Dow Chemical 2012 Annual Report Download - page 61

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Sundry income (expense) - net includes a variety of income and expense items such as the gain or loss on foreign currency
exchange, dividends from investments, and gains and losses on sales of investments and assets. Sundry income (expense) - net
for 2012 was net expense of $27 million, compared with net expense of $316 million in 2011 and net income of $125 million in
2010. In 2012, sundry income (expense) - net included $123 million of losses on the early extinguishment of debt (reflected in
Corporate), foreign currency exchange losses and non-income tax related expenses which were partially offset by gains related
to small divestitures and asset sales and a gain related to post-closing adjustments on the sale of a contract manufacturing
business (reflected in Performance Materials).
In 2011, sundry income (expense) - net included a $482 million loss on the early extinguishment of debt (reflected in
Corporate), a $42 million loss on the sale of a contract manufacturing business (reflected in Performance Materials) and losses
on foreign currency exchange, partially offset by a small gain on the divestiture of the Polypropylene business (reflected in
Performance Plastics) and gains on other small divestitures and asset sales, $25 million of dividend income received from the
Company's ownership interest in Styron (reflected in Corporate), gains from the mark-to-market of trading securities, favorable
working capital adjustments from prior divestitures, and a gain from the consolidation of a joint venture.
In 2010, sundry income (expense) - net included a net $27 million gain on the Styron divestiture, reflected in Performance
Materials ($20 million) and Performance Plastics ($7 million). In addition to the net gain on the Styron divestiture, sundry
income (expense) - net for 2010 included net gains on several other divestitures, partially offset by a loss of $46 million related
to the early extinguishment of debt and a charge of $47 million for an obligation related to a past divestiture (both reflected in
Corporate). See Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results
of Operations; and Note 16 to the Consolidated Financial Statements for additional information on the Company's early
extinguishment of debt. See Note 5 to the Consolidated Financial Statements for additional information concerning the
Company's divestitures.
Net interest expense (interest expense less capitalized interest and interest income) was $1,228 million in 2012, down from
$1,301 million in 2011 and $1,436 million in 2010, reflecting the impact of redemption of debt and lower debt financing costs.
Interest income was $41 million in 2012, $40 million in 2011 and $37 million in 2010. Interest expense (net of capitalized
interest) and amortization of debt discount totaled $1,269 million in 2012, $1,341 million in 2011 and $1,473 million in 2010.
See Liquidity and Capital Resources in Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional information regarding debt financing activity.
The provision for income taxes was $565 million in 2012, compared with $817 million in 2011 and $481 million in 2010.
The Company's effective tax rate fluctuates based on, among other factors, where income is earned, reinvestment assertions
regarding earned income and the level of income relative to tax credits available. For example, as the percentage of foreign
sourced income increases, the Company's effective tax rate declines. The Company's tax rate is also influenced by the level of
equity earnings, since most of the earnings from the Company's equity company investments are taxed at the joint venture
level.
The tax rate for 2012 was negatively impacted by a change in the geographic mix of earnings, notably a decrease in
earnings in Europe and an increase in earnings in the United States, as well as reductions in equity earnings. Equity earnings
were further impacted by asset impairment and restructuring charges at Dow Corning. Additionally, the Company's impairment
of Dow Formulated Systems goodwill and the impairment of the long-lived assets of Dow Kokam LLC received minimal tax
relief. The tax rate was favorably impacted by a change in the permanent reinvestment assertions of certain affiliates in Europe
and Asia Pacific; however, this was primarily offset by unfavorable adjustments to uncertain tax positions and valuation
allowances. These factors resulted in an effective tax rate of 33.9 percent for 2012.
The tax rate for 2011 was negatively impacted by a $264 million valuation allowance recorded in the fourth quarter of
2011. The valuation allowance was recorded against the deferred tax assets of two Dow entities in Brazil. As a result of the
global recession in 2008-2009, coupled with rapidly deteriorating isocyanate industry conditions and increasing local costs,
these two entities were in a three-year cumulative pretax operating loss position at December 31, 2011. While the Company
expects to realize the tax loss carryforwards generated by these operating losses based on several factors - including forecasted
margin expansion resulting from improving economic conditions, higher industry growth rates in Brazil, improving Dow
operating rates, and a restructuring of legal entities to maximize the use of existing tax loss carryforwards - Dow was unable to
overcome the negative evidence of recent cumulative operating losses; and at December 31, 2011, the Company could not
assert it was more likely than not that it will realize its deferred tax assets in the two Brazilian entities. Accordingly, the
Company established the valuation allowance against the deferred tax assets of these companies in the fourth quarter of 2011. If
in the future, as a result of the Company's plans and expectations, one or both of these entities generates sufficient profitability