chemical Company Employees' Savings Plan (the “Plan”) provides only general information. Participants should refer to the plan document or Summary Plan Description for the legal description of the Plan's provisions.
General
- The Plan is a defined contribution plan consisting of (1) a profit sharing plan with a cash or deferred feature which is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code as of 1986, as amended (“Code”) and (2) a leveraged employee stock ownership plan (“LESOP”) which is intended to qualify as a stock bonus plan under Sections 401(a) and 4975(e)(7). The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), as amended. The Plan covers any person who is, or becomes, a regular employee of The Dow Chemical Company (the “Company” or “Dow”), or of certain of the Company's subsidiaries, subject to certain eligibility service requirements for part-time employees.
Employee Contributions
- Plan participants generally may elect to contribute from 0.5% to 40% of their compensation, depending on the participant's eligible pay, limited to a 0.5% minimum contribution. Employees who do not exceed the gross compensation limits are limited to 40% of eligible pay in 0.5% increments, with a 0.5% minimum contribution. The maximum yearly gross compensation pre-tax or Roth 401(k) contribution made through payroll deductions was
$18,000
in
2016
. Participants who attained age 50 before the end of the plan year were eligible to make additional catch-up contributions in the amount of
$6,000
in
2016
. Plan participants may elect to increase, decrease, suspend, or resume compensation deferrals at any time. New elections are effective as soon as practicable after the request is processed. Newly hired eligible employees not electing to enroll (within 60 days of being hired) are automatically enrolled to contribute 3% of their eligible pay to the Plan, unless the employee elects to opt out. The automatic contributions will increase by 1% each year effective April 1 until the contribution rate reaches 6%, unless the employee designates otherwise. The contributions default to the applicable BTC Lifepath Fund based on the employee's date of birth, unless otherwise designated by the employee.
Company Contributions
- In general, the Company's matching contribution provides a 100% match on the first 2% of eligible pay deferrals and a 50% match of the next 4% of eligible pay deferrals. Legacy Rohm and Haas Company employees' Company matching contributions are calculated as 100% of the first 3% of eligible pay deferrals and a 50% match of the next 3% of eligible pay deferrals. For legacy Dow Corning Corporation employees hired prior to January 1, 2006, the Company's matching contribution provides a 100% match on the first 3% of eligible pay deferrals and 50% on the next 2% of eligible pay deferrals; and for those hired on and after January 1, 2006 and prior to September 1, 2016, the Company matching contribution provides a 100% match on the first 3% of eligible pay deferrals and 50% on the next 4% of eligible pay deferrals. The Company's matching contribution is made in the form of Company stock from the LESOP. Employees may divest their Dow stock at any time and elect one of the other investment options available to them under the Plan.
In accordance with the provisions of the Plan, the Plan is required to release shares in proportion to the principal and interest paid on the LESOP loan as a percentage of beginning of year outstanding principal and interest. The shares released from unallocated LESOP shares are allocated to participants to satisfy the Company's matching requirements.
Except as otherwise provided by the Plan, if the required contributions are less than the value of shares released, the difference is allocated to certain participants in the form of contingent matching contributions, and then to all participants, as an “Excess ESOP Shares Distribution” contribution. For the year ended
December 31, 2016
, the total number of shares allocated as contingent matching contributions and Excess ESOP Shares distribution contributions amounted to
1,803,701
, with a market value of
$103,207,771
. The Company allocated these shares to the participants in March
2017
.
If the required Company matching contributions under the provisions of the Plan are greater than the value of the shares released, the Company is required to make an additional contribution to cover the shortfall. No such Company contributions were required for the year ended
December 31, 2016
.
Dividends
- Participants invested in The Dow Chemical Company common stock funds may elect to receive dividends as a distribution rather than reinvesting dividends within the participant account.
Account Valuation
- Participant account balances reflect the total contributions made to the Plan by employees and the Company, plus investment results, less expenses and withdrawals.
Vesting
- Participants are immediately vested in all amounts credited to their plan account, including employee contributions, Company contributions, and investment earnings.
Benefits Distribution
- Benefits are generally distributable upon termination of employment as a lump-sum payment or partial withdrawal or may be deferred until minimum distributions are required by law. The plan makes a lump-sum payment to terminated participants who have a balance that does not exceed $1,000. Active employees may request in‑service distributions upon the attainment of age 59‑1/2.
Participant Notes Receivable
- Active participants, retirees, and terminated participants may borrow from their employee contributions, plus earnings on those contributions, with a minimum note receivable of $1,000. Participant notes receivable are limited to the smaller of:
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•
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50% of the total account balance or
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•
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$50,000 less the highest outstanding participant note receivable balance in the preceding 12 months
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Note receivable repayments for active employees are made through payroll deductions, on an after‑tax basis, with a minimum term of six months and a maximum of 60 months for any purpose other than the purchase of a primary residence; and a minimum term of six months and a maximum of 120 months for participant note receivable for the purpose of purchasing a primary residence. Repayments, both interest and principal, are credited to the participant's account and are allocated among the fund options according to the participant's current investment election. A fixed interest rate is applied to the note receivable. This rate is generally equal to the prime rate on the last day of each calendar quarter before the loan is processed. The range of interest rates on notes receivable outstanding at
December 31, 2016
and
2015
was
3.25%
to
10.5%
.
Investments
- Participants direct the investment of their contributions into various investment options offered by the Plan.
Administration
- Administrative expenses of the trustee are charged to the Plan. The net assets of the Plan are held by Fidelity Management Trust Company (“Fidelity”), who acts as independent trustee, custodian, and recordkeeper for all the investments in the Plan. Fidelity manages certain plan investments. All transactions with Fidelity qualify as party-in-interest transactions.
Amendment or Termination
- The Plan does not have an expiration date. The Company may at any time terminate, amend, or modify the Plan, subject to certain rights of the Plan participants. Upon termination of the Plan, each participant is entitled to receive the entire balance in his or her account in accordance with the terms of the Plan.
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2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Accounting
- The financial statements of the Plan have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates
- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in net assets available for benefits during the reporting period. Actual results could differ from those estimates.
Temporary Investments
- Temporary investments are investments in short‑term money market funds and interest bearing cash in the respective investment funds.
Investment Valuation and Income Recognition
- Investments in the Plan consisting of common stock of the Company, mutual funds, certain money market funds and common stock are stated at fair value based upon the quoted market value of such securities at year end. The investments in common/collective trusts are valued at net asset value per share (or its equivalent) of the fund, based on the fair market values of the underlying net assets. There are no redemption restrictions or unfunded commitments on these investments. Due to their short‑term nature and liquidity, temporary investments, including certain money market funds and interest bearing cash, are stated at outstanding balance, which approximates fair value.
Investments of the Interest Income Fund (“Fund”) included in the Plan consist of Synthetic Guaranteed Investment Contracts (“Synthetic GICs”), a money market fund, and a common collective trust fund. All of the Plan's Synthetic GICs are fully benefit-responsive and are recorded at contract value. Contract value is the amount participants would normally receive if they were to initiate permitted transactions under the terms of the Plan. Contract value represents deposits made to the contract plus earnings
at guaranteed crediting rates less withdrawals and applicable fees. Synthetic GICs operate similarly to an insurance company separate account investment contract, except that the assets are placed in a separate custodial account (owned by the Plan) rather than such assets being held in a separate account of the insurance company. A Synthetic GIC is a wrap contract paired with an underlying investment or investments, usually a portfolio, owned by the Plan, of high-quality, intermediate term fixed income securities or common/collective trusts holding similar investments. The Plan purchases a wrapper contract from financial services institutions.
In addition to holding certain assets, Synthetic GICs include features designed to provide participant liquidity at book value as well as periodic interest crediting rates. The liquidity feature is also known as “benefit responsiveness.” Synthetic GICs may be issued by banks, insurance companies, and other financial institutions.
The Synthetic GICs provide for prospective crediting interest rate adjustments based on the interest earnings and fair value of the underlying assets. The crediting interest rates are reset monthly and the contracts provide that the crediting interest rates cannot be less than zero.
Certain events may limit the ability of the Plan to transact at contract value with the insurance company and the financial institution issuer. Such events include the following: (i) amendments to the plan documents (including complete or partial plan termination or merger with another plan); (ii) changes to the Plan's prohibition on competing investment options or deletion of equity wash provisions; (iii) bankruptcy of the plan sponsor or other plan sponsor events (e.g., divestitures or spin‑offs of a subsidiary) which cause a significant withdrawal from the Plan; or (iv) the failure of the Plan to qualify for exemption from federal income taxes or any required exemption of prohibited transaction under ERISA. The plan administrator does not believe that the occurrence of any such event, which would limit the Plan's ability to transact at contract value, is probable.
Synthetic GICs generally impose conditions on both the Plan and the issuer. If an event of default occurs and is not resolved, the non‑defaulting party may terminate the contract. The following may cause the Plan to be in default: a breach of material obligation under the contract; a material misrepresentation; or a material amendment to the plan agreement. The issuer may be in default if it breaches a material obligation under the investment contract; makes a material misrepresentation; has a decline in its long-term credit rating below a threshold set forth in the contract; or is acquired or reorganized and the successor issuer does not satisfy the investment or credit guidelines applicable to issuers. If, in the event of default of an issuer, the Plan were unable to obtain a replacement investment contract, losses may occur if the market value of the Plan's assets, which were covered by the contract, is below the contract value. The Plan may seek to add additional issuers over time to diversify the Plan's exposure to such risk, but there is no assurance the Plan may be able to do so. The combination of the default of an issuer and an inability to obtain a replacement agreement could render the Plan unable to achieve its objective of maintaining a stable contract value. The terms of an investment contract generally provide for settlement of payments only upon termination of the contract or total liquidation of the covered investments. Generally, payments will be made pro rata, based on the percentage of investments covered by each issuer. Contract termination occurs whenever the contract value or market value of the covered investments reaches zero or upon certain events of default.
If the contract terminates due to issuer default (other than a default occurring because of a decline in its rating), the issuer will generally be required to pay to the Plan the excess, if any, of contract value over market value on the date of termination. If a contract terminates due to a decline in the ratings of the issuer, the issuer may be required to pay to the Plan the cost of acquiring a replacement contract (i.e., replacement cost) within the meaning of the contract. If the contract terminates when the market value equals zero, the issuer will pay the excess of contract value over market value to the Plan to the extent necessary for the Plan to satisfy outstanding contract value withdrawal requests. Contract termination also may occur by either party upon election and notice.
Changes in fixed income market conditions and interest rates may affect the yield to maturity and the market value of the underlying investments. Such changes could have a material impact on the Synthetic GIC's future interest crediting rates. In addition, participant withdrawals from and transfers out of the Interest Income Fund made according to Plan provisions are paid at contract value but funded through the market value liquidation of the underlying investments. This process of funding participant withdrawals and transfers from market value liquidations of underlying investments may also have an effect on future interest crediting rates.
Participant Notes Receivable
- Participant notes receivable are recorded at their unpaid principal balances plus any accrued interest. Participant notes receivable are written off when deemed uncollectible.
Benefits Payable
- Amounts payable to persons who have withdrawn from participation are not recorded as a liability of the Plan. Benefits payable to participants who had withdrawn from participation in the Plan as of
December 31, 2016
and
2015
were insignificant.
Federal Income Tax Status
- The Internal Revenue Service has determined and informed the Company by a letter dated September 2, 2014 that the Plan is qualified and the trust established under the Plan is tax‑exempt under the appropriate sections of the Internal Revenue Code (the “Code”). Although the Plan has been amended since receiving the determination letter, the plan administrator believes the Plan is designed and is currently being operated in compliance with the applicable requirements of the Code.
In accordance with guidance on accounting for uncertainty in income taxes, management evaluated the Plan's tax position and does not believe the Plan has any uncertain tax positions that require disclosure or adjustment to the financial statements. The plan administrator believes it is no longer subject to tax examinations for years prior to 2013.
Risks and Uncertainties
- The Plan invests in various investment instruments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the financial statements.
Recently Adopted Accounting Guidance
- During 2016, the Plan adopted Accounting Standards Update (ASU) Nos. 2015-07,
Disclosures for Investments In Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)
and 2015-12,
Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965) - I. Fully Benefit-Responsive Investment Contracts, II. Plan Investment Disclosures, and III. Measurement Date Practical Expedient.
ASU No. 2015-07 amended ASC 820,
Fair Value Measurements,
and removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share as a practical expedient. Parts I and II of ASU No. 2015-12 were applicable to the Plan. Part I requires the fully benefit-responsive investment contract be recorded at contract value without presentation of fair value or the difference between fair value and contract value and reduces the related disclosures. Part II modified the investment disclosures under ASC 820 and 962. These standards were adopted retrospectively, which resulted in the reclassification of investments previously reported at fair value to fully benefit-responsive investment contracts at contract value on the 2015 statement of net assets available for benefits. The adoption had no impact on the Plan's reported net assets or changes in net assets.
During 2016, the Plan adopted ASU No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU No. 2016-01 amended ASC 825,
Financial Instruments
, and eliminated disclosure of the fair value of financial instruments not recorded at fair value previously required under ASC 825. This standard was adopted retrospectively and had no impact on the Plan’s net assets or changes in net assets.
As a result of the closing of a transaction between Dow and Corning Incorporated on June 1, 2016, Dow Corning Corporation (Dow Corning), previously a 50:50 joint venture between Dow and Corning Incorporated, became a wholly owned subsidiary of Dow. Effective September 1, 2016, the Plan was amended to add Dow Corning as a participating employer under the Plan. Additionally, effective September 1, 2016, the spun-off portion of the Dow Corning Corporation Employees' Capital Accumulation Plan attributable to the accounts of current employees of Dow Corning and other accounts attributable to service as an employee of Dow Corning merged into the Plan, excluding accounts for employees of Hemlock Semi-Conductor Operations, LLC on June 1, 2016. As a result, assets of approximately $1,162 million, including participant loans, were received by the Plan and allocated to participants on September 14, 2016.
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4.
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LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN INVESTMENTS
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The Plan's investment in The Dow Chemical Company LESOP, at
December 31, 2016
and
2015
, is presented in the following table:
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2016
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2015
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Allocated
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Unallocated
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Allocated
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Unallocated
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Number of Shares
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15,811,328
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13,469,618
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15,229,652
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16,546,372
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Cost
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$
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65,947,994
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$
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238,672,315
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$
|
67,304,074
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$
|
272,116,038
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Fair Value
|
$
|
904,724,188
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$
|
770,731,542
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$
|
784,022,485
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|
$
|
851,807,231
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Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.
For investments classified as Level 1 (measured using quoted prices in active markets), the total fair value is either the price of the most recent trade at the time of the market close or the official close price as defined by the exchange in which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.
For investments classified as Level 2 (measured using significant other observable inputs), where the Level 1 process is not available, the underlying assets are valued based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that security. Market inputs are obtained from well established and recognized vendors of market data and placed through tolerance/quality checks.
For investments classified as Level 3, the total fair value is based on significant unobservable inputs including assumptions where there is little, if any, market activity for the investment. Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investments. As a result, the unrealized gains and losses for these investments presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.
The investment's fair value level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The following tables present information about certain assets of the Plan measured at fair value on a recurring basis.
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Assets Measured at Fair Value on a Recurring Basis at December 31, 2016
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Total
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Level 1
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Level 2
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The Dow Chemical Company Stock:
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Allocated participant directed
|
$
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1,838,505,837
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$
|
1,838,505,837
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$
|
—
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Unallocated nonparticipant directed
|
770,731,542
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|
770,731,542
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—
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Common stock
|
29,724,508
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29,724,508
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—
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Mutual funds
|
1,916,655,864
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|
1,916,655,864
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—
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Temporary investments:
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Allocated participant directed
|
62,359,336
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33,839,245
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|
28,520,091
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Unallocated nonparticipant directed
|
7,883
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—
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|
7,883
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Total categorized assets at fair value
|
$
|
4,617,984,970
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$
|
4,589,456,996
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$
|
28,527,974
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Fair value measured at net asset value per share
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Common/collective trusts
|
4,037,851,323
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Total assets at fair value
|
$
|
8,655,836,293
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Assets Measured at Fair Value on a Recurring Basis at December 31, 2015
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Total
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Level 1
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Level 2
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The Dow Chemical Company Stock:
|
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Allocated participant directed
|
$
|
1,668,533,003
|
|
$
|
1,668,533,003
|
|
$
|
—
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Unallocated nonparticipant directed
|
851,807,231
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|
851,807,231
|
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Common stock
|
39,269,457
|
|
39,269,457
|
|
—
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Mutual funds
|
1,680,161,087
|
|
1,680,161,087
|
|
—
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Temporary investments:
|
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Allocated participant directed
|
135,600,327
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|
96,895,150
|
|
38,705,177
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Unallocated nonparticipant directed
|
10,283,499
|
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—
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|
10,283,499
|
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Total categorized assets at fair value
|
$
|
4,385,654,604
|
|
$
|
4,336,665,928
|
|
$
|
48,988,676
|
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|
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Fair value measured at net asset value per share
|
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Common/collective trusts:
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3,254,197,552
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Total assets at fair value
|
$
|
7,639,852,156
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The Plan's policy is to recognize transfers between levels of the fair value hierarchy as of the actual date of the event of change in circumstances that caused the transfer. There were no significant transfers between levels of the fair value hierarchy during 2016.
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6.
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LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN AND LOAN PAYABLE
|
The Plan consists of a profit sharing plan with a cash or deferred feature which is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), and an employee stock ownership plan (the “ESOP”) that is intended to qualify (as a stock bonus plan) under Sections 401(a) and 4975(e)(7) of the Code. The ESOP consists of (i) a leveraged employee stock ownership plan or LESOP, and (ii) the Dow Company Stock Fund. The LESOP includes (i) the assets of the Suspense Account and (ii) a LESOP Stock Fund which (A) shall consist of shares of Dow Common Stock acquired with the proceeds of exempt loans, and allocated to participant accounts, and (B) shall provide for such subaccounts as described in the definition of “LESOP Account” in Section 1.3 in the Plan and as further necessary. The portion of the Plan invested in the Dow Stock Fund constitutes part of the employee stock ownership plan under Section 4975(e)(7) of the Code.
The Plan has one loan outstanding at
December 31, 2016
and
2015
, which bears interest at
10.03%
and matures in 2020. The loan is between the Plan and Dorintal Reinsurance Ltd., a party-in-interest. Prior to February 28, 2011, the loan was between the Plan and Rohm and Haas Holdings Ltd.. On February 28, 2011, Rohm and Haas Holdings Ltd. and Dorintal Reinsurance Ltd entered into an amalgamation agreement, which resulted in the amalgamation of the two companies. The combined company is known as Dorintal Reinsurance Ltd. The Plan uses dividends paid on unallocated shares of Company common stock to make the scheduled quarterly principal and interest payments. If needed, the Plan may use dividends on allocated shares of Company common stock to make the scheduled principal and interest payments. Dividends from allocated shares used to pay principal and interest are replaced by an equal value of shares released in accordance with the release fraction. The Company is required to make a cash contribution to fund any quarterly shortages in Company common stock dividends paid as compared to required principal and interest payments. There was no shortfall so there was no need for a Company cash contribution for the year ended
December 31, 2016
. The Company declared common stock dividends of
$1.84
per share during
2016
.
Interest expense for the year ended
December 31, 2016
is
$6,309,996
. The minimum principal payments on this loan to maturity are as follows:
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Minimum Loan Principal Payment to Maturity
|
|
2017
|
$
|
15,117,833
|
|
|
2018
|
16,692,143
|
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|
2019
|
18,430,396
|
|
|
2020
|
4,007,397
|
|
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|
$
|
54,247,769
|
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7.
|
RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
|
The following is a reconciliation of net assets available for benefits per the financial statements to Form 5500 as of
December 31, 2016
and
2015
:
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Reconciliation of Net Assets Available for Benefits per the Financial Statements to Form 5500 at December 31, 2016
|
2016
|
2015
|
|
Net assets available for benefits per the financial statements
|
$
|
11,122,214,263
|
|
$
|
9,527,943,195
|
|
|
Adjustment from contract value to fair value for fully benefit-responsive synthetic guaranteed investment contracts
|
25,066,866
|
|
31,981,993
|
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|
Net assets available for benefits per Form 5500
|
$
|
11,147,281,129
|
|
$
|
9,559,925,188
|
|
For the year ended
December 31, 2016
, the following is a reconciliation of net investment income per the financial statements to Form 5500:
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|
Reconciliation of Net Investment Income per the Financial Statements to Form 5500 for 2016
|
|
Net investment gain per the financial statements
|
$
|
865,519,373
|
|
|
Adjustment for participant notes receivable interest
|
4,013,784
|
|
|
Adjustment from contract value to fair value for fully benefit-responsive synthetic guaranteed investment contracts
|
(6,915,127
|
)
|
|
Net investment gain per Form 5500
|
$
|
862,618,030
|
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SUPPLEMENTAL SCHEDULES